In December 2015, the Supreme Court reversed yet another California decision relating to arbitration.
Plaintiff Imburgia was a DirecTV customer who subsequently cancelled her DirecTV service, thus subjecting her to cancellation fees. She, along with other plaintiffs who were charged cancellation fees, filed a class-action lawsuit claiming that DirecTV’s high cancellation fees were wrongful. The arbitration agreement in DirecTV’s contracts stated that “[n]either you nor we shall be entitled to join or consolidate claims in arbitration.” The arbitration agreement further stated that if the “law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision is unenforceable. The contract also said that the arbitration provision “shall be governed by the Federal Arbitration Act.”
The California trial court refused to send the case to arbitration and instead permitted the class action to move forward. This ruling appeared to be in direct conflict with federal law. In AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011),the Supreme Court ruled that the FAA preempted state laws—like the California statute—that invalidated arbitration agreements that prohibited plaintiffs from joining their claims together. DirecTV appealed the trial court’s decision to California Court of Appeals.
The California appellate court ruled that the contractual language stating that the FAA was the governing law was a “general” provision and that the language making the arbitration provision unenforceable if the “law of your state” made the waiver of class arbitrations unenforceable was a more specific provision. The appellate court then rather woodenly applied a tradition rule of contract construction that the specific governs the general, and it concluded that California law, not the FAA, governed the parties’ agreement and made the arbitration agreement unenforceable. The court also found the arbitration provision ambiguous and ruled that it should be construed against DirecTV, the drafter. Accordingly, it upheld the trial court’s decision. The California Supreme Court denied discretionary review, and DirecTV petitioned for a writ of certiorari to the United States Supreme Court.
The Supreme Court reversed. The Supreme Court stated that lower courts are bound to follow the previous holdings of the Supreme Court and that the ruling in AT&T v. Concepcion was controlling. Concepcion had invalidated the California statute at issue on the ground that it was preempted by the FAA. The Court also held that the relevant contract language was not ambiguous and should be given its ordinary and logical meaning. Thus, the words “unless the law of your state” make class waivers unenforceable referred to valid state laws, not invalid ones. The statute the California courts relied on was invalidated by Concepcion, thus making its application to the parties’ arbitration clause an error. The end result was that the arbitration agreement, including its ban on plaintiffs joining their claims together in one proceeding, was enforceable.
A practice tip for attorneys drafting agreements is that, if your client wants to include a class action waiver in its arbitration clause, you should make sure the language is concise and clear. You also may need to update the language periodically to reflect changes and clarifications in the law. You should consider that some state courts may be hostile to arbitration and not give those courts the opportunity to thwart your intentions. Obvious though it may be, not every case can support an appeal to the United States Supreme Court or be lucky enough to be granted certiorari! You also might as well include a provision stating that the FAA applies rather than taking a chance that a lower court may not acknowledge that your contract involves interstate commerce (as nearly all contracts do).
A practice tip for litigators is to take note that the Supreme Court has again upheld its holding (Concepcion) that class action bans are enforceable in arbitration clauses governed by the FAA.
Keywords: alternative dispute resolution, adr, litigation, state law, California, class action, class arbitration, enforceability