Split High Court: California Appeals Court Must Enforce Arbitration Agreement

WASHINGTON, D.C. — (Mealey’s) A California appellate panel erred when it refused to enforce an arbitration clause contained in a cable provider’s customer agreement, a divided U.S. Supreme Court ruled this morning, finding that the appellate panel’s interpretation was preempted by the Federal Arbitration Act (FAA) (DIRECTV, Inc. v. Amy Imburgia, et al., No. 14-462, U.S. Sup.).

“We recognize, as the dissent points out, that when DIRECTV drafted the contract, the parties likely believed that the words ‘law of your state’ included California law that then made class-arbitration waivers unenforceable.  But that does not answer the legal question before us.  That is because this Court subsequently held in [AT&T Mobility LLC v.] Concepcion [563 U.S. 333 (2011)], [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], that the Discover Bank [v. Superior Court (36 Cal. 4th 148, 162-163, 113 P. 3d 1100, 1110 [2005])], [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], rule was invalid.  Thus the underlying question of contract law at the time the Court of Appeal made its decision was whether the ‘law of your state’ included invalid California law.  We must now decide whether answering that question in the affirmative is consistent with the Federal Arbitration Act.  After examining the grounds upon which the Court of Appeal rested its decision, we conclude that California courts would not interpret contracts other than arbitration contracts the same way.  Rather, several considerations lead us to conclude that the court’s interpretation of this arbitration contract is unique, restricted to that field,” Justice Stephen G. Breyer wrote for the majority.

Chief Justice John G. Roberts Jr. and Justices Antonin Scalia, Anthony M. Kennedy, Samuel Anthony Alito Jr. and Elena Kagan joined in the opinion.

Class Complaint

Amy Imburgia filed a class complaint against DIRECTV on Sept. 17, 2008, in the Los Angeles County Superior Court.  She brought claims for unjust enrichment, declaratory relief, false advertising and violation of the Consumer Legal Remedies Act (CLRA), California Business and Professions Code Section 17200, et seq., and California Civil Code Section 1671(d).  Imburgia’s claims were based on allegations that DIRECTV improperly charged early termination fees to its customers.  Kathy Greiner filed a similar class action complaint one day after Imburgia, and Imburgia and Greiner jointly filed a first amended complaint on March 16, 2009.  That lawsuit proceeded at the same time as a multidistrict litigation proceeding in federal court involving similar claims.

DIRECTV moved to stay Greiner and Imburgia’s state court action pending the outcome of the multidistrict litigation, but the Superior Court denied the motion.  The plaintiffs subsequently moved for class certification.  The Superior Court granted the motion in part on April 20, 2011, certifying a class as to one of the plaintiffs’ theories but denying certification as to the other.

Concepcion Decided

On April 27, 2011, the U.S. Supreme Court decided AT&T Mobility LLC v. Concepcion (563 U.S. __ 131 S. Ct. 1740 [2011]), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], which held that the FAA preempts the rule of Discover Bank v. Superior Court (36 Cal.4th 148 [2005]).  Discover Bank held that under certain circumstances, class action waivers in consumer contracts are unconscionable and hence unenforceable.

On May 17, 2011, less than one month after the high court decided Concepcion, DIRECTV moved to stay or dismiss Greiner and Imburgia’s lawsuit, decertify the class and compel arbitration of the plaintiffs’ claims.  DIRECTV explained that it had not moved to compel arbitration earlier because the Court of Appeal held, in an unrelated case, that the arbitration provision in DIRECTV’s customer agreement was unenforceable under Discover Bank.

The Superior Court denied the motion, and DIRECTV appealed.

The Second District Court of Appeal on April 7, 2014, affirmed.

DIRECTV petitioned the U.S. Supreme Court on Oct. 21, 2014.  The petition was granted March 23, 2015.  The question presented was:  “Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.”

Oral arguments were held Oct. 6.

Differing Opinions

Explaining the considerations that led to the majority’s opinion, Justice Breyer wrote, “[f]irst, we do not believe that the relevant contract language is ambiguous.  . . .  Second, California case law itself clarifies any doubt about how to interpret the language.  . . .  Third, nothing in the Court of Appeal’s reasoning suggests that a California court would reach the same interpretation of ‘law of your state’ in any context other than arbitration.  . . .  Fourth, the language used by the Court of Appeal focused only on arbitration.  . . .  Fifth, the Court of Appeal reasoned that invalid state arbitration law, namely the Discover Bank rule, maintained legal force despite this Court’s holding Concepcion.  . . .  Sixth, there is no other principle invoked by the Court of Appeal that suggests that California courts would reach the same interpretation of the words ‘law of your state’ in other contexts.”

Justice Clarence Thomas filed a one-paragraph dissenting opinion, saying the FAA does not apply to state court proceedings.

Justice Ruth Bader Ginsberg filed a 14-page dissenting opinion in which Justice Sonia Sotomayor joined. 

“It has become routine, in a large part due to this Court’s decisions, for powerful economic enterprises to write into their form contracts with consumers and employees no class-action arbitration clauses.  The form contract in this case contains a Delphic provision stating that ‘if the law of your state’ does not permit agreements barring class arbitration, then the entire agreement to arbitrate becomes unenforceable, freeing the aggrieved customer to commence class-based litigation in court.  This Court reads that provision in a manner most protective of the drafting enterprise.  I would read it, as the California court did, to give the customer, not the drafter, the benefit of the doubt.  Acknowledging the precedent so far set by the Court, I would take no further step to disarm consumers, leaving them without effective access to justice,” Justice Ginsberg opined.

Counsel

Christopher Landau of Kirkland & Ellis in Washington represents DIRECTV.  Thomas C. Goldstein of Goldstein & Russell in Bethesda, Md., Freda E. Mermelstein of Huntington Beach, Calif., and Paul D. Stevens of Milstein Adelman in Santa Monica, Calif., represent the respondents.

Cory L. Andrews of Washington Legal Foundation in Washington filed an amicus curiae brief on behalf of Washington Legal Foundation.  David M. Axelrad of Horvitz & Levy in Encino, Calif., filed an amicus brief on behalf of DRI – The Voice of the Defense Bar.  Francis J. Balint Jr. of Bonnett, Fairbourn, Friedman & Balint in Phoenix filed an amicus brief on behalf of arbitration and contracts scholars.

Kristen M. Fritz of San Diego filed an amicus brief on behalf of law professors.  Martin S. Kaufman of Atlantic Legal Foundation in Larchmont, N.Y., filed an amicus brief on behalf of Atlantic Legal Foundation and the International Association of Defense Counsel.  Deborah J. La Fetra of Pacific Legal Foundation in Sacramento, Calif., filed an amicus brief on behalf of Pacific Legal Foundation.  Peter Linzer of University of Houston Law Center filed an amicus brief on behalf of himself.

Holly M. Mosier of Sanders Phillips Grossman in Irvine, Calif., filed an amicus brief on behalf of California law professors.  Scott L. Nelson of Public Citizen Litigation Group in Washington filed an amicus brief on behalf of Public Citizen Inc.  Andrew J. Pincus of Mayer Brown in Washington filed an amicus brief on behalf of the Chamber of Commerce of the United States of America, National Association of Manufacturers and Retail Litigation Center Inc.

Benjamin G. Robbins of New England Legal Foundation in Boston filed an amicus brief on behalf of New England Legal Foundation.  Imre S. Szalai of Loyola University New Orleans College of Law in New Orleans filed an amicus brief on behalf of law professors.  Michael R. Vachon of the Law Office of Michael R. Vachon in San Diego filed an amicus brief on behalf of himself.

Rae T. Vann of Norris, Tysee, Lampley & Lakis in Washington filed an amicus brief on behalf of the Equal Employment Advisory Council.  William R. Weinstein of the Law Offices of William R. Weinstein in White Plains, N.Y., filed an amicus brief on behalf of himself.

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