We are now just weeks away from the start of the Supreme Court’s 2015-2016 Term, and in the coming months the Justia Verdict site will feature previews and analyses of many important upcoming cases. In the space below, I discuss DIRECTV v. Imburgia (set to be argued October 6), one in a series of recent cases in which the Supreme Court has been seeking to clarify the extent to which consumer contracts that require disputes to be resolved by binding arbitration, rather than through formal litigation with judges and juries, will be enforceable.
Background on Imburgia and What the Court Ruled Four Years Ago in Concepcion
To understand the issue raised in Imburgia, one must first go back to a case the Supreme Court decided four years ago, AT&T Mobility v. Concepcion. In Concepcion, California plaintiffs filed a class action lawsuit in court alleging that AT&T engaged in fraud by advertising “free” cellphones and then charging sales taxes on those phones. AT&T tried to move the dispute from the courts to the arbitration process, relying on a provision in the consumer contract that required all disputes to be arbitrated rather than litigated in court, and that also required all arbitrations to be individualized, rather than class-oriented. The lower courts rebuffed AT&T’s efforts, holding that a California law principle, emanating from a case known as Discover Bank, rendered the arbitration provisions of the consumer contract unconscionable and void because they prohibited class-wide relief. The U.S. Supreme Court reversed, holding that the Discover Bank rule conflicted with, and was thus preempted by, a federal statute, the Federal Arbitration Act (FAA). Once the Discover Bank hurdle was removed, AT&T was free to enforce the arbitration provisions of the contract and require the plaintiffs to proceed in individualized arbitration rather than any litigation.
The Imburgia dispute is similar in many respects; plaintiffs filed a class action lawsuit in California court against DIRECTV alleging false advertising and unfair competition concerning DIRECTV’s charging of early termination fees to its customers. And DIRECTV moved to dismiss the lawsuit and require the plaintiffs to proceed in arbitration instead. The arbitration discussion contained in the standard form contract entered into by DIRECTV and its customers contained three crucial provisions. One provision (call it provision #1) states broadly that “any legal . . . claim relating to this Agreement . . . will be resolved only by binding arbitration.” Another provision (call it provision #2) says that the “[n]either you nor we shall be entitled to join or consolidate claims in arbitration . . . or arbitrate any claim as a representative member of a class . . . .” And a third provision (call it provision #3) says that “[these arbitration provisions] shall be governed by the Federal Arbitration Act.”
But—and here is where Imburgia raises a new issue—the arbitration section in the contract between DIRECTTV and its customers also had a provision (call it provision #4) that says: “If, however, the law of your state would find the agreement to dispense with class arbitration procedures unenforceable, then [the entire section requiring arbitration] is unenforceable.”
The California courts—relying on this last sentence, on some technical canons of contract interpretation, and on the more basic maxim that any ambiguity in a contract should be resolved against the drafter (in this case DIRECTV)—rejected DIRECTV’s efforts to compel arbitration. The California Court of Appeal, explicitly disagreeing with a ruling on the same question by the U.S. Court of Appeals for the Ninth Circuit, concluded that the “intent” of the drafters of this last sentence was to disregard the entire requirement of arbitration in the contract in those states where state law statutes or cases have sought to prevent parties from dispensing with class-wide arbitration, whether or not such state law efforts are preempted by federal law such as the FAA. The California court concluded that most parties would naturally differentiate between “state” law and “federal” law when they use those two terms in any contract, and when they refer to “the law of your state,” they ordinarily mean what state law says, regardless of whether that state law is preempted or not.
Because the contract in the Imburgia case has this provision (#4) that was lacking in Concepcion, and because the Discover Bank rule in California law does characterize agreements that dispense with class arbitration procedures to be unconscionable and thus void, the California appellate court determined that Concepcion was not controlling and that the consumer litigation could proceed.
DIRECTV sought and obtained review in the U.S Supreme Court, and the case will be argued on the second day of the Court’s argument calendar.
What Will the Supreme Court Do?
It is always dicey to predict how the Court will resolve any particular case. That may be especially so in a case (like this one) where there was a pretty clear conflict in the lower courts (in this instance between the California and federal courts of appeal) over the meaning of a past Supreme Court ruling; when there is a lower court split, the Court’s grant of review is warranted even if the lower court from which review was sought was correct on the merits, so we thus should not infer (as we sometimes do when there is no lower court split) from the grant of review itself that the Court (or at least four of its Justices, the number needed to grant certiorari) thought an error had been made.
With that caveat, I would, for a few reasons, expect the Supreme Court to reverse the California Court of Appeal and order the lower court to compel arbitration as DIRECTV seeks. The question ultimately comes down, I think, to interpreting the contract between the plaintiffs and DIRECTV. Imagine the contract had said: “In those states where any state appellate court has issued a ruling similar to Discover Bank, whether or not that ruling is preempted by federal law, the arbitration provisions and requirements of this contract shall not apply.” In that instance, the parties would have explicitly agreed not to be required to arbitrate in those states (like California) whose state courts had sought—successfully or not—to preserve class-wide arbitration. And there is (or should be) no reason not to respect that explicit agreement.
But was the California Court of Appeal correct to construe the actual DIRECTV contract to mean what my hypothetical variant just said? I think probably not. First, I the technical contract interpretation arguments invoked by the California Court of Appeal are logically flawed; without going into great detail, let me say that the California court’s characterization of provision #4 as a “specific exception” to provision #3’s general embrace of the FAA is not persuasive. Provision #4 need not be seen as “an exception” to provision #3’s adoption of the FAA, but rather as a recognition that, under the FAA, states may in some instances validly ban some contracts that prohibit class-wide arbitration. But where states have not validly banned such a contract, as in the case of California’s aversion to bans on class-wide arbitration that was struck down in Concepcion, the FAA continues to control the contract.
Much more fundamentally, if we look, as the California court rightfully did, to what we can infer the intention of the parties to be, it seems that while the parties probably weren’t (as the California court observed) thinking about specifically about “preemption” when they referred to the “law of your state,” they were thinking about, and focused on, state laws that would actually be enforced. In other words, it is plausible to think that the parties were trying to take account of state laws that were going to operate in the real world, not state laws (like the Discover Bank rule) that were written down but that don’t have real world impact (whether on account of federal preemption, conflict with higher state laws, or something else entirely.)
The Ninth Circuit may have been a bit formalistic in its conclusion that references to “state law” implicitly include federal law (such as the FAA) insofar as valid federal law is, by virtue of the Constitution’s Supremacy Clause, the law in every state. (Parties may not have had the Supremacy Clause explicitly on their minds when they entered into the contract, just as they might not have been focused on the technicalities of preemption.) But we don’t have to be formalistic to say that one natural way—perhaps the best way—of understanding the intent of the DIRECTV contract’s arbitration provisions is the following: “We prefer arbitration over litigation. But we really don’t want class-wide arbitration. So if in fact we would be required to submit to arbitration that is class-wide (because valid state law provides for such class-wide arbitration), then we actually prefer litigation over arbitration. Our preferences are thus, in order: (1) individual arbitration; (2) litigation; (3) class-wide arbitration.”
That reading makes perfect sense of the provision concerning whether “the law of your state would find the agreement to dispense with class arbitration procedures unenforceable” without drawing us into the surreal question of how much the parties were explicitly thinking about FAA preemption. Indeed, with all the attention drawn to what the parties meant by reference to the “law of your state” and what it would “find,” we should not lose focus on the fact that the punchline of the clause referring to the “law of your state” is whether the ban on class-wide arbitrations is “enforceable.” The parties were focused on the state law’s effect on a contract’s enforceability—and if state law is itself unenforceable (whether by virtue of the FAA or for any other reason) then state law would no longer seem to be relevant to the contract.
That leaves us with the other argument on which the California court relied—the notion that ambiguity should be resolved against the drafter. This is a non-trivial interpretive maxim, but there is another principle at work in this case—the Supreme Court’s recent penchant to construe legal texts in favor of, rather than against, arbitration. When push comes to shove, although I would not wager any money on the outcome, that larger pro-arbitration backdrop, and the Court’s admonitions that contract ambiguity should be resolved in favor of arbitration whenever reasonable, may be the strongest reason to expect the Supreme Court to rule in favor of DIRECTV here.