WASHINGTON (Legal Newsline) – On Monday, a majority of the U.S. Supreme Court ruled that a California court must enforce DirecTV’s arbitration agreement with customers in the state who claim they were illegally charged cancellation fees.
The nation’s highest court, in a 6-3 ruling, sided with the satellite cable provider, which is now owned by AT&T.
Justice Stephen Breyer, who authored the majority decision, said the Federal Arbitration Act preempts the California Court of Appeal’s interpretation of the company’s contract.
“California’s interpretation of the phrase ‘law of your state’ does not place arbitration contracts ‘on equal footing with all other contracts,'” Breyer wrote in the 11-page ruling. “For that reason, it does not give ‘due regard… to the federal policy favoring arbitration.'”
DirecTV, which petitioned the Supreme Court to hear the case, and its customers entered into a service agreement that included a binding arbitration provision with a class arbitration waiver.
The company specified that the entire arbitration provision was unenforceable if the “law of your state” made class arbitration waivers unenforceable. The agreement also declared that the arbitration clause was governed by the FAA.
At the time the plaintiffs, California residents, entered into the agreement with DirecTV, California law made class arbitration waivers unenforceable.
Subsequently, in 2008, two class action lawsuits were filed in California state courts against the cable provider. The two later were consolidated into Imburgia et al. v. DirecTV Inc.
Class members alleged they were illegally charged cancellation fees of up to $480. Often, they alleged, the fees were taken directly out of their bank accounts or charged to credit cards without permission.
A trial court denied DirecTV’s request to order the matter to arbitration; the California Court of Appeal affirmed.
The appeals court ruled that state law would render class arbitration waivers unenforceable, so it held the entire arbitration provision was unenforceable under the agreement.
However, in the midst of the litigation, in 2011, the Supreme Court ruled in AT&T Mobility LLC v. Concepcion that California’s rule was preempted by the FAA.
But the California appeals court said that did not change the result because the parties were free to refer in the contract to California law as it would have been absent federal preemption.
The appeals court reasoned that the phrase “law of your state” was both a specific provision that should govern more general provisions and an ambiguous provision that should be construed against the drafter.
Therefore, the court held, the parties had, in fact, included California law as it would have been without federal preemption.
The Supreme Court reversed the appeals court’s ruling, explaining that the phrase “law of your state” is not at all ambiguous and takes its ordinary meaning: valid state law.
“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,” Breyer wrote. “But that does not answer the legal question before us. That is because this Court subsequently held in Concepcion that the Discover Bank 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.”
Breyer continued, “Assuming — as we must — that the court’s reasoning is a correct statement as to the meaning of ‘law of your state’ in this arbitration provision, we can find nothing in that opinion (nor in any other California case) suggesting that California would generally interpret words such as ‘law of your state’ to include state laws held invalid because they conflict with, say, federal labor statutes, federal pension statutes, federal antidiscrimination laws, the Equal Protection Clause, or the like.”
The majority — which included Chief Justice John Roberts and justices Antonin Scalia, Anthony Kennedy, Samuel Alito and Elena Kagan — said the view that state law retains “independent force” after being authoritatively invalidated is one that courts are “unlikely to apply in other contexts.”
“No one denies that lower courts must follow this Court’s holding in Concepcion.
The fact that Concepcion was a closely divided case, resulting in a decision from which four Justices dissented, has no bearing on that undisputed obligation. Lower court judges are certainly free to note their disagreement with a decision of this Court,” Breyer wrote. “But the ‘Supremacy Clause forbids state courts to dissociate themselves from federal law because of disagreement with its content or a refusal to recognize the superior authority of its source.’
“The Federal Arbitration Act is a law of the United States, and Concepcion is an authoritative interpretation of that Act. Consequently, the judges of every State must follow it.”
Justice Clarence Thomas filed a dissent, as did Justice Ruth Bader Ginsburg.
Justice Sonia Sotomayor joined in Ginsburg’s dissent.
“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,” Ginsburg wrote. “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.”
Harvey Rosenfield, founder of Consumer Watchdog and one of the lawyers who represented consumers in the litigation, called the high court’s decision a “troubling” one.
“The Supreme Court has taken away Americans’ only right to obtain justice: their day in court,” he said in a statement. “The more the U.S. Supreme Court allows big corporations to evade accountability, the less confidence Americans have in the judicial branch and the rule of law.”
Ingrid Evans of San Francisco-based Evans Law Firm Inc. — a plaintiffs’ firm that has a special interest and focus in litigating class action and consumer fraud lawsuits — also expressed her displeasure with the court’s ruling.
“This decision represents another denial of justice by the recent pro-business U.S. Supreme Court,” she said in a statement. “It will hurt consumers and will allow corporations to continue overcharging and imposing illegal and undisclosed penalties and charges upon its customers, while evading liability and accountability.”
DirecTV could not immediately be reached for comment on the ruling.
From Legal Newsline: Reach Jessica Karmasek by email at [email protected]