In DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015), issued on December 14, 2015, the United States Supreme Court dealt another blow to class action lawsuits by enforcing an arbitration agreement and confirming the validity of class-arbitration waivers. DIRECTV is an important case for litigators and transactional attorneys because it further underscores the extent to which the Supreme Court is willing to enforce arbitration agreements.
The DIRECTV action was commenced by customers seeking damages for early termination fees. DIRECTV’s customer service agreement contained an arbitration provision and a class-arbitration-waiver clause providing that claims could not be joined or consolidated in arbitration. The practical effect of such a provision is to force customers to personally incur significant fees litigating individual arbitration proceedings regardless of the expected amount of recovery.
California courts have previously found such provisions invalid. In 2005, the California Supreme Court held that waivers of class arbitration in consumer contracts of adhesion involving small amounts of damages were unconscionable and unenforceable. Discover Bank v. Superior Court, 113 P.3d 1100, 1110 (Cal. 2005). The Discover Bank rule, though, was abrogated in 2011 when the United States Supreme Court held that it was an obstacle to the accomplishment congressional objectives embodied in the Federal Arbitration Act, which preempted the rule. AT & T Mobility LLC v. Concepcion, 563 U.S. 333, 352 (2011).
The service agreement in DIRECTV provided that the Federal Arbitration Act governed the arbitration provision. Seemingly inconsistently, it also provided that if the “law of your state” makes class-arbitration waivers unenforceable, then the entire arbitration provision is unenforceable. The California Court of Appeal concluded that, despite the Supreme Court’s ruling in Concepcion, the class-arbitration waiver in the service agreement was unenforceable under California law. It reasoned that just as parties are free to refer to the laws of different states in their contracts, they are also free to refer to California law as it would have been without the Supreme Court’s invalidation of Discover Bank. The Court further held that the California law provision trumped the provision in the services agreement referring to the Federal Arbitration Act on the basis of two common law canons of contract construction: (1) specific language governs general language, and (2) courts must construe ambiguous language against the drafter. Read more.