Supreme Court agrees to decide the third case in five years involving enforcement of class-arbitration waivers in FAA-governed arbitration agreements

March 24, 2015

Class Action Alert

Author(s): Charles M. Dyke, Christopher M. Mason, Dan Deane

Will the third time be the charm? For the third time in five years, the U.S. Supreme Court has agreed to hear a petition for certiorari to consider a lower court decision invalidating a class waiver clause in a consumer-facing arbitration agreement. The California Appeal Court decision under review is directly at odds with a decision of the United States Court of Appeals for the Ninth Circuit, which held that it was “nonsensical” to argue that California could have a valid state law on class-arbitration waivers that is inconsistent with federal law.

The United States Supreme Court yesterday agreed to hear an appeal by DirecTV from a decision of the California Court of Appeal refusing to enforce a class-arbitration waiver in an arbitration agreement. The case is DirecTV, Inc. v. Imburgia, No. 14-462, cert. granted, 2015 WL 1280237 (S. Ct. Mar. 23, 2015). This is the third case before the Supreme Court in the past five years involving the enforceability of class arbitration waivers. In the previous two cases, the Court held that the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16, preempts state laws that purport to invalidate arbitration agreements containing class arbitration waivers (AT&T Mobility, LLC v. Concepcion, 563 U.S. 321 (2011)), even if a waiver of class procedures might make it uneconomic for individuals to pursue certain types of claims (Am. Express Co. v. Italian Colors Rest., 133 U.S. 2304 (2013)). [1]

The latest case arises out of a consumer class action filed in 2008 in California state court alleging, under California law, that DirecTV improperly charged subscribers early termination fees. At the time the lawsuit was filed, the United States Supreme Court had not yet decided the Concepcion case. Accordingly, the California Supreme Court’s holding in Discover Bank v. Super. Ct., 36 Cal. 4th 148 (2005)—that class-procedure waivers in consumer contracts are unenforceable as long as certain (easily alleged) conditions are satisfied—appeared to the trial court to be controlling. In April 2011, that court therefore certified a class on one of the plaintiff’s claims despite the existence of a class waiver in DirecTV’s contracts.

A week after the class certification order, the United States Supreme Court decided Concepcion, expressly rejecting the exception to FAA enforcement of class arbitration waivers that the California Supreme Court had purported to recognize in Discover Bank. DirecTV then immediately moved in the trial court to stay or dismiss the action, decertify the class and compel arbitration. The trial court denied the motion and DirecTV appealed. The California Court of Appeal agreed with the trial court, basing its decision on an interpretation of the choice of law provisions in DirecTV’s 2007 customer agreement. The California Supreme Court allowed the lower court’s decision to stand.

DirecTV’s customer agreement provided in its Section 9 that “any legal or equitable claim relating to this Agreement, any addendum, or your Service” will first be addressed through an informal process. If not resolved informally, “any Claim either of us asserts will be resolved only by binding arbitration.” Section 9 further specified that neither class procedures nor private attorney general procedures would be available in arbitration. The section then provided: “If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.” Section 10 of the customer agreement provided that the agreement was governed by federal and state law and also was “subject to modification if required by such laws.” It then noted, however, that “[n]otwithstanding the foregoing, Section 9 shall be governed by the Federal Arbitration Act.”

The plaintiff argued that Section 9 was ambiguous because, in requiring consideration of whether “the law in your state would find this agreement to dispense with class arbitration procedures unenforceable,” it left unclear whether courts should consider state law only to the extent that such law survived FAA preemption, or whether courts should consider the state’s law without regard to preemption. The plaintiff argued for the latter interpretation, and the California Court of Appeal agreed.

In its successful petition for certiorari to the United States Supreme Court, DirecTV emphasized two key points. First, the California Court of Appeal’s decision directly conflicts with a decision by the Ninth Circuit interpreting the exact same language in the exact same customer agreement in a parallel lawsuit. See Lombardi v. DirecTV, Inc., 546 F. App’x 715 (9th Cir. 2013). There, the Ninth Circuit characterized the plaintiff’s proffered reading of the agreement as “nonsensical” because, under the FAA and Concepcion, the law in California (as in all of the other 49 states) is that class waivers are enforceable. To the extent any California law would purport to provide otherwise, it would be a nullity under the Supremacy Clause. In the words of the DirecTV petition, it would be “fanciful to interpret a reference to ‘the law of your state’ to mean state law that is ‘without effect,’ . . . which, after all, is not ‘law’ at all.” Second, DirecTV argued that the California Court of Appeal’s decision, which would bind all California Superior Courts, would seriously undermine both the FAA and the Supreme Court’s decisions interpreting it.

We will issue another alert when the United States Supreme Court decides the case. A decision is expected sometime during fall 2015 or spring 2016. Stay tuned!

  1. See Nixon Peabody alerts: “U.S. Supreme Court upholds class action waivers in consumer contracts: AT&T Mobility v. Concepcion,” and “SCOTUS upholds class action waiver again: Amex III significantly limits the ‘effective vindication’ of statutory rights doctrine.” [Back to reference]

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