Justices Will Review Class Action Waiver And FAA Preemption in Consumer Context

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By Kevin McGowan

March 23 — Granting a satellite television provider's petition, the U.S. Supreme Court March 23 agreed to review a California appeals court ruling that subscribers could pursue class claims in court despite an arbitration agreement apparently blocking such claims, a legal issue that potentially also affects employees subject to arbitration pacts.

The justices granted DIRECTV Inc.'s request to review a California Court of Appeal decision affirming a lower court's denial of the company's motion to compel arbitration of subscribers' challenges to early cancellation fees the company charges to customers who prematurely cancel their satellite TV service.

The appeals court reasoned the arbitration pact required interpretation under state law and that under California law, the pact's class action waiver was invalid, so the entire arbitration agreement was unenforceable (Imburgia v. DIRECTV, Inc., 2014 BL 97698, 170 Cal. Rptr. 3d 190 (Cal. Ct. App. 2014)).

In its petition for review, DIRECTV argued that under U.S. Supreme Court precedent, the appeals court's decision can't be squared with the Federal Arbitration Act, which requires enforcement of arbitration pacts as written and preempts inconsistent state law.

The justices should reverse the state court's “nonsensical” ruling that DIRECTV and its subscribers contractually opted out of FAA preemption, allowing for enforcement of state law disfavoring class action waivers, even though the arbitration agreement specified it “shall be governed” by the FAA, DIRECTV said.

In their brief opposing review, the subscribers said the appeals court properly interpreted the arbitration agreement at issue and decided no larger issue regarding FAA preemption.

“Ultimately, accepting review of this matter would involve this [Supreme] Court in a determination of whether the California Court of Appeal erred in its application of California state contract law,” the subscribers said. “It is therefore not appropriate for review.”

Conflicts With Concepcion, Federal Court 

The Supreme Court in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (U.S. 2011), held that California's Discover Bank rule, which conditioned the enforceability of an arbitration agreement on the availability of classwide arbitration, is preempted by the FAA, DIRECTV said.

The Concepcion court said requiring classwide arbitration as a condition of enforcement “interferes with fundamental attributes of arbitration” and “creates a scheme inconsistent with the FAA.” Since class arbitration “is not arbitration as envisioned by the FAA” and “lacks [arbitration's] benefits,” the Concepcion court said class arbitration “may not be required by state law,” DIRECTV said.

DIRECTV's customer agreements required “binding arbitration” if customer complaints couldn't be resolved informally and prohibited class claims in arbitration. But they also provided if “the law of your state” would find the class action waiver unenforceable, “then this entire [arbitration clause] is unenforceable.” In a separate section, however, the arbitration agreement said that “notwithstanding the foregoing, the [arbitration clause] shall be governed by the Federal Arbitration Act.”

After Concepcion was decided, DIRECTV moved to compel arbitration of pending customer class actions in California state court. But a superior court denied the motion, finding the arbitration pacts unenforceable because they purported to waive California Private Attorneys General Act representative actions.

The justices should reverse the state court's “nonsensical” ruling that DIRECTV and its subscribers contractually opted out of FAA preemption, allowing for enforcement of state law disfavoring class action waivers, even though the arbitration agreement specified it “shall be governed” by the FAA, DIRECTV said.

The Court of Appeal affirmed on a different rationale, reasoning that the arbitration clause's non-severability provision required application of state law disfavoring class action waivers even though Concepcion had held the FAA preempts such state law, DIRECTV said. The appeals court said no arbitration was required because the parties had agreed to apply state law, including the discredited Discover Bank rule.

In a separate case, the U.S. Court of Appeals for the Ninth Circuit interpreted the same DIRECTV arbitration agreement after Concepcion and held satellite TV customers must arbitrate their claims despite the class action waiver, rejecting as “nonsensical” an interpretation that the parties agreed to follow state laws even if they are preempted by the FAA (Murphy v. DIRECTV, Inc., 724 F.3d 1218 (9th Cir. 2013)).

“The upshot is the intolerable situation that parties in California can enforce their federal arbitration rights in federal court, but not in the state court across the street,” the company said. “And because the Court of Appeal's decision is binding on every state trial court in California, and ‘non-severability' clauses of the type at issue here are found in millions of individual consumer arbitration agreements in that state and elsewhere, the scope of the problem is truly monumental.”

Supreme Court review is “warranted to resolve this manifest and acknowledged split of authority on a matter of federal law,” DIRECTV said.

Overturn ‘Hostility' to Arbitration, Company Urges 

The state court's decision also “makes a mockery” of the FAA's “substantive federal policy in favor of arbitration” as well as Concepcion by refusing to enforce federal arbitration rights “on a theory the Ninth Circuit has described as ‘nonsensical,' ” the company said.

The state court transformed a pact that forbids class arbitration into an agreement that requires class arbitration in order to be held enforceable, DIRECTV said.

“By no stretch of the imagination can that decision be characterized as resolving any doubts in favor of arbitration; rather, that decision can only be described as a brazen attempt to defy Concepcion by resurrecting the preempted Discover Bank rule,” the company said.

“Because the decision below not only creates an acknowledged conflict between state and federal courts on a matter of federal law, but also evinces the very hostility to arbitration that led to the enactment of the FAA in the first place, this court's review is warranted,” DIRECTV said.

Many arbitration agreements refer to state law, DIRECTV noted. If courts may interpret such references to include state law that is preempted by the FAA, then the federal arbitration statute's “preemptive effect is essentially nullified,” the company said.

“[T]he California Court of Appeal flouted federal law by refusing to endorse the FAA-governed arbitration agreement in this case and resurrecting the Discover Bank rule buried in Concepcion,” DIRECTV said. “This [Supreme] Court should not countenance such insubordination.”

Christopher Landau of Kirkland & Ellis LLP in Washington is counsel of record for DIRECTV Inc.

No Review of State Contract Issue 

In opposing review, the DIRECTV subscribers said the appeals court interpreted specific language in the 2007 DIRECTV customer agreements and “in no way” premised its decision denying arbitration on the Discover Bank rule discussed in Concepcion.

Supreme Court review is “inappropriate” because “the question of how to interpret language in an arbitration agreement is not a preemption issue, but a matter of state contract law,” the subscribers said.

Indeed, the state court complied with Concepcion and the FAA by enforcing the arbitration agreement “according to its terms,” which included “a more specific and unique class waiver provision” than the one involved in Concepcion, the subscribers said.

The subscribers disputed DIRECTV's arguments that the state law reference in their arbitration agreement is commonly found in other companies' arbitration pacts or that differences between the state court's ruling and the Ninth Circuit decision in Murphy raise an “intolerable” conflict between federal and state courts that will encourage forum shopping.

“[T]he only question is whether California law pertaining to contract interpretation was applied correctly, and not whether a particular statute or doctrine is preempted by the FAA,” the subscribers said.

Supreme Court review isn't warranted for a case that raises only the issue of whether an intermediate state appeals court properly applied state contract law, the subscribers said.

Paul D. Stevens of Milstein Adelman LLP in Santa Monica, Calif., is counsel of record for the subscribers.

To contact the reporter on this story: Kevin McGowan in Washington at kmcgowan@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

Text of DIRECTV's petition for review is available at http://op.bna.com/dlrcases.nsf/r?Open=kmgn-9uvqdx and the subscribers' brief opposing review at http://op.bna.com/dlrcases.nsf/r?Open=kmgn-9uvqes.