Justices Weigh Opposing ‘Horribles' in DIRECTV Case

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By Perry Cooper

Oct. 6 — The possible effects of the U.S. Supreme Court's eventual ruling in a case over a DIRECTV arbitration agreement—a SCOTUS docket filled with state contract cases versus an unchecked state court system—troubled somejustices at oral argument Oct. 6 (DIRECTV Inc. v. Imburgia, U.S., No. 14-462, argued 10/6/15).

Justice Stephen G. Breyer expressed concern that if the court questions the California court's interpretation of California law to prohibit arbitration in this case, it will have to monitor every state court opinion interpreting a contract under state law.

He balked at the idea that the justices are “the supervisor of all state contract interpretation judges.”

Justice Antonin Scalia said he sympathized with Breyer's point: “Where does it stop? We're going to reinterpret every state interpretation of state law that ends up invalidating an arbitration agreement? Certainly not. So what's the test?”

At the same time, Scalia said he's concerned about the opposite “horrible”—that the state courts will be allowed to do whatever they want if the Supreme Court doesn't keep them in check.

The case, which involves a dispute over satellite television fees, asks the court to consider whether an arbitration provision in a DIRECTV customer agreement barring class arbitration was properly found unenforceable by a state appeals court because of its reference to California law.

Contract Didn't Freeze Law

The 2007 contract included an arbitration provision explicitly governed by the Federal Arbitration Act. But the contract also included a provision stating that if “the law of your state” would find the class action waiver in the contract unenforceable, the entire arbitration provision was invalid.

That wording created problems of interpretation when, in 2011, the Supreme Court decided AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) (12 CLASS 362, 5/13/11), which nullified state law requiring the availability of classwide arbitration in some cases, saying it was inconsistent with the FAA.

The central question that then arose in this case was whether the contract's reference to state law meant California law as it existed before Concepcion (when class action waivers were barred), or after (when the FAA trumped the waiver bar).

A California trial court, and an intermediate state appeals court, went with the former reading.

Why even mention the “law of your state”? Justice Ruth Bader Ginsburg asked. “If state law means state plus federal law and federal trumps state law, the reference to state law is just inexplicable.”

Christopher Landau, arguing for DIRECTV, said that state law doesn't mean inoperable state law, that is, state law that is preempted by the FAA.

When the parties entered the agreement, they agreed that state law meant California law, which forbade class action waivers, Ginsburg said. “Isn't that what they intended?”

But, Landau said, “there is nothing in the contract that freezes this in a particular point in time, that it takes a snapshot.”

If California had repealed the California Consumers Legal Remedies Act, which has the anti-waiver provision in question, the parties wouldn't still say they disclaimed arbitration, he said.

‘We Don't Do Wrongness'

Justice Elena Kagan conceded to Landau that the California appeals court's opinion is “unsatisfying, to use a kind word,” and that the court got the answer wrong.

But she blamed it on the wording of the contract. “It's a very unusual contract provision. Most companies use very clear ones,” she said. “This one did not.”

But the Supreme Court has no business correcting the state court if it just got it wrong, she said. “Wrongness is just not what we do here.”

Landau responded that the federal courts' role is to check state courts when they misapply federal law.

Parade of Horribles

Thomas C. Goldstein, arguing for the consumers, told the court that if it reverses the appeals court's decision here, “you are going to invite an enormous amount of second-guessing of state law contract interpretation.”

“That's one horrible,” Scalia said. “And the horrible on the other side is if we agree with you, the states can do whatever they want to invalidate arbitration agreements so long as they're doing it under the guise of contract interpretation. Is that not also a horrible?”

But there's no evidence this is actually happening, Goldstein said.

DIRECTV Changed Practices

Goldstein said that DIRECTV wrote this version of the contract in 2006 “before AT&T v. Concepcion was a glimmer in anyone's eye at all.” At that time, everyone agrees, California law prevented any arbitration whatsoever, he said.

And DIRECTV filed an amicus brief in Concepcion, in which it said it didn't arbitrate with anyone in California because of the contract provision, he said. So it's wrong to say DIRECTV intended to arbitrate California disputes when it formed these contracts, he argued.

Thomas C. Goldstein of Goldstein & Russel P.C. in Washington argued for the plaintiffs.

Christopher Landau of Kirkland & Ellis LLP in Washington argued for DIRECTV.

To contact the reporter on this story: Perry Cooper in Washington at pcooper@bna.com

To contact the editor responsible for this story: Steven Patrick at spatrick@bna.com

A transcript of the oral argument is at http://src.bna.com/uM.