U.S. Supreme Court Enforces Class Action Arbitration Waiver In DIRECTV's Adhesion Contract

The U.S. Supreme Court, on December 14, 2015, ruled, 6 to 3, that DIRECTV customers in California who were allegedly illegally charged hefty “early termination fees” of up to around $500 can neither file their individual claim with a court nor join together to sue the company in court. The Supreme Court ordered that each consumer must have their respective complaint adjudicated through a private arbitration system established by DIRECTV (now owned by AT&T). See DirecTV, Inc. v. Imburgia, et al, available at: http://www.supremecourt.gov/opinions/15pdf/14-462_2co3.pdf . 

         The majority refused to give the customer the benefit of the doubt when DIRECTV itself drafted and provided the ambiguous contractual languages in its 2007 version of the form service contract in dispute. Section 9 of this 2007 form agreement provides that (1) any claims raised by DIRECTV or consumers will be resolved only by binding arbitration; (2) no class-based arbitration is permitted; (3) the entire arbitration provision (i.e., arbitration only and no class-based claims) is unenforceable if “the law of your state” makes the class arbitration waiver unenforceable. Section 10 states that Section 9 shall be governed by the Federal Arbitration Act (FAA). The majority deferred to California Court of Appeal’s interpretation and concluded “the law of your state” refers to “the law of California.” The only issue in this case, thus, was whether California state law made the class arbitration waiver unenforceable so as to make the entire arbitration provision unenforceable.

The majority held that current California state law could not make DIRECTV’s clause of class arbitration waiver unenforceable even though in 2007—when DIRECTV drafted the form agreement—California’s Supreme Court, in Discover Bank v. Superior Court, 36 Cal. 4th 148, 162-163 (2005), had held class arbitration waiver clauses under such circumstances unconscionable and unenforceable. In other words, when DIRECTV imposed this 2009 service agreement, both parties (DIRECTV and California customers who read and understood the agreement) would have had to assume if they knew California law that the class arbitration waiver would be unenforceable in California, which would have made the entire arbitration provision unenforceable under the terms of the agreement. The majority acknowledged that such assumption was likely to exist.

 The majority, however, held “the law of your state” should be presumed to be the current “valid state law.” Given the Supreme Court, in 2011, held that Discover Bank was pre-empted by the FAA (in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 352 (2011)), Discover Bank is not “valid state law.” The majority held that California courts discriminated against arbitration—violating the FAA’s policy that favors arbitration. Therefore, the majority concluded California Court of Appeal’s decision interpreting DIRECTV’s 2009 form service agreement was pre-empted by the FAA and individual arbitration is required.

Justices Ginsburg and Sotomayor dissented, as did Justice Thomas. Justice Thomas (surprisingly) opined that the FAA does not require state courts to order arbitration, stating that it does not apply to proceedings in state courts.

Justice Ginsburg articulated at least four errors in the majority’s opinion. 

First, the majority misread the FAA (enacted in 1925 to resolve disputes between merchants with equal bargaining powers), depriving consumers of effective relief against powerful economic entities, which have created their contracts with consumers and employees containing no-class arbitration clauses. Consumers and most employees, unlike merchants with equal bargaining powers, lack the ability to change the terms of consumer adhesion contracts or employment agreements so that their effective access to justice would be safeguarded.

Second, the majority unreasonably expanded the FAA’s pre-emption scope. The FAA preempts state laws only to the extent that state laws conflict with “the contracting parties’ intent.” For example, the contracting parties in 2009 expected Discover Bank to be valid – their 2009 intent should not be gauged in light of the 2011 Concepcion decision.

Third, Section 1751 of California’s Consumer Legal Remedies Act (CLRA), which the Plaintiffs relied upon to prosecute DIRECTV’s alleged violations, also renders class action waivers invalid, and Section 1751 remains “valid California state law.” Therefore, the majority erred in ignoring it.

Fourth, the majority’s decision contravenes international standards making arbitration clauses in adhesion contracts unenforceable. For example, Justice Ginsberg points out that the European Union bars enforcement of one-party-dictated mandatory consumer arbitration agreements because consumers cannot agree to arbitration that would effectively deprive them of the ability to enforce their rights.

Bryan Schwartz Law has had extensive experience fighting for employees who have no other choices but to accept a mandatory arbitration clause to get a job. We agree with the Ginsburg dissent that “arbitration is a matter of consent, not coercion” and believe the majority’s decision empowers the powerful economic enterprises but deprives the powerless, like workers and consumers, of their ability to protect their rights effectively.

Contact Bryan SchwartzLaw to learn how an arbitration agreement may affect your rights.