Arbitration/Class Action Waiver/FAA/Consumers: Court of Appeal Holds That Agreement Inviting Consideration Of Unenforceability Of Class Arbitration Procedures Allowed Trial Court To Invalidate Class Action Waiver

 

Sticking To Its Contract Interpretation Guns, Second District, Division One, Shoots Down Federal Decisions

     The Court of Appeal has upheld a trial court order denying a motion to dismiss or stay class action litigation and to compel arbitration, basing its conclusion on principles of contract interpretation.  Imburgia v. DIRECTV, Inc., B239361 (2nd Dist. Div. 1 April 7, 2014) (Rothschild, Chaney, Miller).

     AT&T Mobility LLC v. Concepcion, 563 U.S. __, 131 S.Ct. 1740 (2011) (Concepcion) held that the Federal Arbitration Act (FAA) preempts the rule of Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), which case held that class action waivers in consumer contracts may be unconscionable and unenforceable.  (Under California law, the Consumer Legal Remedies Act would also preclude waiver of the right to bring a class action under the CRLA). 

     But Concepcion does not necessarily invalidate all class action waivers.  The objective of the FAA is to carry out the intent of the parties, and contract interpretation may lead to the conclusion that the parties intended to proceed under state law rules that allow for the invalidation of class action waivers.  In Imburgia v. DIRECTV, Inc., the Court of Appeal concluded that here, the parties intended to proceed under California state law, allowing the trial judge to invalidate the class action waiver.

     The Court of Appeal summarized:  “the 2007 customer agreement provides that ‘if . . . the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire [arbitration] section is unenforceable.’  The class action waiver is unenforceable under California law, so the entire arbitration agreement is unenforceable.” 

      To reach its conclusion, the Court of Appeal applied two principles of contract interpretation. 

     First, in case of inconsistency, the specific provision takes precedence over the general provision in a contract.  Here,  the contract generally adopted the FAA, but specifically adopted “the law of your state” with respect to the specific issue of enforceability of class action waivers.  Therefore, California state law took precedence over the FAA with respect to the specific issue of enforceability of the class action waiver.

     Second, if the contract was ambiguous, then it had to be interpreted against the drafter, namely, against DIRECTV, Inc. 

      The Court of Appeal disagreed with two federal decisions, In re DIRECTTV Early Cancellation Fee Marketing and Sales Practices Litigation, 810 F.Sup.2d 1060, 1071 (C.D.Cal. 2011), and Murphy v. DIRECTV, Inc., 724 F.3d 1218 (9th Cir. 2013), finding that the courts that rendered those decisions failed to properly apply important principles of contract interpretation.  Because “the dispositive issue” was the intent of the contracting parties, contract interpretation was highly relevant and deserved more weight than the federal courts had given to it.  (See my August 4, 2013 post on Murphy.)

      While consumer advocates may have found a gap in the fortress wall in Imburgia, allowing the consumers, at least for now, to beat arbitration and a class action waiver, one can count on DIRECTV, Inc. and other corporations finding drafting solutions to plug the gap in the future.   And one can also count on ever imaginative consumer advocates searching for new ways to scale the fortress wall.