Two weeks ago, the US Supreme Court issued its ruling in DirecTV Inc. v Imbrurgia. The High Court upheld a provision in an arbitration clause that waived the right to class action claims, in line with its earlier decision in a separate landmark case. Significantly, this result came despite the arbitration clause containing a proviso respecting state law that prohibits class action waivers.

Background

DirecTV is a US satellite television company. The plaintiff was part of a class of consumers who had entered into a service agreement with DirecTV. In 2008, the plaintiff and other DirecTV customers initiated a class action suit before the California state courts against DirecTV, alleging that the early termination fees imposed in DirecTV's service agreements were a violation of Californian law.

Like many standard-form consumer contracts in the US, the agreement contained a clause compelling parties to settle any claim through arbitration. The same clause also prohibited either party from consolidating or joining claims in arbitration, which is widely known as a class action waiver. What was less usual in the DirecTV case was a proviso which stated that the entire arbitration clause was invalid if "the law of your state" (in this case, California law) made class action waivers unenforceable.

The issue of class action waivers in arbitration was first considered by the US Supreme Court in 2011, in the decision of AT&T Mobility LLC v Concepcion, 563 U.S. 333 ("Concepcion"). The Court there struck down the class action suit mounted by consumers against the telecommunications giant, ruling that the class action waiver contained in AT&T's service agreements was valid.

Shortly after that decision, DirecTV sought to compel arbitration in late 2011 and to have the class action suit dismissed before the California courts. This was rejected by both the California Superior Court and the California Court of Appeal. DirecTV then petitioned to the US Supreme Court.

In a 6-3 decision, the Supreme Court ruled that DirecTV's arbitration clause was valid and that the class action waiver was enforceable.

Majority of the court: federal law pre-empted California law from outlawing class action waivers

The task before the Court was largely one of interpreting the phrase "law of your state" in the proviso. In particular, the Court had to consider whether California law rendered class action waivers unenforceable.

The majority held that California state law had been pre-empted by federal law on this issue. The California Supreme Court had held in the 2005 case of Discover Bank v Superior Court, 36 Cal. 4th 148 ("Discover Bank"), that class action waivers in consumer contracts that involve small amounts of damages are unconscionable and unenforceable. However, this decision was overruled by the US Supreme Court in Concepcion when it found that parties can enforce class action waivers in arbitration agreements. Citing the Supremacy Clause in the US Constitution, the Court in DirecTV held thatConcepcion had pre-empted Discover Bank. As a result, the "law of your state" was referring to Californian law that has been pre-empted by federal law.

In so ruling, the Court rejected the plaintiff's argument that parties were free to choose the pre-Concepcion California law to govern the contract. The Court noted that doing so would mean that parties intended for the phrase "law of your state" to refer to invalid state law, which it found implausible.

It also rejected the plaintiff's argument that the ambiguous phrase should be resolved against DirecTV, which drafted it. In the Court's view, this would push the anti-drafter canon of interpretation beyond its limits.

The dissent: consumer protection justifies interpreting clause against DirecTV

The main dissent was written by Justice Ginsburg (joined by Justice Sotomayor). The minority believed that the "law of your state" referred to the consumer's "home state law untouched by federal preemption", for a number of reasons.

First, the parties at the time of contract probably had in mind California law which prohibited class action waivers since the contract pre-dated the US Supreme Court decision in Concepcion. Second, the minority considered it "bizarre" for the parties to insert the proviso if they had intended for it to refer to state law as incorporating federal law. Lastly, as this was a standard-form consumer contract, it would only be fair, in light of the unequal bargaining power of the parties, for the clause to be interpreted against the drafter. The minority opinion ended with an outline of the key concerns that the Court's jurisprudence on this issue had eroded consumer protection.

Justice Thomas issued a solo dissent re-stating his long-held view that the Federal Arbitration Act did not apply to proceedings in state courts, and as a result, there was no issue of federal law for the Supreme Court to determine.

Conclusion

By the majority's own admission, this was an unusual case where the US Supreme Court disagreed with a state court's interpretation of a contract governed by state law. It re-affirms the US Supreme Court's desire to give full effect to its 2011 decision in Concepcion upholding class action waivers. Lower courts, both state and federal, are likely to take heed in enforcing class action waivers.

Corporations that are dealing with US consumers and wary about class actions can now insert waivers with greater confidence that such waivers would be enforced by the courts there.