GavelOn April 27, 2011, the Supreme Court in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), cleared the way for consumer products companies and other businesses to incorporate class action waivers into their arbitration agreements with customers.  On April 7, 2014, the Second District Court of Appeal in California affirmed the denial of a motion to compel arbitration despite Concepcion, relying on language in the arbitration clause that rendered the clause invalid if state law would find the class action waiver unenforceable.  The decision appears to contradict a recent Ninth Circuit decision, calling into question Concepcion’s scope and ensuring further litigation of the issue.

In Imburgia v. DirecTV, Inc., 170 Cal. Rptr. 3d 190 (2014), Plaintiffs accused DirecTV of improperly charging early termination fees and brought a class action against the company for false advertising, violation of California’s Consumer Legal Remedies Act (CLRA) and related claims.  After the trial court granted in part Plaintiffs’ motion for class certification, Concepcion came down and DirecTV moved to decertify the class and compel arbitration.  DirecTV’s arbitration clause included a class action waiver and provided generally that the Federal Arbitration Act (FAA) applied, but also provided:  “If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section … is unenforceable.”  Id. at 193.

The trial court denied the motion based on this language, and the Court of Appeal affirmed, finding that “the law of California would find the class action waiver unenforceable because, for example, the CLRA expressly precludes waiver of the right to bring a class action under the CLRA.”  Id. at 194, citing Cal. Civ. Code §§ 1751, 1781(a).

DirecTV argued that the decision was contrary to Concepcion and its broad interpretation of the FAA.  However, the Court stated, “[t]he FAA’s broad policy of enforcement of arbitration agreements according to their terms applies even to ‘agreements to arbitrate under different rules than those set forth in the [FAA] itself.'”  Id. (citation omitted).  Accordingly, based on the California rule of contract interpretation that a specific provision controls over a general one, “the reference to ‘the law of your state’ in [the arbitration agreement] operates as ‘a specific exception to the arbitration agreement’s general adoption of the FAA'” found elsewhere in the agreement.  Id. at 195.  In addition, the Court held, Plaintiffs’ “interpretation of the contract finds further support in ‘the common-law rule of contract interpretation that a court should construe ambiguous language against the interest of the party that drafted it.'”  Id. at 196 (citation omitted).

DirecTV relied on the recent Ninth Circuit case of Murphy v. DirecTV, Inc., 724 F.3d 1218 (9th Cir. 2013), which was decided after briefing in the Imburgia appeal was completed.  There, the Ninth Circuit held that the class action waiver in DirecTV’s customer agreement was enforceable under Concepcion, which preempts contrary state law.  724 F.3d at 1228.  The Court of Appeals reasoned that “‘the parties’ various contract interpretation arguments’—which included both the argument that the specific reference to state law controlled over the general reference to the FAA and the argument that ambiguities should be construed against the drafter — ‘are largely irrelevant to our analysis,’ because under the Supremacy Clause of the United States Constitution, and the related doctrine of federal preemption, federal law is the law of every state.”  Id. 

The California Court of Appeal was unpersuaded:  “a reasonable reader of the customer agreement would naturally interpret the phrase ‘the law of your state’ as referring to (nonfederal) state law, and any ambiguity should be construed against the drafter.[]  On the other hand, insofar as the court reasoned that contract interpretation is irrelevant because the parties are powerless to opt out of the FAA by contract, we are aware of no authority for the court’s position.”  170 Cal. Rptr. 3d at 197 (footnote omitted).

DirecTV’s counsel has stated that the company intends to appeal.  Thus, the extent to which parties are indeed powerless to opt out of the FAA because “federal law is the law of every state,” or whether state law contract principles may allow them to do so, remains undecided.  Based on the broad scope of the FAA as interpreted by Concepcion and Murphy, it is far from clear that the Imburgia decision will survive.