WASHINGTON (CN) - California courts should have forced a would-be class to arbitrate their case over DirecTV's early termination fees.
Amy Imburgia and Kathy Greiner won class certification in their state-court action against DirecTV just one week before the U.S. Supreme Court delivered a boon to corporations with the April 27, 2011, decision of Concepcion v. AT&T Corp.
Though Concepcion holds that the Federal Arbitration Act pre-empts California's law on unconscionable contracts, a California appeals court found that DirecTV's class-action waiver was still unenforceable under state law.
In doing so, the court relied on California precedent from the 2005 decision Discover Bank v. Superior Court, which made class-arbitration waivers in a contract unenforceable.
The U.S. Supreme Court took up the DirecTV case in March and reversed 6-3 on Monday.
"No one denies that lower courts must follow this court's holding in Concepcion," Justice Stephen Breyer wrote for the majority. "The fact that Concepcion was a closely divided case, resulting in a decision from which four justices dissented, has no bearing on that undisputed obligation."
In the DirecTV case, however, the California Court of Appeal noted that the Federal Arbitration Act includes considerable latitude for parties to an arbitration contract in choosing what law governs some or all of its provisions, including the law governing enforceability of a class-arbitration waiver.
"In principle, they might choose to have portions of their contract governed by the law of Tibet, the law of prerevolutionary Russia, or (as is relevant here) the law of California including the Discover Bank rule and irrespective of that rule's invalidation in Concepcion," Breyer wrote.
Critical to the majority, however, was the fact that Concepcion invalidated the Discover Bank rule.
"Thus the underlying question of contract law at the time the Court of Appeal made its decision was whether the 'law of your state' included invalid California law," Breyer wrote.
Turning to that issue, Breyer said "California courts would not interpret contracts other than arbitration contracts the same way."
"Rather, several considerations lead us to conclude that the court's interpretation of this arbitration contract is unique, restricted to that field," the decision continues.
For the majority, "California's interpretation of the phrase 'law of your state' does not place arbitration contracts 'on equal footing with all other contracts.'"
"Hence, the California Court of Appeal must 'enforce' the arbitration agreement," Breyer added.
Justice Clarence Thomas wrote in dissent that the Federal Arbitration Act does not apply to proceedings in state courts.
Justice Sonia Sotomayor meanwhile joined a more lengthy dissent by Justice Ruth Bader Ginsburg, which says that courts should DirecTV's "Delphic" contract in a manner giving the customer the benefit of the doubt.
"I would take no further step to disarm consumers, leaving them without effective access to justice," Ginsburg wrote.
"The California Court of Appeal appropriately applied traditional tools of state contract law to interpret DirecTV's reference to the home state laws of its customers," the dissent concludes. "Demeaning that court's judgment through harsh construction, this court has again expanded the scope of the FAA, further degrading the rights of consumers and further insulating already powerful economic entities from liability for unlawful acts. I resist the court's bent, and would affirm the judgment of the California Court of Appeal.
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