If you’re a business looking for new ways to squeeze money out of your consumers without having to worry about whether doing so is illegal, than you had a very good day in the Supreme Court on Monday. In its first divided decision of the current Supreme Court term, the Court held in DIRECTV v. Imburgia that the satellite television company DIRECTV could effectively immunize itself from many suits claiming that they charged illegal fees, despite the fact that this decision cuts against language in DIRECTV’s own contract. Only three justices, the conservative Clarence Thomas and the liberals Ruth Bader Ginsburg and Sonia Sotomayor, dissented.
On the surface, not very much is at stake in DIRECTV. The company allegedly charged early termination fees that violate California law. If the plaintiffs win, they get their fees back. So this is hardly a case where some innocent’s life or livelihood is at stake.
Yet the very smallness of the claim in DIRECTV makes it an important case. In 1925, Congress enacted the Federal Arbitration Act (FAA) so that, as Justice Ginsburg explains in her dissent, “merchants with relatively equal bargaining power” could agree to resolve their disputes through arbitration rather than through potentially more costly litigation. Beginning in the 1980s, however, the Supreme Court began to expand this law to allow businesses to force their workers and customers to agree to arbitration as a condition of doing business with the company. In many cases, the Court’s expansions of the FAA have departed drastically from the law’s text. In Circuit City v. Adams, for example, a 5-4 Court held that employers could force many workers engaged in foreign or interstate commerce into arbitration despite the fact that the FAA specifically exempts “workers engaged in foreign or interstate commerce.”
DIRECTV builds off a similar decision. In 2011, a 5-4 Court held in AT&T Mobility v. Concepcion that businesses can tack bans on class action lawsuits onto forced arbitration agreements, even if those bans violate state law. In practice, this meant that AT&T Mobility, the cell phone company at issue in Concepcion, could refuse to provide service to anyone who does not sign away their right to bring a class action lawsuit. AT&T then allegedly imposed an illegal $30.22 charge on its customers.
As a practical matter, Concepcion meant that companies that engage in this practice can immunize themselves from small-dollar lawsuits. Class actions permit multiple parties to join together in a single lawsuit with a single legal team, rather than having to file individual cases where the costs of hiring a lawyer will massively exceed the total value of the case. As one federal appeals court judge once explained, “the realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.”
The DIRECTV case closely resembles Concepcion, with one exception. DIRECTV inserted a provision into their own contract providing that its class action ban does not apply “if the law of your state” does not permit such a ban. Writing for the majority of six justices, Justice Stephen Breyer claims that this provision really means “the law of your state” minus any laws that were preempted by decisions such as Concepcion, but it’s all but certain that this is not what DIRECTV thought they were agreeing to when they wrote their own contract.
(Breyer, it’s worth noting, authored the dissent in Concepcion. It’s unclear why he flipped his vote in DIRECTV, although there is some language in Breyer’s more recent opinion suggesting that he did not want to relitigate a settled dispute.)
Justice Ginsburg lays out in her dissent just how far DIRECTV departs from the most likely reading of the contract and from ordinary contract law. For one thing, the parties litigated this case for three years before Concepcion was handed down — and only then did DIRECTV discover that its own contract required this dispute to be handled in no-class arbitration. For another, the contract is, at best, ambiguous regarding whether “the law of your state” refers to the actual law of the state where this dispute takes place, the state of California, or only those California laws that align with the anti-class action rule in Concepcion.
As Breyer acknowledges in his opinion, parties to a contract may “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” unmolested by Concepcion. Given the fact that the DIRECTV could not have known in 2007, when it drafted its contract, that Concepcion would be handed down in 2011, it’s more than a little odd for a court to read this contract to assume that the parties wanted Concepcion‘s rule to apply.
And even if the contract is ambiguous, Ginsburg explains, a holding in DIRECTV’s favor violates a basic rule of contract law taught to most law students during their first year of study. “Courts generally construe ambiguous contractual terms against the drafter,” Ginsburg writes, because “a party should not be permitted to write an ambiguous term, lock another party into agreeing to that term, and then reap the benefit of the ambiguity once a dispute emerges.” If you are the sole author of a contract, you have the opportunity to fix language that cuts against your desires in the drafting process. The other party does not have this opportunity, so they benefit from any ambiguities.
Concepcion is an odd decision. The Federal Arbitration Act is the Federal Arbitration Act. It has nothing to say about class actions. The defendant in Concepcion, moreover, was able to lock its customers into an unfavorable contract because of its superior bargaining power. Few cell phone users have the power to negotiate terms with their provider, they can either sign the contract that is handed to them or do without the provider’s service.
But at least the defendant in Concepcion can say that they actually got their customers to sign a piece of paper purporting to strip them of their right to bring a class action — albeit in violation of state law. DIRECTV did not even accomplish that task. Instead, it locked its consumers into an agreement that, by its own terms, only applied a class action ban in states where such bans are legal. And yet, even without the benefit of favorable contract terms, the Supreme Court holds that a much more stringent class action ban than the one DIRECTV originally asked for must stand.
Concepcion and similar cases, Ginsburg warns, “have predictably resulted in the deprivation of consumers’ rights to seek redress for losses, and, turning the coin, they have insulated powerful economic interests from liability for violations of consumer protection laws.” But at least those cases only stripped consumers of the rights that they sign away (regardless of what state law has to say about such contracts). Now, the Supreme Court is willing to rewrite contracts so that ambiguous terms favor the most powerful party. That’s a bridge the justices previously were not willing to cross.