Monday, September 16, 2013
The Ninth Circuit's opinion in Murphy v. DirecTV starts in the manner to which we have been accustomed in the past few years. Although Plaintiffs state claims under California consumer protection statutes, and although another California statute declares unenforceable arbitration clauses in consumer contracts that preclude collective or class action proceedings, the Ninth Circuit must uphold DirecTV's arbitration agreement with the plaintiff class and compel arbitration. The Supreme Court's 2011 decision in Concepcion compels this result.
The arbitration provision with its class action waiver also contained a "jettison clause," which reads: “If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire [section on dispute resolution] is unenforceable.” Originally, the Distirct Court relied on the jettison clause in denyingDirecTV's motion to compel arbitration, and the Ninth Circuit affirmed. Post-Concepcion, however, the District Court reversed itself and granted the motion to compel and the Ninth Circuit affirmed that grant of the motion to compel.
This confuses me, and I must confess that I do not find the Ninth Circuit's explanation enlightening, despite several pages devoted to distinguishing cases that Plaintiffs thought supported their claim. The Ninth Circuit treats the issue of one of retroactivity. When the Supreme Court interpreted in Federal Arbitration Act (FAA) in Concepcion, it told us what the FAA meant, and it has always meant what it meant in Concepcion. If the FAA preempts state law, then it has always done so, and it can do so with respect to claims that arose before Concepcion was decided. As the Court explains.
A contract cannot be unenforceable under state law if federal law requires its enforcement, because federal law is “the supreme Law of the Land . . . , any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” U.S. Const. art. VI, cl. 2. Section 9 of the Customer Agreement provides only that the arbitration agreement will be unenforceable if the “law of your state” disallows class waivers, which California law does not—and could not—under the FAA as interpreted in Concepcion.
But the Ninth Circuit also quotes the Supreme Court as saying that the FAA “places arbitration agreements on an equal footing with other contracts, and requires courts to enforce them according to their terms.” Here, the parties have stipulated that their agreement to arbitrate is unenforceable if state law would prohibit it, and there seems to be no doubt that the law of California at the time of the contract prohibited class action waivers in arbitration provisions. If the courts are aiming at giving effect to the intent of the parties, it seems to me that the "jettison clause," rather than Concepcion governs. The FAA is about enforcing arbitration agreements, and here the parties have agreed that, to the extent California law governs, claims cannot be arbitrated. Concepcion should not be construed so broadly as to compel arbitrations to which the parties have not agreed.
But fortunately for Plaintiffs, they also have claims against Best Buy, where they acquired their DirecTV equipment and which is neither a party to the arbitration clause nor a third-party beneficiary of it, according to the Ninth Circuit. The nature of that acquisition is at the heart of Plaintiffs' claims. They allege that Best Buy misled them into thinking that they were purchasing DirecTV equipment when in fact the two companies consider the transaction a lease. Plaintiffs also allege that the lease terms are oppressive and unfair.
The District Court granted Best Buy's motion to compel arbitration based on equitable estoppel. Plaintiffs are suing alleging that the two parties colluded in imposing on them unfair and oppressive terms in a Customer Agreement and Lease Addendum. If it is suing based on that document, the arbitration provision should be in with respect to both defendants. The District Court held that Plaintiffs were estopped to deny Best Buy the benefits of the arbitration provision.
The Ninth Circuit reversed on estoppel. Plaintiffs are suing DirecTV because of unfair and oppressive terms in a lease agreement. They are suing Best Buy because its conduct in the transaction misled Plaintiffs into thinking they were buying equipment when they were in fact only leasing it. In short, the Ninth Circuit concludes that "Plaintiffs’ claims against Best Buy do not rely on, and are not intertwined with, the substance of the DirecTV Customer Agreement or Lease Addendum." In addition, while alleged collusion is another ground for equitable estoppel, and Pliantiffs have alleged collusion, the alleged collusion is unrelated to the contract on which Best Buy would rely in order to compel arbitration.
The Ninth Circuit also rejected Best Buy's claims that it was entitled to benefit from the arbitration provision either under an agency theory or as a third-party beneficiary.