SCOTUS, Arbitration and Contra Proferentem — Greg Klass

Post by Greg Klass

The Supreme Court heard oral argument yesterday (October 6th) in DIRECTV v. Imburgia (full transcript here). The case involves the meaning of “the law of your state” in an arbitration clause. DIRECTV argues that it means “the law of your state as limited by preempting federal law,” whereas the plaintiffs argue that it means “the law of your state without regard to any preempting federal law.” Because the phrase does not appear in a choice of law clause, the plaintiff’s have a decent argument for their reading—or that the words read in light of the contract as a whole are at least ambiguous. The reasons are complicated, but if the phrase means what DIRECTV says, then the arbitration clause kicks in and the plaintiffs lose their class action. If it means what the plaintiffs say, their class action remains in state court.

DIRECTV has argued that if the words “the law of your state” are ambiguous, the presumption in favor of arbitration means that they win. That would be a very weird result.

One reason is relatively technical. It is well established that when the scope of an arbitration clause—what claims it covers—is ambiguous, courts will apply a presumption in favor of arbitration. This case, however, involves whether a condition of arbitration is satisfied. A new presumption about when arbitration can happen, as distinguished from what can be arbitrated, would be a big deal in the arbitration law.

The other reason is of more concern to contracts folks like myself. The California Court of Appeal decided the case in part on the basis of contra proferentem: contracts will be interpreted against the drafter. That rule is, of course, especially appropriate in a mass consumer contract like this one, which was drafted by one side and given to tens of thousands of consumers on a take-it-or-leave-it basis. Even if the federal presumption in favor of arbitration applies, it runs up against another rule of construction: contra proferentem.

As far as I know, the Supreme Court has never said what should happen when these two rules of come into conflict. But it would surely be weird to say that a presumption in favor of arbitration should defeat contra proferentem in consumer contracts. First, it would get all the incentives wrong. Drafters would have new reason to be vague about the reach of arbitration, creating opportunities to mislead. Second, the rule would run up against the more fundamental principle, which the Supreme Court invokes in just about every arbitration case it decides, that the parties’ intentions control. When one side has had no role in drafting an ambiguous clause, there is no reason to think that reading it to permit arbitration, against that party’s present wishes, is more likely to get at her intentions when she assented to the contract.

Of course when the reading also prevents that party from bringing a class action for claims that would otherwise be too low-value to litigate, there is even less reason to presume that this was her understanding—which is what’s really at stake in this case. I doubt, however, that this Court will mention that fact.

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