The Supreme Court vs. Contract Law — Greg Klass

Post by Greg Klass

My last two posts on DIRECTV v. Imburgia [post one, post two] were on relevant rules of construction: (1) the FAA presumption in favor of arbitration and (2) the common law tradition of reading against the drafter. But those rules should come into play only if the Supreme Court agrees with the California Court of Appeal that the phrase “the laws of your state” is, as it appears in the contract, ambiguous. At oral argument several justices explored an alternative holding: finding that “the laws of your state” had only one contractual meaning, and that the California Court of Appeal’s conclusion that it was ambiguous was so unreasonable as to be (presumptively?) hostile to arbitration. This post discusses what it would take to reach such a conclusion, and a few of the weirder things the Justices said at oral argument.

The core interpretive question in the case is whether “the laws of your state,” as it appeared in DIRECTV’s Customer Agreement, referred (a) to California law on the books, without regard to preemptive force of the FAA, or (b) only to that portion of California law not preempted by the FAA.[*] The question practically begs one to go all metaphysical on it. What is a law anyway? If a state statute is preempted and so cannot be enforced, is it still the law? One might think that if it cannot be enforced, it’s no more an actual law than is the law of Westeros. Alternatively, perhaps it is a law, but is defeated by a superior law. If a preempted law were not a law, a sentence like “The Supreme Court held that the Texas law violates the Constitution,” would be make no sense. (Bringing us to sentences like, “The present King of France is bald.”)

Such reasoning is a nice example of what Felix Cohen called “transcendental nonsense.” At oral argument, none of the Justices seemed tempted by such logic, though Justice Breyer was perhaps playing with it when he asked the respondents’ attorney “does California have a law, a valid law that would find the agreement to dispense with class actions unenforceable?” And Justice Sotomayor got close when she suggested that if the California statute is preempted, “it’s preempted forever” – including before the Court held it to be preempted.

But there was some other nonsense at oral argument. This court has much more experience interpreting statutes than they do interpreting contracts. None of the current Justices, for example, has ever served on a state court. Sometimes it shows.

Justice Scalia, for example, suggested that the decision below might have “flouted well-accepted universal Contract law principles, the most important of which is you interpret a Contract in a manner that makes it valid rather than invalid.” This exhibits several layers of confusion. First, the rule Scalia refers to is indeed a rule of contract construction – see the Restatement (Second) of Contract § 203(a). But it is hardly the “most important” of them, and certainly not more important than contra proferentem: interpreting against the drafter. Second, like contra proferentem, the rule should apply only when there is an ambiguity – raising all the issues I flagged in my last post. It is therefore inconsistent with the suggestion that the California court’s conclusion involved an unreasonable interpretation. Third, the rule favoring validity (or “effectiveness”) can do no work in this case. The arbitration provision at issue is valid and effective no matter whether you read it to permit arbitration or to prohibit arbitration. At issue is not the validity or effectiveness of the clause, but what it says about when arbitration is permissible. Under any answer to that question, the clause is valid and effective.

Justice Breyer seems to have sent one of his clerks to the civil rights cases to figure out whether courts talk about state laws as “laws” even though those laws are unconstitutional. But of course the first question in any contract case is the parties’ intent – what they used the words to mean. And one of the two parties to each of these contracts was a consumer. How courts use the words “state law” in civil rights cases is no more relevant to how consumers understood “the law of your state” than is how George R.R. Martin uses “the law of Westeros” in the Song of Ice and Fire. Actually, the civil rights cases are probably less relevant than is Martin. Consumers are more likely to be familiar with references to fictional laws than they are with talk of federally preempted ones and how judges talk about them. The question is what the term meant to the parties, not any technical legal definition it might have.

And here we arrive at what is really odd about this case, which goes back to the interpretation-construction distinction.

If the clause is ambiguous, it makes perfect sense for the Supreme Court to weigh in, by clarifying the appropriate rule of construction for when there is an ambiguity in a condition on arbitration.

But if the Court finds that the clause is not ambiguous, and that the California Court of Appeal’s conclusion that it was ambiguous was manifestly wrong, then the Supreme Court will find itself opining on an essentially factual question: How did DIRECTV and DIRECTV’s customers understand, subjectively or objectively, the words “the law of your state” as they appeared in the contract?

It is true, of course, that courts often decide questions of contract interpretation on motions to dismiss or for summary judgment, as if they were questions of law not fact. But that is usually in contracts between sophisticated parties. This case, in distinction, is at least fifty-percent about how a typical consumer would have understood “the law of your state” as it appeared in DIRECTV’s Customer Agreement. This is a purely factual question. And the nine Justices of the Supreme Court, attuned as they are to the most subtle and sophisticated nuances of any legal-interpretive question, are perhaps the least qualified people in the country to answer it – especially from the comfort of their hermetically sealed chambers at One First Street. I’m not saying five of the Justices won’t reach out to do just that. But for anyone attuned to the workings of contract law, seeing the Supreme Court reach out to decide the issue would be a very strange outcome.

[*] A separate interpretive question concerns the time at which the referent of “the law of your state” is fixed: Is it the law (a) at the time of contracting, (b) at the time a suit is filed, or (c) any time a party wants to invoke the clause? Again, I would say the contract is at least ambiguous on this point, in which case contra proferentem should decide it.