Two recent opinions by the Ninth and Second Circuits illustrate that challenges to the enforceability of arbitration agreements have not been dampened by a string of pro-arbitration Supreme Court rulings in the last decade.
On September 30, 2020, the Ninth Circuit affirmed the denial of DIRECTV, LLC’s motion to compel arbitration, concluding that the Federal Arbitration Act (“FAA”) does not preempt California’s “absurd-results” canon. The decision is noteworthy because it creates a circuit split concerning an identical arbitration clause that hinges on the meaning of the term “affiliates.”
- In 2018, plaintiff Jeremy Revitch commenced a putative class action against DIRECTV, claiming it violated the TCPA by leaving him pre-recorded messages without his written consent.
- While he had no prior contact with DIRECTV, Revitch was a customer of AT&T Mobility LLC and had signed a contract to upgrade his mobile device in 2011 (“AT&T Contract”). That contract included an arbitration clause compelling arbitration for “all disputes and claims between” Revitch and AT&T Mobility or its “affiliates.”
- DIRECTV moved to compel arbitration based on the fact that it was acquired by AT&T Inc.—the parent company of AT&T Mobility—in 2015. In its motion, DIRECTV claimed it was an “affiliate” of AT&T Mobility and could therefore compel arbitration under the AT&T Contract. The district court denied the motion and DIRECTV appealed.
- The Ninth Circuit affirmed, concluding the FAA did not preempt California law, which governed the AT&T Contract and which requires courts to interpret unambiguous contracts in a way that avoids “absurd results.”
- The court found that interpreting the term “affiliate” to include DIRECTV—which did not become an “affiliate” until years after the AT&T Contract was formed—would lead to an absurd result, as it would require Revitch “to arbitrate any dispute with any corporate entity that happens to be acquired by AT&T, Inc., even if neither the entity nor the dispute has anything to do with providing wireless services to Revitch—and even if the entity becomes an affiliate years or even decades in the future.”
- The majority rejected DIRECTV’s argument that the FAA preempted the “absurd-results” canon due to the U.S. Supreme Court’s holding in Lamps Plus, Inc. v. Varela, which we analyzed in our May 2019 issue. That case concluded that the FAA preempts California’s contra proferentem rule, which requires ambiguities to be construed against the drafter. The majority found Lamps Plus inapposite because the contra proferentem rule only applies when the court has already determined that it cannot discern the parties’ intent. By contrast, the “absurd-results” canon applies in order to determine the parties’ intent. On that basis, DIRECTV’s argument failed to show that application of the canon disfavored arbitration agreements as compared to other contracts.
- In a concurring opinion, Judge O’Scannlain agreed with the majority, but also would have denied DIRECTV’s motion on the ground that the controversy over which DIRECTV sought to compel arbitration (which concerned satellite television products) did not “arise out of” the AT&T Contract (which concerned wireless services), and thus did not fall within the scope of § 2 of the FAA.
- In a dissenting opinion, Judge Bennett took issue with several aspects of the majority’s decision, finding that the application of the “absurd-results” canon was inappropriate because: (1) it only applies when there is an ambiguity, and the term “affiliates” is clear and confers no temporal limit; (2) even if “affiliates” was ambiguous, the “absurd-results” canon could not apply because the Supreme Court has ruled that any ambiguities in the scope of arbitration agreements must be construed in favor of arbitration; and (3) the majority’s application of the “absurd-results” canon contravened Supreme Court precedent because it disfavored arbitration.
- As the majority acknowledged, the Fourth Circuit recently considered a case with an identical arbitration clause and substantially similar facts, but reached the opposite conclusion. See Mey v. DIRECTV, LLC, 971 F.3d 284 (4th Cir. 2020). That decision largely aligns with Judge Bennett’s dissent.
On September 15, 2020, the Second Circuit denied a motion to compel arbitration in another TCPA class action, concluding it could not apply the broad construction favored by the FAA without first determining the threshold question of whether the parties truly agreed to arbitrate their disputes. In that case, the court found that the terms and conditions containing the arbitration provisions were not displayed with sufficient prominence on the relevant website. As such, the user was not put on “inquiry notice” of the terms, which precluded their enforceability.
- Plaintiff Luis Arnaud sued Doctor’s Associates, Inc. d/b/a Subway (“Subway”) for sending him unsolicited text messages in alleged violation of the TCPA. Subway filed a motion to compel arbitration, claiming Arnaud agreed to arbitrate any claims against Subway when he entered his phone number on a promotional page on Subway’s website.
- Subway claimed that clicking the “I’M IN” button on the promotional page constituted assent to the terms and conditions on a separate page that was accessible via hyperlink and included an arbitration clause. The district court denied the motion and Subway appealed.
- The Second Circuit affirmed, explaining that an offeree must have either actual or inquiry notice of the contractual terms in order to form an enforceable contract. To determine whether an offeree is on “inquiry notice” of terms included in web-based contracts under New York law (which applied to this contract), courts look to the design and content of the interface. The court concluded that Subway’s website failed to provide inquiry notice to a reasonable user because the relevant link was at the bottom of the page, in relatively small font, and only identified by “T & Cs.” Therefore, it held there was no enforceable arbitration agreement.
- The Ninth Circuit opinion in Revitch v. DIRECTV, LLC is available here. The Second Circuit summary order in Arnaud v. Doctor’s Associates Inc. is available here.