California Business Owners Should Note Ninth Circuit Decision on California’s “Absurd Results” Canon

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The Ninth Circuit handed down a decision at the end of September that holds that the Federal Arbitration Act doesn’t preempt California’s absurd results canon, which requires that courts must interpret contracts to avoid absurd results. California business owners should make sure they understand what this means and how it pertains to their business agreements in a dispute.

In Revitch v. DIRECTV, LLC, the plaintiff, Jeremy Revitch, brought a class action in which he alleged that DIRECTV made numerous sales robocalls to his cell phone in violation of the Telephone Consumer Protection Act (TCPA). The plaintiff was a customer of AT&T Mobility, a cell phone service provider. The contract he signed for his cell phone service included an arbitration clause for all disputes with AT&T. As defined in that contract, any reference to AT&T Mobility also included its “affiliates.” However, several years later, DIRECTV was acquired by AT&T, Inc., which became the parent company of both DIRECTV and AT&T Mobility.

Revitch said he had no previous contact with DIRECTV, never provided DIRECTV with his phone number, and certainly didn’t give them permission to flood his cell phone with robocalls. Frustrated with the calls, he brought a class action against DIRECTV on behalf of everyone in the U.S. who’d received prerecorded messages from the company over the last four years without prior express written consent.

DIRECTV discovered that Revitch was a customer of AT&T Mobility. It argued that it’s now an “affiliate” of AT&T Mobility within the meaning of the cell phone services agreement and should therefore be able to piggyback onto the arbitration clause—despite the fact that it wasn’t an affiliate when Revitch signed the contract with AT&T Mobility four years earlier. When Revitch initiated his lawsuit, DIRECTV filed a motion to compel arbitration pursuant to the Federal Arbitration Act.

The trial court denied DIRECTV’s motion, concluding that the contract between Revitch and AT&T Mobility didn’t reflect an intent to arbitrate the claim that Revitch asserted against DIRECTV. DIRECTV appealed.

Ninth Circuit Judge Diarmuid F. O’Scannlain wrote in his majority opinion for the panel that California Civil Code § 1636 states that “[a] contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting.” The judge explained that the Court normally determines the mutual intention of the parties “from the written terms [of the contract] alone,” provided the “contract language is clear and explicit and does not lead to absurd results,” quoting a California state appellate court decision.

Judge O’Scannlain said that the panel had to decide whether DIRECTV qualifies as an “affiliate” of AT&T Mobility, as the term is used in the cell phone agreement. The word “affiliate” wasn’t defined in the contract, so the Court relied on the ordinary definition. Also, a 2009 Ninth Circuit case held that an affiliate is normally understood as “a company effectively controlled by another or associated with others under common ownership or control,” quoting Webster’s Dictionary. Thus, because DIRECTV and AT&T Mobility are now under common ownership by AT&T, the Court deemed them to be affiliates.

But Judge O’Scannlain wrote absurd results follow from DIRECTV’s preferred interpretation. The Court explained–

“Revitch would be forced 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.”

Judge O’Scannlain noted that the Eastern District of New York, addressing a similar set of facts in a 2016 case concluded that “no reasonable person would think that checking a box accepting the ‘terms and conditions’ necessary to obtain cell phone service would obligate them [sic] to arbitrate literally every possible dispute he or she might have with the service provider, let alone all of the affiliates under AT&T Inc.’s corporate umbrella—including those who provide services unrelated to cell phone coverage.”

The judge also opined that the Court examines the reasonable expectation of the parties at the time of the contract and that it may explain a contract “by reference to the circumstances under which it was made, and the matter to which it relates,” quoting California Civil Code § 1647. In this case, when Revitch signed his wireless services agreement with AT&T Mobility for cell phone services, he couldn’t have reasonably expected that he’d be forced to arbitrate an unrelated dispute with DIRECTV—which wouldn’t become affiliated with AT&T until years later. Thus, the panel held that a valid agreement to arbitrate between Revitch and DIRECTV didn’t exist.

However, if the cell phone agreement stated that “AT&T” refers to “any affiliates, both present and future,” Judge O’Scannlain said the Court might have arrived at a different conclusion. But without this type of forward-looking language, the panel was convinced that the agreement didn’t cover entities that became affiliated with AT&T Mobility years after the contract was signed in an unrelated corporate acquisition.

Therefore, because it wasn’t and isn’t now a party to the cell phone agreement between Revitch and AT&T Mobility, DIRECTV was not permitted to invoke the agreement to compel arbitration. Revitch v. DIRECTV, LLC, 977 F.3d 713 (9th Cir. September 30, 2020).

Takeaway

The Federal Arbitration Act doesn’t preempt California’s absurd results canon, which requires courts to interpret contracts to avoid absurd results. The Ninth Circuit panel concluded that the correct issue was whether there was a valid agreement to arbitrate between the plaintiff and DIRECTV, and whether the scope of that agreement required the plaintiff to arbitrate claims against entities like DIRECTV that later became affiliates of AT&T.

Contact Matthew Eanet or (310) 997-4185 for questions about this decision and how it might impact your business contracts. We can help your business with a thorough audit to determine whether any contracts are subject to the new laws in California or are subject to California’s “Absurd Results” Canon.

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