Arbitration pact doesn’t extend to affiliates added later

An affiliate cannot piggyback onto an arbitration agreement executed between its parent company and a plaintiff when the contract in question was reached after acquisition of the affiliate, an appellate panel ruled Wednesday.

A split 9th Circuit Court of Appeal panel affirmed a U.S. magistrate judge's decision denying DIRECTV's motion to compel arbitration since the plaintiff's contract with parent company AT&T does not extend to claims against the satellite television company.

"Here, absurd results follow from DIRECTV's preferred interpretation: Under this reading, [plaintiff] 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 -- and even if the entity becomes an affiliate years or even decades in the future," Judge Diarmuid O'Scannlain wrote.

AT&T and DIRECTV did not immediately respond to requests for comment.

Opening a circuit split on the issue, the appellate court struck a rare blow to corporate entities' arbitration rights. O'Scannlain assessed "troubling hypothetical scenarios" that might arise from DIRECTV's interpretation of the Federal Arbitration Act.

DIRECTV appealed last year U.S. Magistrate Judge Joseph Spero's refusal to allow it to arbitrate a proposed class action alleging it spammed calls to plaintiff Jeremy Revitch's cellphone in violation of the Telephone Consumer Protection Act. Revitch v. DIRECTV, LLC, 18-cv-01127 (N.D. Cal., filed Feb. 21, 2018).

Revitch was a customer of AT&T with which he agreed to an arbitration clause extending to all disputes between him and the company. As defined in the contract, any reference to the company also included its affiliates. AT&T acquired DIRECTV in 2015, seven years after Revitch signed the disputed contract.

The satellite television company argued it does not matter that it was not an affiliate at the time Revitch and AT&T entered into their contract.

Writing for the majority, O'Scannlain found that a valid agreement to arbitrate does not exist between the plaintiff and DIRECTV because the company was not an AT&T affiliate when the contract was signed. He held that the Federal Arbitration Act does not preempt California contract law requiring courts to interpret such documents to avoid absurd results.

Revitch could not have reasonably expected that he would be forced to arbitrate an unrelated dispute with DIRECTV when he signed his wireless services agreement with AT&T, according to the panel.

Responding to claims from the defense that any ambiguity in the contract requires interpretation in its favor, O'Scannlain opposed characterizations of the arbitration agreement as unclear. He wrote DIRECTV's "preferred framework for resolving this case is a misreading of our precedents," since the U.S. Supreme Court has held that arbitration is "strictly a matter of consent."

But Judge Mark J. Bennett, who dissented and kept in line with the 4th Circuit, concluded the term "affiliates" in the contract "clearly included DIRECTV" despite it not being one at the time the agreement was reached.

"Nothing in the arbitration clause or in the dictionary definition of the word "affiliate" confers any type of temporal scope to the term so that "affiliates" should be read to refer only to present affiliates," he wrote, referencing language in the contract stating it must be broadly interpreted.

Bennett also found state law does not control since the U.S. Supreme Court provides that the default rule for resolving ambiguities must be resolved in favor of arbitration.

In a case against DIRECTV the panel acknowledged that to present similar circumstances, the 4th Circuit reached the opposite conclusion. It found the disputed arbitration agreement contained no limitation on the term "affiliates."

The panel also held that it would be inappropriate to consider hypotheticals in reaching its ruling.