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Tune Into Your Contracts

Every day people sign contracts they don't read: Cable agreements; cell phone agreements; new product purchasing agreements. Even attorneys sign contracts they don't read -- although hopefully they read contracts before their clients sign them. There are a few reasons for this. First, they're long and complicated. Even if we read them they would be hard to understand. And second, we generally assume that they won't be enforced against us or that we don't need them anyway. But this isn't necessarily true. Often times that contract that we had to sign to watch Game of Thrones, will control the terms of a dispute we have when our cable goes out, we miss the finale, and a radio announcer ruins the surprise ending for us.

The United State Supreme Court recently granted a writ of certiori to decide whether state law should be applied to DIRECTV'S arbitration provision. See DIRECTV, Inc. v. Imburgia, et al.; and The case raises issues as to at least three very common contract provisions:

  1. Non-severability clauses
  2. Arbitration provision; and
  3. Choice of law

Severability and Non-severability. Most contracts contain a severability clause, which state that if one clause of the agreement is found to be void or invalid, the remainder of the contract is still enforceable. DIRECTV's arbitration agreement contains a non-severability clause. This means that if the Court finds that one of the provisions is void, the entire agreement is unenforceable. Here, the Court found that the provision in which DIRECTV required its customers to waive their right to arbitration is invalid under California law. Because of the non-severability clause, the entire arbitration agreement is also invalid.

Arbitration Provisions. In most day-to-day contracts, an arbitration provision – or other dispute resolution provision – is a great idea. Typically, the language states that before a claimant can file a lawsuit, they need to go through the arbitration process. The arbitration process is more efficient and more affordable. A dispute resolution clause such as this is great among parties with equal bargaining power. It is also great for companies like DIRECTV, AT&T, and all the other cell phone and cable providers. It is not so great for the consumer whose claim – taken alone – is not valuable enough to pursue protracted litigation. The average consumer's claim will not likely be worth that consumer's time and money. It is also not valuable enough for an attorney to litigate it on a contingency basis.

When large numbers of consumers suffer the same wrong, but their individual damages are low, a class action is the consumers' best remedy. In contrast to an individual claim, a class action requires little to no investment by the consumers and is sufficiently valuable for the attorneys. Class action remedies are not simply for money-hungry attorneys. The ability to bring a class action acts serves as a means of enforcing consumer protection laws. Without them, companies have less incentive to follow the rules because, as stated above, it's not worth it to the consumer or the attorney to enforce.

Choice of Law. Choice of law provisions are also commonly taken for granted. A choice of law provision dictates which state's laws will govern the contract. This is valuable if the parties entering the contract reside in different states. In the DIRECTV case, the applicability of the choice of law provision is seminal. California law differs from federal law as it relates to the waiver of class action lawsuits. DIRECTV's arbitration agreement designates California as its choice of law. If California law does not apply, however, then the waiver of class action suits does not destroy the enforceability of the entire agreement.

Good lessons can be learned from DIRECTV's lawsuit: pay attention to choice of law provisions; and consider the risks and benefits of severability provisions.

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