In a major victory for plaintiffs across the country, the Ninth U.S. Circuit Court of Appeals today upheld a District Court ruling that DirecTV’s contract ban on plaintiffs bringing class-action lawsuits against it violated a fundamental policy of California. The court also held that, since DirecTV is a wholly-owned subsidiary of AT&T, that merger was insufficient to support such an argument. Finally, the court found that the state law precedent that had allowed class-action lawsuits to be brought against a wholly-owned subsidiary of the defendant corporation was inapplicable to DirecTV, since DirecTV was wholly owned by an investor group. In other words, the California class-action law is not relevant to DirecTV.
The first case challenging DirecTV and its contract ban occurred in 2020, when the California Supreme Court held that the ban did not violate California’s policy of allowing class-action lawsuits against a defendant corporation if the corporation has been convicted of a crime related to the transaction being challenged. In other words, in order to succeed with a class-action lawsuit against DirecTV, a plaintiff would have to prove that the contract ban violates California’s statutory scheme for awarding damages against the corporation.
In this ruling, the California Supreme Court relied on the California statute, section 3292, which authorizes class-action lawsuits against a defendant corporation for all harms proximately caused by a defendant’s illegal activity. As the case was decided under California state law, the court concluded that class-action lawsuits were not available against DirecTV, which is a company incorporated in Delaware, but that if the district court allowed such litigation, it would “jeopardize the ability of other Delaware corporations to enforce their contracts in the future.”
In response to the ruling, DirecTV filed an emergency motion in the United States District Court for the Southern District of California asking that the district court’s order is vacated, arguing that the judgment was void for the reasons discussed above. In the Motion, DirecTV explained that the merger between DirecTV and AT&T was invalid under California’s Business and Professions Code, and that AT&T’s ownership of DirecTV was not an issue. because the merger was a “quid pro quo” –a promise to make a certain amount of equity in a particular business. if a contract is signed–and that AT&T’s ownership of DirecTV did not alter the obligation of any of the class members to the class itself.
The Ninth Circuit affirmed the district court’s ruling and then remanded for further proceedings. While the Court declined to grant the request for rehearing, the case back to the lower court, the Second Circuit of Appeals has issued an en bifurcation of the case. This panel now considered the preliminary injunctive relief requested by DirecTV and has scheduled oral arguments in the fall of 2020.
The decision in the second case, a suit against DirecTV is not limited to the contract ban. In the second case, the plaintiffs alleged that the contract ban bars them from bringing a class-action lawsuit on the basis of the same facts that had been the basis of the District Court’s injunction, such as whether the contract prohibits class-action lawsuits.
The Second Circuit stated that the contract ban is applicable even if the contract does not prohibit class-action lawsuits based on the contract itself, but only if the contract was entered into prior to the Supreme Court’s decision in United States v. Jones, in which the Court held that a contract clause was void for the reason that the “contract itself could be used to restrain class actions.” While the Second Circuit has not yet made its final decisions, it appears that the contract ban may be applied retroactively to plaintiffs’ claims against DirecTV, especially in the second lawsuit against DirecTV.