California Supreme Court Review: December 2023

With only modest activity on the California Supreme Court’s civil docket in 2023, the state’s highest court has not precisely set trends with its recent opinions. But while the relative dearth of decisions limits the opportunity for meta-analysis, the Court’s selectivity is revealing of its discerning process, and its major civil decisions in the last twelve months seem to underscore an overall bent on the parts of all California appellate courts towards expanded arsenals for parties seeking to challenge the enforceability of contracts.

This column’s first installment of the year evaluated the Supreme Court’s opinion in Yahoo Inc. v. National Union Fire Insurance Company of Pittsburgh, PA, 519 P.3d 992 (2022). More important than the Court’s final disposition in that case was its articulation of an analytical framework for interpreting ambiguous contract provisions. The ultimate conclusion of the Court was that, where discovery fails to illuminate the meaning of a contract, ambiguity should not only be resolved in favor of the non-drafting party, but that litigation to resolve that ambiguity should focus on the non-drafting party’s “objectively reasonable expectations” – without considering those of the drafting party.

The Yahoo decision is the most significant recent holding from the state’s highest court favoring the challenger’s seat in contract-based litigations. But this theme was echoed in our appellate courts as well.

In Jack v. Ring LLC, 91 Cal.App.5th 1186 (2023), discussed in this column’s June 2023 publication, the 1st District determined that arbitration provisions in contracts do not preclude plaintiffs from seeking public injunctive relief in every forum. But perhaps more importantly, the court also determined that a failure to explicitly and wholly delegate authority to an arbitrator can lead to adjudication of the undelegated matter to a court. Said differently, the 1st District left the door open to challenge arbitration provisions and seek redress in a California court wherever a party can convincingly argue that an arbitration provision is ambiguous.

In Ramirez v. Charter Communications, Inc., an appellate decision addressed in the inaugural article of this column and which the California Supreme Court is set to review, the 5th District cast similar doubt on long-standing fee-shifting clauses in mandatory arbitration agreements. 75 Cal.App.5th 365, 377 (2022). The court determined that such provisions in mandatory arbitration agreements were unconscionable, thereby forcing lawyers to think twice about how they are drafted. Id.

The Ring and Ramirez decisions are in line with the Supreme Court’s decision in Yahoo in one respect: these decisions create room to maneuver within the four corners of a contract in provisions that might previously have been regarded as unassailable.

This evolving approach to contract interpretation demands the attention of the legal community. Litigators should take note of this shift as it introduces an element of flexibility in dispute resolution, allowing for a more contextual analysis of contractual terms. Particularly interesting are the ways that these holdings and those that may follow might combine in argumentation. For instance, it is conceivable that Yahoo and Ramirez could provide the legal nexus required to first impugn a drafting party’s arguments regarding the intended meaning of key contract provisions, and then argue for the unconscionability of those provisions. In a landscape favoring such challenges, litigators might find these kinds of creative arguments gaining surer footing in California courts.

Corporate attorneys, on the other hand, must adapt their drafting strategies to align with the changing judicial perspective, prioritizing clarity and specificity to avoid potential pitfalls. The other side of the coin, however, is that there is no certainty as to what language courts will consider to be clear and specific enough. Drafting attorneys are likely safe relying on well established and largely unchallenged model contracts such as those provided by the National Venture Capital Association, but will find drafting for novel circumstances more challenging.

The recognition of the more porous view of contracts underscores the importance of staying abreast of legal developments and adapting legal strategies accordingly, as the interpretation of contracts continues to evolve in the vibrant legal landscape of California.