The Supreme Court Preview, Part II: Tuning Up Arbitration Clauses

This is the second post in our series “The Supreme Court Preview,” view the first post here.

California state and federal courts have a rocky history with the U.S. Supreme Court, as the highest court in the land has repeatedly reversed the Ninth Circuit and California state courts in deciding cases under the Federal Arbitration Act like AT&T Mobility LLC v. Concepcion, Preston v. Ferrer, and Circuit City Stores, Inc. v. Adams. In what may be a continuation of that trend, the Court has teed up two more cases under the FAA, one from the Ninth Circuit, and one from California state courts, but both involving California’s reluctance to enforce arbitration agreements.

• DIRECTV, Inc. v. Imburgia, No. 14-462: Already argued on the second day of the new term, DIRECTV is a follow-up of sorts to the Concepcion decision, which held that a California law effectively mandating that class actions be available in arbitration agreements was preempted by the FAA, and that class arbitration had to be a matter of consent between the parties. In DIRECTV, the California Appellate Court considered a contract clause drafted pre-Concepcion, which contained an arbitration clause and a class waiver, which further provided that if the customer’s state law deemed the class waiver unconscionable, the arbitration provision as a whole was unenforceable. The intent of the drafter is clear in the pre-Concepcion context: if the class waiver was held unenforceable, DIRECTV wanted to go to court, not arbitration, to fight the class action. The California Appellate Court, interpreting this provision, ruled that the reference to state law in the DIRECTV contract meant that the FAA no longer preempted California law for the purposes of Concepcion, as the parties had agreed that California law applied notwithstanding the FAA. Unsurprisingly, DIRECTV wanted to see Concepcion apply, to require arbitration on an individual basis.

Based on oral argument, the case may turn on the balance the Supreme Court decides to strike between deference to state court interpretation of state court contract principles—which, even in the event of a bad interpretation (as the Justices generally agreed was the case with the California court’s opinion), the Supreme Court is loathe to second-guess—and ensuring that those state court interpretations do not undermine the staunchly pro-arbitration purpose of the FAA. While on its face this case is about class arbitration, the Court’s ruling could make it harder (or easier, for that matter) to use state contract law to fight enforcement of arbitration agreements generally.

• MHN Government Services, Inc. v. Zaborowski, No. 14-1458: This case comes from the federal Ninth Circuit Court of Appeals, which applied a different twist of California law to reject an arbitration agreement. The arbitration agreement contained five separate provisions that the district court held (and a panel of the Ninth Circuit panel affirmed) were unconscionable. The lower courts went on to hold that under California law, the arbitration provision as a whole was unenforceable, despite a severability clause in the agreement, because the number of flawed provisions “permeate[d] the entire agreement with unconscionability” under California contract principles.

MHN argues to the Supreme Court that California law regarding severability has singled out arbitration agreements, routinely ruling that they are unenforceable as a whole based on findings of more than one unlawful provision in those agreements, while applying a far more liberal standard to other types of agreements. Again, the Court’s decision—which, if history holds, is likely to reverse the Ninth Circuit—has the potential to further narrow the state-law grounds on which a party can resist enforcement of an arbitration agreement.