The Supreme Court Reaffirms Enforceability of Class Arbitration Waivers, This Time Through the Supremacy Clause of the U.S. Constitution

17 December 2015 Legal News: Focus on Wisconsin Publication
Authors: Max B. Chester

Legal News: Focus on Wisconsin

In DIRECTV v. Imburgia, the Supreme Court reversed the California Court of Appeal, which held that a contractual class arbitration waiver was unenforceable under California law, even though the arbitration provision at issue was stated to be governed by the Federal Arbitration Act (FAA). In a 6-3 decision authored by Justice Breyer, the Supreme Court reminded all that the FAA is a law of the United States; that in AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), the Supreme Court held that the FAA permits class-arbitration waivers; and that, “[c]onsequently, the judges of every State must follow it” and cannot “dissociate themselves from federal law because of disagreement with its content or a refusal to recognize the superior authority of its source.” That Justice Breyer dissented in Concepcion,1 but authored the Imburgia decision and described during oral argument2 California Court of Appeal’s reasoning as “flying in the face” of the Supreme Court, underscores the federal policy favoring arbitration and the supremacy of the FAA, if chosen by the parties.3

The facts of the Imburgia case are pretty straightforward and are commonplace in the consumer service industry setting. DIRECTV’s standard service agreement with its customers contained a binding arbitration clause governed by the FAA with a class-arbitration waiver. However, the service agreement also stated that the entire arbitration provision was unenforceable if the “law of your state” made class-arbitration waivers unenforceable. In 2007, when this service agreement was drafted, California prohibited class-arbitration waivers in consumer contracts as unconscionable. In 2008, two customers, Kathy Greiner and Amy Imburgia, sued DIRECTV in California state court, seeking damages for early termination fees they contended violated California law. In the midst of the litigation, the Supreme Court issued the Concepcion opinion, and DIRECTV asked the California trial court to send the matter to arbitration. The trial court refused, and DIRECTV appealed.

The California Court of Appeal affirmed the trial court on California contract law grounds. Specifically, the state appellate court interpreted the phrase “law of your state” to mean “the law of your state without considering the preemptive effect, if any, of the FAA.”4 The California Court of Appeal used two rules of contract interpretation to come to its conclusion: (1) the importance of a specific contract provision over a general one; and (2) the construction of an ambiguous contract against the drafter. Because the California Court of Appeal concluded the parties intended for the entire arbitration provision to “blow up” if California state law—regardless of Concepcion or any potential FAA preemption—made class-arbitration waivers unenforceable, the court affirmed denial of DIRECTV’s motion to compel arbitration. In Murphy v. DirecTV, Inc., the Ninth Circuit characterized this interpretation as “nonsensical” in its analysis of the same DIRECTV agreement.5 DIRECTV appealed to the California Supreme Court, which denied discretionary review. DIRECTV then filed a petition for writ of certiorari, noting the Ninth Circuit’s contrary Murphy decision.

The Supreme Court acknowledged that the FAA allows parties to an arbitration contract to choose what law governs some or all of its provisions and also acknowledged, as the California Court of Appeal concluded, that the parties might have chosen to apply California law as it was before its invalidation in Concepcion. The Supreme Court stated, however, that the issue was not whether the California Court of Appeal correctly interpreted a contract (a matter of state law to which federal courts defer) but whether California law was consistent with the FAA. The Supreme Court concluded that the California Court of Appeal erred in invalidating the class arbitration waiver because it did so on grounds that do not “exist at law or in equity for the revocation of any contract,” which is the standard of invalidation in Section 2 of the FAA. In doing so, the California Court of Appeal did not place the arbitration contract “on equal footing with all other contracts,” as required by the Supreme Court precedent interpreting the FAA. Justice Breyer listed six reasons the California courts would not interpret non-arbitration contracts in the same way:

  1. The phrase “law of your state” was not ambiguous and meant valid state law
  2. The California precedent recognizes the power of the legislature to change the law retroactively
  3. The California Court of Appeal’s conclusion appeared to reflect the bias against arbitration because the court did not cite any other California decision where the parties were held to have chosen an invalid law
  4. The language of the California court’s decision focused only on arbitration
  5. Courts are unlikely to conclude that state law retained any independent force after being invalidated by the Supreme Court
  6. The tools of contract interpretation utilized by the California Court of Appeal would not lead other courts to reach a similar conclusion in a non-arbitration context

Justice Thomas penned a dissent, as did Justice Ginsburg, who was joined by Justice Sotomayor. Justice Thomas maintained his stance that the FAA does not apply to state court proceedings. Justice Ginsburg took issue with the majority’s reasoning that the phrase “law of your state” was unambiguous. Characterizing the language as a “Delphic provision,” Justice Ginsburg approved the California Court of Appeal’s methods of contract interpretation. She, too, would construe ambiguities against the drafter “to give the customer, not the drafter, the benefit of the doubt.”

For those who favor arbitration provisions in their contracts, the Imburgia decision provides yet another tool to support enforceability against any hostile interpretation on state law grounds. The decision also provides a roadmap on how to minimize the attacks against arbitration provisions. The FAA should be selected as the governing law and the arbitration provision should be carefully prepared to ensure that it would not be revoked under state law if it existed as a separate contract. The Imburgia decision also serves as an important reminder that the Supreme Court, not the state courts, have the “superior authority” in the matters of interpretation of the FAA, and that the FAA trumps any inconsistent state law.


1Justice Kagan, another Concepcion dissenter, also switched sides to join the 6-3 Imburgia majority.

2Oral argument transcript, p. 50, available at http://www.supremecourt.gov/oral_arguments/argument_transcripts/14-462_bi7b.pdf

3DIRECTV, Inc. v. Imburgia, No. 14-462, 2015 WL 8546242, at *5 (U.S. Dec. 14, 2015).

4Imburgia v. DIRECTV, Inc., 225 Cal. App. 4th 338, 344, 170 Cal. Rptr. 3d 190, 195 (2014).

5Murphy v. DirecTV, Inc., 724 F.3d 1218, 1226 (9th Cir. 2013) (stating the “contention that the parties intended for state law to govern the enforceability of DirecTV's arbitration clause, even if the state law in question contravened federal law, is nonsensical.”).

________________________

Legal News is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Max B. Chester
Partner
Milwaukee, Wisconsin
414.297.5573
mchester@foley.com

Chelsey B. Metcalf
Associate
Milwaukee, Wisconsin
414.319.7072
cmetcalf@foley.com

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