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:
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.”).
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