Cruz-Alvarez_FFeatured Expert Contributor – Civil Justice/Class Actions

By Frank Cruz-Alvarez, Shook, Hardy & Bacon L.L.P. (co-authored with Rachel A. Canfield, an associate with the firm)

Last week, in a 6-3 decision, the U.S. Supreme Court reversed and remanded a California Court of Appeal’s interpretation of and refusal to enforce an arbitration agreement.  Justice Breyer delivered the Court’s well-reasoned opinion, which concluded that the California court’s arbitration-specific interpretation of contractual language was preempted by the Federal Arbitration Act (“FAA”). DirecTV Inc. v. Imburgia, et al.

Petitioner DirecTV entered into service agreements with certain customers. Although governed by the FAA, the agreement’s arbitration provision contained a class-action waiver which rendered the entire provision unenforceable if the waiver clause was deemed unenforceable under the law of the customer’s state.  Seeking damages for early termination fees that allegedly violated California law, respondents Amy Imburgia and Kathy Greiner filed suit against DirecTV in California state court.

At the time DirecTV drafted the service agreement, then-existing California law deemed such class-action waivers unenforceable.  Discover Bank v. Superior Court (2005) (declaring waiver of class arbitration in a consumer contract of adhesion “unconscionable under California law”). While the lawsuit was still pending, the Supreme Court rejected California’s Discover Bank rule as an obstacle to the objectives of Congress and held that the FAA preempts state laws which per se prohibit enforcement of class-action waivers.  AT&T Mobility LLC v. ConcepcionConcepcion thereby rendered invalid Discover Bank’s limitation on the enforceability of such arbitration agreements.  Following Concepcion, DirecTV moved to compel arbitration of the action, which the trial court denied. DirecTV appealed.

Applying general contract principles, the California court surmised that the parties were free to refer to California law as it would have been prior to Concepcion. Under this framework, the California court concluded that the contractual language “law of your state” established that state law, as opposed to the FAA, governed.  Acknowledging Concepcion, the California court relied on two sections of California’s Consumer Legal Remedies Act (CLRA) that rendered the agreement unenforceable and affirmed the trial court’s denial of DirecTV’s motion to compel arbitration.

The California Supreme Court denied discretionary review and DirecTV petitioned the U.S. Supreme Court for a writ of certiorari, citing a decision from the Ninth Circuit that reached an opposite result on an identical issue.

On review, the Court reiterated the importance and effect of the Supremacy Clause, noting that because the “F[AA] is the law of the United States, and Concepcion is an authoritative interpretation of that Act,” the “judges of every state must follow it.” Taking care to recognize that “California courts are the ultimate authority on California contract law,” the decision does not address whether California’s interpretation of state contract law was correct, though the decision indicates sincere doubt on this point. Instead, the Court reframed the issue to determine whether the decision rested on a ground that “exist[s] at law or in equity for the revocation of any contract” and was therefore, consistent with the FAA.

Concepcion effectively rendered invalid the applicable California law at the time the appeal was decided. Hence, the crux of the Court’s decision turned on whether the contractual phrase “law of your state” included invalid California law. First and foremost, the Court emphasized that the contractual language unambiguously refers to valid state law. Flowing from that basic premise, the Court underscored that California case law itself dictates that courts must consider retroactive changes in the law when interpreting contractual language and noted that nothing in the decision on review suggested that California’s courts would interpret the contractual phrase “law of your state” to encompass invalid law in any context other than arbitration. The Court concluded that the California’s interpretation of “law of your state” was preempted by the FAA because the result of that arbitration-specific decision prevented arbitration contracts from being “on equal footing with all other contracts.” The case was reversed and remanded.

Justice Thomas filed a dissent, expressing his view that the FAA does not apply to state court proceedings. Justice Ginsberg filed a separate dissent in which Justice Sotomayor joined. Justice Ginsburg regards the contractual “law of your state” language as ambiguous and to be construed against drafter DirecTV. Justice Ginsburg’s dissent further admonished the Court for continually expanding the scope of the FAA to “deprive consumers of effective relief against powerful economic entities that write no-class-action arbitration clauses into their form contracts.”

Imburgia is the most recent case in a decade’s worth of, at times inconsistent, Supreme Court preemption jurisprudence, a state of affairs discussed in our 2015 WLF Monograph, Federal Preemption: Origins, Types and Trends in the U.S. Supreme Court. While the long-term effects of Imburgia remain to be seen, the decision makes clear that form-contract arbitration provisions should be cautiously crafted to avoid any ambiguity, the Court has grown impatient with state-court resistance to arbitration, and the Court will not permit state courts to evade the FAA’s reach.