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State Limitations on Arbitration Agreements with Class Action Waivers Again before U.S. Supreme Court

  • October 9, 2015

The latest of a line of recent cases in which the U.S. Supreme Court has weighed the enforceability of class action waivers in arbitration agreements was before the Court on October 6, 2015, when the Supreme Court heard oral argument in DirecTV, Inc. v. Imburgia, et al., No. 14-462. These decisions almost uniformly have favored arbitration, and many employers have adopted and successfully utilized arbitration agreements containing class action waivers.

The Facts

DirecTV’s customer agreement contained an arbitration agreement requiring claims relating to the agreement or to the company’s service to be decided by binding arbitration on an individual basis. Arbitration on a class basis was specifically prohibited. At the time Amy Imburgia signed the agreement, the controlling California law was the “Discover Bank rule” announced by the California Supreme Court in 2005. Under the Discover Bank rule, almost all consumer arbitration agreements containing class action waivers were deemed unconscionable and, therefore, unenforceable.

In recognition of the Discover Bank rule, and to avoid the possibility of defending class claims in arbitration, DirecTV’s arbitration agreement contained a non-severability clause providing that if “the law of your state would find [the class action waiver] unenforceable,” then the entire arbitration agreement would be inapplicable and unenforceable. (Emphasis added.) The next section of the agreement provided that “notwithstanding the foregoing,” the arbitration agreement “shall be governed by the Federal Arbitration Act.”

In 2008, Imburgia brought a class action against DirecTV in California state court. Given the Discover Bank rule, DirecTV did not invoke its arbitration agreement at that time. Then, in 2011, the U.S. Supreme Court decided, in AT&T Mobility v. Concepcion, 563 U.S. 333, that California’s Discover Bank rule was preempted by the Federal Arbitration Act and could no longer be applied to invalidate class action waivers in arbitration agreements. After Concepcion came down, DirecTV moved to compel individual arbitration of Imburgia’s claim.

The trial court denied DirecTV’s motion and the California Court of Appeal affirmed. The appellate court held the phrase, “the law of your state,” in the arbitration agreement referred to the Discover Bank rule, even though that rule was no longer in effect after Concepcion. As reliance on the Discover Bank rule (if it were still in effect) would have resulted in the class action waiver being unenforceable, the appellate court ruled the entire arbitration agreement to be unenforceable under the terms of the agreement itself. The California appellate court declined to follow the decision of the U.S. Court of Appeals for the Ninth Circuit (in San Francisco) in Murphy v. DirecTV, Inc., 724 F.3d 1218 (9th Cir. 2013), enforcing the very same DirecTV arbitration agreement. The Ninth Circuit’s decision expressly rejected the same argument relied upon by the California courts in Imburgia, calling that argument “nonsensical.”

The U.S. Supreme Court accepted the case to answer the question, “Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.”

Oral Argument

At oral argument, two things seemed clear: first, the majority of the Supreme Court Justices believed that the California Appellate Court’s decision was in error; and, second, the Justices were concerned about intruding on the role of state courts in interpreting contracts and were struggling to articulate a basis for reversing the decision below without turning every state court decision interpreting the scope of an arbitration agreement into a federal question.

Counsel for DirecTV was confronted throughout his argument by questions from several Justices about the propriety of the Supreme Court rejecting the interpretation of a contract made by a state court as a matter of state law. Justice Stephen Breyer, for example, stated that he could not find a single decision supporting such a result. Several Justices also pressed counsel to articulate a test or a rule to guide future decisions. In response, counsel quoted from the Court’s decision in Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468 (1989). Volt recognized that the interpretation of private contracts is “ordinarily a question of State law” that the Supreme Court does not review, but that, under the Federal Arbitration Act, “in applying general State principles of contract interpretation to the interpretation of an arbitration agreement … due regard must be given to the federal policy favoring arbitration and ambiguities as to the scope of the arbitration clause itself resolved in favor of arbitration.” Counsel argued it was clear that the California courts in this case were trying to get around Concepcion.

Following up on the many questions that had been posed to counsel for DirecTV, counsel for Imburgia argued that if the Supreme Court “interjected” federal law into a state court interpretation of state contract law, it would open up any state court decision that was not pro-arbitration to a legal challenge in federal court.

Chief Justice John Roberts responded, “I am sympathetic to the notion that this is a matter of State contract interpretation, but that is precisely what the FAA was getting after, State judges interpreting contracts under special rules hostile to arbitration.” Chief Justice Roberts also weighed in on what the appropriate rule might be: “It may be a hard question in some cases; it may be easy in others. But it’s a very simple question of what the rule is. The rule is does it demonstrate hostility to arbitration contracts?”

The outcome of the case likely could turn on which of the competing principles attracts a majority of the Court — the principle of deferring to state court interpretations of state law versus the pro-arbitration policy of the Federal Arbitration Act.

A decision is expected by spring.

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