The Supreme Court Monday re-affirmed the enforceability of class-waivers in arbitration agreements. The five-justice majority felt the need to rebuke the California courts for trying to end-run Federal preemption through a latent “States-rights” nullification approach. Two of the three dissenters saw the case as a consumerist crusade against big business. But the biggest take away for businesses using arbitration clauses just might lie hidden within the opinion.

 DirectTV’s Conditional Class-Waiver.

DirectTV’s consumer contracts contained a conditional class waiver. It required arbitration and waived class-action arbitrations, thus requiring each consumer’s claim to be arbitrated alone. But it specified that both the arbitration clause and the class waiver were not enforceable if the “law of your state” prohibited class waivers. At the time, California law prohibited class waivers. But the Supreme Court’s Concepcion decision later held that California law preempted by the Federal Arbitration Act, and affirmed the enforceability of class waivers.

So after Concepcion, DirectTV moved to compel arbitration and the Imburgia class opposed. California’s courts held the clause was ambiguous because it didn’t specify which law of the state (before or after Concepcion?) and construed it against the DirectTV as the drafter, thus unenforceable. Those decisions – generally consumer-friendly and hostile to arbitration – would have allowed the class claims to proceed in the California courts.

Majority Sees Affront to Court’s Preemptive Ruling in Concepcion.

The Court’s majority approached the lower-courts’ view as an affront to the authority of the Supreme Court and to Federal preemption. The majority held the California Courts’ view — that the contract inadvertently incorporated now-invalid, prior state law — was an arbitration-specific attempt to end-run Concepcion that was not “grounds as exist at law or in equity for the revocation of any contract,” as required under 9 U.S.C. § 2.

In a somewhat redundant list of argument points the majority held:

  1. The clause was not ambiguous and means valid state law, unless expressly specified otherwise;
  2. That’s what California courts have held in other, ordinary contexts not involving arbitration;
  3. Nothing suggests the lower courts’ interpretation in any context other than arbitration;
  4. The lower courts’ language focused only on arbitration;
  5. State law doesn’t retain independent force after it has been invalidated by the Supreme Court; and,
  6. No other principle of California law supports that interpretation of “laws of your state.”

Getting to the animating principle of the decision, the majority wrote: “The Federal Arbitra­tion Act is a law of the United States, and Concepcion is an authoritative interpretation of that Act. Consequently, the judges of every State must follow it. U. S. Const., Art. VI, cl. 2 (“[T]he Judges in every State shall be bound” by “the Laws of the United States”).” Slip Op. at 5. Interestingly, the opinion was written by Justice Breyer, who had dissented in Concepcion.

David-vs-Goliath Consumerist Dissent.

Dissenting, Justices Ginsburg and Sotomayor went all-in for consumers against big business, viewing the issue as a contract of adhesion to be construed against the drafter in favor of consumers. They wrote:

“Today’s decision steps beyond Concepcion and Italian Colors. There, as here, the Court misread the FAA to deprive consumers of effective relief against powerful economic entities that write no-class-action arbitration clauses into their form contracts.”

Slip Op. (dissent) at 9, and even cited a recent New York Times article highly critical of arbitration provisions in consumer contracts:

“These decisions have predictably resulted in the depri­vation of consumers’ rights to seek redress for losses, and, turning the coin, they have insulated powerful economic interests from liability for violations of consumer-protection laws. See N. Y. Times, Nov. 1, 2015, p. A1, col.5.”

Slip Op. (dissent) at 11. We discussed that article here.

The Bigger Drafting Take-Away: Be Specific.

The bigger message for businesses using arbitration clauses lies hidden in between the two opinions. Both the majority and minority noted that parties can specify just about anything in their arbitration clauses, including what law will apply. The majority wrote:

In principle, they might choose to have portions of their contract governed by the law of Tibet, the law of pre­revolutionary Russia, or (as is relevant here) the law of California including the Discover Bank rule and irrespec­tive of that rule’s invalidation in Concepcion.

Slip. Op. at 6, and with reciprocal snark, Justice Ginsburg replied:

Pre-revolutionary Russian law, but not Califor­nia’s “home state laws” operative and unquestionably valid in 2007? Makes little sense to me.

Slip Op. (dissent) at 6. Combine that with the dissenters’ observation that theConcepcion decision came some three years into the DirectTV litigation, and two propositions start to come clear.

First, eight Justices operated from the unspoken assumption that, all else equal, the effect of the arbitration provision must be considered as of the date of judicial consideration – and not the date of the parties’ agreement. That makes sense, because all contracts are written today to govern the parties’ future conduct and so are considered at some future date when one party seeks to compel the other to change her conduct. If one were to consider the DirectTV clause as of the date the parties agreed to it, then “law of your state” implicitly would have meant “law of your state as of the date of our agreement.” The lower courts clearly thought that’s what DirectTV meant, but it didn’t say so when drafting the agreement.

Second, eight Justices agreed that the parties can designate any law to apply to their agreement. Theoretically, then, the parties might specify what law will govern, or might even negate some parts of applicable law. For example, an arbitration provision might include a class waiver and specify Tennessee law, “but excluding any law, provision, or ruling holding class waivers unenforceable.” Though somewhat circular, the drafting technique is fairly common with (for example) choice of law provisions excluding the chosen forum law’s conflicts-of-law provisions (and to a lesser extent, reformation and rescission clauses). And ironically, the dissent’s suggestion that the parties could include invalid prior law, could be read to support such a technique.

So the take-aways from DirectTV are three: (1) Be specific when drafting arbitration clauses and watch for “temporal drift” loopholes that might unsettle the condition or circumstances you’re trying to protect; and (2) If you mean to have a particular law apply – or only in part — say what it is and which parts don’t apply; and (3) Have a couple of litigators review that clause to argue for and against your proposition.

The decision is DirectTV, Inc. v. Imburgia, No. 14-462 (U.S. Dec. 14, 2015).