Finding that the California Court of Appeal did not place arbitration contracts “on equal footing with all other contracts”, the Supreme Court held that California’s interpretation of the arbitration contract was pre-empted by the FAA. DIRECTV, INC. V, IMBURGIA, No. 14-462, Dec. 14, 2015. The Court did not question whether the Court of Appeal’s decision was a proper statement of California law, but “whether the Court of Appeal’s decision in fact rests upon ‘grounds as exist at law or in equity for the revocation of any contract.’”
DIRECTV’s service agreement with its customers provides that any claim asserted will be resolved by arbitration and adds that if the “law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision “is unenforceable”. The contract also states that the arbitration provision “shall be governed by the Federal Arbitration Act.”
The Court of Appeal found that the critical legal question involved the meaning of the phrase “law of your state”, in this case, the law of California. Prior to Concepcion, California held class action waivers in consumer contracts unconscionable and unenforceable. If ‘this law’ of California is applicable, the poison pill would render the entire arbitration agreement unenforceable. However, if the law of California permits the enforceability of class action waivers, then the arbitration provision is enforceable.
The Court of Appeal reasoned that as the parties were free to incorporate the laws of different states or nations in their contract, so too, they were free to incorporate California’s law as it would have been pre-Concepcion. Relying on principles of contract interpretation, the Court of Appeal determined that the parties had intended just that.
In writing the decision for the majority, Justice Breyer began by affirming the obligation of lower courts to follow the Court’s holding in Concepcion.However, the Supremacy Clause did not resolve the issue in this case because the FAA provides the parties wide latitude to determine what law governs their contracts including choosing the “law of Tibet or of pre-revolutionary Russia,” if they so desire. Instead, the question before the Court was whether the decision of the California court places arbitration contracts on “equal footing with all other contracts.” In other words, whether the Court of Appeal’s decision that the “law of your state” included invalid California law is consistent with the FAA.
The Court proffered six considerations that lead it to conclude California’s interpretation of this contract was unique to arbitration:
First, the Court did not find the contract language ambiguous. As the contract did not indicate that the language “law of your state” is meant to refer toinvalid state law, it presumably takes its ordinary meaning: valid state law.
Second, California general contract principles contemplate the applicability not only of the current law but also of the power of the state to amend the law. In addition, judicial construction of a statute ordinarily applies retroactively.
Third, nothing in the Court of Appeal’s reasoning implies that a California court would reach the same interpretation of “law of your state” in a context other than arbitration. Nothing in the opinion or in any other California case suggests that California would include as “law of your state” “state laws held invalid because they conflict with, say, federal labor statutes, federal pension statutes, federal anti-discrimination laws, the Equal Protection Clause or the like.”
Fourth, the language used by the Court of Appeal specifically addressed arbitration suggesting that it was limiting its holding to arbitration contracts.
Fifth, courts are unlikely to accept, as a general matter, that state law maintains independent force even after it has been invalidated by this Court.
Sixth, the Court of Appeal does not invoke any other principle that suggests California courts would reach the same interpretation of the language “law of your state” in other contexts.
Finally, the Court rejected the Court of Appeal’s reliance on construing the ‘ambiguous’ language against the party drafting the contract, finding that the phrase was not ambiguous and that the reach of the canon construing contract language against the drafter must have limits. The Court could not find a similar case interpreting the words “law of your state” to include invalid law.
Because California’s interpretation of “law of your state” does not place arbitration agreements on equal footing with all other contracts, it is pre-empted by the FAA.
There were two dissents. Justice Thomas dissented maintaining his view that the FAA does not apply to proceedings in state court.
Justice Ginsberg (joined by Justice Sotomayor) dissented arguing that the Court expanded the scope of the FAA resulting in “the deprivation of consumers’ rights to seek redress for losses and insulating powerful economic interests from liability for violations of consumer protection laws.” She reasoned that the phrase “law of your state” should be construed against the drafter “to protect the party who did not choose the language from an unintended or unfair result.” She also argued that the Court had historically respected state court interpretations of arbitration agreements and had not “reversed a state-court decision on the ground that the state misapplied state contract law” in over 25 years. Her dissent also asserted that the parties are free to choose any law they want, which she noted the Court had acknowledged in referencing the law of Tibet. In maintaining that the Court “misread the FAA to deprive consumers of effective relief against powerful economic entities”, she cited the recent New York Times article, discussed the historical purpose of the FAA as including the enforcement of “consensual agreements,” and noted that the Court’s decision “contrasts sharply with how other countries treat mandatory arbitration clauses in consumer contracts of adhesion.”