Originally published in the May 2015 issue of Alternatives to the High Cost of Litigation (a CPR/Wiley Periodicals, Inc. joint publication)
Is the U.S. Supreme Court's new arbitration case merely an ADR re-run?
It's not a new legal problem: Preemption of arbitration by a state law is back before the U.S. Supreme Court.
A California appellate court has declined to enforce an arbitration agreement because of a class action waiver. And the nation's top court agreed to hear the case.
The challenge since the March order for ADR wonks has been figuring out precisely what is different in the case, DirecTV Inc. v. Imburgia, No. 14-462, from the previous Supreme Court class arbitration waiver cases.
On its face, the case appears to a be a re-examination of law settled in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), where the Supreme Court said that a California state court ruling prohibiting the enforcement of a contract with a waiver of class processes was invalid because it conflicted with the Federal Arbitration Act. The Supreme Court backed individual arbitrations for class members in the case.
So what's new here? Not much. One difference in DirecTV, which the Court will hear in the term beginning next October, from AT&T Mobility and subsequent federal cases, is that the California Court of Appeal said that the parties had contractually agreed to opt out of Federal Arbitration Act preemption by making the contract subject to state law.
The successful cert petition by DirecTV—in a case where class action plaintiffs charged that the satellite television provider had improperly charged its customers termination fees—says that the California court misused the contract's arbitration and severability clauses to provide a distorted reading of the Federal Arbitration Act to uphold a California state consumer law in the face of the contract's clear ban on class arbitration.
So DirecTV will be one in what has become a line of cases that have dealt with arbitration preemption because of class action waivers. Since AT&T Mobility, the Court dove deeper into a refusal to arbitrate that invoked class cases in American Express Co. v. Italian Colors, 133 S. Ct. 2304 (2013), holding that a detailed economic claim that the only way arbitration could proceed would be on a class basis was rejected in favor of individualized processes.
It's likely the Court took DirecTV to repeat its view on FAA preemption, because the Court has been consistent in its preference for private arbitration processes over litigation, and, arguably more so, individualized arbitration over class actions.
Perhaps the justices believe the California state courts don't get its arbitration jurisprudence. In agreeing to decide DirecTV, the court has reached down to the appeals court level, accepting a case that the California Supreme Court let stand.
That fact isn't lost on the original plaintiffs, who countered the cert petition noting that the matter doesn't rise to the level of review in Washington, D.C., and discounting the apparent conflict with the federal circuit that oversees the state.
But it's also not a hopeless cause for the DirecTV plaintiffs. Earlier this year, the U.S. Supreme Court surprisingly declined to hear a California state court case striking down an arbitration waiver, and refusing to compel individual arbitration.
The Court's denial of certiorari in CLS Transportation v. Iskanian, No. 14-341 (cert. denied Jan. 23, 2015), let stand the California Supreme Court's refusal to compel employment arbitration and allowed a so-called “representative action” under the state's Private Attorney Generals Act of 2004 to go forward.
[Alternatives discussed CLS Transportation's facts and circumstances at Gideon Hanft, “Iskanian Denied: Scotus Leaves California Supreme Court's Split Decision in Place,” 33 Alternatives45 (March 2015).]
The DirecTV case had certified a class just before the Supreme Court decided AT&T Mobility, which eliminated California's rule from Discover Bank v. Superior Court, 36 Cal.4th 148 ((2005)). Discover Bank said that consumer contract class-action waivers were unconscionable.
But despite the then-new precedent, the mid-level California Court of Appeals in DirecTV Inc. v. Imburgia, 225 Cal.App.4th 338, 170 Cal. Rptr. 3d 190 (2d A.D. April 7, 2014), agreed with the plaintiff that because state law still prohibited consumer class waivers, the existence of the law invalidated the arbitration provision under the contract's specific terms.
The opinion says that the parties can't opt out of the FAA completely, and the contract invoked the federal law, but then interpreted it to be subject to the state law. The contract had invalidated the arbitration if the state law produced a class proceeding. The state appellate court rejected DirecTV's reading of AT&T Mobility, and said the state law was still applicable.
The DirecTV cert petition says that the California state Court of Appeal case results in “the intolerable situation that parties in California can enforce their federal arbitration rights in federal court, but not in the state court across the street.”
The petition says a Ninth U.S. Circuit Court of Appeal case, Murphy v. DirecTV Inc., 724 F.3d 1218 (9th Cir. 2013), settled the question via its interpretation of the exact same contract as the Imburgia case, creating the apparent federal-state conflict that the Supreme Court is almost certain to address.
There are three customer agreement arbitration contact clauses at issue in Imburgia and Murphy:
1) Section 9, a dispute-resolution provision, says:
[I]f we cannot resolve a Claim informally, any Claim either of us asserts will be resolved only by binding arbitration. The arbitration will be conducted under the rules of JAMS that are in effect at the time the arbitration is initiated … and under the Rules set forth in this Agreement.
Neither you nor we shall be entitled to join or consolidate claims in arbitration by or against other individuals or entities, or arbitrate any claim as a representative member of a class or in a private attorney general capacity. Accordingly, you and we agree that the [Irvine, Calif.-based ADR provider JAMS'] Class Action Procedures do not apply to our arbitration. If, however,the law of your state [emphasis is Alternatives'; see discussion below] would find this agreement to dispense with class action procedures unenforceable, then this entire Section 9 is unenforceable.
2) Section 10(c) on applicable law says:
The interpretation and enforcement of this Agreement shall be governed by the rules and regulations of the Federal Communications Commission, other applicable federal laws, and the laws of the state and local area where Service is provided to you. This Agreement is subject to modification if required by such laws. Notwithstanding the foregoing, Section 9 shall be governed by the Federal Arbitration Act.
3) Section 10(d)) states:
If any provision is declared by a competent authority to be invalid, that provision will be deleted or modified to the extent necessary, and the rest of the Agreement will remain enforceable.
DirecTV asked the U.S. Supreme Court to review the case because it says that the California state court decision in the case had “transformed an agreement that forbids class arbitration into an agreement that requires class arbitration to be enforceable.” [Emphasis in the brief.]
But the unanimous three-justice California appellate court addressed Murphy, saying that the Ninth Circuit's analysis was “unpersuasive” because the phrase “the law of your state” in Section 9 showed agreement to preempt federal law by the use of the state law:
On the one hand, insofar as the [Murphy] court's reasoning is a matter of contract interpretation, it means that when the parties used the phrase “the law of your state,” they meant “federal law plus (nonfederal) state law.” Murphy provides no basis for concluding that the parties intended to use the phrase “the law of your state” in such a way, and we are aware of none. On the contrary, a reasonable reader of the customer agreement would naturally interpret the phrase “the law of your state” as referring to (nonfederal) state law, and any ambiguity should be construed against the drafter. On the other hand, insofar as the court reasoned that contract interpretation is irrelevant because the parties are powerless to opt out of the FAA by contract, we are aware of no authority for the court's position. Rather, as we have already observed, if the customer agreement expressly provided that the enforceability of the class action waiver “shall be determined under the (nonfederal) law of your state without considering the preemptive effect, if any, of the FAA,” then that choice of law would be enforceable; Murphy cites no authority to the contrary. Consequently, the dispositive issue is whether the parties intended to make that choice. As a result, “the parties' various contract interpretation arguments” are not “largely irrelevant.” (Murphy, supra, 724 F.3d at p. 1228).
See DirecTV Inc. v. Imburgia, 225 Cal. App. 4th at 346-347.
In its cert petition, DirecTV told the U.S. Supreme Court that the sole question presented in the case is “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.”
DirecTV is dismissive of the state appellate court decision, summarizing that it “does precisely what [AT&T Mobility] prohibits: it applies state law to invalidate an arbitration agreement solely because that agreement includes a class-action waiver.”
The reasoning the California Court of Appeal deploys on the consumer contract clauses, according to the DirecTV brief, doesn't make sense in the wake of AT&T Mobility. “Under the Supremacy Clause,” the successful cert petition says, “there is no such thing as state law immune from the preemptive force of federal law; to the extent that state law is preempted by federal law, it is a nullity.”
In analyzing the contract, DirecTV says that the “petition presents a conflict about as stark as they come: the California Court of Appeal and the Ninth Circuit interpreted the same language in the same FAA-governed arbitration agreement, and came to diametrically opposite results.”
Citing the Ninth Circuit's Murphy, the brief says that “there is no such thing as state law immune from the preemptive force of federal law.” It also notes that DirecTV contract's Section 10(c) choice-of-law provision, which insists that the FAA governs the agreement, needs to be enforced; the brief cites American Express v. Italian Colors, to back what it says is that party expectation.
Finally, DirecTV notes that the decision runs counter to the strong federal policy that the Supreme Court has exhibited favoring arbitration.
In opposing the cert petition, the plaintiffs noted that the questions presented were whether the Supreme Court had jurisdiction “to review a state Court of Appeal's application of neutral, nondiscriminatory state law principles of contract interpretation in determining whether there exists an agreement to arbitrate,” and “[w]hether the Court of Appeal erred in finding that the parties could select state law to the exclusion of federal law to determine the enforceability of a class action waiver.”
Though the opposition argument failed to keep it away from the Court, it presages a potentially interesting battle—even with, from the plaintiffs' perspective, the daunting specters ofAT&T Mobility and American Express v. Italian Colors, as well as a general feeling among arbitration practitioners of déjà vu.
The plaintiffs say that the California Court of Appeal decision doesn't conflict with the Ninth Circuit decision. They also wrote that it doesn't violate AT&T Mobility.
The response to the cert petition says that the state appellate court didn't roll back the arbitration timeline to Discover Bank, but instead applied AT&T Mobility. The plaintiffs wrote that the state court enforced
the private arbitration agreement according to its terms which, unlike the agreement in [AT&T Mobility], the agreement [in DirectTV] contains a more specific and unique class-waiver provision, stating that the customer may not sue as part of a class, but that the arbitration provision in its entirety is invalid if the class-waiver provision violates “the law of your state.” The agreement in [AT&T Mobility] did not include “the law of your state” language.
The original plaintiffs also had stated that the case shouldn't be reviewed because it is an intermediate court decision that had been denied review by the California Supreme Court.
They had declared that the conflict didn't merit review because it “comes down to a question concerning the interpretation of seldom-used language in an unnecessary class waiver provision.”
They also noted that the provision will not affect future contracts, because the “one-off” 2007 consumer contract clause is no longer in use by DirecTV.
The satellite-TV provider responded on Feb. 10, 13 days after the Imburgia plaintiffs' brief, and wrote that the contentions were meritless:
Respondents do not seriously deny that the decision below conflicts with the Ninth Circuit's decision in Murphy …, which enforced the same arbitration agreement at issue here and dismissed the reasoning adopted by the court below as “nonsensical.” Rather, respondents attempt to shield the conflict from this Court's review by asserting that it (1) involves nothing more than state contract law, and is thus “not subject to review by this Court,” … (2) is “marginal,” and involves an intermediate state court, … and (3) is “not important,” … . Each of these arguments is manifestly incorrect.
The Court agreed, and granted the petition to hear the case on March 23.
DirectTV's brief was signed by Christopher Landau, who heads the appellate litigation practice at Kirkland & Ellis in the firm's Washington, D.C. office, and who was joined by three attorneys in the firm's Los Angeles office. Landau is best-known in arbitration jurisprudence for successfully writing the brief and arguing the Supreme Court case of Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), which held that disputes over contracts with arbitration clauses go to arbitrators, not courts, for decisions unless the dispute is about the validity of the arbitration clause itself.
The counsel of record for Imburgia is Paul D. Stevens of the Santa Monica, Calif., office of Milstein Adelman, along with two attorneys at the firm. Also on the reply brief are F. Edie Mermelstein, who has an office bearing her name in Huntington Beach, Calif.; two attorneys at the San Francisco principal office of Evans Law Firm Inc., and two officials at Consumer Watchdog, a Santa Monica, Calif., public interest organization that litigates and lobbies on behalf of consumers in their claims against big companies.
© 2015 by Institute for Conflict Prevention & Resolution and Wiley Periodicals, Inc. Reprinted with permission. The original article can be found here, at www.altnewsletters.com or in the Wiley Online Library (http://bit.ly/1BUALop).