Arbitration Redux: Supreme Court Speaks Again


Arbitration Redux: Supreme Court Speaks Again

Arbitration Take 2Just seven days after my last blog post on arbitration clauses, the United States Supreme Court issued its decision in DIRECTV, Inc. v. Imburgia finding, yet again, that a class action waiver provision was enforceable against a consumer.  Although the decision turned on a rather nuanced question of contract interpretation, it serves as a powerful reminder of the majority’s inclination to uphold class action waivers in consumer contracts.  (The DIRECTV case is, essentially, the child of the Supreme Court’s earlier decision in AT&T Mobility LLC v. Concepcion, which I previously discussed here and here.)

Here’s what you need to know.

Concepcion Sets The Stage

Both Concepcion and DIRECTV began in California.  Both involved the question of whether a class action waiver (whether in court or by means of class arbitration) in a consumer agreement is enforceable.  Because of the Federal Arbitration Act (or FAA), the enforceability of an arbitration clause is a federal question.  In Concepcion, the Supreme Court found that a California state statute deeming class action waivers to be per se unconscionable in consumer contracts was, essentially, superseded by the FAA’s clear purpose to make arbitration agreements enforceable notwithstanding state law to the contrary.  The rule in Concepcion is fairly clear:  a state law that singles out any part of an arbitration agreement as per se unenforceable is trumped by the FAA, absent some federal law to the contrary.  (An example of a contrary federal law is the McCarran-Ferguson Act, which exempts the business of insurance from most federal regulations, and courts have found that, on the basis of this federal statute, state laws forbidding arbitration agreements in insurance contracts override the FAA.)

Ordinary Contract Interpretation Rules Apply to Arbitration Clauses

So, how is DIRECTV different?   The contract entered into by the parties in DIRECTV case was created prior to Concepcion, at a time when the California statutory bar on class action waivers had not yet been invalidated by the U.S. Supreme Court.  The contract provided expressly that its class action waiver was unenforceable–indeed, the entire arbitration clause would be thrown out–if the “law of your state” makes class action waivers unlawful.  The position of the class was that, irrespective of what happened later in Concepcion, the California law plainly barred class action waivers.   Thus, by agreement, the class-action waiver was invalidated as a matter of contract law.  The Supreme Court disagreed, finding that the “law of your state” should be interpreted to mean “valid law of your state,” and that its holding in Concepcion demonstrated California’s bar on class action waivers to be unenforceable.

How the Supreme Court got to this conclusion–by a process of contract interpretation vigorously contested by the dissent–may be less important to direct marketers than two major points made along the way.

First, the Supreme Court underscored that the FAA “allows parties to an arbitration contract considerable latitude to choose what law governs some or all of its provisions, including the law governing enforceability of a class-arbitration waiver.”  The breadth of such power was shown, by illustration, to be sweeping.  “In principle,” the majority wrote, “they might choose to have portions of their contract governed by the law of Tibet, the law of pre-revolutionary Russia, or (as relevant here) the law of California … irrespective of [the invalidation of the class-action waiver law] in Concepcion.”  In other words, the parties could require the application of even an invalid state law, provided their contract made that clear.  Thus, what the contract should have said, for the plaintiffs to prevail, was: “your state law applies, even those provisions determined to be invalid by a court of competent jurisdiction.”  In other words, the holding in DIRECTV was all about contract law.

Second, the rule from Concepcion, and applied in DIRECTV, is that arbitration agreements must, under state law, “stand on equal footing with all other contracts.” Under this prism, the interpretation of “law of the state” needed to be guided by ordinary contract interpretation principles.  In so doing, the majority concluded that this language was unambiguous as to extend only to valid state laws, and such an interpretation was consistent with prior contract interpretation decisions and guidance from the Supreme Court of California.  There was no need, the majority wrote, to read the clause against the drafter (here, DIRECTV) because its language was “unambiguous.”

Key Takeaway

In dissent, two of the Justices, Ginsburg and Sotomayor, looked at the case through a “consumer protection” lens, finding not only that the phrase “law of the state” was ambiguous (calling it “Delphic,” as in the inscrutable prophecies of the ancient Oracle), but also that any ambiguity ought to be read against the party who wrote the agreement, particularly where that party has a disproportionate power to set its terms.  “I would read it,” Justice Ginsberg wrote, “to give the customer, not the drafter, the benefit of the doubt.”  If DIRECTV had sought to exclude laws that would later be found invalid, it had the absolute right to say so, in other words, and there would have been nothing that a consumer could do about it except walk away from the deal.

The dissent’s view is important to bear in mind for at least two reasons.  First, this consumer-oriented approach to form contracts is typical of what you’ll find in the trial courts of most states, both state and federal.  They will often look for any basis for ambiguity, and then turn the tables on the company that wrote the agreement.  Second, the U.S. Supreme Court rarely takes cases that turn on the interpretation of a contract under state law.  Indeed, the Supreme Court takes very few cases overall (in the single percentage points), and it may decline to interfere with a lower court decision presenting, perhaps, a closer call on contract interpretation.

So, here’s the lesson, which probably should inform all of your contracts, but especially consumer contracts:  Be clear, concise, and understandable.





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