On Monday, the Supreme Court held in DIRECTV, Inc. v. Imburgia that a California appellate court erred by declining to enforce an arbitration agreement that prohibits arbitration on a class-wide basis. The decision is the latest in a steady line from the Supreme Court chastising lower courts for failing to give effect to arbitration agreements. Perhaps most interesting, the opinion is written by Justice Breyer, who recently authored a dissent arguing that the Supreme Court has expanded the Federal Arbitration Act (FAA) too far. In the Imburgia opinion, Justice Breyer acknowledges his prior dissent but makes clear that the Court’s decisions are the law of the land: While “[l]ower court judges are certainly free to note their disagreement” with Supreme Court precedent, “the judges of every State must follow it.”
We recently previewed Imburgia on this blog. The plaintiffs brought a putative class action in California state court alleging that the defendant, DIRECTV, violated California consumer-protective legislation by imposing large early-termination fees. The DIRECTV service agreement contains a provision requiring consumers to arbitrate their disputes with DIRECTV individually and not on a class-wide basis. The agreement further provides, however, that if the “law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision is unenforceable, thus permitting consumers to litigate their disputes with DIRECTV in court.
When the plaintiffs filed their lawsuit in 2008, existing California law held that class-arbitration waivers like the one in DIRECTV’s service agreement were unenforceable. Therefore, per the terms of the service agreement, the entire arbitration provision was unenforceable. In 2011, however, the U.S. Supreme Court held in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), that the California law is preempted by the FAA. In light of Concepcion, DIRECTV moved to stop the litigation and compel arbitration on an individual basis.
The California trial court denied DIRECTV’s motion, and the California Court of Appeal affirmed. The Court of Appeal focused on the provision of the service agreement making the arbitration agreement unenforceable if the “law of your state” makes the waiver of class arbitration unenforceable. The court acknowledged that, after Concepcion, California law does not prohibit DIRECTV’s class arbitration waiver. But, applying California contract law, the court interpreted the words “law of your state” to mean California law without regard to whether that law is preempted. Because pre-Concepcion California law made DIRECTV’s class-arbitration waiver unenforceable, the court held that the entire arbitration agreement is unenforceable.
The U.S. Supreme Court reversed, holding that the arbitration agreement must be enforced. The Court began its analysis by conceding that the parties to the agreement were free to define the words “law of your state” however they like, including, “[i]n principle,” “by the law of Tibet, the law of pre-revolutionary Russia, or (as is relevant here) the law of California . . . irrespective of that [law’s] invalidation in Concepcion.” The Court further acknowledged that because the meaning of “law of your state” is a question of state law, and the Supreme Court reviews only federal law issues, the Court will accept the Court of Appeal’s interpretation of those words. Nonetheless, the Court stated, the FAA prohibits courts from discriminating against arbitration agreements by applying state law principles to such agreements in a manner different from how courts would apply those principles to other agreements. The Court concluded that the Court of Appeal’s interpretation of the words “law of your state” is unique to arbitration contracts and therefore is preempted by the FAA.
The Court gave several reasons for its conclusion. First, the Court said that the phrase “law of your state” unambiguously means valid state law. Second, consistent with this, California case law provides that references to California law incorporate retroactive legislative changes to that law. Third, “nothing in the Court of Appeal’s reasoning suggests that a California court would reach the same interpretation of ‘law of your state’ in any context other than arbitration.” Fourth, the language the Court of Appeals used when discussing California interpretive principles focused on arbitration. Fifth, the Court of Appeal’s reasoning implies that preempted state law maintains legal force—a view the Supreme Court said is unlikely to be accepted by courts or outside of the arbitration context. And finally, “there is no other principle invoked by the Court of Appeal that suggests that California courts would reach the same interpretation of the words ‘law of your state’ in other contexts.”
Justice Ginsburg wrote a heated dissent, which Justice Sotomayor joined. Much of the dissent—which, at 14 pages, is three pages longer than the majority opinion—focuses on what Justice Ginsburg believes is the Court’s improper expansion of the FAA. She opens her dissent by stating that “[i]t has become routine, in a large part due to this Court’s decisions, for powerful economic enterprises to write into their form contracts with consumers and employees no-class-action arbitration clauses.” The Court’s decisions, she states, “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.” With respect to this case, Justice Ginsburg says it is clear that when DIRECTV originally drafted the service agreement, DIRECTV meant the words “law of your state” to mean state law without regard to federal preemption. And, to the extent “law of your state” is ambiguous, Justice Ginsburg says that the ambiguity should be resolved against DIRECTV because DIRECTV could have avoided the ambiguity through more precise drafting. According to Justice Ginsburg, the Court reaches its holding by substituting its interpretation of “law of your state” for the Court of Appeal’s. Justice Ginsburg says that, in doing so, the Court’s decision “steps beyond” its precedents and is a “dangerous first.”
As noted, it seems meaningful that Justice Breyer, in particular, authored the majority opinion. He was the lead dissenter in Concepcion, where he, joined by Justices Ginsburg, Sotomayor, and Kagan, argued that “the Court is wrong” to hold that the FAA preempts California’s prohibition on certain class-action arbitration waivers. Now, in Imburgia, Justices Breyer and Kagan have moved to the majority, while Justices Ginsburg and Sotomayor remain as dissenters. In the Imburgia opinion, Justice Breyer acknowledges his prior dissent but emphasizes that Concepcion is controlling law: “The fact that Concepcion was a closely divided case, resulting in a decision from which four Justices dissented, has no bearing on [the] undisputed obligation” that “the judges of every State must follow it.” This portion of the opinion reads almost like a personal note to lower court judges who may hesitate to enforce arbitration clauses with class action waivers. The most lasting effect of Imburgia, therefore, may be to chasten such judges from resisting Concepcion.
Finally, Justice Thomas wrote a brief dissent reaffirming his view that the FAA does not apply to proceedings in state courts.
