In part I of a two-part post (here), we summarized the Supreme Judicial Court of Massachusetts’ decision in Feeney v. Dell Inc., ___ Mass. ___, slip op. (July 2, 2009). The Court there refused to enforce an arbitration agreement in a consumer contract because it contained a class action waiver that the Court found violative of Massachusetts public policy favoring class actions under G.L., c. 93A, and which the Court found not to be severable from the remainder of the arbitration agreement. The Court also refused to enforce on public policy grounds a choice-of-law clause providing that Texas law – which apparently permits class action waivers — would govern the parties’ agreement. In this part II we discuss whether the decision comports with the Federal Arbitration Act.
The critical issue in Feeney was whether a state public policy against class action waivers was preempted by the Federal Arbitration Act, the preeminent purpose of which is to enforce according to their terms arbitration agreements falling within its scope. With all due respect to the SJC, we think Feeney was a tough case and that the preemption issue was a close call. The Court obviously worked hard to justify the outcome and drilled down on the preemption issue, but at the end of the day its arguments simply proved too much.
As discussed in yesterday’s post, each party agreed with the Dell entities that it would arbitrate its claims, and only its claims, against those entities. Each party agreed that Texas law – which permits class action waivers – would govern. The agreements were not unconscionable, entered into under duress or otherwise subject to a defense applicable to contracts generally.
But the SJC refused to enforce the arbitration agreement, including the choice-of-law clause. While it went to great lengths in one breath to say that class action arbitration under c. 93A would not offend Massachussets policy, in the next breath it tossed out not only the class action waiver and the choice-of-law clause, but the entire arbitration agreement. Why? Because the arbitration agreement and the class action waiver were apparently so inextricably intertwined that the Court could not “sever” the class action waiver from the arbitration agreement itself. That is another way of saying that the Court, to excise the class action waiver, would have had to rewrite the arbitration agreement to impose class action arbitration on the parties. And if the Court rewrote the parties’ agreement to permit class arbitration it would have violated the Federal Arbitration Act because it would have imposed on the parties an arbitration procedure to which they never expressly or impliedly agreed. So instead, the Court said that it would not enforce the arbitration agreement at all, which also violated the Federal Arbitration Act.
The flip side of the Court’s severability analysis was this: If the Court said the arbitration agreement was severable from the class action waiver, then, under the doctrine of severability the question whether the class action waiver was enforceable would have been for the arbitrators to decide. The arbitrators had, in fact, already decided that it was enforceable, and, given the Texas choice-of-law provision, the Court could hardly have vacated the arbitrators’ award on excess of powers grounds, or any other ground. The arbitrators did nothing but enforce all aspects of the parties’ contract, which is exactly what arbitrators are supposed to do. Had the parties opted to apply Massachusetts law to their contract, then there might have been some basis for the court to vacate the award and remand the matter to a new arbitration panel, provided there was no colorable basis for the award under Massachusetts law. But that is not what the parties agreed and that is not what happened.
The analysis and outcome here should give us pause. The Court was correct when it said that principles of state contract law that “‘arose to govern issues concerning the validity, revocability and enforceability of contracts generally . . . ” are applicable to arbitration agreements under the FAA. (internal quotation and citation omitted) Those are the basic state law principles that apply to all contracts. They are not displaced by the FAA because the purpose of the FAA is to put arbitration agreements on the same footing as ordinary contracts.
In an exceedingly broad sense the Court was probably correct when it said “the tenet that a contract may be invalidated on grounds that it violates public policy” is a state law principle that is applicable to contracts generally. But to the extent that states have public policy defenses that apply to contracts across the board, those defenses are usually reflected in the law of contracts. For example, states generally have a public policy in favor of freedom of contract, but that policy is reflected in state law prohibiting enforcement of contracts entered into under duress or against a party who lacks the capacity to contract. So if the Dell entities had entered into an arbitration agreement with a minor, or if a representative of Dell procured plaintiffs’ assent to the arbitration agreements by pointing guns at the plaintiffs’ heads, then surely the arbitration agreements would have been unenforceable for public policy reasons reflected in state law applicable to contracts generally.
But that is as far as it goes. Typically, a contract is not enforceable on public policy grounds because state law prohibits enforcement of a particular type of contract. Gambling contracts, contracts that require the performance of an illegal act, and choice of law provisions that purport to require the application of laws that contravene a fundamental public policy of the forum state are a few examples.
These “public policy” based rules of contract enforcement do not, by definition, apply to contracts generally. The state public policy prohibition in Feeny is no exception. It targets a specialized subset of contracts: those waiving the class action procedure provided by G.L., c. 93A in both an arbitral or judicial forum. As a practical matter that subset of contracts consists almost entirely of arbitration clauses. And while the Court tries to sidestep this fact by pointing out that any contract that purported to waive a party’s resort to class action procedures would violate the policy – even if the parties had not agreed to arbitrate –such contracts, if they exist at all, are, as far as we know, rare indeed. But in fairness to the SJC we should give the Court the benefit of the doubt and assume that such contracts are common. Yet even then the public policy prohibition does not apply to contracts generally.
If readers have lingering doubts consider this. We do not think anyone versed in Supreme Court precedent concerning FAA preemption of state law would seriously argue that Massachusetts (or any other state) could refuse to enforce an FAA-governed agreement to arbitrate solely on the ground that it had a state public policy against the enforcement of arbitration agreements. But the Court’s reasoning – that public policy is a defense to the enforcement of contracts generally without regard to what the public policy prohibits – would squarely support such a result.
At the risk of gilding the lily, there is yet another reason why the Court’s analysis missed the mark. The parties agreed that Texas law would govern their arbitration agreement and the SJC acknowledged that Texas law “likely” permitted class action waivers. But the Court refused to enforce that part of the parties’ agreement, not because state law principles applicable to contracts generally required non-enforcement, but because state conflict-of-law rules (which by definition are not applicable to contracts generally) allow the forum state not to enforce the parties’ choice of law on public policy grounds.
We certainly appreciate that the Court had nothing but good intentions — it wanted to protect an important state public policy favoring class litigation and arbitration in cases governed by c. 93A. There is nothing wrong with that policy, and it may well be a good one. But, as important as that policy may be to Massachusetts, and as wise as that policy may be, we believe the federal substantive law of arbitrability trumped it in this case.
Tags: Arbitrability, Class Action Arbitration, Class Action Waiver, Class Actions, Federal Arbitration Act, Federal Preemption, Federal Substantive Law of Arbitrability, Feeney v. Dell Inc., Massachussets Supreme Judicial Court, Public Policy, Section 2, SJC