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U.S. Supreme Court Grants Certiorari in Another Class Arbitration Case: Can the Federal Arbitration Act Spare DIRECTV an Extended Stay in Class-Arbitration-Waiver Purgatory?

March 31st, 2015 Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, California State Courts, Choice-of-Law Provisions, Class Action Arbitration, Class Action Waivers, Contract Interpretation, FAA Preemption of State Law, Practice and Procedure, State Courts, United States Supreme Court Comments Off on U.S. Supreme Court Grants Certiorari in Another Class Arbitration Case: Can the Federal Arbitration Act Spare DIRECTV an Extended Stay in Class-Arbitration-Waiver Purgatory? By Philip J. Loree Jr.

On March 23, 2015 the U.S. Supreme Court granted certiorari in DIRECTV, Inc. v. Imburgia, No. 14-462. If decided on its merits, the case will be by our count the fifth U.S. Supreme Court decision concerning class arbitration decided on its merits during the period 2010 forward.

yay-1341284-digitalImburgia is a decision by the California Court of Appeals, Second District, Division One of which the California Supreme Court denied review. Like many other Federal Arbitration Act cases, it presents some interesting vertical conflict of law questions, but the California Court of Appeals does not appear to have resolved them in the way the U.S. Supreme Court presumably intended them to be resolved under the Volt and Mastrobuono lines of cases. 

The case centers  on a class-action waiver non-severability provision included in a consumer contract DIRECTV entered into in 2007, about four years before the U.S. Supreme Court ruled in Concepcion that the Federal Arbitration Act preempted California’s Discover Bank rule. The Discover Bank rule provides that class action waivers are unenforceable in litigation or arbitration proceedings. See, generally, AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, 1753 (2011).

yay-3535433-digitalBefore Concepcion not only did the California state courts hold that the Federal Arbitration Act did not preempt the Discover Bank rule, but so did the U.S. Court of Appeals for the Ninth Circuit. Thus, at the time, the risk companies like DIRECTV and others with consumer class arbitration exposure had was that applicable state law would not only ban class arbitration waivers, but applicable federal law would permit that to happen.

So companies like DIRECTV and others built into their arbitration agreements a fail-safe mechanism under which the entire arbitration agreement would be rendered uneneforceable if state law rendered the class arbitration waiver unenforceable. In other words, the companies understandably viewed class action litigation to be a more favorable alternative than class arbitration if forced to choose between the two.

 

The Arbitration Agreement

yay-15481222-digitalLet’s take a look at what the customer agreement says. Section 9 of the contract, the arbitration agreement, provides that “any legal or equitable claim relating to this Agreement, any addendum, or your Service” will, after resort to informal dispute resolution procedures, “be resolved only by binding arbitration” under JAMS rules. Section 9 also provided that “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 JAMS Class Action Procedures do not apply to our arbitration. If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 [i.e., the entire arbitration agreement] is unenforceable.”

Section 10 of the contract addressed, among other things, “Applicable Law”: “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.”

 

Procedural History

yay-8639332-digitalThe proceedings that led to the petition for certiorari began in 2008, when plaintiffs filed a class action complaint in California state court, which alleged that DIRECTV had improperly charged customers early termination fees. DIRECTV did not at that time compel arbitration because in 2006 the California Court of Appeal, Second District had ruled in an earlier, unrelated case that DIRECTV’s class arbitration waiver was unenforceable under Discover BankSee Cohen v. DIRECTV, Inc., 142 Cal.App.4th 1442, 1455 (2d Dist. 2006). It therefore believed that moving to compel arbitration would have been futile.

 

On April 20, 2011 the trial court granted in part and denied in part a motion for class certification. Seven days later the U.S. Supreme Court decided Concepcion, and on May 17, 2011 DIRECTV moved to compel arbitration, explaining why before Concepcion doing so would have been futile. The trial court denied the motion and DIRECTV appealed to the California Court of Appeals, Second District.

Affirming the trial court decision, the Court of Appeals, explained, “[s]ummariz[ing]” its reasoning:

Section 9 of the 2007 customer agreement provides that ‘if … the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.’ The class action waiver is unenforceable under California law, so the entire arbitration agreement is unenforceable. The superior court therefore properly denied the motion to compel arbitration.

Imburgia v. DIRECTV, Inc., 225 Cal.App.4th 338, 347-48 (2d Dist. 2014) (footnote omitted).

Can Imburgia be Squared with Federal Law?

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A play-by-by of the interpretative path the Court of Appeals followed to reach an outcome under which DIRECTV’s right to arbitrate was conditioned on the non-existence of a state law barring enforcement of class arbitration waivers—irrespective of whether that state law was preempted by the Federal Arbitration Act—is beyond the scope of this brief article. Suffice it to say that the Court of Appeals appears to  have selectively applied state law contract construction principles without giving effect to at least two controlling principles of federal law.

The first is the federal presumption of arbitrability under which doubts about the scope of an agreement to arbitrate are resolved in favor of arbitration. Here, the question was whether the parties agreed to arbitrate on a bilateral basis the claims that formed the basis for plaintiffs’ class action, or whether they agreed to litigate them. That’s a classic question of arbitrability to which the presumption applies.

Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 58-64 (1995) demonstrates how the presumption of arbitrability is to be applied in conjunction with state law contract interpretation rules. There the Court reminded us that when application of state law contract principles leads to the conclusion that the contract is ambiguous, the ambiguity is resolved in favor of arbitration. See 514 U.S. at 62.

The California Court of Appeals acknowledged that the contract was ambiguous, but purported to resolve that ambiguity simply by applying state law rules of contra proferentem and the rule that specific terms prevail over general ones, even though that resolved the ambiguity in a way that assumed the parties agreed to: (a) condition their mutual obligations to arbitrate on whether the agreement’s class action waiver would be unenforceable under state law in a hypothetical scenario where federal law did not preempt that state law; and (b) to impose that condition in circumstances where federal law preempted state law. The California Court of Appeals concluded that Mastrobuono required that result.

yay-10379532Mastrobuono required the Supreme Court to determine whether a broad New York choice-of-law clause should be interpreted to mean the parties intended that: (a) New York law would govern the merits of the underlying dispute, but otherwise applicable federal law would govern the allocation of power between courts and arbitrators; or, alternatively, (b) New York law would govern all issues, even if otherwise applicable federal law would preempt conflicting New York law on the allocation of power question. Construing the choice of law clause in conjunction with the arbitration agreement, the Court explained, “[a]t most, the choice-of-law clause introduces an ambiguity into an arbitration agreement that would otherwise allow punitive damages awards.” 514 U.S. at 62. The Court interpreted that ambiguity in favor of the arbitrability of punitive damage claims because, “when a court interprets such provisions in an agreement covered by the FAA, due regard must be given to the federal policy favoring arbitration, and ambiguities as to the scope of the arbitration clause itself resolved in favor of arbitration.” Id.

Contrary to Imburgia‘s suggestion, Mastrobouno did not hold that arbitration agreements must be interpreted against the drafter. It simply pointed out that, in addition to the presumption of arbitrability, the applicable state contract interpretation rule that interprets doubtful language against the drafter, yielded the same result, for the award-challenging party in Mastrobouno had drafted the contract. In Imburgia the drafter of the agreement (DIRECTV) is seeking to resolve an ambiguity in the contract in favor of arbitration, so the applicable federal-law contract interpretation rule (the presumption of arbitrability) and a state contract interpretation rule are in conflict in a case governed by federal law, which means that the federal law rule trumps the state rule. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944-45 (1995) (federal-law presumptions in favor of—and against—arbitration are “important qualification[s]” to state law contract interpretation rules) (emphasis added).

yay-12597670-digitalThe other key federal law the California Court of Appeals apparently overlooked is an important limitation on the Volt principle, which allows parties to agree to arbitrate under state arbitration law rules that are inconsistent with the Federal ‘Arbitration Act, because the main purpose of the Federal Arbitration Act is to enforce arbitration agreements as written and according to their terms. Deeming the parties to have agreed to arbitrate under rules that conflict with the Federal Arbitration Act, and applying them to an arbitration otherwise governed by the Federal Arbitration Act, must not “‘stand [] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.'” Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 477-78 (1989) (quoting Hines v. Davidowitz, 312 U. S. 52, 67 (1941)).

Here, the California Court of Appeals invokes the Volt principle to impose a rather bizarre regime on DIRECTV and other companies which, prior to Concepcion, included non-severability provisions into their arbitration agreements to avoid the risk of being forced into class arbitration. Under this purgatory-like regime DIRECTV has been deemed to agree to arbitrate only in states whose laws do not purport to ban class arbitration waivers even though: (a) under Concepcion  no state or federal court may enforce those laws to ban DIRECTV’s class arbitration waiver; and (b) but for the California court’s interpretation of the non-severability provision, applicable federal law would require enforcement of DIRECTV’s arbitration agreement, including its class waiver.

yay-9088292-digitalThe question is whether imposing through the guise of state-law contract interpretation rules this kind of “class-arbitration-waiver purgatory” on DIRECTV (or anyone else) is an “obstacle” to the accomplishment and execution of the Federal Arbitration Act’s purposes and objectives. We think Concepcion strongly suggests that the answer is yes.

Concepcion held that the Federal Arbitration Act preempted the Discover Bank rule “[b]ecause it cause it ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.  .  .  .” Concepcion, 131 S. Ct. at 1753 (quoting Hines, 312 U.S. at 67). Interpreting Section 2 of the Federal Arbitration Act to “save” the Discover Bank rule from preemption would, said the Court, “interfere[] with fundamental attributes of arbitration and thus create[] a scheme inconsistent with the FAA.” 131 S. Ct. at 1748.

Where, as here, one or more alternative interpretations of the arbitration agreement would have given effect to DIRECTV’s expressed intent to arbitrate wherever the courts would be required to enforce their arbitration agreement under the Federal Arbitration Act—including that agreement’s class arbitration waiver—a court undermines the Federal Arbitration Act’s purposes and objectives if it selects an alternative that does not give effect to that intent. Choosing an alternative that denies DIRECTV the benefits of the U.S. Supreme Court decision that made the non-severability clause no longer necessary, rather than one that gives effect to that decision, likewise frustrates the FAA’s purposes and objectives.

We are  sure there are many other arguments in favor of DIRECTV’s position that may (and perhaps will) be made. It will, as always, be interesting to see how the case develops and how the Court decides it.

We’d like to thank our good friend and colleague Richard Faulkner, who was kind enough to inform us that SCOTUS had granted certiorari in this case and to provide us with briefs in support of and in opposition to DIRECTV’s petition.

 

 

Photo Acknowledgements: 

All  photos used in the text portion of this post were licensed from Yay Images:

Photo Number (from top down)
Photographer (Using Yay Image Abbreviations)
Text Added? (Y or N)
1 Speedfighter N
2 BDS Y
3 Master_Art N
4 72Soul N
5 Wavebreakmedia Y
6 Wavebreakmedia Y
7 Wavebreakmedia N
8 Sergey Nivens Y

 

         

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