Recently, the Supreme Court reversed a California court’s refusal to enforce an arbitration agreement made unenforceable by valid California state law. The Court emphasized the fact that under the Federal Arbitration Act, state law prohibiting class-arbitration waivers is invalid. In her dissent, Justice Ginsburg focused on the parties’ intent at the time of execution and warned of the expansive path the Court is embarking on issuing decisions in a pro-business manner and wholly precluding relief to consumers.
In 2007, the plaintiffs in DirecTV, Inc. v. Imburgia (136 S. Ct. 463) entered into a service agreement with DirecTV. The service agreement required all claims to be resolved by binding arbitration and included a class-arbitration waiver, with the caveat that “if the “law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision “is unenforceable.”” Although the agreement provided that the FAA would interpret the language, it was unclear whether the clause applied to this specific “law of your state” provision. In 2008, the plaintiffs brought suit against DirecTV for early termination fees they believed violated California law. At that time, California law held class-arbitration waivers unenforceable and DirecTV did not attempt to compel arbitration. Five years later, when the Supreme Court invalidated California law holding class-action waivers unenforceable in AT&T Mobility LLC v. Conception, DirecTV moved to compel arbitration. The California Court of Appeal found the phrase “law of your state” ambiguous and interpreted it against DirecTV (the drafting party), and ultimately denied the motion. The California court conceded that Conception invalidated the class-action waiver ban under the FAA, but concluded that, exclusively under California law, the waiver in the service contract remained unenforceable. The California court reasoned that the parties were free to select whatever law they chose to interpret the contract. Since this specific provision required the application of the plaintiff’s state law, and ambiguous terms are interpreted against the drafter, the decision complied with Conception. The California Supreme Court denied review and DirecTV petitioned for certiorari.
The Supreme Court started off with the premise that lower courts must follow the rule created in Conception. Neither party contested this. The Court then admitted that the parties are allowed to choose what law governs some or all of its provisions. Although the main issue was whether California law, as applied, was consistent with the FAA, the underlying question was whether the application of California law included now invalid law.
The first matter addressed was the language of the provision. The Court rejected the idea that the phrase was ambiguous. Next the Court stated that California case law held under general contract principles that references to California law incorporate the legislature’s power to change the law retroactively. Third, the Court held that nothing indicated that a California court would apply invalid state law in any context other than arbitration. Fourth, expanding on the third premise, the Court held that the interpretation of “laws of your state” to the extent they are not preempted by the FAA, would limit the application to arbitration. Fifth, because the state law was invalidated by Conception, it could not maintain independent force under state law. Sixth, and finally, reiterating the equal footing adhered to in the third and fourth points, because no authority suggested that “laws of your state” would apply invalid law in other contexts, the interpretation was invalid. The Court rejected the interpretation that this specific clause was exempted from the general adoption of the FAA in the parties’ agreement. Because the interpretation did not place arbitration agreements “on equal footing with all other contracts” the Court reversed and remanded for further proceedings.
In her dissent, Justice Ginsburg stressed the preclusive effect on consumers, making the cost of recovery more than it is worth. She started her discussion with the fact that DirecTV did not oppose litigation until after Conception. There was no reason to at that time, because DirecTV would have been precluded by California law. When DirecTV moved to compel arbitration, the Court of Appeal based its decision on the fact that DirecTV knew of California law in 2007 and could not have predicted that, four years later, the Supreme Court would hold the FAA preempts state-law protection against compelled class-arbitration waivers. Even in its state court filing, DirecTV admitted that California prevented enforcement of the class-arbitration waiver.
Going further, Ginsburg explains that Conception only holds that a state cannot compel class arbitration when prohibited by the agreement. Just as the parties may agree to individual or class arbitration, the parties are also free to select the choice of law. Since the CLRA was and is still valid in California, the parties were free to select that law. The question at issue, according to Justice Ginsburg, was not whether the parties intended the “law of your state” phrase to include laws preempted by the FAA, but rather the law of the state as frame by the state legislature. Ginsburg agreed with the California court, arguing that specifically referring to the “law of your state” in one provision, rendered the language meaningless if preempted by the FAA, considering the general FAA choice of law provision. Ginsburg found it unbelievable, that any consumer would have anticipated the Court’s decision in Conception four years later. Although the court has found a “federal policy favoring arbitration” in the FAA, it has also cautioned that finding to “where it reflects, and derives its legitimacy from a judicial conclusion that arbitration is what the parties intended because their express agreement to arbitrate was validly formed, legally enforceable, and best construed to encompass the dispute.”
For the rest of her opinion, Ginsburg expressed her concern for the majority decision and the expansive deprivation of consumer rights. Included in many consumer agreements, class action waivers effectively preclude consumers from obtaining remedies for minor injuries that make individual recovery cost prohibitive. She closed noting that in the EU only post-dispute arbitration agreements are binding, and mandatory arbitration clauses in consumer contracts are nearly nonexistent outside of the United States.