'DIRECTV' and class arbitration waivers under the FAA

Benjamin G. Robbins, The Daily Record Newswire

In DIRECTV v. Imburgia, decided on Dec. 14, the U.S. Supreme Court was faced once again with a California court's refusal to enforce a class arbitration waiver contained in a consumer form agreement falling under the Federal Arbitration Act.

The plaintiffs were two customers of satellite provider DIRECTV. In 2007, they had signed a customer service agreement with DIRECTV that contained a mandatory arbitration clause and a class arbitration waiver.

Despite the arbitration clause, the plaintiffs subsequently sued DIRECTV in California state court, alleging that DIRECTV's imposition of early termination fees violated California law.

DIRECTV moved to compel arbitration, but the California Court of Appeal denied the motion, and the California Supreme Court denied discretionary review.

The lower court based its decision on its interpretation of language in the 2007 agreement stating that if "the law of your state" invalidated the class arbitration waiver, then the entire arbitration agreement would be unenforceable.

In that non-severability or "jettison" clause, DIRECTV was clearly trying to protect itself, in 2007, from the perceived risk of class arbitration when it referred to "the law of your state" with respect to the enforcement of its class arbitration waiver. The language reflects the general understanding, back in 2007, that the FAA deferred to a state's general contract law on the issue of enforcing class arbitration waivers.

And California law at the time would have refused to enforce a class arbitration waiver appearing in a consumer form agreement such as DIRECTV's service contract.

But all that changed in 2011, when the Supreme Court decided AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).

In Concepcion, the court held that the FAA preempts the very law of California (and the law of any other state, for that matter) that invalidated a class arbitration waiver contained in an otherwise valid arbitration agreement.

After Concepcion, then, "the law of your state" has no effect on the enforcement of a class action waiver. Therefore, the disputed "law of your state" language in the 2007 agreement is now a meaningless artifact from the pre-Concepcion era.

Nevertheless, the California Court of Appeal in DIRECTV interpreted "the law of your state" in the 2007 agreement to include the very California law hostile to class arbitration waivers that Concepcion subsequently declared to be invalid under the FAA.

Therefore, the lower court struck the class waiver under invalid, pre-Concepcion California law. The court also applied the contract's jettison clause and refused to enforce the entire arbitration agreement.

At issue, then, was whether the FAA preempted the lower court's interpretation of "the law of your state" to include invalid state law. In a skillful six-member majority opinion written by Justice Stephen G. Breyer (who, significantly, wrote a powerful four-member dissent in Concepcion), the court held that the FAA preempts the lower court's interpretation of the agreement.

The court explained that, while the FAA permits parties to apply any body of law to their arbitration agreements, including preempted state law, that is not what "the law of your state" means under the generally applicable contract law of California (or under the contract law of any other state in the union).

And the FAA requires state courts to interpret arbitration agreements on an equal footing with all other contracts. That means that a reference to "the law of your state" in any pre-Concepcion agreement evolves with the times and reflects any subsequent changes made by a state legislature, a state supreme court, or, as in this case, a decision of the Supreme Court on the supremacy of federal law over state law.

In short, the FAA preempts the lower court's departure from general California contract law when it presumed that "the law of your state" referred to California law that was declared invalid in Concepcion.

Under the court's decision, then, parties would have to refer expressly to invalid or preempted state law in their arbitration agreements (an unlikely but nonetheless enforceable contract clause under the FAA), to override the presumptive meaning of "the law of your state."

The decision is significant because it effectively announces a nationwide rule of contract interpretation under the FAA. A reference to state law in an arbitration agreement cannot impede the enforcement of a class arbitration waiver, unless the parties expressly say so in the agreement. That ensures the enforcement of class arbitration waivers in older, pre-Concepcion agreements, such as DIRECTV's 2007 service contract, which typically contain a reference to state law within a larger jettison clause. (This also ensures the enforcement of class waivers in newer arbitration agreements that contain such obsolete language through faulty draftsmanship.)

And the result makes sense because a reference to "the law of your state" in a pre-Concepcion jettison clause was never intended to displace the application of the FAA to a class arbitration waiver.

Quite to the contrary, a reference to state law with respect to the enforcement of class arbitration waivers actually indicated an intent to comply with the FAA, as it was generally understood before Concepcion. Back then, most courts and commentators had misinterpreted the FAA's "saving clause" as deferring to a state's general contract law on the enforceability of class arbitration waivers, typically via the contract defense of unconscionability.

And so compliance with the FAA before Concepcion was equated with compliance with a state's generally applicable contract defenses. Since a reference to state law indicated an intent to comply with the FAA, it follows that, once Concepcion was decided, "the law of your state" could no longer include any state law that was hostile to class arbitration waivers and hence inimical to the FAA itself.

The purpose of a pre-Concepcion jettison clause, then, was not to displace the FAA but was instead to protect businesses like DIRECTV from the perceived risk of mandatory class arbitration at the time.

This erroneous belief in mandatory class arbitration deserves some explanation. At the time, there was a widespread misinterpretation of Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003) (plurality opinion), which the court later addressed and corrected in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662, 680-81 (2010).

According to that misreading, Bazzle had recognized an implied right to class arbitration in any arbitration agreement governed by the FAA, which the drafting party would need to overcome with express contract language forbidding class arbitration.

Therefore, if a class waiver were invalidated under state contract law, pre-Concepcion, a claimant's purported presumptive right to class arbitration that was misattributed to Bazzle might remain undisturbed and intact in the remaining terms of the arbitration agreement.

Without a jettison clause, then, the drafting party could face the undesirable prospect of mandatory class arbitration if the class waiver were invalidated under a state's general contract law, or so it was believed back then.

Now, of course, both Concepcion and Stolt-Nielsen have obviated the need for a jettison clause in an agreement governed by the FAA.

Under Concepcion, a class arbitration waiver is impervious to state contract defenses.

And, under Stolt-Nielsen, the FAA does not create an implied right to class arbitration. Instead, the FAA requires a contractual basis that the parties consented to class arbitration.

A class arbitration waiver clearly defeats any contractual basis authorizing class arbitration. And now, with its latest decision in DIRECTV, the Supreme Court has made clear that courts cannot misinterpret any vestigial reference to state law in an arbitration agreement as an effort to undermine the enforcement of class arbitration waivers under Concepcion.

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Benjamin G. Robbins is senior staff attorney at New England Legal Foundation.

Published: Tue, Dec 29, 2015