SCOTUS Scrutinizes California Arbitration Law, Again

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By Perry Cooper

Oct. 1 — The U.S. Supreme Court will hear oral arguments Oct. 6 in a case that once again pits California arbitration law and class waivers against the Federal Arbitration Act (DIRECTV Inc. v. Imburgia, U.S., No. 14-462, oral arguments 10/6/15).

The case, which involves a dispute over satellite television fees, asks the court to consider whether an arbitration provision in a DIRECTV customer agreement barring class arbitration was properly found unenforceable by a state appeals court because of its reference to California contract law.

Some on the side of big business say this question has already all but been decided by the nation's top court.

This suit “is the last ditch effort of the state of California to get around the Supreme Court’s clear rule that the Federal Arbitration Act preempts contrary state law,” Cory Andrews, senior counsel of the Washington Legal Foundation, told Bloomberg BNA in a September interview.

The court's 2011 case, AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), nullified a California law requiring the availability of classwide arbitration in some cases, saying it was inconsistent with the FAA (12 CLASS 362, 5/13/11).

Andrews sees DIRECTV as a case of the court defending this precedent rather than charting new territory.

Even consumer advocates agree that the court isn't expected to break new ground in this case.

Deepak Gupta told Bloomberg BNA in September that the case is “a real one-off, not a terribly significant case.” Gupta is founding principal of Gupta Wessler PLLC, a Washington public interest law firm representing consumers and workers.

It's unlikely to have much of a prospective impact because the type of language in the arbitration clause at issue really isn't used anymore, he said.

But the limits of California's arbitration laws continue to pique the interest of the court, which granted certiorari in another arbitration case Oct. 1.

In that case, involving Fair Labor Standards Act overtime claims, the court will consider whether California's arbitration-only severability rule is preempted by the FAA (MHN Gov't Servs. Inc. v. Zaborowski, U.S., No. 14-1458, cert. granted 10/1/15).

Question Already Laid to Rest?

At the time the court agreed to hear this dispute, attorneys of all persuasions were caught off guard.

“I was mystified, I was really surprised that they took that case,” as it's a matter of contract interpretation, Gupta said.

It was unexpected for Andrews too, but mostly because he thought the court had already put the arbitration issue to bed.

“Ordinarily a matter of state contract by a state court is not the sort of thing that the Supreme Court gets involved in, but in this case it’s being used to deny a substantive federal right—the right for parties to agree to arbitrate their disputes,” he said.

“The machinations that the intermediate court in California went to to arrive at this conclusion are pretty preposterous,” he said. The Supreme Court's decision will “hopefully send a signal to California courts that this sort of insubordination, for lack of a better word, won’t be tolerated.”

California may already be getting the picture. In August, the California Supreme Court conceded that the FAA required enforcement of a contract's class action waiver in Sanchez v. Valencia Holding Co., 2015 BL 247805, Cal., No. S199119, 8/3/15 (16 CLASS 858, 8/14/15).

“If the California Supreme Court had come to its senses earlier, this entire cert. petition merits case [in DIRECTV] wouldn’t be necessary,” Andrews said.

Cancellation-Fee Dispute

Amy Imburgia and Kathy Greiner filed a proposed class suit against DIRECTV Inc., alleging the company violated California law by charging early cancellation fees.

Section 9 of the terms and conditions of DIRECTV's customer agreement provided that all claims would be resolved by binding arbitration, and prohibited class arbitration.

But the agreement also contained the provision: “If, however, the law of your state would find this agreement to dispense with class action procedures unenforceable, then this entire Section 9 is unenforceable.”

DIRECTV didn't move to compel arbitration right away because the California Supreme Court ruled in 2005 that almost all consumer arbitration agreements with class action waivers were invalid under California law, Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005) (06 CLASS 885, 12/23/05).

After the U.S. Supreme Court held in Concepcion that the Federal Arbitration Act preempted the Discover Bank rule, DIRECTV moved to compel arbitration.

The trial court denied the motion and the California Court of Appeal affirmed. The intermediate appeals court held that the parties agreed to apply California law, under which the class action waiver is unenforceable.

After the California Supreme Court denied review, DIRECTV petitioned the U.S. Supreme Court for certiorari. The court granted review March 23 (16 CLASS 347, 3/27/15).

DIRECTV's Arguments

DIRECTV argues in its brief to the Supreme Court that the FAA requires state and federal courts to interpret and enforce arbitration agreements according to their terms, and to resolve any questions in favor of arbitration.

“The California Court of Appeal here, however, did precisely the opposite: the court refused to enforce arbitration by embracing a nonsensical interpretation of the parties’ agreement,” the company says.

That interpretation took the agreement's reference to state law to mean “state law immune from the ordinary preemptive effect of federal law,” DIRECTV says. But, “in our federal system, there is no such thing as state law immune from the ordinary preemptive force of federal law; preempted state law is a legal nullity.”

The appeals court clearly violated the FAA by failing to enforce the arbitration agreement, DIRECTV says. “Indeed, this case is about as easy as they come.”

Plaintiffs' Arguments

But the plaintiffs argue in their brief that parties to a contract are free to specify whether and how disputes will be arbitrated.

“DIRECTV’s argument depends on the false premise that the Act preempts the Contract’s express incorporation of California’s prohibition on class action waivers,” they said.

“The core principle under the Act is that the parties’ own agreements will be respected,” the plaintiffs argue. “Here, the parties incorporated that state law and decided to abide by it.”

The plaintiffs point out that when the contract was formed and when the dispute arose, there was no doubt that the anti-severability clause barred arbitration in California.

“There is no reason to believe the parties intended that, when the understanding of federal preemption changed almost three years into the case, they would dissolve the class, terminate the court proceedings, and start the whole process over in innumerable individual arbitrations,” they argue.

The plaintiffs suggest that the court should dismiss the case as improvidently granted. They argue that it will have no prospective significance, as no one—not even DIRECTV—uses a “law of your state” formulation in contracts anymore.

Thomas C. Goldstein of Goldstein & Russel P.C. in Washington will argue for the plaintiffs.

Christopher Landau of Kirkland & Ellis LLP in Washington will argue for DIRECTV.

To contact the reporter on this story: Perry Cooper in Washington at pcooper@bna.com

To contact the editor responsible for this story: Steven Patrick at spatrick@bna.com

DIRECTV's brief is at http://www.bloomberglaw.com/public/document/DIRECTV_Inc_v_Amy_Imburgia_et_al_No_15462_Brief_for_Petitioner.

Imburgia's brief is at http://www.bloomberglaw.com/public/document/DIRECTV_Inc_v_Amy_Imburgia_et_al_No_14462_Brief_for_the_Responden.