Today, the Supreme Court issued its decision in DirecTV v. Imburgia (click here for a copy of the decision). It is no surprise: the majority disdains arbitration decisions from California and views them as inherently questionable. Six Justices voted to reverse the California decisions below, with three Justices dissenting (Justice Thomas dissented on his usual – and correct- view that the FAA should not apply in state court proceedings, and Justices Ginsburg and Sotomayor also dissented).
DirecTV’s arbitration agreement contained a class action waiver, but at the same time, stated that “if the law of your state” does not permit class action waivers, the arbitration agreement becomes unenforceable. The lower court decisions interpreted this phrase “law of your state” to refer to California law, since the plaintiffs were from California, and because California law does not permit class action waivers, the arbitration agreement was not enforceable. However, six Justices found that the FAA preempted this state court interpretation of contract law. The majority reasoned that the state courts’ interpretation was hostile to arbitration because the state courts would not likely apply the same interpretation to non-arbitration contracts.
What’s wrong with the majority? Let me count the ways. I see several flaws in the majority’s reasoning. To affirmatively show that the lower courts applied a different interpretation to arbitration agreements as compared to non-arbitration contracts, the majority in effect flipped the burden of proof. The majority said nothing suggests the courts below would apply the same reasoning for non-arbitration contracts. In other words, to prove discriminatory and favorable treatment of arbitration clauses, the majority points to nothing and says there is no evidence of equal treatment. So, proof of discriminatory treatment = lack of evidence of equal treatment; the Court is starting with the assumption that California courts are hostile to arbitration. Also, the majority further expanded Concepcion and read it in an extremely broad manner and simply glossed over the state consumer protection interests at issue by conclusorily stating, without much analysis, that the state laws at issue were “authoritatively invalidated” by Concepcion. I see several differences between the state statutes here and the malleable, judge created Discover Bank rule at issue in Concepcion. (This DirecTV decision, and how it views and expands Concepcion, suggests the California Iskanian decision’s days are numbered.) Furthermore, the majority in DirecTV questions why would parties agree to incorporate invalid, preempted state laws? This is missing the most fundamental principle of arbitration law – arbitration is supposed to be a matter of agreement. As the Supreme Court recognized more than 20 years ago in Mastrobuono, because arbitration is a matter of agreement, parties in their arbitration clauses can agree to incorporate state laws that normally would be preempted by the FAA. See Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U. S. 52, 59 (1995) (“[I]n the absence of contractual intent to the contrary, the FAA would pre-empt” a particular state law.). But it is okay for the Justices to ignore their prior case law in the name of trying to manufacture an arbitration agreement where none existed.
As pointed out in dissent, and in an amicus brief I submitted, which was quoted by Justice Ginsburg, FAA preemption does not operate without reference to the parties’ contract. In other words, FAA preemption does not operate like preemption with other federal statutes since the parties’ agreement must be taken into account. For example, suppose a contract states: “Any claim arising out of this agreement for cell-phone service shall be settled by arbitration; however, if the law of your state prohibits the arbitration of such claims, this arbitration agreement is not enforceable.” Further suppose state X has such a state law. With a broad arbitration agreement, the FAA would preempt such a state law, but if the parties chose to submit to the state law, nothing should stop the parties from designing such a tailored clause. In other litigation, DirecTV relied on the fact that its contract incorporated the laws of each individual consumers’ states in this manner – why? To frustrate the possibility of a certification of a nationwide class. See Cohen v. DIRECTV, Inc., 101 Cal. Rptr. 3d 37, 42 (Cal. Ct. App. 2009) (“Where a state by state analysis of an arbitration provision’s enforceability would be required to certify a nationwide class, predominance does not exist and the nationwide class should not be certified.”).
As recognized by the dissent, what the Court did today was dangerous. A state court judge simply interpreted the meaning of contract terms and said “state law” means “state law”. However, the majority of the Supreme Court is now meddling in state contract law and second-guessing how lower courts interpret contract language, analyzing whether the interpretation is reasonable. One thing is clear from the majority: nothing can stand in the way of the FAA and its broad preemptive powers, which can now even trump the parties’ intentions.