Can parties to a consumer arbitration agreement incorporate otherwise preempted state law into their agreement, or does the Federal Arbitration Act preempt that law in all cases?
The Supreme Court will decide whether an arbitration provision in a Customer Agreement purportedly governed by the Federal Arbitration Act (“FAA”) requires the application of state law preempted by, or independent from, the FAA. DIRECTV argues that the parties intended to arbitrate all disputes, that state law is always subject to the preemptive force of federal law, and that in any event the FAA requires courts to resolve ambiguities in favor of arbitration. Imburgia counters that the FAA requires agreements to be interpreted according to their express terms and that courts should interpret the express reference to state law in the agreement as California state contract law, independent from the preemptive force of federal law. The Court’s decision may affect the enforcement of arbitration agreements in other contexts, as well as impact the way in which state courts interpret arbitration agreements.
Questions as Framed for the Court by the Parties
Did the California Court of Appeal err by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act?
In September 2008, Amy Imburgia and a class of litigants filed a class action complaint against DIRECTV in California Superior Court, alleging violations of state contract law after receiving a series of early termination fees following the cancellation of their accounts with the company. Although DIRECTV’s Customer Agreement expressly noted that any legal claim that arose would be resolved “only by binding arbitration,” the court nevertheless allowed the civil litigation to continue. In addition, the Customer Agreement contained a class-arbitration waiver, whereby DIRECTV customers agreed to settle disputes only in an individual capacity rather than through class procedures. The class-arbitration waiver included an express non-severability clause, which stated that if the law of the customer’s state would find the waiver provision unenforceable, then the entire section of the agreement regarding arbitration would be invalidated.
On April 20, 2011, the superior court granted Plaintiffs’ motion for class certification without an opposing motion by DIRECTV to compel arbitration. Subsequently, on April 27, 2011, the Supreme Court held in AT&T Mobility LLC v. Concepcion, 563 U.S. 321 (2011), that the California legal rule invalidating certain arbitration agreements containing class-action waivers is preempted by the Federal Arbitration Act (“FAA”). Less than a month after the Court’s decision in Concepcion, DIRECTV moved to decertify the class and compel arbitration of plaintiffs’ case in the superior court. DIRECTV claimed that it would have been fruitless to move to compel arbitration any earlier because of the now-obsolete California rule invalidating arbitration agreements containing class-action waivers. The superior court decided the motion in favor of the Plaintiffs, and DIRECTV timely appealed to the California Court of Appeal.
The California Court of Appeal reviewed the arbitration agreement de novo, applying California contract law, in order to determine if the agreement was legally enforceable. The court affirmed the superior court’s holding because of the non-severability clause to the class-arbitration waiver referencing the law of the customer’s state. The court reasoned that because arbitration agreements containing class-arbitration waivers are unenforceable under California contract law, the entire arbitration agreement is unenforceable according to the express terms of the customer agreement. The California Court of Appeal acknowledged that its decision was at odds with the Ninth Circuit's recent decision in Murphy v. DIRECTV, Inc., 724 F.3d 1218 (9th Cir. 2013), which had interpreted the very same Customer Agreement to compel arbitration of customers’ claims. DIRECTV petitioned for review in the California Supreme Court but that court denied review. The Supreme Court subsequently granted certiorari on March 23, 2015.
The Supreme Court will determine whether a reference to state law in an arbitration agreement governed by the FAA requires the application of state law. DIRECTV asserts that the parties intended to arbitrate any dispute, that the FAA requires resolving ambiguities in favor of arbitration, and that California state law is always subject to the preemptive force of federal law. But Imburgia argues that the FAA compels the Court to interpret contracts according to their terms, that ambiguities should be resolved against the party which drafted the agreement, and that the reference to state law in this agreement means California law.
PARTIES’ INTENT IN CONTRACTING
DIRECTV argues that the Customer Agreement reflects the parties’ intent to arbitrate disputes. DIRECTV argues that it is crucial that courts enforce agreements according to the contractual rights and expectations of the parties. DIRECTV explains that the parties specifically stated that the FAA would govern their arbitration agreement. DIRECTV asserts that the parties agreed that any claims not resolved informally would be resolved by binding arbitration only. DIRECTV maintains that parties are free to choose the law that will govern the interpretation and enforcement of their agreements, and in this case, they chose the FAA.
Imburgia contends that at the time of contracting, the parties intended to litigate claims, not arbitrate them, as shown by DIRECTV’s delay in compelling arbitration when the litigation commenced. Imburgia asserts that nothing in the FAA presumes that parties intend to arbitrate disputes. And Imburgia contends that that consumers could assume reasonably that California consumer protection law protects them. To that end, Imburgia argues that the Customer Agreement was a form contract and that when a company uses a single nationwide contract for all of its customers, it is common for certain provisions to apply in some states but not in others. Imburgia argues that DIRECTV could have used separate contracts for customers in different states but chose not to do so for the sake of convenience. Imburgia concludes that under common law rules of contract interpretation, any ambiguities must be resolved against the party that drafted the agreement, in this case, DIRECTV.
PURPOSE OF THE FAA
DIRECTV contends that the FAA governs the interpretation and enforcement of arbitration agreements, and that its purpose is to eliminate archaic judicial opposition to arbitration by requiring courts to resolve any ambiguities regarding the question of arbitrability in favor of arbitration. DIRECTV points to the California Court of Appeal’s decision as a prime example of the hostility the FAA seeks to correct. DIRECTV argues that the FAA explicitly provides that a written arbitration provision is “valid, irrevocable, and enforceable.” Otherwise, DIRECTV argues, courts could hinder federal arbitration law by refusing to enforce arbitration agreements on state-law grounds. DIRECTV maintains that the FAA serves as a check to prevent state law from depriving parties of their federal arbitration rights.
Imburgia asserts that the FAA simply seeks to ensure that there is no particular hostility to arbitration, but that “[t]here is no federal policy favoring arbitration under a certain set of procedural rules.” Imburgia explains that the FAA requires courts to interpret and enforce contracts according to their terms, which in this case requires the Court to incorporate California law. Imburgia maintains that one of the basic principles of the FAA is that “arbitration is a matter of consent, not coercion,” and that the FAA seeks only to ensure that those disputes the parties agreed to submit to arbitration are arbitrated. Imburgia concludes that the FAA was designed to make arbitration agreements just as enforceable as other contracts, but not more so.
PREEMPTION OF STATE LAW
DIRECTV argues that the FAA preempts state law that would force the parties into class arbitration. DIRECTV contends that the California Court of Appeal erred when it interpreted the phrase “the law of your state” to nullify the preemptive effect of the FAA, because state law cannot be immunized from the ordinary preemptive force of federal law. DIRECTV states, “Indeed, the California Court of Appeal turned the parties’ arbitration agreement upside down by applying state law preempted by the FAA to refuse to enforce an arbitration agreement governed by the FAA.” DIRECTV explains that the Supremacy Clause of the Constitution subjects all state law to federal preemption (if applicable). Furthermore, DIRECTV cites the Court’s decision in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), which held that “as a matter of federal law  an arbitration clause is severable from the rest of the contract, regardless of contrary state law.” Although DIRECTV acknowledges that contracting parties may choose to bind themselves to state law that has been nullified by federal law, it argues that it is unrealistic to assume that this was the case here without any affirmative indications.
Imburgia contends that “parties are free to choose whatever state rules they want,” including rules that are contrary to the FAA. Moreover, Imburgia argues that under the FAA, the interpretation of private contracts is generally a question of state law. Imburgia contends that the applicable state law in this case is California law, specifically the California Consumer Legal Remedies Act. Imburgia argues that reading the reference to state law to mean state law preempted by federal law would essentially read the reference to state law out of the agreement, and that the words would only mislead. Imburgia asserts that as a settled principle of contract interpretation, words of an agreement should be given meaning whenever possible. Imburgia maintains that the FAA preempts requirements imposed by state law that would override the parties’ own agreement, but does not preempt the parties’ choice to incorporate California law into their agreement. Imburgia further argues that the non-severability clause that DIRECTV drafted is unique because it is not employed by any other Fortune 500 company and is no longer even used by DIRECTV. Imburgia points out that now, DIRECTV uses more general language that refers to whether a court would deem the FAA to preempt state law prohibition of a class action waiver. The California Supreme Court has held that these arbitration agreements are enforceable. Therefore, the California Court of Appeal ruled the opposite way in this case because DIRECTV chose to use distinct language.
The Supreme Court will consider whether a reference to state law in a customer service agreement, which is governed by the Federal Arbitration Act, requires the application of state law preempted by or independent from the FAA. DIRECTV argues that the reference to state law is preempted by substantive federal law, which favors arbitration, because the reference falls within a section of the agreement expressly governed by the FAA. Imburgia contends that the section in question is unenforceable by its own terms, because the referenced law of her state prohibits class-arbitration waivers in arbitration agreements. The Court’s decision in this case may impact the way in which arbitration agreements are drafted and reviewed, and could affect arbitration agreements in various other contexts.
JUDICIAL REVIEW OF ARBITRATION AGREEMENTS
The Chamber of Commerce (“Chamber”), in support of DIRECTV, argues that the state court evaded the FAA and Congress’ intent to enforce valid arbitration agreements by refusing to enforce the arbitration agreement to which the parties agreed. The Chamber explains that the FAA requires reasonable contractual ambiguities to be interpreted in favor of arbitration. The DRI—the Voice of the Defense Bar states that the lower court’s opinion, by rejecting the federal mandate, demonstrates continued judicial hostility towards the FAA. Accordingly, the Chamber argues that the Court should reverse the opinion below to ensure that arbitration agreements are respected and enforced at the state level.
A group of law professors, in support of Imburgia, contends that courts read arbitration agreements using fundamental principles of contract interpretation in order to enforce the bargained-for terms of the parties. Accordingly, Public Citizens, Inc. argues that these fundamental interpretative principles are typically a matter of state contract law and may vary across jurisdictions. The law professors further argue that the lower court read the agreement correctly by applying California state contract law where the agreement explicitly referenced the law of the customer’s state. Because contracting parties freely bargain for the terms of their agreement, the law professors maintain that the parties should be able to incorporate a choice-of-law provision dictating what law applies when disputes arise.
ARBITRATION AGREEMENTS IN OTHER PROFESSIONAL CONTEXTS
The Equal Employment Advisory Council (“EEAC”), in support of DIRECTV, contends that if the Court affirmed the opinion below, the decision could have ramifications for employment arbitration in addition to commercial arbitration. The EEAC argues that an unfavorable holding would jeopardize the enforceability of agreements in the employment arbitration context that use language similar to that of DIRECTV’s customer service agreement. According to EEAC, many employment arbitration agreements make reference to state law with the understanding that the FAA’s preemptive effect would ultimately control. If that understanding were to change, EEAC argues, employers would be faced with the prospect of litigating claims they assumed would be resolved in arbitration. EEAC concludes that this would compromise the purpose of arbitration as a speedy, affordable, and accessible dispute resolution mechanism.
Professor Peter Linzer, in support of Imburgia, contends that companies have drafted arbitration agreements in the commercial context in order to block potential class litigation. Linzer argues that this strategy should not extend beyond the commercial context because of its seemingly disadvantageous effects on consumers. Similarly, California Law Professors maintain that courts need not transfer this strategy into the employment context, because state courts already uphold certain arbitration agreements in the employment context, including ones that limit an employee’s right to an administrative proceeding designed to help employees bring wage claims.
This case will determine whether the phrase “law of your state” in an arbitration agreement governed by the FAA refers to state law independent from or preempted by the FAA. DIRECTV argues that the phrase should be read to incorporate the preemptive effects of the FAA because state law necessarily includes federal mandates. Imburgria counters that because contracting parties are free to include terms of their choosing, the explicit reference to state law in the agreement should be interpreted as California state law, independent from the preemptive effects of the FAA. The Court’s decision will impact how state courts interpret arbitration agreements and will impact the scope of arbitration agreements in a variety of professional contexts.
- Lawrence Hurley, U.S. Supreme Court Agrees to Hear DIRECTV Arbitration Case, Thomson Reuters (March 23, 2015).
- Vikram David Amar, A Preview of DIRECTV v. Imburgia, Justia (Sept. 11, 2015).