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. See Brief for Petitioner, DIRECTV, Inc. at 1. 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. See id. at 18-19. 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. See Brief for Respondent, Amy Imburgia et al. at 15. 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. See Brief of Equal Employment Advisory Council as Amicus Curiae, in Support of Petitioner at 21–25.
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. See Imburgia v. DIRECTV, Inc., 225 Cal. App. 4th 338, 340 (2014). 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. Id. at 341. 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. Id. at 341–42. 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. Id.
On April 20, 2011, the superior court granted Plaintiffs’ motion for class certification without an opposing motion by DIRECTV to compel arbitration. Id. 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. See Imburgia 225 Cal.App.4th at 341. 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. Id. The superior court decided the motion in favor of the Plaintiffs, and DIRECTV timely appealed to the California Court of Appeal. Id. at 342.
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. Id. 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. Id. at 344–45, 347. 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. Id. at 347. 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. Id. DIRECTV petitioned for review in the California Supreme Court but that court denied review. See Brief for Petitioner, DIRECTV, Inc. at 9. The Supreme Court subsequently granted certiorari on March 23, 2015. Id.
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. See Brief for Petitioner, DIRECTV, Inc. at i. 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. See id. at 14, 12, 17. 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. See Brief for Respondent, Amy Imburgia et al. at 11–12, 29–30, 37.
PARTIES’ INTENT IN CONTRACTING
DIRECTV argues that the Customer Agreement reflects the parties’ intent to arbitrate disputes. See Brief for Petitioner at 14. DIRECTV argues that it is crucial that courts enforce agreements according to the contractual rights and expectations of the parties. See id. at 13. DIRECTV explains that the parties specifically stated that the FAA would govern their arbitration agreement. See id. at 14. DIRECTV asserts that the parties agreed that any claims not resolved informally would be resolved by binding arbitration only. Id. at 15. 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. See id.
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. See Brief for Respondent at 31. Imburgia asserts that nothing in the FAA presumes that parties intend to arbitrate disputes. See id. at 22. And Imburgia contends that that consumers could assume reasonably that California consumer protection law protects them. See id. at 33. 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. See id. at 23. 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. See id. 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. See id. at 29–30.
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. See Brief for Petitioner at 12. DIRECTV points to the California Court of Appeal’s decision as a prime example of the hostility the FAA seeks to correct. See id. at 23. DIRECTV argues that the FAA explicitly provides that a written arbitration provision is “valid, irrevocable, and enforceable.” Id. at 11. Otherwise, DIRECTV argues, courts could hinder federal arbitration law by refusing to enforce arbitration agreements on state-law grounds. Id. at 12. DIRECTV maintains that the FAA serves as a check to prevent state law from depriving parties of their federal arbitration rights. See id. at 14.
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.” See Brief for Respondent at 11, 13 (internal quotation omitted). 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. See id. at 11–12. 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. See id. at 16, 42. Imburgia concludes that the FAA was designed to make arbitration agreements just as enforceable as other contracts, but not more so. See id. at 14.
PREEMPTION OF STATE LAW
DIRECTV argues that the FAA preempts state law that would force the parties into class arbitration. See Brief for Petitioner at 17. 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. See id. 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.” See id. DIRECTV explains that the Supremacy Clause of the Constitution subjects all state law to federal preemption (if applicable). Id. at 19. 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.” See id. at 13. 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. See id. at 20.
Imburgia contends that “parties are free to choose whatever state rules they want,” including rules that are contrary to the FAA. See Brief for Respondent at 26. Moreover, Imburgia argues that under the FAA, the interpretation of private contracts is generally a question of state law. Id. at 12. Imburgia contends that the applicable state law in this case is California law, specifically the California Consumer Legal Remedies Act. See id. at 37. 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. See id. at 35. Imburgia asserts that as a settled principle of contract interpretation, words of an agreement should be given meaning whenever possible. Id. 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. See id. at 17. 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. See Respondents’ Supplemental Brief, Ana Imburgia et al. at 3. 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. See id. The California Supreme Court has held that these arbitration agreements are enforceable. See id. Therefore, the California Court of Appeal ruled the opposite way in this case because DIRECTV chose to use distinct language. See id.
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. See Brief for Petitioner, DIRECTV, Inc. at i. 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. See id. at 12–13. 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. See Brief for Respondent, Amy Imburgia et al. at 17. 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. See Brief of Amici Curiae Chamber of Commerce of the United States of America ("Chamber") et al., in Support of Petitioner at 5. The Chamber explains that the FAA requires reasonable contractual ambiguities to be interpreted in favor of arbitration. See id. at 12. 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. See Brief of Amicus Curiae DRI, in Support of Petitioner at 5. 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. See Brief of Chamber at 10.
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. See Brief of Amici Curiae Law Professors, in Support of Respondents at 1. Accordingly, Public Citizens, Inc. argues that these fundamental interpretative principles are typically a matter of state contract law and may vary across jurisdictions. See Brief of Amicus Curiae Public Citizen, Inc., in Support of Respondents at 4. 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. See Brief of Law Professors at 16. 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. See id. at 17.
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. See Brief of Amicus Curiae Equal Employment Advisory Council, in Support of Petitioner at 20–21. 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. See id. at 26. According to EEAC, many employment arbitration agreements make reference to state law with the understanding that the FAA’s preemptive effect would ultimately control. See id. 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. See id. EEAC concludes that this would compromise the purpose of arbitration as a speedy, affordable, and accessible dispute resolution mechanism. See id. at 21.
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. See Brief of Amicus Curiae Professor Peter Linzer, in Support of Respondent at 6–7. Linzer argues that this strategy should not extend beyond the commercial context because of its seemingly disadvantageous effects on consumers. Id. 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. See Brief of Amici Curiae California Law Professors, in Support of Respondent at 12–13.
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. See Brief for Petitioner, DIRECTV, Inc. at 1. DIRECTV argues that the phrase should be read to incorporate the preemptive effects of the FAA because state law necessarily includes federal mandates. See id. at 18-19. 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. See Brief for Respondent, Amy Imburgia et al. at 15. 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. See Brief of Amicus Curiae Equal Employment Advisory Council, in Support of Petitioner at 21-25.
- 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).