15 April 2014
The hostility of some California courts to arbitration—and their resistance to preemption under the Federal Arbitration Act (FAA)—has produced nearly three decades of U.S. Supreme Court reversals. The most recent is AT&T Mobility LLC v. Concepcion, which held that the FAA preempted the Discover Bankrule, under which the California Supreme Court had blocked enforcement of consumer arbitration agreements that required individual rather than class arbitration. Last week’s decision in Imburgia v. DirecTV, Inc. (pdf) demonstrates that resistance to Concepcion lives on in the California courts, even at the cost of creating a split with the Ninth Circuit on the same issue in the same contract used by the same company.
Specifically, DirecTV’s arbitration agreement—like many others—provides that the arbitration agreement shall not be enforced if a court invalidates the ban on class arbitration. Taking advantage of the specific wording of the agreement, a panel of the California Court of Appeal in Los Angeles held that the preemptive effect of Concepcion did not apply and the agreement could be invalidated on the basis of the very Discover Bank rule that Concepcion held was preempted.
The arbitration clause at issue in Imburgia appeared in Section 9 of DirecTV’s customer agreement; the arbitration clause expressly precluded class actions and class arbitration. Section 10 provided that “Section 9 shall be governed by the Federal Arbitration Act.” Section 9 also stated, after the sentence that waived class procedures: “If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.”
The Imburgia court held that the reference to “the law of your state” should be read to invalidate the arbitration agreement if the class waiver would be unenforceable under state law without regard to the preemptive effect of the FAA. That is, the court held, the agreement was subject to state-law rules that are invalid under the FAA even though the arbitration agreement explicitly provided that the FAA would govern. That holding takes an idiosyncratic view of the Supremacy Clause, which mandates that federal law—including the FAA—trumps contrary state law. Under the Supremacy Clause, once state law has been displaced by federal law, the state law cannot survive in some shadow universe. Rather, state law is not “law” when it has been declared unconstitutional, whether because it violates the First Amendment or the Supremacy Clause because it is preempted by a federal statute.
Imburgia also expressly conflicts with the Ninth Circuit’s decision in Murphy v. DIRECTV, Inc., 724 F.3d 1218 (9th Cir. 2013), which enforced the same clause and rejected the same argument. The Ninth Circuit explained that “Section 2 of the FAA, which under Concepcion requires the enforcement of arbitration agreements that ban class procedures, is the law of California and of every other state.” DirecTV may well seek further review in light of this conflict.
In the meantime, Imburgia offers businesses a pair of cautionary lessons. First, businesses that use arbitration clauses should not underestimate the pockets of resistance to Concepcion and other recent Supreme Court precedents—especially in some California state courts.
Second, the decision underscores the importance of careful drafting of arbitration clauses that waive class actions. Even though the Supreme Court has made clear that any doubts concerning the scope of arbitral agreements should be resolved in favor of arbitration, the court here—like other courts hostile to arbitration—chose to construe the language of the arbitration clause against the drafter. And viewed in that (improper) light, it is easy to see why the wording of DirecTV’s clause, and in particular the use of the phrase—“[i]f … the law of your state would find …”—unnecessarily appeared to give state law special stature. Choice-of-law issues have bedeviled companies in the past—as detailed in an article (pdf) one of us has published, it is important for companies to address the governing law carefully in their agreements and thus minimize the risk that hostile courts will apply the wrong law to defeat arbitration.