March 24, 2015 Practice Points

SCOTUS to Review Another Case Rejecting Class Action Waiver

By Mark Kantor

Continuing to focus on arbitration, on March 24, 2015, the U.S. Supreme Court granted certiorari in DIRECTV, Inc. v. Imburgia, Docket No. 14-462. The issue in Imburgia is again the preemption relationship between the Federal Arbitration Act and local state law concerning consumer class actions and arbitration. As posed by petitioner DirectTV, the Question Presented is

[w]hether the California Court of Appeal erred 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.

Even though the Imburgia dispute focuses on state law regarding class arbitration waivers, the preemption relationship between the FAA and state arbitration law is of course important to commercial disputes as well.

According to DirectTV, the California Court of Appeals, 170 Cal. Rptr. 3d 190 (April 7, 2014), erred in holding that the contractual language in DirectTV’s standard Customer Agreement operated to make the arbitration clause in that agreement unenforceable due to California law preventing waivers of consumer class arbitration. Therefore, it may be possible to dispose of this case as a simple matter of contract interpretation (although the contract clauses in question are messy, to say the least), or alternatively by addressing again the preemption relationship between the FAA and state law. DirectTV’s explanation of the state court’s decision naturally stresses the latter approach.

The California Court of Appeal’s decision in this case does precisely what Concepcion prohibits: it applies state law to invalidate an arbitration agreement solely because that agreement includes a class-action waiver. The Court of Appeal purported to reconcile that result with Concepcion by holding that the parties here contractually opted out of FAA preemption, even though they specified that their arbitration agreement “shall be governed by the Federal Arbitration Act.” Ironically, the Court based that holding on a “non-severability” clause designed to prevent class arbitration. Under that clause, the parties agreed that the arbitration agreement as a whole would be unenforceable if “the law of [the customer’s] state” would find the class-action waiver unenforceable. The Court of Appeal seized on that clause to declare that the parties intended to rely on state law preempted by the FAA to avoid enforcement of an arbitration agreement governed by the FAA.

In 2013, the U.S. Ninth Circuit Court of Appeals, addressing the same issue, had reached the exact opposite conclusion on the basis of the exact same arbitration agreement in Murphy v. DIRECTV, Inc., 724 F.3d 1218, 1226 (9th Cir. 2013). In Imburgia, the California Court of Appeals declined to follow the Murphy opinion, regarding the Ninth Circuit ruling as “unpersuasive.” The California court thereby set up a classic “State vs. Federal” conflict attracting the Supreme Court’s attention.

Three clauses of the DirectTV Customer Agreement are relevant to this dispute: 1) the arbitration clause; 2) a general choice of law clause with a specific choice for the arbitration agreement; and 3) the severability clause.

The Customer Agreement at issue here includes a dispute-resolution provision (Section 9) that specifies:

[I]f we cannot resolve a Claim informally, any Claim either of us asserts will be resolved only by binding arbitration. The arbitration will be conducted under the rules of JAMS that are in effect at the time the arbitration is initiated . . . and under the Rules set forth in this Agreement.
* * *
Neither you nor we shall be entitled to join or consolidate claims in arbitration by or against other individuals or entities, or arbitrate any claim as a representative member of a class or in a private attorney general capacity. Accordingly, you and we agree that the JAMS Class Action Procedures do not apply to our arbitration. 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.

In addition, the Customer Agreement contains a choice of law provision (Section 10(c)) that states:

Applicable Law. The interpretation and enforcement of this Agreement shall be governed by the rules and regulations of the Federal Communications Commission, other applicable federal laws, and the laws of the state and local area where Service is provided to you. This Agreement is subject to modification if required by such laws. Notwithstanding the foregoing, Section 9 shall be governed by the Federal Arbitration Act.

The Customer Agreement also contains a general severability provision (Section 10(d)): “If any provision is declared by a competent authority to be invalid, that provision will be deleted or modified to the extent necessary, and the rest of the Agreement will remain enforceable.”

Oral argument in Imburgia will occur during the Fall 2015 Term of the Supreme Court.

Keywords: alternative dispute resolution, litigation, Federal Arbitration Act, consumer, class action waiver, preemption

Mark Kantor is a member of the College of Commercial Arbitrators in Washington, D.C.


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