Post Image
SCOTUS Rules In DIRECTV Case that FAA Does Not Permit Parties To Agree To Application of State Law Preempted by the FAA
Posted on Categories Arbitration Agreements, Court Decisions, News, Non-Securities ArbitrationTags , , , , ,

The Supreme Court in a 6-3 decision holds in DIRECTV v. Imburgia, No. 14-462 (Dec. 14, 2015), that, while parties can agree to application of state law in their arbitration agreement, the Federal Arbitration Act requires application of valid law. In this case, the FAA does not permit application of California law that was held preempted by AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).

We have reported previously on DirecTV, which sought review of a California appellate decision, Imburgia v. DIRECTV, 225 Cal.App.4th 338 (2014) (see, e.g., SAAs 2015-12 & -23). To review, the Petition for Cert., which was granted without explanation in an Order dated March 23rd, framed the issue as: “Whether 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.” We said in March: “…it seems that it boils down to whether the parties can contractually alter the impact of the FAA. On this issue the Court has gone both ways. In Volt Information Sciences, Inc. v. Stanford University, 489 U.S. 468 (1989), the Court held that the FAA requires courts to enforce the parties’ arbitration agreement according to its terms, including their agreement to apply a state law that might not be arbitration-friendly. On the other hand, in Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. 576 (2008), the Court ruled that the parties could not contractually agree to expand the scope of review of arbitration Awards under the FAA.” A plethora of amicus briefs were filed (see SCOTUSblog). Oral argument was held October 6th, the second day of the Court’s fall term.

Not on All Fours with Concepcion

In March, we took a look at the opinion below to see why the Court might have taken the case. After all, in Concepcion, SCOTUS ruled that FAA preempted California’s rule of law that a PDAA with a class action waiver was an unconscionable contract of adhesion and was unenforceable under California law. Because the California law had a disparate impact on arbitration agreements, it was preempted because “Although [FAA] § 2’s saving clause preserves generally applicable contract defenses, nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA's objectives.”

Concepcion involved a class action lawsuit brought by customers who were induced to sign up for cell phone service by getting a “free phone” for which they were charged sales tax. The facts in DIRECTV at first blush appeared to be very similar, but on closer analysis were not. The contracts contained a PDAA and class action waiver. Aggrieved consumers attempted to bring a class action over allegedly illegal early termination fees, and DIRECTV countered that the contracts required individual arbitrations. However, the contract contained somewhat unusual language stating: “If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 [PDAA] is unenforceable.” California law, for example Consumers Legal Remedies Act (“CLRA”), Civ. Code, § 1750 et seq., expressly bars class action waivers.

The Chicken or the Egg?

What did the parties’ agreement provide? Either the state law trumped the FAA or the FAA trumped California’s law. A unanimous Court of Appeal embraced the former, ruling: “To summarize: Section 9 of the 2007 customer agreement provides that ‘if ... the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.’ The class action waiver is unenforceable under California law, so the entire arbitration agreement is unenforceable. The superior court therefore properly denied the motion to compel arbitration.” This despite that fact that the Ninth Circuit in Murphy v. DIRECTV, Inc., 724 F.3d 1218 (9th Cir. 2013), interpreting the same language, went the opposite way. The California Supreme Court declined to review the case.

SCOTUS Weighs in

The Court holds first that, while the parties under Volt can in their PDAA agree to application of state law, they cannot adopt laws that have been invalidated. Here, Concepcion invalidated California law barring class action waivers. Second, application of the anti-class action waiver law, which by the parties’ contract would invalidate the entire PDAA, would frustrate the goals of the FAA, something SCOTUS prohibits. “California’s interpretation of the phrase ‘law of your state’ does not place arbitration contracts ‘on equal footing with all other contracts.’… For that reason, it does not give ‘due regard ... to the federal policy favoring arbitration.’… Thus, the Court of Appeal’s interpretation is pre-empted by the Federal Arbitration Act” (citations omitted).

(ed: *Justice Thomas dissented, articulating his oft-expressed view that the FAA does not apply in state court cases. **Justice Ginsburg, joined by Justice Sotomayor, also dissents, reasoning that: “Just as a contract itself may provide for class arbitration, so the parties may choose to be bound by a particular state law, in this case, the CLRA, even if the FAA would otherwise displace that state law.” ***The beginning of Justice Breyer’s Opinion has some rather strong language stressing that the FAA “is a law of the United States, and Concepcion is an authoritative interpretation of that Act. Consequently, the judges of every State must follow it.” To us, this is a jab at California’s begrudging acceptance of Concepcion.) (SAC Ref. No. 2015-47-02)

Like what you see here?

Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.