Arbitration and Litigation

Another Arbitration Agreement Upheld by Supreme Court

I’ve written several articles regarding the somewhat recent shift toward courts upholding arbitration agreements.  A few years ago, California courts in particular were reluctant to force employees into arbitration even when the parties agreed to resolve all disputes through arbitration.  After AT&T Mobility LLC v. Concepcion, 563 U. S. 333, held that California’s Discover Bank rule was pre-empted by the Federal Arbitration Act, more and more courts have upheld arbitration agreements.  Still, some courts try to find ways to bring cases outside AT&T’s broad application.  The result of this case: arbitration agreement upheld.

In DirectTV, Inc. v. Imburgia the U.S. Supreme Court upheld another arbitration agreement.  DIRECTV, Inc., and its customers entered into a service agreements that included a binding arbitration provision with a class-arbitration waiver. It specified that the entire arbitration provision was “unenforceable if the ‘law of your state’ made class-arbitration waivers unenforceable.” The agreement also declared that the arbitration clause was governed by the Federal Arbitration Act. When the plaintiffs entered into that agreement, California law made class-arbitration waivers unenforceable (see Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P. 3d 1100, subsequently overruled by AT&T Mobility LLC v. Concepcion, 563 U. S. 333).

When the customers sued DirectTV, the trial court denied the company’s request to order the matter to arbitration, and the California Court of Appeal affirmed. The court thought that California law would render class-arbitration waivers unenforceable, so it held the entire arbitration provision was unenforceable under the agreement. The fact that the Federal Arbitration Act pre-empted that California law did not change the result, the court said, because the parties were free to refer in the contract to California law as it would have been absent federal pre-emption. The court reasoned that the phrase “law of your state” was both a specific provision that should govern more general provisions and an ambiguous provision that should be construed against the drafter. Therefore, the court held, the parties had in fact included California law as it would have been without federal pre-emption.

 Arbitration Agreement Upheld

The U.S. Supreme court held that because the California Court of Appeal’s interpretation is preempted by the Federal Arbitration Act, that court must enforce the arbitration agreement. No one can deny that courts must follow Concepcion, but that does not resolve the issue because the parties are free to choose the law governing an arbitration provision, including California law as it would have been if not pre-empted.

According to the Supreme Court, the California court’s interpretation did not place arbitration contracts “on equal footing with all other contracts,” because California courts would not interpret contracts other than arbitration contracts the same way. Several considerations led to this conclusion:

  • First, the phrase “law of your state” is not ambiguous and takes its ordinary meaning: valid state law.
  • Second, California case law—that under “general contract principles,” references to California law incorporate the California Legislature’s power to change the law retroactively, Doe v. Harris, 57 Cal. 4th 64, 69–70, 302 P. 3d 598, 601– 602—clarifies any doubt about how to interpret it.
  • Third, because the court nowhere suggests that California courts would reach the same interpretation in any other context, its conclusion appears to reflect the subject matter, rather than a general principle that would include state statutes invalidated by other federal law.
  • Fourth, the language the court uses to frame the issue focuses only on arbitration.
  • Fifth, the view that state law retains independent force after being authoritatively invalidated is one courts are unlikely to apply in other contexts.
  • Sixth, none of the principles of contract interpretation relied on by the California court suggests that other California courts would reach the same interpretation elsewhere. The court applied the canon that contracts are construed against the drafter, but the lack of any similar case interpreting similar language to include invalid laws indicates that the anti-drafter canon would not lead California courts to reach a similar conclusion in cases not involving arbitration.

It worth noting that this case was decided 4 to 3, with Justices Thomas, Ginsburg and Sotomayor dissenting.  As Justice Thomas has repeatedly said in the past, he believes that the Federal Arbitration Act (FAA), does not apply to proceedings in state courts.  Justices Ginsburg and Sotomayor thought “California court’s interpretation of the ‘law of your state’ provision is not only reasonable, it is entirely right.”

Many U.S. Supreme Court decisions upholding arbitration agreements are won on a 4 to 3 vote.  It will be interesting to see what will happen when one of the Supreme Court justices retires and is replaced by a new judge.

Original article by Robert E. Nuddleman of Nuddleman Law Firm, P.C.

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