Arbitration guru Imre Szalai (Loyola) provides us with his thoughts on the Supreme Court’s recent DirecTV case. Naturally Imre kicked off the listserv thread Jill mentioned yesterday. And here’s a link to Imre’s arbitration blog for further info on the case.
Earlier today, the Supreme Court issued its decision in DirecTV v Imburgia. Three issues struck me after reading the decision: 1) a majority of the Justices re-affirmed (and in my mind, expanded) the broad preemptive powers of the FAA and lost sight of the real meaning of the FAA; 2) the majority federalized contract law by opening the door to review state court interpretations of contract terms; and 3) along the same lines of the Court’s decisions in Concepcion, Rent-A-Center, and American Express, the Court continues to shut the door on challenges to arbitration clauses, and in effect, is moving closer to a model of rubberstamping arbitration agreements.
FAA preemption
The core principle of arbitration law is that arbitration is a matter of contract, and thus, if parties desire to, they should be able to incorporate state law in connection with their arbitration clauses, even if the state law would normally be preempted by the FAA. See Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U. S. 52, 59 (1995) (“[I]n the absence of contractual intent to the contrary, the FAA would pre-empt” a particular state law.). In other words, FAA preemption should not operate without reference to the parties’ contract. If you consider the Supreme Court’s prior FAA preemption cases, they involved broad arbitration clauses, but if narrower clauses had existed, the Court’s prior preemption cases may have turned out differently. For example, in the Preston v. Ferrer case involving the agent’s dispute about fees, imagine the clause at issue stated that “all disputes arising out of this agreement are subject to arbitration, unless the law of your state makes a fee dispute non-arbitrable.” The Preston decision would have come out differently if the parties had a different, narrower arbitration clause. Similarly, if the franchise agreement in Southland v. Keating had an exclusion providing that the arbitration clause was not enforceable if the “law of your state” requires judicial resolution of franchise claims, Southland also would have turned out differently. Parties are able to incorporate “preempted” state law through their arbitration agreements. In such situations, state law is not frustrating the FAA; rather, state law applies because the parties’ contract incorporated such state law. Section IV of the Court’s decision in Mattel also recognizes this strong sense of party autonomy in arbitration law. Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 590 (2008) (parties to an arbitration agreement “may contemplate enforcement under state statutory or common law”). The FAA’s preemption doctrine was not supposed to operate without reference to the agreement of the parties, the foundation of all arbitration.
Today, the Supreme Court’s DirecTV decision expanded FAA preemption doctrine to preempt not just state law, but also the parties’ agreement. The Court assumed that the appellate court below interpreted the parties’ intent correctly, but the FAA nevertheless preempted this interpretation. Instead of overriding a parties’ agreement, the FAA should be interpreted and applied to honor parties’ agreements, which is the basis for all arbitration. Now, after today’s DirecTV decision, it is possible for the FAA to operate in contravention of the intent of the parties. (There are many reasons why DirecTV intended to incorporate the laws of fifty different states in its nationwide contract. For example, by incorporating fifty different states laws, DirecTV is able to frustrate the certification of a nationwide class action, which happened in a different case involving DirecTV. See Cohen v. DIRECTV, Inc., 101 Cal. Rptr. 3d 37, 42 (Cal. Ct. App. 2009) (“Where a state by state analysis of an arbitration provision’s enforceability would be required to certify a nationwide class, predominance does not exist and the nationwide class should not be certified.”) The Supreme Court allowed DirecTV to have its cake and eat it too.).
Federalization of State Contract Law
The savings clause of section 2 of the FAA permits general contract defenses to invalidate arbitration agreements, and the FAA preempts arbitration-specific defenses or arbitration-specific state laws in connection with a broad arbitration clause. Now, after today’s DirecTV decision, notice the expansion in FAA preemption: not only state laws are subject to preemption, but also state court judge’s interpretations of contract language. However, in the 1980s, in its Volt decision, the Supreme Court deferred to the state court’s interpretation of the arbitration clause at issue. As recognized by Justice Ginsburg in dissent in DirecTV, the Court took a “dangerous” step in interfering with the state court’s contract interpretation here. This decision could open a wave of “DirecTV cert petitions” arguing that the judge below simply interpreted the contract in a way that is hostile to arbitration. This DirecTV decision represents an expansion of the FAA’s preemption doctrine, and state court judge’s interpretations of contract terms have now been federalized and are subject to review under the FAA.
Rubberstamping of Arbitration Clauses
If you look at recent Supreme Court cases, they appear to be moving closer to a model of rubberstamping arbitration clauses. Taken together, Concepcion’s expansive and overly-broad preemption test, American Express’ limiting of the effective vindication doctrine as dicta, and Rent-A-Center v. Jackson’s enforcement of delegation clauses are all combining to constrict the scope of judicial review of the enforceability of individual arbitration agreements. For example, today, if a consumer or employee argues they cannot effectively vindicate their rights under harsh, one-sided procedures set forth in an arbitration clause, a court may easily respond the effective vindication doctrine is dead, and if there is a delegation clause, the agreement is summarily enforced. Moreover, any application of state law that dares to challenge arbitration or that somehow is viewed as disproportionately impacting arbitration is at risk of preemption under Concepcion. In other words, the ability of courts to review harsh terms in arbitration clauses is shrinking. This DirecTV case takes preemption and rubberstamping one step further. A judge’s mere interpretation of contract terms, if arguably hostile to arbitration, can now be preempted by the FAA.
Also, the Court’s analysis in DirecTV presumes state court hostility to arbitration. The Court found that the state court decisions below treated arbitration contracts differently from non-arbitration contracts. What was the court’s proof of this discriminatory treatment? The absence of contrary proof. More than once in its majority opinion, the Court said there was nothing to suggest that California courts would apply the same interpretation or analysis to non-arbitration contracts. In other words, a lack of evidence of equal treatment proved discriminatory treatment. With such a test, the Court appears to presume the lower courts were hostile to arbitration, and such a presumption or analysis would make it easier to challenge a judge’s interpretation of contract terms invalidating an arbitration clause. In sum, this guilty-until-proven-innocent presumption and the preemption analysis of DirecTV are consistent with the atomic preemptive power of the FAA found in cases like Concepcion, American Express, and Rent-A-Center.
I’m troubled by the disappearing scope of judicial review of arbitration clauses for fundamental fairness, especially in the consumer and employment contexts, and today’s decision will contribute to that shrinking scope. The FAA was never intended to apply in these contexts or in such an expansive manner. Also, more troubling, the Supreme Court today rewrote a parties’ contract pursuant to the FAA, turning the FAA and arbitration law on its head. I can’t wait to teach FAA preemption next semester in my arbitration course; it will be the easiest chapter to cover. After DirecTV, everything can be preempted, including the parties’ contract.
I think a lot turns on whether you see the “law of your state” language as a choice of law clause or as what contracts folks would call an express condition precedent–not to a choice of law but to a choice of forum. I wrote about this on the AALS contracts list serve. The point of the blowout clause was to say, *IF* the law of your state makes class waviers unenforceable, then the arbitration clause disappears. It was not an affirmative choice of law, like we had in Volt. Instead, the objective meaning of the clause is that it is a condition which, *IF* satisfied, takes the case out of arbitration entirely. Consider this hypo: Concepcion comes down days *before* the complaint in Imburgia is filed. In that case, DirecTV would almost certainly have moved to compel arbitration based on Concepcion. Why? Because DirecTV was NOT choosing California law–in many ways it wanted California law NOT to apply. The thrust of the clause is just to say, “IF we are really stuck with California law, we want our second best option, which is class litigation.”
If you read the clause as an express condition precedent to a choice of forum, as I do, the lower court’s interpretation of the clause is substantially less persuasive in my view. Because California law on the subject is now preempted after Concepcion. And if so, Breyer’s conclusion that this wreaks of discrimination–while still problematic in many ways–then seems to me more palatable.