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January 05, 2016

Thinking Pure Thoughts About Arbitration

We did not really learn very much about arbitration from the U.S. Supreme Court’s 6-3 decision in DirecTV v. Imburgia, 136 S.Ct. 463, 2015 WL 8546242 (Dec. 14, 2015). After all, we knew, even before we were reminded by the New York Times, that companies that sell goods and services to consumers using written contracts, in interstate or international commerce, use arbitration clauses that prohibit class or consolidated actions, doing so to foreclose legal challenge to profitable but perhaps dubious business practices. We also knew that the U.S. Supreme Court has mainly condoned such use of class arbitration waivers by denouncing, on FAA pre-emption grounds, state law efforts to permit consumers to disavow such clauses and bring class arbitrations or judicial class actions. In particular, and as the backdrop for the DirecTV case, we knew from the Concepcion case that such state law escape valves are held to be impermissibly hostile to enforcement of arbitration contracts, as compared to the ordinary run of contracts,

So what do we learn from DirecTV that we did not know before? Probably not much more than this: that liberal state court judges, when they try to protect consumers against adhesion arbitration contracts and to dodge Concepcion-based FAA pre-emption at the same time, probably will fail. Even a reliable liberal Supreme like Justice Breyer (presumably a dislocated Patriots fan who uses DirecTV to keep tabs on Tom Brady) will grind to dust a brazen state court dodge of federal stare decisis. And so he did in this case.

To appreciate DirecTV one needs the polish up and switch on the trusty Arbitration Law Time Machine. The year is 2007; the Supreme Court’s decision in Concepcion is three years away, and some states most notably California are cracking down on class action waivers in arbitration agreements by treating such waivers as unconscionable (ostensibly a venerable common law basis for non-enforcement of any contract) because they operate to deprive consumers of access to justice and to shield shady corporate practices from legal challenge. Some arbitration observers and institutions thought that, as the waivers could be set aside while the underlying arbitration agreements would remain intact, class arbitration would be the wave of the future. DirecTV’s legal team had an idea to counter this: a sort of arbitration law poison pill. They added to the arbitration clause in the standard service contact a sentence the provided that if “the law of your state” would render the class arbitration waiver unenforceable then the entire arbitration agreement would be unenforceable. So Plan B for DirecTV, in a state like California, was that if state law would force the company to have class actions with consumers, at least the proceedings would take place in the courts where they could be long and miserable and appealable. (Besides, judges spend Sunday afternoons watching pro football on DirecTV’s NFL Sunday Ticket. Arbitrators go to antique shows.)

The problem confronted in turn by the California Court of Appeal and the U.S. Supreme Court was how to construe the “law of your state” agreement-not-to-arbitrate in light of (1) Concepcion, decided after the litigation had begun but before it reached the California Court of Appeal, and (2) the DirecTV contract’s own separate provision affirming that the arbitration clause was subject to the FAA.  For the California court, professing to be applying neutral contract interpretation principles neutrally, not through an arbitration prism, it was not difficult to conclude that (1) the “specific” law-of-your-state provision in the arbitration clause trumped the “general” declaration in the contract that the FAA applied, and (2) construing the “ambiguous” (my air-quotes) agreement against the drafter, “law of your state” meant the California law that would apply if that law were not pre-empted by the FAA.

Sure.

Shame on you California judges!,” exclaim six Justices of US Supreme Court. “Shame on you for not recognizing your own use of the arbitration prism and its refraction of state contract law!“…. “Without looking through at this through the arbitration prism, you would not have happened upon (or accepted counsel’s advocacy of) this ‘general’ v ‘specific’ contract interpretation principle as a way to construe together the juxtaposed arbitration clause and FAA applicability clause. And without looking through the arbitration prism, you would not have found ‘law of your state’ to be ambiguous, and so you would not have had occasion to invoke the construe-against-the-drafter canon. So nice try California judges, but too clever by half!”  (Quotation not found in Justice Breyer’s opinion, but perhaps in synch with one of his e-mails to the Brethren written at halftime of a Patriots game).

So there you have the DirecTV case:  No use of refractory arbitration prisms is allowed when state court judges purport to apply neutrally state law rules of contract interpretation to decide whether an agreement to arbitrate may be enforced. When arbitration prisms refract contract law, with regard to principles governing the enforceability of a contract to arbitrate, the decision to deny enforcement of the arbitration contract (touching interstate or foreign commerce) violates FAA Section 2’s strict limitation on the grounds for such denial of enforcement.

Happy New Year! Keep your prisms in the closet. Think only nice thoughts about arbitration. Think what you will about the New England Patriots.