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SCOTUS Grants Cert. in another Class Action Waiver Case: Now What?
Posted on Categories Arbitration Agreements, Class Action/Collective Waivers, Class Actions, Court Decisions, NewsTags , , ,

By George H. Friedman*

For those who thought the Supreme Court in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), laid to rest any questions about whether the Federal Arbitration Act (“FAA”) preempts state laws barring class action waivers in a consumer predispute arbitration clause, think again. The Court on March 23rd granted certiorari in another class action waiver case, DIRECTV v. Imburgia, No. 14-462 (2014), which involves a California case, Imburgia v. DIRECTV, 225 Cal.App.4th 338 (2014). The petition for cert. was granted without explanation in an Order dated March 23rd.

Back to the Future: a Refresher on Concepcion

Let’s go back a few years. Concepcion was is another unconscionability case that also involved a class action waiver. The underlying case was 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. Their contracts had a PDAA and a class action waiver. The customers resisted arbitration on the ground that the arbitration clause/class action waiver was an unconscionable contract of adhesion and was unenforceable under California law. The Ninth Circuit held that California’s decisional law on unconscionability of agreements barring class action participation, articulated in Discover Bank v. Superior Court, 36 Cal.4th 148, 113 P.3d 1100 (2005), was not preempted by the FAA. Said the Ninth Circuit, “The FAA does not bar federal or state courts from applying generally applicable state contract law principles and refusing to enforce an unconscionable class action waiver in an arbitration clause.”

The Supreme Court reversed, holding that California’s rule of law had a disparate impact on arbitration agreements and 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.” Essentially, because the California rule of law had a disparate impact on arbitration agreements, it was preempted by the FAA.

DIRECTV is Not on All Fours with Concepcion

One rarely knows why SCOTUS decides to grant cert., but sometimes looking at the opinion below sheds some light on the subject. The facts in DIRECTV at first blush appear to be very similar to Concepcion, but on closer analysis are 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 contract required individual arbitrations. So far, this is pretty standard fare and at a basic level similar to the facts in Concepcion.

So, what’s different? First, we should remember that a core issue in Concepcion was whether to require a class-wide arbitration, something not at issue in DIRECTV. Also, the contract in DIRECTV contained somewhat unusual language. Specifically, it provided: "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 [the PDAA] shall be governed by the Federal Arbitration Act." But, the class action waiver adds “If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.” California law, for example Consumers Legal Remedies Act (“CLRA”), Civ. Code, § 1750 et seq., expressly bars class action waivers.

Who’s on First?

What did the parties’ agreement provide? Either California’s 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.”

The Court acknowledged that its holding was contrary to Murphy v. DIRECTV, Inc., 724 F.3d 1218 (9th Cir. 2013), where the Ninth Circuit -- interpreting the same language -- went the opposite way. Said the DIRECTV court, “We find the analysis in Murphy unpersuasive... Rather, as we have already observed, if the customer agreement expressly provided that the enforceability of the class action waiver ‘shall be determined under the (nonfederal) law of your state without considering the preemptive effect, if any, of the FAA,’ then that choice of law would be enforceable; Murphy cites no authority to the contrary. Consequently, the dispositive issue is whether the parties intended to make that choice” [footnote omitted]. The California Supreme Court declined to review the case.

What will SCOTUS do?

This one is not as easy to predict. Clearly, the Court perceives a need to clear up the conflicting rulings. But, to me it seems the issue boils down to whether the parties can contractually alter the impact of the FAA. On this issue the Court seems to have 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. In fact, the Concepcion Court acknowledged that the parties could agree to arbitration schemes that states could not impose on them. “Parties could agree to arbitrate pursuant to the Federal Rules of Civil Procedure, or pursuant to a discovery process rivaling that in litigation. Arbitration is a matter of contract, and the FAA requires courts to honor parties' expectations…  But what the parties in the aforementioned examples would have agreed to is not arbitration as envisioned by the FAA, lacks its benefits, and therefore may not be required by state law” [citations omitted].

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. And of course, most of us thought that Concepcion had nailed down the class action waiver preemption issue.

The pleadings thus far are interesting. The Petition for Certiorari does not cite either Volt or Hall Street, while firing away on Concepcion and Murphy. The Respondents’ Brief, however, extensively cites Volt and the Petitioner’s Reply Brief circles back to discuss Volt.

That said, given that we are on the cusp of a new baseball season, and in light of my lifetime .800 batting average predicting Supreme Court rulings, I’ll go out on a limb and predict that “John Roberts and the Supremes” will reverse the DIRECTV Court. Yes, I know what Volt says, but that case was decided more than 25 years ago. I look at these things as a continuum. The more recent cases clearly support FAA supremacy. Also, I don’t think the Court granted cert. just to interpret a very unusual, one-off arbitration clause. We can compare notes next fall, when this case is expected to be heard. I reserve the right to amend my prediction after the case is fully briefed and argued!

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*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors of the Securities Arbitration Commentator. He is also a member of the AAA’s national roster of arbitrators. He holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional (Wharton-FINRA Institute).

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