DIRECTV v. Imburgia

Yesterday, the Supreme Court heard arguments in yet another arbitration case, DIRECTV v. Imburgia. Here's the transcript. The issue is esoteric even by the standards of the Supreme Court's arbitration docket, but it has a certain practical significance. In a series of recent cases, the Court has mandated the enforcement of arbitration clauses that require claimants to proceed on an individual basis rather than as part of a class action. Many of these cases involve small-dollar consumer claims, so the likely effect is to eliminate, or at least substantially reduce, the potential liability of the business. The opinions can be baffling to read. Even when I agree with the results, it can be hard to accept the Court's application of seemingly-settled arbitration law. The common theme, though, is fairly clear: A small majority of justices view arbitration clauses as a permissible means to avoid class action liability.

Below the jump, more discussion of the specific issue in Imburgia.

Here's the issue: The relevant contract clause requires the parties to arbitrate all disputes and also provides that neither side "shall be entitled to ... arbitrate any claim as a representative member of a class." The same clause adds (emphasis mine): "If, however, the law of your state would find this agreement to dispense with class action procedures unenforceable, then this entire [arbitration clause] is unenforceable." The very next clause then provides that the arbitration clause itself is to be "governed by the Federal Arbitration Act."

Imburgia is from California, and California law denies enforcement to at least some arbitration clauses that prevent the use of class action procedures. This state-law rule is indisputably preempted (i.e., it cannot be applied) in cases subject to the Federal Arbitration Act (FAA). But there is an exception to this preemption rule: State law is not preempted if the parties have agreed to abide by it.

Imburgia brought a class action in California state court. DIRECTV asked the court to require her to arbitrate (as an individual), but the court refused. Here's the relevant opinion, which is from the intermediate appellate court. Interpreting the language highlighted above, the court reasoned that the parties had agreed to be bound by California law, including the state's rule against the enforcement of arbitration clauses that forbid class actions. Put differently, the court interpreted the reference to "the law of your state" to negate an express term of the contract: the class action waiver.

As a matter of contract interpretation, this is hard to defend. That is putting it mildly. As Justice Kagan--hardly a fan of the Court's recent dismantle-the-class-action project--put it, to call the opinion "unsatisfying, would be a kind word for it." She added: "the State court ... probably got the answer wrong. Strike the 'probably.'" Normally, courts interpret unclear contract language to preserve rather than negate the express terms of the agreement. Here, one can do that simply by reading "the law of your state" to incorporate law that the FAA does not preempt. That reading is made even more plausible by the stipulation that the arbitration clause is to be "governed" by the FAA. So there isn't much to recommend the state court's decision, aside perhaps from the result: DIRECTV doesn't get to insulate itself from class action liability. (At least under that contract; it has since amended its contracts...)

If Imburgia wins at the Supreme Court, it will likely be because the Court does not typically review questions of contract interpretation resolved by state courts. That's because the Court doesn't review state court applications of state law. However, the Court can decide whether a state court's interpretation of a contract runs afoul of controlling federal law. In a 1989 case (Volt), the Court reviewed a state court's contract interpretation on this basis. In Volt, the Court allowed the interpretation to stand because--as Volt is typically understood--the interpretation resulted in the application of state law that "generally fostered the federal policy favoring arbitration." Given the Court's recent pro-arbitration/anti-class action cases, it is hard to see a majority of the Court reaching that conclusion here.

Arbitration image courtesy of Shutterstock.