Mayhew-Hite Report        Supreme Court Oral Argument Summary: DIRECTV, Inc. v. Imburgia

Danny Dubow

A rising question in the field of ADR has been whether the Federal Arbitration Act (FAA) preempts state law on arbitration agreements. The Supreme Court will hopefully create a clear ruling on this issue in DIRECTV. Of pertinence to this case, is the FAA’s handling of class action arbitration. Under the FAA, a party can draft an arbitration clause into an agreement, forcing any claims between two parties to be brought to arbitration—not in the court system. Further, the drafting party can preclude other parties from consolidating claims and attempting to enter into class action arbitration. This stance from the FAA stands in direct conflict with some states and circuit courts, holding that arbitration clauses prohibiting class action arbitration to be unenforceable as unconscionable. California is one of these states.

The parties stayed DIRECTV to await the Supreme Court’s decision of AT&T LLC v. Concepcion, 563 U.S. 333 (2011). In Concepcion, the Supreme Court faced the question of whether the FAA preempts state law prohibiting a party from having an arbitration clause precluding class arbitration. AT&T had a contract that compelled those with cell phone contracts to bring claims to arbitration. Plaintiffs brought a claim after AT&T advertised “free” cell phones, but charged tax on the so-called free phones. The plaintiffs attempted to bring a class action claim, and AT&T moved to compel arbitration, where each would have to proceed alone.

The Ninth Circuit found that state law preempted federal law on this matter. Thus, because California holds arbitration clauses prohibiting class arbitration to be unconscionable, the Ninth Circuit found that this clause was also unconscionable, and the plaintiffs could proceed in court. However, the Supreme Court reversed this ruling. According to the Court, holding the way the Ninth Circuit did would be inconsistent with Congress’s intent in passing the FAA. This would effectively render the arbitration clause useless, when the parties both agreed to arbitrate rather than proceed in court. Further, class action arbitration frustrates the process of arbitration itself, removing many of the benefits of arbitration over the court system (formality, costs, and the like). Congress passed the FAA intending to protect arbitration clauses, as many parties attempt to back out of arbitration even after signing such agreements.

DIRECTV differentiates from Concepcion due to an additional clause referencing state law. One of the provisions in DIRECTV’s contract states: “If, however, the law of your state would find the agreement to dispense with class arbitration procedures unenforceable, then [the entire section requiring arbitration] is unenforceable.” The arbitration clause in Concepcion did not mention state law—California attempted to apply state law to the contract. Thus, the issue presented in DIRECTV is whether a clause referencing state law in the arbitration clause requires the state law to preempt the FAA.

During the oral argument,1 DIRECTV argued that the clause referencing state law further underscores the importance of precluding class actions, and proceeding to arbitration. Because the contract written by DIRECTV preceded the Supreme Court’s decision in Concepcion, the contract was written in this fashion to acknowledge that state courts were holding arbitration clauses prohibiting class action to be unenforceable. The provision was written to acknowledge this problem, not to say that state law would apply to the proceeding instead of the FAA. Further, congress passed the FAA to resolve ambiguities in arbitration clauses in favor of compelling the parties to arbitrate. Volt Inf. Sciences v. Stanford Univ., 489 U.S. 468 (1989). The parties contracted together to arbitrate future claims, and reading the clause allowing state law to preempt the FAA would lead to unenforceability. This would mean that the parties entered a contract that both knew was invalid and unenforceable. Both parties have an incentive to enter into a contract that is valid. Finally, the contract only included the reference to state law to delineate that the FAA would prevail, and that state law would not govern the arbitration clause. If the drafters of the contract intended state law to prevail over the FAA, they would have included more information suggesting this, rather than stating that the FAA should prevail.

The respondents in the oral argument expressed fear over the broad presumption in favor of arbitration. The respondents argued that plaintiffs did not offer a rule that would keep the court from always deciding in favor of arbitration. Further, the respondents argued that whether the arbitration agreement is enforceable is a question left for the state to decide—not to be determined by federal law. According to the respondents, parties have only agreed to arbitrate when sufficient evidence proves that they intended to arbitrate under the state law in which they entered a contract. As the consumers entered into the contracts in California, and California law does not allow provisions prohibiting class arbitration, the California consumers then did not agree to arbitrate. Further, respondents pointed to the fact that DIRECTV changed the wording in the contract during the Concepcion case, to strengthen the language that the FAA would be controlling. Also, DIRECTV filed an amicus brief for Concepcion stating that they would not arbitrate with any consumers in California due to the law in California being against arbitration. The respondents suggested that this meant DIRECTV understood that consumers in California did not agree to arbitrate in their state.

1 A transcript of the oral argument can be found at DIRECTV, INC. v. Imburgia, Oyez.org, https://apps.oyez.org/player/#/roberts6/oral_argument_audio/23999 (last visited Nov. 25, 2015).