December 14, 2015

Supreme Court reverses California court on freedom of contract – again

By Deborah J. La Fetra Senior Attorney

Today, the Supreme Court once again upheld the freedom of Californians to contract for arbitration of consumer disputes. In DIRECTV, Inc. v. Imburgia, the Court reviewed a California Court of Appeal decision invalidating a consumer contract that provided that it would be invalidated if “the law of your state” made class-arbitration waivers unenforceable. Such waivers used to be unenforceable in California, under a rule devised by Discover Bank v. Superior Court, but the Supreme Court invalidated that rule as preempted by the Federal Arbitration Act in AT&T Mobility v. Concepcion. Today’s 6-3 majority opinion is authored by Justice Breyer, joined by Chief Justice Roberts, and Justices Scalia, Kennedy, Alito and Kagan. PLF filed an amicus brief supporting the freedom of contract.

The opinion begins by noting that the parties to a contract could freely choose to have their contracts interpreted by reference to invalidated state law. “In principle, they might choose to have portions of their contract governed by the law of Tibet, the law of pre-revolutionary Russia, or (as is relevant here) the law of California including the Discover Bank rule and irrespective of that rule’s invalidation in Concepcion.” Given the possibility that the parties might have intended this (the decision openly doubts whether the court’s ruling on this point is correct) and that the Court ordinarily defers to state court interpretations of state law, the only question is whether the state law is consistent with the FAA.

Specifically, the question is whether the California court’s decision places arbitration contracts on “equal footing” with all other types of contracts. It does not, for several reasons that the opinion sets out one by one: First, there are no contract cases from California—or any other State—that interpret “state law” to include invalid state law. Second, judicial construction of a statute ordinarily applies retroactively, meaning that Concepcion’s invalidation of the Discover Bank rule would remove that rule from the “law of your state.” Third, the fact that California never considers laws preempted by other federal laws (e.g., statutes governing labor relations, pensions, antidiscrimination) to retain contractual validity means that the court’s decision was guided by the specific subject matter of arbitration. Fourth, the language of the California court’s decision focused solely on arbitration. Fifth, it is unlikely that California courts would construe contracts in other contexts to include state law that “has been authoritatively invalidated by this Court.” Sixth, and finally, the California courts have never applied the canon that contracts are construed against the drafter in any other context remotely similar to this case.

The majority opinion concludes that the case is governed by “present well-established law.” The California court’s interpretation fails to place arbitration contracts on an equal footing with other types of contracts, fails to adhere to the federal policy favoring arbitration, and is therefore preempted by the Federal Arbitration Act.

Justice Ginsburg, joined by Justice Sotomayor, dissented.  She would have found the language of the contract to be ambiguous and construed it against the drafter to give the customer “the benefit of the doubt.” Her disagreement with the majority is stark:  “As I see it, the California court’s interpretation of the ‘law of your state’ provision is not only reasonable, it is entirely right.” Justice Thomas dissented in a single paragraph, reiterating his view that the FAA does not apply to proceedings in state courts.

The majority’s comment that today’s ruling sits well within the confines of “present well-established law” is noteworthy because Supreme Court decisions usually break new ground in one way or another. The context, however, is that California courts continue to ignore, evade, and otherwise purport to distinguish away both the Federal Arbitration Act and the federal substantive law of arbitration, both which serve to protect the freedom of contract. There has been a steady stream of cert petitions asking the Supreme Court to reverse California state court decisions invalidating arbitration contracts. Unlike the California courts, the Supreme Court recognizes that both parties to a contract calling for alternative dispute resolution benefit  from that contract. The informality, reduced expense, and quickness of arbitration mean that consumers and employees can recover in a fraction of the time they would spend in court. Studies show that consumers and employees prevail at least as often in arbitration as they do in court. What, then, drives the anti-arbitration views of the California courts? They simply want to protect the class action attorneys—the only real winners in small dollar amount class actions where the plaintiffs get pennies apiece and the attorneys snag 30% or more of the “common fund.”  Today’s decision is a victory for the freedom of contract and fast, inexpensive resolution of disputes.

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