Private: DirecTV v. Imburgia: Supreme Court Gives Arbitration, Not Consumers, the Benefit of the Doubt

by Scott L. Nelson, Public Citizen Litigation Group

It sometimes seems as if the Supreme Court is willing to take on even the most trivial issues if they relate to arbitration. A case in point: Monday’s decision in DirecTV, Inc. v. Imburgia. There, the Supreme Court saw fit to second-guess an intermediate California state court’s interpretation of highly idiosyncratic language in an arbitration clause, all in the service of ensuring that one case would be sent to arbitration rather than proceeding as a class action in court.

A little background is necessary to understand how this case came up. In a controversial 5-4 decision in 2011, AT&T Mobility LLC v. Concepcion, the Court held that states can’t hold that arbitration agreements that waive consumers’ rights to bring class actions are “unconscionable” and thus unenforceable as a matter of state contract law. The reason? The Federal Arbitration Act (FAA) provides that arbitration agreements are enforceable, and the majority of the Court held that class proceedings are incompatible with arbitration. Thus, a state law prohibition on waivers of the right to participate in class actions is “anti-arbitration” and is preempted by the FAA.

The result of Concepcion is that if a company includes an arbitration clause with a class action ban in the contracts that it foists on consumers, it can block them from pursuing class actions against it and force them to pursue any claims they have against it in arbitration, where the procedural rules work to the disadvantage of consumers. Because many consumer claims involve the kinds of frauds and ripoffs that cost each consumer a relatively small amount but make a lot of money for the company in the aggregate, the only practical way to pursue those claims is in a class action, where plaintiffs join together and, in effect, share the costs of litigation. Banning class actions allows defendants to get off scot-free in cases where individual litigation is not cost-effective.

Concepcion has had, and will continue to have, a huge impact. But, as in all matters involving arbitration, whether a defendant can take advantage of Concepcion depends on how it writes its arbitration agreement. The Supreme Court’s interpretation of the FAA is, in general, that it provides for arbitration agreements to be enforced according to their terms. Thus, the Court has held that parties can agree to have issues concerning the way their arbitration clause is enforced governed by state law rather than the rules that would otherwise govern under the FAA. In other words, the FAA itself allows parties to contract around it.

That’s how the Imburgia case arose. The company in the case, DirecTV, wrote an arbitration clause (before Concepcion) that had a class action ban, but also provided that if the class action ban would be unenforceable under state law where a consumer lived, the whole arbitration clause would go out the window. The plaintiff in Imburgia, who lived in California, filed a class action against DirecTV. Because, under California law, DirecTV’s class action ban was unenforceable (before Concepcion), the case proceeded in court. But once Concepcion was decided, the company changed its mind about being in court and sought to enforce the arbitration clause and class action ban. Its argument was that the class action ban would no longer be unenforceable under state law because Concepcion had held California law preempted on that point. Thus, in its view, the contract now provided that the plaintiff had to go to arbitration on an individual basis, and the class action had to be dismissed.

A California state court saw things differently. The court, reading the contract’s words, thought it was ambiguous because it could be read to say that the arbitration clause was not operative if the law of the state would render its class action ban unenforceable in the absence of FAA preemption. Because ambiguous contracts are usually interpreted against the party who drafted them, the court ruled against DirecTV.

The Supreme Court took the case even though there was no reason to think any company other than DirecTV used an arbitration clause with the kind of wording used in DirecTV’s agreement. Moreover, DirecTV itself had changed its agreement so that it no longer turned on what state law would provide. Thus, whatever the Supreme Court decided about the proper interpretation of the agreement, its decision would be very unlikely to affect other cases. The Court usually doesn’t take cases with such limited public importance.

The Court’s opinion is as unusual as its decision to take the case. The opinion, written by Justice Breyer (usually seen as part of the Court’s “liberal” wing), acknowledged that parties are free under the FAA to write arbitration agreements whose enforceability depends on state law—even state law that is otherwise preempted by the FAA. As Justice Breyer put it, “In principle, [the parties] 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 … irrespective of [its] invalidation in Concepcion.” Justice Breyer also conceded that what the contract meant by its reference to state law was itself a simple matter of contract interpretation, which is itself a question of state law. And the Court has no authority to overrule a state court on a question of state law.

Nonetheless, the Court reversed the California court. How? It concluded that the state court’s resolution of the contract interpretation question was so unusual that it could only be explained as an indication of hostility to arbitration. In other words, the Court didn’t believe that a California court would have interpreted the contract the way it did if it had not been an arbitration agreement. And, remember, the Supreme Court’s view of the FAA is that it prohibits state laws that reflect hostility to arbitration. Had the state court applied contract law without hostility to arbitration, Justice Breyer reasoned, it would have concluded that, after Concepcion, the class action ban was no longer unenforceable under state law, and thus the arbitration clause as a whole would be enforceable.

Justice Ginsburg, joined by Justice Sotomayor in dissent, would have none of it. In her view, the state court’s decision reflected the application of garden-variety contract law calling for an ambiguous contract to be interpreted against the company that drafted it: The state court’s decision was “not only reasonable,” but “entirely right.” The better reading of the contract, to Justice Ginsburg, was that its own words prohibited arbitration in this case.

Thus, for Justice Ginsburg, the majority’s decision to bend over backwards to rule for arbitration in this case reflected the Supreme Court’s propensity to give the “benefit of the doubt” not to relatively powerless consumers seeking justice, but to “powerful economic enterprises” seeking to close the courthouse doors to consumers, “leaving them without effective access to justice.”

It’s tempting to dismiss Imburgia as a one-off case involving some unusual contract language. And compared to Concepcion, it undoubtedly will have little direct impact. But as Justice Ginsburg points out, it is reflective of the Court’s more general approach to arbitration cases, under which state laws that seek to protect consumers’ rights seem as alien to the majority as “the law of Tibet” or “the law of pre-revolutionary Russia.” And it’s troubling that not only Justice Breyer, but Justice Kagan as well, bought into the notion that the Court should parse the words of a contract and, if the Justices disagree with a lower court’s interpretation, attribute the different reading to the lower court’s impermissible hostility to arbitration.

Imburgia itself will have little or no impact beyond the parties to the case. But the case is a reminder that the Supreme Court’s FAA jurisprudence—a relatively recent body of case law that has turned what had been an obscure piece of legislation into a broad license for companies to opt out of the justice system—is not likely to change soon. Absent a paradigm shift, legislative or judicial, we’ll be left with the results wrought by what Justice Ginsburg described as “[t]he Court’s ever-larger expansion of the FAA’s scope.” Trivial as the case may seem, it does reflect what Justice Ginsburg called “the Court’s bent,” and serves as an appropriate occasion for her to deliver a dissent that stands as a manifesto of resistance to that bent—albeit resistance that may take a long time to bear fruit.