The U.S. Supreme Court once again upheld consumer arbitration contracts against attacks by class-action lawyers, in a decision that featured an unusual alliance of liberal Justices Stephen Breyer and Elena Kagan with court conservatives and dissents from Justice Clarence Thomas and two liberals.
The decision in DirecTV v. Imburgia follows the reasoning of the court's recent decisions giving full power to the Federal Arbitration Act to override conflicting state law, especially court decisions and statutes prohibiting consumers from waiving their rights to participate in class actions. The court's jurisprudence in this area benefits rich corporations but hurts another wealthy, powerful special interest: Class-action lawyers, who fiercely oppose limiting consumer litigation to two parties.
This case featured an unusual wrinkle because DirecTV's contract included one clause prohibiting class actions and another declaring the entire arbitration agreement void if it conflicted with "the law of your state." California law prohibited class-action waivers in 2007, when DirectTV wrote the contract, and in 2008, when Imburgia's lawyers filed the proposed class action in state court. But the U.S. Supreme Court overruled California law in 2011 with
A California appeals court ruled that the "law of your state" in 2007 was what mattered and threw out the entire arbitration agreement. But the U.S. Supreme Court reversed, saying the contract couldn't be interpreted to refer to a law that had been invalidated by the highest court in the land. Breyer wrote the opinion, even though dissented in Concepcion because he thought it gave too much power to the FAA to preempt state law.
“The Federal Arbitration Act is a law of the United States, and Concepcion is an authoritative interpretation of that Act," wrote Breyer. "Consequently, the judges of every State must follow it.”
Justice Ruth Bader Ginsburg disagreed, saying the majority had once again misinterpreted the FAA, passed in 1925 before the rise of huge consumer conglomerates. The decision works to "deprive consumers of effective relief against powerful economic entities that write no-class-action arbitration clauses into their form contract," Ginsburg wrote in a 14-page dissent joined by Sonia Sotomayor.
Thomas wrote a simpler, one-paragraph dissent making the federalist argument the FAA doesn't apply to state-court proceedings.
The majority decision should encourage companies to include class-action waivers in all their contracts including employment-related contracts such as non-disclosure and non-compete agreements, said Michael Droke, a partner in Dorsey & Whitney's employment law practice. Such clauses tend to be opposed by labor activists and left-wing politicians but this decision cements the Supreme Court's view on the enforceability of agreements requiring consumers and employees to resolve their cases on an individual basis.
"It's more of the same but that in itself is remarkable," Droke said. "The court rarely takes on a single issue this many times in this short a period."
The decision also glosses over some odd quirks, including the fact that DirectTV at one point argued in favor of chucking out the contract and consumers circa 2008 could not have anticipated the Supreme Court would invalidate class waivers in 2011. Reasonable people also can disagree over whether the legislators who passed the FAA back in 1925 ever anticipated their measure, designed to clarify federal law for business-to-business contracts, would be applied to so-called contracts of adhesion millions of consumers click their way past on the way to purchasing cellphone service and satellite TV.
Breyer noted that the FAA gives parties wide leeway to choose which law to follow, whether that is the law of Tibet or pre-revolutionary Russia (or, as the New York Times described with horror in a recent article, religious courts). But if that's the case, Ginsburg wrote, why not the law as determined by California courts and the state legislature, which has never eliminated its ban on class waivers? Shouldn't a company as sophisticated as DirectTV be held to the terms of the contract it wrote?
"Pre-revolutionary Russian law, but not California’s `home state laws' operative and unquestionably valid in 2007?" Ginsburg asked. "Makes little sense to me."
Breyer noted some strangeness in the California appeals court's reasoning too. The court seemed to focus only on arbitration contracts, and specifically class-action waivers within arbitration contracts, he wrote.
Were the phrase “law of your state” ambiguous, surely some court would have construed that term to incorporate state laws invalidated by, for example, federal labor law, federal pension law, or federal civil rights law. Yet, we have found no such case.
Today's decision merely cements a long-term movement by the court to assert federal control and consistency over consumer arbitration contracts. Class-action lawyers hate them, and for good reason: They deprive them of the rich fees they earn negotiating settlements that enrich lawyers on both sides but rarely provide much for consumers.
Ginsburg and Sotomayor clearly buy into the theory these plaintiff lawyers are providing a valuable service to consumers. Ginsburg even quotes the New York Times article of Nov. 1, 2015, which ignored any evidence undercutting the premise that class actions are good for consumers.
The Consumer Financial Protection Bureau is busily working to prohibit class-action waivers in consumer finance contracts. But barring action by Congress, the Supreme Court's rulings enforcing the FAA mean consumers should pay attention to those contracts they're clicking past.
"There are going to be very limited ways to overturn a class-action waiver" in the wake of today's decision, said Droke of Dorsey & Whitney. But employers, especially, should be careful what they wish for: Arbitrators in employment cases often order more intense discovery than judges and sometimes without the protective orders that keep confidential information from public view.
