Argument analysis: Justices have scorching criticism for California court’s refusal to enforce arbitration agreement, but debate their authority to correct it
on Oct 7, 2015 at 9:06 am
Dèjá vu was the theme of the day on the second morning of the October argument session, as the Justices listened to arguments in DIRECTV v. Imburgia, the most recent in a line of cases from state supreme courts refusing to enforce arbitration agreements. This case presents the Court’s second look at the hostility of California law to waivers of classwide arbitration. Three years ago, after California courts refused to enforce provisions in arbitration agreements that barred class arbitration (on the ground that the provisions were unconscionable), a closely divided court in AT&T Mobility v. Concepcion disagreed, holding that the Federal Arbitration Agreement preempted the California doctrine invalidating those waivers.
This case involves the agreements that petitioner DIRECTV was using after California adopted the prohibition on class action waivers, but before the Supreme Court rejected that prohibition. Trying to avoid classwide arbitration, the form agreement at that time (signed by respondent Amy Imburgia) included a provision indicating that “if the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire [arbitration provision] is unenforceable.” After Concepcion, DIRECTV assumed that it could resume arbitrations in California. But in this case the California court held that the provision still barred arbitration, reasoning that whatever the Supreme Court might have said about federal law, the law of California (“your state”) would find the agreement to dispense with class arbitration unconscionable.
The argument had an odd texture. First up was Christopher Landau (representing DIRECTV), who received a succession of pressing inquiries worrying about the need to draw the line between contract-interpretation cases that warrant Supreme Court attention and those that do not. Justice Stephen Breyer’s opening comment is typical as he wondered whether on a question of contract interpretation the Court could “have the power to say that they’re wrong, even if they were to say the words ‘do not turn on the light’ mean ‘turn on all the lights.’”
The Justices repeatedly pressed him to specify a test. Even Justice Antonin Scalia chimed in: “You need a test, Mr. Landau. I sympathize with Justice Breyer’s point. … Where does it stop? We’re going to reinterpret every interpretation of State law that ends up invalidating an arbitration agreement? Certainly not? So what’s the test?”
In the same vein, Justice Elena Kagan asked him
[W]hat’s the standard? There’s nothing on the face of this opinion that indicates hostility to arbitration. To the extent you can find reasoning in this opinion … it’s about interpreting form contracts, whenever you see an ambiguity, against the drafter. And that’s a principle of contract interpretation that has been used hundreds of times in California. It appears to be a very common principle … whenever California courts look at a contract of adhesion.
Landau tried hard to deflect the question, contending that “this case is not a great case for saying how wrong does wrong have to be. I mean, clearly, here, it’s nonsensical. … I could use other words like unreasonable or manifestly wrong.” But as long as he was at the podium, the line-drawing problem dominated the discussion.
But when Landau yielded the podium to Thomas Goldstein (representing Imburgia) the tone of the argument changed noticeably. Two topics dominated his time at the podium: the sense that the California court’s reading of the contract was indefensible, and the concern that it reflected an unexpressed hostility to arbitration.
The Chief Justice set the tone shortly after Goldstein took the podium, distancing himself from the idea that it is difficult to identify an appropriate standard:
What could be more hostile to the FAA than to interpret a phrase that says nothing about the FAA to dispense with our holdings about what the FAA has to say[?] And to do that even though there’s a provision in the contract that says this is governed by the FAA. … I’m sympathetic to the notion that this is a matter of State contract interpretation, but that is precisely what the FAA was getting after, State judges interpreting contracts under special rules hostile to arbitration.
In the same vein, Justice Scalia dismissed what he regarded as an effort by Goldstein to build a parade of horribles out of the possibility that accepting DIRECTV’s argument would flood federal courts with minor contract-interpretation cases: “That’s one horrible, and the horrible on the other side is if we agree with you, the States can do whatever they want to invalidate arbitration agreements so long as they’re doing it under the guise of contract interpretation. Is that not also a horrible?”
Justice Samuel Alito put the point in a hypothetical that seemed in context to present his view of this case: “Well, if we could see a State court opinion that doesn’t say anything that is explicitly against arbitration, but it interprets a contract in such a strange way that the only possible explanation for the interpretation is hostility to arbitration. Can that be invalidated?”
The concern about hostility was closely related to the near consensus that the California court’s decision was patently incorrect as a matter of contract law. Justice Scalia expressed his view that “the State court’s interpretation flouts well-accepted universal contract-law principles, the most important of which is you interpret a contract in a manner that makes it valid rather than invalid. And they went out of their way to interpret this in a manner that causes the whole agreement to be thrown out.” Similarly, Justice Breyer characterized the California court’s conclusion as “a bad interpretation,” while Justice Kagan seemed incredulous, repeatedly criticizing the California court in unusually explicit terms. So, at one point she introduced a question by commenting that “to the extent you can find reasoning in this opinion — which you have to search to find.” Again, she prefaced a question to Mr. Landau by suggesting that the lack of reasoning “does make this State court opinion – unsatisfying would be a kind word for it.”
Echoing the concerns (mentioned above) of Justices Scalia, Kagan, and Alito about tacit rejection of the Court’s FAA jurisprudence, Justice Breyer (author of the dissent in AT&T Mobility) seemed to summarize the choices facing the Court:
I think there is a pretty good argument that this particular interpretation, consciously or unconsciously, is flying in the face of an opinion of this Court, which I disagreed with. … I dissented.
All right. So we have, on the one hand, the risks that we’ll get into too many State law cases if we take their side. On the other hand, there is the risk that they’ll run around our decisions. Now when you get to that second thing, even though I dissented, I think it’s an extremely important thing in a country that has only nine judges here and thousands of judges in other places who must follow our decisions – and think of the desegregation matters, et cetera – that we be pretty firm on saying you can’t run around our decisions, even if they’re decisions that I disagreed with.
Given those concerns, it seems unlikely that five of the Justices will vote to affirm the California decision. But do we know exactly how they’ll explain their decision? For that I suppose we’ll have to wait a few months yet.
[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel to the respondents in this case. The author of this post, however, is not affiliated with the law firm.]