Drafter Beware: Exercise Caution when Choosing the Law

DirecTV, Inc. v. Imburgia, 136 S.Ct. 463 (2015)

            In 2008, two DirecTV customers in California brought suit against the company seeking damages for early termination fees that they believed violated California law. Section 9 of the service agreements signed by the customers in 2007 required any disputes be resolved by arbitration. Section 9 also contained a class arbitration waiver; however, it further stipulated that if the “law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision would be unenforceable. Finally, §10 of the agreement made clear that §9 “shall be governed by the Federal Arbitration Act.”

            In 2005, California law provided that the enforcement of class arbitration waivers in “consumer contract[s] of adhesion” that “predictably involve small amounts of damages” and meet certain other criteria is “unconscionable under California law and should not be enforced.” Imburgia, 136 S.Ct. at 466 (quoting Discover Bank v. Superior Court, 113 P.3d 1100, 1110). Because neither party disputed that this rule – the “Discover Bank rule” – prohibited the class arbitration waiver in the service agreements and thus invalidated DirecTV’s arbitration clauses with its California customers, the dispute proceeded to litigation.

During the pendency of this litigation in a California court, the United States Supreme Court held the Discover Bank rule “stands as an obstacle to the accomplishment and execution of the full purposes and objective of Congress” embodied in the Federal Arbitration Act (“FAA”). AT & T Mobility LLC v. Concepcion, 563 U.S. 333, 352 (2011). In other words, the Supreme Court determined that the FAA “pre-empts and invalidates th[e] rule.” Imburgia, 136 S.Ct. at 466.

            After the Court’s decision in Concepcion, DirecTV moved the California trial court for an order staying the litigation and compelling arbitration. DirecTV’s request was denied, an appeal ensued, and the California Court of Appeal affirmed. The court reasoned that “just as the parties were free in their contract to refer to the laws of different States or different nations, so too were they free to refer to California law as it would have been” without federal preemption. Id. at 467. In other words, the appellate court read the phrase “law of your state” as indicating that state law, without consideration for federal preemption, was to be applied, and therefore the parties had contractually agreed to the Discover Bank rule. This conclusion was premised upon general construction principles of contract law.

In particular, the Imburgia court reasoned that §10 of the contract, stating that the FAA governed the arbitration provision contained in §9, was a general provision, but the provision voiding arbitration if the “law of your state” would invalidate the class arbitration waiver was a specific provision. Applying longstanding rules of contract interpretation, the court concluded that the specific invalidation provision must control over the general FAA enforcement provision within the DirecTV agreement. The court further explained that the meaning of the phrase “law of your state” in this specific context was ambiguous, and should therefore be construed against DirecTV. The California Court of Appeal affirmed the lower court’s order denying DirecTV’s request that the parties be compelled to arbitrate the dispute and writs of certiorari were granted noting that the United States Court of Appeals for the Ninth Circuit had reached the opposite conclusion on exactly the same question.

Overturning the California court’s decision, the Supreme Court explained that the logical conclusion of the appellate court’s holding would be to allow the “law of your state” phrase to apply invalid state law to the dispute. Id. at 469. Because the Court could find no other examples of a California court applying that meaning to the phrase “law of your state” in other contractual contexts, it concluded that the California court was interpreting the arbitration clause differently than it would other types of contracts. This method of analyzing an arbitration clause, the Court explained, is not allowed under established FAA jurisprudence. Id. Further, the Court noted that although the parties could have selected pre-Concepcion California law, there was nothing about use of the phrase “law of your state” which indicated that was their intent. Id.

Although the Supreme Court’s decision in Imburgia dealt with a California law and a California state court’s decision, its holding should be noted by practitioners in Louisiana and elsewhere. Practically speaking, attorneys drafting arbitration agreements and who wish to take advantage of specific state laws favorable to their client’s interests may find those efforts frustrated if, later, federal courts conclude that state laws affecting the arbitrability of the claim are preempted by federal law. Although these state laws may still have independent force where wholly intrastate relationships are in play, and it may very well have been the parties’ intent to disregard federal preemptive effects, arbitrators should be aware of Imburgia’s potential to undermine their decisions in later enforcement actions when a subsequent change in federal law occurs. Further, where federal law does preempt state law in certain areas, drafters of arbitration agreements should be mindful of this fact and carefully draft clauses making absolutely clear which of the two laws is meant to apply.

Jacqueline M. Brettner, Partner

Carver, Darden, Koretzky, Tessier, Finn, Blossman & Areaux, LLC

1100 Poydras Street, Suite 3100

New Orleans, LA 70163