The U.S. Supreme Court’s ruling in a nonemployment case will likely have serious ramifications for employers’ use of arbitration agreements with class-action waivers.
The justices on Oct. 6, 2015, reviewed the decision of a California appellate court that affirmed the denial of arbitration to DirecTV in an action filed by past subscribers challenging the company’s imposition of early cancellation fees (DirecTV, Inc. v. Imburgia, No. 14-462).
A form agreement between the company and its subscribers required arbitration of all contract disputes, and it prohibited either party from combining claims in arbitration or joining in a class action.
But an addition to the arbitration clause said that if the “law of your state” banned class-action waivers, then the entire arbitration provision was “unenforceable.” California law bans class-action waivers.
“Regardless of how the court rules, this decision will apply to all arbitration agreements, not just those involving customers or that were signed in California,” Michael Droke, an attorney with Dorsey and Whitney in its labor and employment division, told SHRM Online. The decision will change the landscape of arbitration agreements, he said.
“If [the subscribers] win, any company using arbitration clauses will be required to review the agreement to comply with state laws. This would require companies either to ditch their arbitration agreement, create one form that complies with the most-restrictive laws across the United States, or have a piecemeal approach with multiple agreements. Companies will need to hire lawyers to review arbitration agreements at additional cost. Any arbitration agreements with a class-based waiver will be under attack,” Droke said.
“If DirecTV wins, companies will be encouraged to include class-based waivers in their arbitration agreements. Companies will be encouraged to require arbitration agreements across the board,” he continued. Nationwide standards may apply, which will encourage more companies to require arbitration clauses in employment agreements, he said.
State Law or Federal Policy?
Two past subscribers to DirecTV, a television company headquartered in Segundo, Calif., sued the business over the cancellation fee issue. The company moved to compel arbitration in the pending case, which had been certified for class action.
A state trial court denied arbitration, reasoning that the contract’s reference to state law meant the parties had intended to follow California law, which bans class-action waivers. The California Court of Appeal affirmed the denial of arbitration.
The Supreme Court on March 23, 2015, granted DirecTV’s petition to review the state appeals court decision.
Arguing for DirecTV, Christopher Landau, an attorney with Kirkland & Ellis in Washington, D.C., said that even though contract interpretation is ordinarily a question of state law, the Federal Arbitration Act (FAA) gives federal courts the power to make sure state court decisions don’t frustrate the federal policy favoring arbitration. The state court’s contract interpretation in this case would infringe on that strong federal pro-arbitration stance, he said.
If the court reviews the state law contract interpretation in this case, “we’ve got every arbitration case in the world” coming to the Supreme Court, Justice Stephen Breyer responded. “We would have federalized” a “huge area” of state contract law, he said.
The state court opinion was “unsatisfying” at best, Justice Elena Kagan said, but she questioned whether that gives the Supreme Court the power to intervene and reverse on a state law issue. The DirecTV contract was poorly drafted, the state law reference was ambiguous and the state court probably “got the answer wrong,” Kagan said. “But ‘wrong’ isn’t what we do here.”
Representing the class of subscribers, Thomas Goldstein, an attorney with Goldstein & Russell in Bethesda, Md., said that even if the state court incorrectly interpreted the arbitration pact, it relied on ordinary state rules of contract construction that don’t implicate federal power under the FAA. If the justices override the ruling in this case, the high court will face “a wealth of challenges” to state law contract rulings that happen to touch on arbitration clauses, he said.
Congress enacted the FAA in response to state courts exhibiting “hostility” to private arbitration agreements and refusing to enforce them, Chief Justice John Roberts responded. Those courts adopted “special rules of interpretation” for arbitration agreements, different from other types of contracts, and that’s what Congress expressly wanted to stop, Roberts said.
If the Supreme Court grants Goldstein’s argument, Justice Antonin Scalia added, the states then “can do whatever they want” to invalidate arbitration agreements.
Another Arbitration Case before the Court
The high court on Oct. 1 agreed to review whether the FAA pre-empts a California state court rule regarding the enforcement of contracts containing unconscionable provisions (MHN Gov’t Servs, Inc. v. Zaborowski, No. 14-1458).
The justices will review the 9th U.S. Circuit Court of Appeals’ decision that denied arbitration to MHN Government Services on Fair Labor Standards Act (FLSA) and state law claims filed by consultants used by MHN to provide counseling services to military service members and their families.
The consultants claimed that MHN, based in San Rafael, Calif., incorrectly classified them as independent contractors rather than employees. When they sued in federal court for overtime pay and other employee benefits, MHN moved to compel arbitration under service contracts the consultants had signed that included mandatory arbitration clauses.
But the 9th Circuit affirmed a district court decision denying arbitration on the grounds that those agreements contained unconscionable terms that couldn’t be severed from the rest of the pact, despite the fact that the agreements contained severability clauses. These clauses stated that if any provision was “rendered invalid or unenforceable,” the agreement’s other provisions “shall remain in full force and effect.”
The district court ignored the severability clauses and refused to sever the allegedly unconscionable portions of the agreement and enforce the remainder, relying on a California state court ruling that arbitration agreements with more than one unconscionable provision can’t be saved by a severability clause.
MHN asked the Supreme Court to resolve whether this non-severability rule is pre-empted by the FAA, which states a strong federal policy in favor of arbitration.
– Joanne Deschenaux, J.D., is SHRM’s senior legal editor.