The Supreme Court's ruling for DirecTV on binding arbitration language in customers' service agreements has little applicability in the real world, "but the consequences are profound" since it marks a landmark reversal of a state court decision on arbitration, on the grounds a state court misapplied state contract law, said Harvey Rosenfield, a founder of Consumer Watchdog.
As a result, the Federal Arbitration Act (FAA) now seems to supersede everything, including parties' contract terms, legal experts tell us. "What the majority did here was dangerous and leads to a very slippery slope. In effect, the majority just federalized a big area of contract law, which has traditionally been a subject of state regulation and oversight," said Imre Szalai, a law professor at Loyola University New Orleans and co-author of an amicus brief in the case.
In Monday's ruling in DirecTV v. Amy Imburgia, justices 6-3 tossed out a California Court of Appeals decision that state law and not the Federal Arbitration Act (FAA) applied to the DirecTV arbitration agreement with
customers, and remanded the case.
In dissents, Justices Clarence Thomas and Ruth Bader Ginsburg brought up issues of federal involvement in matters before state courts. When the justices heard oral argument in October, their questions repeatedly involved how much the federal government should involve itself in state contractual disputes (see 1510060032).
In a statement Monday, DirecTV said the decision "affirms the strong federal policy favoring arbitration agreements that efficiently allow consumers and businesses to resolve disputes without further burdening our overloaded courts."
The case started as a 2008 class-action complaint against DirecTV for its early termination fees, with a state court denying the company's request the matter be sent to arbitration. Language in DirecTV customer agreements mandating arbitration for disputes unless applicable state law forbids it became the central issue (see 1509280016).
In his majority opinion, Justice Stephen Breyer said that while the California Court of Appeal's interpretation of state law in its original decision might be questionable, debating that isn't the Supreme Court's place. He said the state court was biased against arbitration contracts because the language in the DirecTV customer contracts was plain, and the 9th U.S. Circuit Court of Appeals followed state arbitration law even though the Supreme Court's 2011 decision in AT&T Mobility vs. Concepcion decision had invalidated it (see 104280070).
In a one-paragraph dissent, Thomas said he believes the FAA doesn't apply to state court proceedings, and thus can't make state courts order arbitration.
In a 14-page dissent, longer than the 11-page majority decision, Ginsburg — joined by Justice Sonia Sotomayor — said the DirecTV decision was "a dangerous first" because it reversed the court's long tradition of staying out-of-state court interpretations of contract law.
Neither the FAA nor Concepcion nullifies California's Consumers Legal Remedies Act, Ginsburg said. So the key question is whether "law of your state" language in the customer contracts meant state law as pre-empted by federal law, as the majority held, or home state law without pre-emptive effect of federal law, as the California appellate court held, Ginsburg said, saying the latter reading "is the better one."
DirecTV wouldn't have had language referring to state law in its contract if it were really referring to state law pre-empted by FAA, she said. "Any California customer who read the agreement would scarcely have understood that she had submitted to bilateral arbitration of any and all disputes with DirecTV," Ginsburg said.
"She certainly would have had no reason to anticipate the Court's decision in Concepcion, rendered four years later, or to consider whether 'law of your state' is a chameleon term meaning California legislation when she received her service contract but preemptive federal law later on."
Ginsburg's dissent "rightly points out that the way the Court has decided what is essentially a one-off case reflects the Court's general approach to arbitration issues," emailed Scott Nelson, a lawyer with the litigation group of Public Citizen, which filed an amicus brief in the case. "It's disappointing that the Court would second-guess a state-court decision on how to interpret an arbitration agreement and take its disagreements with the way the state court decided that issue of contract interpretation as an indication that the state court has applied state contract law in a manner hostile to or discriminatory against arbitration."