This article originally ran in the December 2015 issue of AVN magazine. Click here to see the online edition.
On Tuesday, October 6, 2015, the second day of the Supreme Court’s 2015 term, the Court heard argument in a case that, while not receiving much press, stands to dramatically impact businesses, consumers, employers and employees. The question to be answered involves the extent to which the Federal Arbitration Act trumps the rights under state law to class actions and jury trials, among other things.
In the November 2012 issue of AVN, this column discussed alternative dispute resolution, which includes arbitration. Fundamentally, arbitration is where the parties agree to hear a case before an arbitrator, rather than a judge or jury. The arbitrator acts like a judge—and, in fact, the bulk of arbitrators are retired judges.
Arbitration is popular in contracts between businesses because both sides know that it will result in a less expensive and more expedient resolution of disputes. Arbitration is also popular in contracts between a business, on the one hand and one of its employees or consumers, on the other hand. Arbitration has become pretty much standard because the contracts are written by the businesses on a take-it-or-leave-it basis and in a dispute with an employee or a customer, the business would much rather be before a professional judge than a jury full of employees and consumers.
Time was, courts resisted civilians acting in their stead. Judicial sentiment was that elected/appointed judges should resolve disputes, not private individuals. However, in 1925, Congress changed that with the Federal Arbitration Act. 9 U.S.C. §§1, et seq. (“FAA”). Seizing on Congress’ constitutional power to regulate interstate commerce, which has expanded profoundly since 1925, the FAA in essence says that where parties to a dispute have agreed to arbitration, courts are required to respect that. The FAA was upheld against the most powerful constitutional challenge to it in 1984, when the Supreme Court approved its application to state courts.**
The case argued on the second day of the Court’s 2015 term pits DirecTV against a group of its former customers who wanted to certify a class action and worm their way out of arbitration.*** Although arbitration as opposed to a court trial is a big deal, the really big deal is that the contract’s arbitration agreement foreclosed class actions. Although the Court already has upheld arbitration provisions that foreclose class actions), the DirecTV case has a different twist.
As is commonplace, DirecTV had a standard contract with all of its customers. Two of them separately filed suit, each complaining that DirecTV’s cancellation policies violated a series of California’s consumer-protection laws—and know that California has more of those than anywhere. Answering the suits, DirecTV moved to compel arbitration, which is the procedure for a defendant to bounce a case out of court and into arbitration. DirecTV took the case to the California Court of Appeal, which rather remarkably affirmed. “Remarkably” because the United States Court of Appeals for the Ninth Circuit—the court that hears federal appeals from federal trial courts in Western states, including California—had held squarely to the contrary, in favor of DirecTV’s position. That left the absurd result that whether an arbitration provision was enforceable became a function of whether a California suit was brought in a state or federal court.
The nub of the dispute, albeit oversimplified, is that there was a provision in the DirecTV’s contract acknowledging that FAA would govern the contract; but another one that said that the arbitration provision would not apply if it violated “the law of [the consumer’s] state.”
California, the customers argued, had a provision in one of its statutes that provided the basis of the action stating that its provisions—including the right to class actions—could not be waived.
DirecTV argued that the FAA is part and parcel of the laws of every state because of provisions in the FAA, amongst others, that the FAA governs all arbitration agreements and substitutes itself for any state-law rule to the contrary. As an analogy (one which did not arise in argument), if a contract licensing a copyright commanded the application of the laws of a particular state, the contract would necessarily be governed by the federal Copyright Act of 1976, which expressly preempts all state copyright laws.
Although the DirecTV case presents an obscure set of facts, its result could render arbitration agreements unassailable, as they should be. It is California’s last gasp.
Constitutional scholars have identified this Supreme Court as a business-friendly one. During oral argument, Chief Justice John Roberts punctuated that in what didn’t sound much like a question:
“[T]he FAA was adopted because State courts were hostile to arbitration, and Congress didn’t like that. Now, how were they hostile to arbitration? They were hostile to arbitration by adopting special rules of Contract interpretation that this favored arbitration. And in those instances, what the FAA says is that that’s what they wanted to stop: special rules of Contract interpretation, ordinarily a matter of State law, but not when it’s hostile to the FAA. And 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 as they came about 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.”
Finally, for any attorneys reading this piece, it is an admittedly gross oversimplification of the convoluted facts before the Court. The point is to allow the non-attorney readers to grasp the significance of the DirecTV case.
* Southland Corp. v. Keating, 465 U.S. 1 (1984).
** DirecTV v. Imburgia, et al., No. 14-462; certiorari granted ___ U.S. ___, 135 S.Ct. 1547 (March 23, 2015).
*** (Oxford Health Plans LLC v. Sutter, 133 S.Ct. 2064 (2013); AT&T Mobility, LLC v. Concepcion, 131 S.Ct. 1740 (2011)
Clyde DeWitt is a Las Vegas and Los Angeles attorney, whose practice has been focused on adult entertainment since 1980. He can be reached at [email protected]. More information can be found at ClydeDeWitt.com. This column is not a substitute for personal legal advice. Rather, it is to alert readers to legal issues warranting advice from your personal attorney.
