Earlier this week, the Supreme Court issued another landmark arbitration decision in DirectTV v. Imburgia. The case pitted one of America’s least loved companies against two of its former subscribers, who complained about the company’s obnoxious early termination fees.
The key facts:
- As a New York Times series recently reported, major companies have become very aggressive and rather slippery about closing off consumers’ access to class actions in favor of arbitration. Arbitration is seen as more favorable to companies, as they appoint and frequently re-hire the arbitrators.
- In 2005, the California Supreme Court indicated that it wouldn’t enforce certain arbitration agreements, finding them “unconscionable”.
- Amy Imburgia brought a case against DirectTV in 2008 over the fees. Although the TV company generally requires arbitration, its customer contract at the time indicated that this arrangement could be overridden by the “law of your state”. Since this was true in California at the time, DirectTV did not push Imburgia into arbitration.
- Fast forward a few years. In 2011, Justice Scalia announced for the Supreme Court in AT&T v. Concepcion overrode the 2005 California decision. He argued that California law – which allowed for consumers to band together in “class arbitrations” – made arbitration too expensive. Scalia argued that this defeated the purpose of the Federal Arbitration Act of 1925, which created a judicial deference to arbitrators: “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”
- In 2014, California courts ruled in Imburgia’s favor, arguing that the state law at the time favored them. They took note of the 2011 decision, but found that there was ambiguity in DirectTV’s contract, and that this should count against the company (since arbitration was such an exceptional mechanism).
- Earlier this week, the US Supreme Court overruled them. The court decision split the liberal bench. In AT&T v. Concepcion, Justice Breyer penned a pro-consumer dissent signed onto by his three liberal colleagues. In DirectTV, Breyer flipped to the other side – writing the majority decision with the conservatives and Justice Kagan. Justice Ginsburg wrote a sharply worded dissent (co-signed by Sotomayor), calling out Breyer for his inconsistencies.
There’s a few things I take from this case.
First, arbitration is not “privatized justice”. Get three arbitrators together in a room (whether for DirectTV or Chevron), and the only reason their decision matters is because a public court will back it up. What these arbitration cases are about is the precise division of labor between private and public courts, and between federal and state courts. The federal government will override a state court that allows “class arbitration” or blocks standard (non-class) arbitration. Private arbitrators will determine the merits of disputes between consumers, and state and federal courts will back them up.
Second, arbitration is no longer about voluntary agreements between two equal parties. Arbitration’s supposed difference from courts is that the litigants choose to be there. This party consent is the main justification for such an exceptional waiver of legal rights. Yet, much of which gets called “arbitration” today has little to no party consent. Consumers are often automatically signed up for arbitration without knowing it; states sign arbitration treaties without knowing who will use them.
With this history, it is unsurprising that a lot of the debate in DirectTV was about who should be given the benefit of the doubt in the absence of clear party consent. To Ginsburg and the California courts, it was the customers who had been forced into arbitration. As she wrote,
as the California court appreciated, courts generally construe ambiguous contractual terms against the drafter. See Mastrobuono, 514 U. S., at 63 (“Respondents drafted an ambiguous document, and they cannot now claim the benefit of the doubt.”). This “common-law rule of contract interpretation,” id., at 62, reflects the principle that a party should not be permitted to write an ambiguous term, lock another party into agreeing to that term, and then reap the benefit of the ambiguity once a dispute emerges. The rule has particular force where, as here, a court is interpreting a“standardized contrac[t]” that was not the product of bilateral bargaining…
Allowing DIRECTV to reap the benefit of an ambiguity it could have avoided would ignore not just the hugely unequal bargaining power of the parties, but also their reasonable expectations at the time the contract was formed. See Mastrobuono, 514 U. S., at 63 (it is particularly appropriate to construe terms against the drafter where the other party had no reason to anticipate or intend the drafter’s preferred result). See also Trans World Airlines, Inc. v. Franklin Mint Corp., 466 U. S. 243, 262 (1984) (“[C]ontract[s] . . . are to be read in the light of the conditions and circumstances existing at the time they were entered into, with a view to effecting the objects and purposes of the [parties] thereby contracting.” (quoting Rocca v. Thompson, 223 U. S. 317, 331–332 (1912); ellipsis in original)). At the time DIRECTV imposed this agreement on its customers, it assumed that the arbitration clause would be unenforceable in California. App. 52(explaining in state-court filing that, “[b]ecause California law would not enforce the arbitration agreement . . . , DIRECTV has not sought and will not seek to arbitrate disputes with California customers”). Likewise, 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. 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.
No one denies that lower courts must follow this Court’s holding in Concepcion. The fact that Concepcion was a closely divided case, resulting in a decision from which four Justices dissented, has no bearing on that undisputed obligation…
the reach of the canon construing contract language against the drafter must have limits, no matter who the drafter was… California’s interpretation of the phrase “law of your state”does not place arbitration contracts “on equal footing with all other contracts,” … For that reason, it does not give “due regard. . . to the federal policy favoring arbitration.”
But of course Breyer himself was the dissenter in that case. Here, he presents himself as judicial manager, dutifully holding his subordinates to a decision he disagreed with.
Given the stakes involved, the justices’ arguments were rather narrow. Remember, this is a big deal case. Our top legal officials are debating about when they will put the power of their gowns behind arbitrators to whom they outsource work. Here, Breyer plays middle management, seemingly agnostic as to the underlying policy issue. Ginsburg plays the defender of the people,withering in her critique of Breyer. (See here for a funny exchange between them.) She calls arbitration a “step to disarm consumers, leaving them without effective access to justice”.
But Ginsburg’s legal argument isn’t equal to her political one. She would have found for Imbruglia only because she had reason to believe arbitration wouldn’t cover her. This doesn’t call into question arbitration in states other than California, or in California for post-2011 disputes.
Indeed, I wonder whether Breyer is really a flip-flopper. He has backed companies’ right to use international arbitration. And a close reading of his dissent in AT&T v. Concepcion was all about expanding the availability of arbitration:
class proceedings have countervailing advantages [over non-class arbitration]. In general agreements that forbid the consolidation of claims can lead small-dollar claimants to abandon their claims rather than to litigate. I suspect that it is true even here, for as the Court of Appeals recognized, AT&T can avoid the $7,500 payout (the payout that supposedly makes the Concepcions’ arbitration worthwhile) simply by paying the claim’s face value, such that “the maximum gain to a customer for the hassle of arbitrating a $30.22 dispute is still just$30.22.” Laster v. AT&T Mobility LLC, 584 F. 3d 849, 855, 856 (CA9 2009). What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim? See, e.g., Carnegie v. Household Int’l, Inc., 376 F. 3d 656, 661 (CA7 2004) (“The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30”). In California’s perfectly rational view, nonclass arbitration over such sums will also sometimes have the effect of depriving claimants of their claims (say, for example, where claiming the $30.22 were to involve filling out many forms that require technical legal knowledge or waiting at great length while a call is placed on hold).
His argument is not that arbitration is “bad”, but that it should be expanded into the class action arena. His argument is not about empathy for consumers, but about rationalizing the incentives faced by their lawyers.
As such, his decision this week should not be a surprise. It’s just the latest move in an ongoing power shift in the judiciary. More work is punted to private judges, but ultimate power remains monopolized in a top-down legal hierarchy.