The blog in a nutshell

The blog in a nutshell

Monday, December 14, 2015

Today, the Court decided DirecTV v. Imburgia.   The case involved a pretty complicated contract, one not likely to be seen in the future, where the arbitration clause was dependent on whether state law permitted class arbitration.  Specifically, the arbitration states that if the “law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision “is unenforceable.”

At the time the arbitration agreement in DirecTV was entered into, California banned class arbitration waivers, making such waivers unenforceable. In 2011, the Supreme Court found all such bans preempted by the Federal Arbitration Act.  The question in DirecTV was whether the provision above applied to make the arbitration provision unenforceable.

One easy way to decide this case would be to find that California law did not make the waiver of class arbitration unenforceable at the time.  Under this theory, despite what the parties may have thought at the time, California law did not actually make waivers of class arbitrations unenforceable.  This would be because California law in this regard was invalid and had no effect.  Such is consistent with a long history that, when a court announces a new rule, they are merely finding it, not changing it.  

In fact, that appears how the Court wanted to decide the case.  But California courts held otherwise, and the FAA does not allow the Supreme Court to *interpret* California law.   It only allows it to invalidate a California rule of decision that discriminates against arbitrability (more about that when discussing the dissent).

Rather than accept the decision of the California Court--which is what the dissent suggested--what the Court did here was say that, in other cases, California would have interpreted a provision incorporating the law of a state to include yet-discovered changes to the law; they would have adopted the "finding law" theory I summarized above.  By not incorporating the law of a state to include the change here, California was discriminating against arbitration provisions - a no-no under the FAA.

There were actually two dissents.  Thomas dissented on his usual grounds in cases like these, arguing that the FAA does not apply in state courts.  Ginsburg, along with Sotomayor, separately dissented.   Nothing in this post touches on Thomas's arguments, so I refer to the Ginsburg opinion as "the dissent."

The dissent's position was essentially that all the FAA really bars is the invalidation of arbitration provisions by state law:  The FAA's text bars arbitration-specific rules that would invalidate provisions "evidencing a transaction involving commerce to settle by arbitration a controversy."  Here, the California Supreme Court was merely interpreting the provision, not invalidating it.

I think the majority probably got this case wrong, but for a slightly different reason.  (I will explain my qualification of "probably" at the end.)  The dissent is not entirely convincing because choosing to find an arbitration provision inapplicable is the same thing as finding it not "enforceable."  So I don't think the FAA is as quite as narrow as the dissent makes it to be.  Nevertheless, as the dissent does note, the hallmark of arbitration is consent.  And for the FAA to apply, there must be an intent in the contract "to settle by arbitration a controversy."  And I don't think that existed here.

At the time the contract was entered into, the parties knew California law applied, and thought (incorrectly) that California law barred class arbitration waivers.  Thus, they would have thought the arbitration provision was inapplicable.  The majority assumed they at the time the contract was entered into, the parties agreed to enter into a class arbitration provision, subject to the waiver clause, and only to the extent the waiver clause is valid, so that a change in law might snap the arbitration provision back at any time.  (Indeed, the slice of time they thought mattered as to what the relevant law was not when the contract was formed, or even when the breach occurred or the claim brought, but at the time of the California court's ultimate decision.)  While "meetings of the mind" are often more legal fiction than fact, it seems unlikely that the  parties were agreeing to was a convoluted, conditional arbitration provision.  I think a better way to understand the intent of the parties at the time was that, when the arbitration agreement would be governed by a state that's law did not enforce class arbitration waivers, the entire arbitration clause was not agreed to.  Or, in other words, let's say hypotheically that the California rule as it existed was also the rule in 6 other states, say NY, NJ, MI, ME, IL, and IA.  The agreement was simply shorthand for saying, "this provision does not apply in NY, NJ, MI, ME, IL, IA, and CA."  

After all, how would a non-class case have proceeded prior to the Supreme Court announcing the class-arbitration-waiver-ban unenforceable?  If the arbitration provision is initially valid, then the arbitrator would have to initially decide the issue (as it had to in Green Tree v. Bazzle).  So the arbitrator would have to decide this broad issue about class arbitrations.  Only once that was decided, would a state court be able to review the decision.  It is unlikely a person in California, thinking the arbitration clause would not even apply to them, were agreeing to such procedural hurdles to their contractual rights to bring a claim. 

And if the parties were deciding not to arbitrate in California at the time of arbitration, a change in law should not create the consent to arbitrate.  That would be true even if California law changed on its own, without prodding by the Supreme Court.  So the required consent necessary for arbitration never existed, and the FAA should not apply to compel arbitration in this case.

Indeed, the Court treats the State Court's decision as discriminatory against arbitration, and it is; in this case.  But in doing so, the Court creates a rule of interpretation that might be discriminatory based on other facts.  What if the parties entered into the same agreement today, and then Congress changed the FAA to explicitly bar class-arbitration waivers?  This is not entirely infeasible should Democrats again control Congress, as the financial reforms after the 2008 recession will likely lead to a ban on such waivers in financial contracts within the regulatory purview of the Consumer Finance Protection Bureau.  Presumably, the Court would hold that the arbitration provision was unenforceable in California, even as it applies to non-class arbitrations.   But it is possible that the California court may have found, in that situation, the parties, not anticipating this change in the law, agreed to arbitrate their claims, and although this does not include an agreement to arbitrate class claims, such a limitation is unenforceable.  Thus, the Supreme Court's decision would be the one discriminating against arbitration!  (The Supreme Court's decision would nevertheless be consistently pro-corporate, for those of you who take a more realist view of Supreme Court decisions.)

The reason I say "possible" is the same reason I said "probably," and it may make my entire analysis moot.  As I mentioned above, it is the California court's interpretation of the provision that matters, not my own.  And the California court did not explicitly adopt my analysis.  Rather, the California court said that it interpreted the provision to apply to California law irrespective of whether that law was pre-empted by California law.  So, to treat the California decision literally, it's not entirely clear the California Court of Appeals agreed with my interpretation, and, from the Supreme Court's analysis, it is that interpretation that matters, not its own, and not mine.  I do think its interpretation is consistent with mine, at least to the extent that both of us broadly found that the heart of the parties' meeting of the mind was simply "no arbitration provision."

But I don't think the Court was taking that detailed a look at things, so I can't be sure if it would have applied the "opposite" reasoning above in the reverse hypothetical.  While the text of that decision implies that it would not, I don't know if the decision should be read that broadly. One reason for that is because, once the Supreme Court ruled such class-action-waiver-bans preempted by the FAA, nobody would put such a provision in their arbitration clauses.   And the fact that such a provision would be eliminated does highlight the likeliness that the parties simply agreed to omit the arbitration provision, rather than to apply it the way the Court holds.  

The fact that such a provision would be eliminated for all post-2011 contracts also highlights the limited reach of this decision.  It simply is not likely to be one that ever repeats itself.  It's application required a confluence of events:  class-action waiver bans originally thought to be allowed under state law becoming retroactively barred by Supreme Court interpretation.  The only way for it to happen again is if the Supreme Court changes its mind on its own about that 2011 pre-emption decision, someone drafts a similar arbitration provision, and then the Supreme Court changes it back again.  Given how unlikely such a scenario this is, it is curious why the Supreme Court bothered to take this case in the first instance.

Thursday, December 10, 2015

General thoughts on the December sitting

Sorry for the lack of blogging.  It has been a combination of being very busy and, to be honest, nothing particularly noteworthy in the legal world for me to blog about.  That seems odd because there have been a number of high-profile cases recently argued before the Supreme Court.  But I don't have much to say about them:

Evenwel (the case challenging whether voting districts can be apportioned by person, rather than by eligible voter): The result here seems pretty straightforward as a matter of basic doctrine.  We live in a representative democracy.  The Constitution itself requires, for purposes of determining Congressional apportionment, for representatives to represent a certain number of people, not voters.  The legal arguments supporting the petitioner are incredibly thin.  The practical difficulties of the challengers' claim is highlighted by the fact that we do not even have good information about the number of eligible voters in most voting districts.  But, like the Voting Rights Act cases and others, this Supreme Court has found ways to make up doctrine as it suits them for what many would think is partisan advantage.  I'm afraid whether the Supreme Court finds for Evenwel or not will simply depend on how shameless it is.  

Fisher II (the Texas affirmative action case)- I think it has been pretty clear that the Supreme Court has basically constructed a rule about affirmative action that, ever since O'Connor left the Court, allows for de jure affirmative action in the abstract only.  So the only real question is how much more battered will the hopes of people who support affirmative action get.  I think the more interesting question is one put forth by Ilya Somin at the Volokh Conspiracy.  Prof. Somin argues that even facially-neutral affirmative action plans that have the  intent of increasing minority enrollment are unconstitutional.  (In Fisher, it is the Texas "10%" plan that guarantees admission to all Texas students who finish in the top 10% of their class.  It is not being challenged in this case.) I think this is actually a very liberal (and doctrinally incorrect) argument that would create very wide repercussions:  

First - Whether legislation can have an intent (as opposed to a purpose) is a difficult question in and of itself.  Conservatives believe that a drafter's intent is irrelevant, and legislation should be interpreted as a segregated reader would interpret text, rather than read text as the drafter intended.  Liberals disagree (but only as a guide for interpreting text).  Somin would go further and read intent into a bill even when there is no text.  And intent in passing a bill - as opposed to interpreting text in light of purpose - is an impossible thing to determine because intent may vary from person to person.  Someone may vote for a welfare cut because they want money for tax cuts.  Another may do it because they dislike the poor or minorities.  And a third may do it merely to get support on a different bill.  Is the intent of Congress in passing this welfare reduction a violation of the 14th Amendment under Somin's theory?

Second - It's a pretty well-established doctrine of law that judicial inquiry into the actual intent of legislatures (and executives passing government action) should be avoided at practically all costs.*  This is why the rational and strict scrutiny tests normally used to determine constitutionality of laws is objective, not subjective, in nature.  Stating that subjective intent matters would create a host of problems, ranging from questions of who gets to do the factfinding to what intent matters and when is something "too" racially motivated.

Third - If this rule applies to affirmative action, will it apply to regular laws as well?  Conservatives have panned disparate impact analysis in the context of Constitutional rights, and have generally won.  What Somin is arguing for is not quite disparate impact, but it is getting there.  And given the Conservative southern strategy (where Lee Atwater infamously admitted that cutting government spending was broadly an appeal to racists), how many laws will we have to invalidate?  Liberals and conservatives have recently excused them of looking for whatever reason around to invalidate the other's preferred laws (think gay marriage bans, health care, Voting Rights Act, campaign finance refom, state immigration laws).  With Somin's theory applied broadly, this will go from Pandora's Box being slightly cracked to busted wide open.  But if it is applied narrowly, minorities will rightly wonder if the Equal Protection Clause of the Constitution is only applied broadly when it is used against them, rather than by them.

(I reserve the right to a more detailed version of this critique in a follow-up post).

Hyatt:  Hyatt is a case that involves the question of whether and when states may assert sovereign immunity, as a matter of federal constitutional right, when being sued in the state courts of other states.

I actually think this might be the most doctrinally interesting of the December cases.  My gut (and completely uninformed) reaction is that the challengers asking the federal government to interfere in the state's judicial proceedings itself sort of violates a form of federalism.  In that sense, I'm not even sure the case is procedurally ripe.  Instead, I think the federal court should essentially stay out of it until the state of Nevada takes a specific action *against* the state of California independent of merely announcing a rule of decision in its judiciary.  Should the state of Nevada try to attach or seize California's assets, then California could go and challenge that action - in an Original Jurisdiction case - before the Supreme Court.  And, in doing so, I think the sovereign immunity claim can be better distilled and applied when there really is a sovereign interest at play that must be vindicated by our Constitutional structure.

*In some cases, such as using pre-emptive strikes against black jurors, the test cannot be subjective.  Even then, we've seen, Courts have been reluctant to overturn even the most obvious of intentionally-racist acts that can be objectively defended.