The California legislature made headlines on June 28 when it passed—and the Governor signed—AB 375, a sweeping new data privacy bill known as the “California Consumer Privacy Act.” As further described in our colleagues’ report, the Act grants broad new privacy rights to customers of certain companies doing business in California. In addition, the Act both provides for enforcement by the California Attorney General and creates a private right of action for some violations. Because of the latter feature, this new legislation may pave a new road to court for class actions in the wake of data breaches affecting California consumers.
In AT&T Mobility LLC v. Concepcion, the Supreme Court held that the Federal Arbitration Act (“FAA”) preempts state-law rules barring enforcement of an arbitration agreement if the agreement does not permit the parties to utilize class procedures in arbitration or in court. Before Concepcion, the law of California included that limitation on the enforceability of arbitration agreements, but Concepcion declared that rule invalid as a matter of federal law. Yesterday, in DIRECTV, Inc. v. Imburgia (pdf), the Supreme Court held that Section 2 preempts a state-law interpretation of an arbitration agreement based on a legal rule that the state’s courts had applied only in the arbitration context, concluding that the state-law ruling “does not rest ‘upon such grounds as exist . . . for the revocation of any contract.’”
(We filed an amicus brief on behalf of the U.S. Chamber of Commerce in support of DTV.)
What’s the difference between claiming that a food product is improperly certified as organic and claiming that the producer was properly certified but the product isn’t really organic? A unanimous California Supreme Court held in Quesada v. Herb Thyme Farms, Inc. (pdf) that state courts and juries should figure out the answer. That ruling opens the door to state-law actions that challenge food producers’ compliance with the federal organic food product certification and labeling scheme, so long as the claims don’t take issue with the original certification decision. The decision revived a consumer class action alleging that a food producer—though properly certified to use the “organic” label—intentionally misapplied that label to products containing conventionally produced herbs from one of its noncertified facilities.
Drawing an exquisitely fine line, the California Supreme Court held that preemption extends only to “matters related to certifying production as organic” and left “untouched enforcement against abuse of the label ‘organic.’” The court concluded that state lawsuits alleging intentional misuse of an organic label were not preempted because (in the California court’s view) lawsuits of that kind would help rather than hinder Congress’s objective.
The federal Organic Foods Production Act of 1990 (OFPA) creates a uniform, federal definition of the term “organic” and gives the U.S. Department of Agriculture exclusive authority to elucidate the labeling standard and to certify producers as qualifying to label food as “organic.” The USDA may approve a state agency to carry out the certification function and impose more stringent state substantive standards. The California Department of Food and Agriculture has been approved for both of these roles. The OFPA and its California counterpart both provide for administrative enforcement of the regulations, including processes for consumer complaints to the relevant agency.
In Quesada, the plaintiff sued Herb Thyme Farms under California’s Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA), alleging that Herb Thyme applied a “Fresh Organic” label to conventionally produced herbs and to a mixture of organic and conventional herbs. Herb Thyme has an organic farm that has been certified to use the “organic” label, but also operates conventional, nonorganic farms.
The California Supreme Court held that the federal OFPA did not preempt Quesada’s state-law claims. First, the court held that, because the pertinent provisions of OFPA do not reference enforcement, the statute expressly preempts state law only as to the definition of “organic” and the process for certifying that a grower’s methods of production entitle it to use the “organic” label. The California court relied on the fact that the mislabeling claims did not address the certification or compliance of Herb Thyme’s organic facility, but only challenged the use of the “organic” label for Herb Thyme products that contained (or consisted solely of) herbs that were not produced at the certified farm. The federal certification standards also address the procedures to be followed where a producer has both organic and conventional facilities, but the California Supreme Court found that regulation insufficient to bring the case within the OFPA’s preemptive scope.
Second, the California court concluded that Quesada’s claims were not impliedly preempted because they did not pose an obstacle to the uniform federal regulatory scheme, but rather furthered the purpose of that scheme. In the court’s view, once the regulators decide whether a producer or product meets the standards in the first instance, private plaintiffs may enlist state-law theories to enforce the producer’s later compliance with the labeling requirements. According to the court, allowing plaintiffs to use state statutory and common law to enforce the OFPA would “affirmatively further the purposes of the Act”—the more enforcement, the merrier.
By allowing a private plaintiff to pursue a state-law misrepresentation theory to police compliance with OFPA labeling standards, Quesada conflicts with the Eighth Circuit’s decision in In re Aurora Dairy Corp. Organic Milk Marketing & Sales Practices Litigation. The Eighth Circuit held in Aurora Dairy that claims alleging that “milk [was sold] as organic when in fact it was not organic are preempted because they conflict with the OFPA.” As the court of appeals put it, “compliance and certification cannot be separate requirements.” While the plaintiffs in Aurora Dairy could not sue over the use of the “organic” label, they could challenge related assertions and omissions about the way the cows were raised and fed, including affirmative claims that the cows were antibiotic- and hormone-free.
The California Supreme Court tried to avoid the conflict by asserting that the plaintiffs in Aurora Dairy were challenging the certification process itself. But that is not what the Aurora court said; moreover, the claims it allowed were based on representations that did not use the word “organic.”
Although the Quesada decision is limited on its face to claims involving fraudulent or intentional substitution of uncertified products for certified ones, that restriction may provide only modest comfort to defendants. Plaintiffs’ counsel can manipulate the allegations in their complaints with relative ease, particularly under the elastic standards of the UCL and CLRA. And the California Supreme Court opinion reflects hostility to federal preemption, suggesting that state lawsuits serve the purposes of an otherwise uniform federal regulatory scheme merely by increasing the volume of litigation, and that the so-called presumption against preemption may be dispositive even in an area like food safety, where the federal government has been heavily involved for more than 100 years. .
The California Supreme Court has a reputation for hostility to arbitration, especially in the consumers and employment context. Much of the arbitration docket of the United States Supreme Court over the past 30 years has involved reversals of California Supreme Court decisions refusing to enforce arbitration agreements, most recently (and perhaps most notably) in AT&T Mobility v. Concepcion (in which the authors were counsel). Even when seemingly compelled to enforce an arbitration provision in the face of recent U.S. Supreme Court authority, the California court has often found a way to carve out some exception to arbitration in the particular case or to offer suggestions to plaintiffs seeking to avoid arbitration in a future case. A prime example is the 2014 decision in Iskanian v. CLS Transportation, which exempted from arbitration all wage-and-hour civil-penalty claims under the Private Attorney General Act.
The decision in Sanchez v. Valencia Holding Co. (pdf) represents a welcome break from this pattern, upholding an arbitration agreement against an array of unconscionability challenges without finding it necessary to sever even a single clause to render the agreement enforceable. Although every point decided in Sanchez is consistent with recent U.S. Supreme Court authority applying the Federal Arbitration Act, however, the opinion’s emphasis on the specific factual setting may seed further efforts to evade arbitration agreements . As so often is the case, the devil is often in the details.
Plaintiffs’ lawyers love to challenge products labeled as “natural,” with hundreds of false advertising class actions filed in just the last few years. Recently, in Astiana v. Hain Celestial (pdf), the Ninth Circuit reversed the dismissal of one such class action, and in doing so, addressed some key recurring arguments made at the pleading stage in litigation over “natural” labeling.
The Hain Celestial Group makes moisturizing lotion, deodorant, shampoo, conditioner, and other cosmetics products. Hain labels these products “All Natural,” “Pure Natural,” or “Pure, Natural & Organic.” A number of named plaintiffs, including Skye Astiana, filed a putative nationwide class action, alleging that they had been duped into purchasing Hain’s cosmetics. According to plaintiffs, those cosmetics were not natural at all, but allegedly contained “synthetic and artificial ingredients ranging from benzyl alcohol to airplane anti-freeze.” Astiana claimed that she likely would not have purchased Hain’s cosmetics at market prices had she been aware of their synthetic and artificial contents. As is typical in such cases, she sought damages and injunctive relief under a variety of theories: for alleged violations of the federal Magnuson-Moss Warranty Act, California’s unfair competition and false advertising laws, and common law theories of fraud and quasi-contract.
The district court dismissed the entire case in deference to the “primary jurisdiction” of the U.S. Food and Drug Administration over natural labeling of cosmetics. On appeal, the Ninth Circuit made two important rulings to which defendants in “natural” litigation should pay special attention:
Federal regulators have (with a few limited exceptions not relevant here) declined either to adopt a formal definition of the term “natural” or to regulate that term’s use on cosmetics or food labels. But both plaintiffs and defendants have pointed to informal FDA statements and letters on the subject to advance particular litigation positions. For example, in this case, Hain invoked the prudential doctrine of primary jurisdiction to argue that a case challenging labeling statements cannot go forward because the FDA, not the courts, must determine in the first instance what the challenged labeling statement means and how it should be used. (Indeed, as we have previously discussed, the primary jurisdiction doctrine has led more than a dozen courts to stay false advertising cases in which plaintiffs allege that the ingredient name “evaporated cane juice” is misleading.)
Critically for other defendants intending to invoke primary jurisdiction in the future, the Ninth Circuit concluded that the district court had not erred in concluding that the doctrine applied. Rather, the district court’s error was only in dismissing the case rather than staying it. As the Ninth Circuit explained, “[w]ithout doubt, defining what is ‘natural’ for cosmetics labeling is both an area within the FDA’s expertise and a question not yet addressed by the agency,” and “[o]btaining expert advice from that agency would help ensure uniformity in administration of the comprehensive regulatory regime established by the [Food Drug and Cosmetics Act.]” Significantly, as the Ninth Circuit noted, the FDA had shown “reticence to define ‘natural’” at the time Hain invoked the doctrine with respect to food labels, in light of competing demands on the agency, and there is no reason to believe the FDA is on the verge of rulemaking on ‘natural’ labeling. But that was not a reason to bar the doctrine’s application.
That said, when, as in Astiana, additional judicial proceedings are contemplated once the FDA completes its work, the Ninth Circuit held that the case should be stayed rather than dismissed. And on that basis, the Ninth Circuit reversed the district court’s dismissal. Whether the Astiana decision supports primary jurisdiction arguments outside the context of “natural” labeling on cosmetics—such as ‘natural’ statements on food labels—remains to be seen. But as we read it, the court’s core holding would seem to have broader application.
Hain separately argued that the FDCA expressly preempted the plaintiffs’ claims challenging the use of the term “natural.” But because there are no regulations defining ‘natural’ or its use on cosmetics labels, the Ninth Circuit disagreed, concluding that neither plaintiffs’ claims nor their requested remedy would impose requirements different from the (non-existent) federal rules on “natural” labeling. The Court did not find persuasive Hain’s argument that the FDA’s conscious decision not to define or regulate the term “natural” supports express preemption. That said, in other settings, including in “natural” cases, defendants may still find it appropriate to point out that the FDA (or another agency) has made a conscious decision not to regulate, and that such a decision should be entitled to deference and respect, or should be taken into account in assessing whether plaintiff has stated a claim.
As readers of this blog know, prior to the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, the California Supreme Court (and a number of other state courts) had declared that waivers of class-wide arbitration were unenforceable as a matter of state law. But in Concepcion, the Supreme Court held that the Federal Arbitration Act (“FAA”) preempts state-law rules requiring the availability of class-wide arbitration.
How do the FAA and the Supremacy Clause of the U.S. Constitution affect the interpretation of arbitration clauses written prior to Concepcion? The Supreme Court may provide further guidance on that issue in DIRECTV, Inc. v. Imburgia, No. 14-462, in which it granted certiorari today. (We have previously blogged about Imburgia.)
At issue in Imburgia is whether an arbitration provision that specifies that it is inapplicable if its ban on class-wide procedures is unenforceable under “the law of [the customer’s] state” is (a) governed by state law without reference to FAA preemption, or (b) by state law taking into account the preemptive effect of the FAA. Stated another way, did the parties contract out of the FAA’s coverage?
Respondent Imburgia, a customer of petitioner DIRECTV, Inc. (“DTV”), filed a class action in California state court against DTV in 2007, alleging that DTV improperly charged early termination fees to its customers. DTV’s Customer Agreement contained an arbitration clause that specified that it was governed by the FAA and that arbitration would take place on an individual rather than class-wide basis. That arbitration clause also stated that “[i]f … the law of your state would find this agreement to dispense with class action procedures unenforceable, then this entire Section [i.e., the arbitration clause] … is unenforceable.”
In Discover Bank v. Superior Court, the California Supreme Court declared that consumer arbitration agreements are unconscionable under California law unless they allow for class arbitration. In light of Discover Bank, DTV did not invoke the arbitration provision when the lawsuit was filed. Shortly after the Supreme Court decided Concepcion—and held Discover Bank to be preempted by the FAA—DTV moved to compel arbitration. The trial court denied DTV’s motion.
The California Court of Appeal affirmed. The Court of Appeal held that the reference in the arbitration provision to “the law of [the customer’s] state” was ambiguous and could mean either (1) the state’s law without regard to federal law; or (2) the state’s law, as superseded by federal law (such as the FAA). The court adopted the first interpretation—i.e., that the preemptive effect of federal law does not bear on the meaning of “the law of [the customer’s] state.” Under that interpretation, the California Court of Appeal declared, the law of California is that agreements to dispense with class action procedures are unenforceable, and accordingly DTV’s arbitration clause is unenforceable. The California Supreme Court denied review. (We filed an amicus letter (pdf) in the case urging that the California Supreme Court grant review.)
Interpreting the same DTV arbitration provision, the Ninth Circuit in Murphy v. DIRECTV, Inc., 724 F.3d 1218 (9th Cir. 2013), reached the opposite conclusion. In Murphy, the Ninth Circuit held that “Section 2 of the FAA, which under Concepcion requires the enforcement of arbitration agreements that ban class procedures, is the law of California and of every other state. The Customer Agreement’s reference to state law does not signify the inapplicability of federal law,” because under the Supremacy Clause, “the Constitution [and] laws . . . of the United States are as much a part of the law of every State as its own local laws and Constitution.” Id. at 1226 (citation omitted). As a result, the Ninth Circuit concluded that the reasoning later adopted by the California court—that “the parties intended state law to govern the enforceability of the arbitration clause, even if the state law in question contravened federal law”—“is nonsensical.” Id.
The Supreme Court’s decision in Imburgia should help clarify whether a company’s good-faith effort to include in an arbitration provision language designed to comply with existing state law risks can have the unintended effect of jettisoning the protections of the FAA. The case will likely be briefed over the next several months and argued in the fall.
A decade ago, California’s unfair competition law (UCL) and its closely related false advertising law (FAL) were the ideal plaintiff’s tools. Any person—even one with no connection to a particular asserted violation or harm—was able to bring a claim on behalf of the “general public” and recover restitution for thousands of people (and, of course, attorney’s fees) without going through the hassle of class certification. But in 2004, the California voters changed that; private plaintiffs who want to sue on behalf of others must certify a class. The statutes still work the old way for public prosecutors, who can invoke the public’s rights without meeting the requirements for class certification.
Sometimes a plaintiff’s attorney and a prosecutor fasten on the same target. Then what? What if the private plaintiffs get there first, settling for the class before a prosecutor brings an action on behalf of the general public?
The Ninth Circuit recently addressed this scenario in People v. Intelligender, LLC. Intelligender makes a test designed to predict a baby’s gender. The test’s accuracy allegedly disappointed some of its purchasers, who brought a class action under the UCL and FAL. Intelligender removed the case to federal court under the Class Action Fairness Act of 2005 (CAFA), and eventually settled the class action. As part of the settlement approval process, the parties notified the California Attorney General, as CAFA requires (see 28 U.S.C. § 1715). The AG did not seek to challenge the settlement—which involved both monetary and injunctive relief—and the district court approved it.
Enter the San Diego City Attorney, who decided that Intelligender had not paid enough. The City Attorney brought a new action in state court on behalf of the general public and in the name of the State, seeking not only a broader injunction and civil penalties but also restitution for same class of buyers that had settled the federal case.
But Intelligender did feel that enough was enough. After removing the case to federal court under CAFA, Intelligender asked the district court to enjoin the entire lawsuit. The district court declined and remanded the case to state court. Intelligender then asked the district court to enjoin only the State’s pursuit of restitution, but the district court declined again.
The Ninth Circuit affirmed in part and reversed in part. The court of appeals agreed that California could pursue its own injunction and could seek civil penalties because the private settlement did not have res judicata effect over a public entity. The court reasoned that law enforcement cannot be shut down by a private settlement, and the private plaintiffs could not and did not pursue civil penalties.
But the Ninth Circuit drew the line at the pursuit of duplicative restitution, which failed under “longstanding principles of res judicata.” Citing the Supreme Court’s admonition in EEOC v. Waffle House, Inc. that “it goes without saying that the courts can and should preclude double recovery by an individual” even when a public agency litigates on the individual’s behalf, the Ninth Circuit turned back the State’s effort to increase the private payout. Because the certified class of all purchasers had settled all their claims for restitution, the State could not step in and seek greater compensation for the same injury. This was so even though the settlement only compensated those whose test results were inaccurate, while the State also sought “restitution” of the entire purchase price for buyers who got everything they paid for—persons who were in the settlement class, but received no payment under the settlement. The time for the State to challenge the lack of payment to uninjured buyers was in the private case after receiving the CAFA-required notice of the settlement.
The Ninth Circuit—joining a long list of district court decisions, including one we blogged about last year—was right to prevent the State from reopening the issue of compensation for class members. Whatever a State may do in pursuing public law enforcement remedies, it cannot try to extract greater payments to individuals whose own claims have been decided or settled. So while defendants cannot altogether stop follow-on UCL actions by public prosecutors, any additional pecuniary liability must run to the State, not to the plaintiffs who sued—and settled—first.
Suppose that you’re a trial court considering a motion for class certification. And suppose that the parties present you with two competing statutory interpretations. One legal standard permits the case to be adjudicated with common evidence. And the other standard would require individualized inquiries. What should you do? Should you decide what the law is and then see whether the putative class claims can be tried in a single trial?
The surprising answer of the California Court of Appeal is in Hall v. Rite Aid Corp. (pdf) is “No.” Hall appears to conclude that commonality and predominance need not be established under the correct substantive legal standards. Rather, if the plaintiffs propose a legal standard dispensing with individualized inquiries, the very question whether that standard applies is a common issue supporting class certification.
Hall is another decision in a growing series of “suitable seating” cases addressing a California Industrial Welfare Commission Wage Order that requires employers to provide employees with “suitable seats when the nature of the work reasonably permits the use of seats.” The plaintiffs in Hall—cashier-clerks who divided their time between check-out counters, stockrooms, and sales floors—construed the Order to require seats to be provided to every employee for every task where providing seats would be reasonable. In particular, the plaintiffs contended that Rite Aid had a duty to provide a seat to any employee who worked at a check-out counter for any period of time, even if for much of that time the employee would not be able to perform the job while sitting. Rite Aid, in contrast, contended that the duty to provide a seat depended on the employee’s duties as a whole, so that the Order would not require providing a seat to an employee working at a check-out counter if the employee worked mostly at tasks where seating was inappropriate, or if check-out duties would not allow the employee to sit most of the time. Thus, under plaintiffs’ legal theory, any failure to have a seat at a check-out counter was a violation requiring no further inquiry, while under Rite Aid’s theory such a failure would violate an employee’s rights only under certain, largely individualized circumstances.
Agreeing with Rite Aid’s view of the substantive law, the trial court decertified a class. The San Diego-based Court of Appeal reversed. In its view, the disputed legal elements of the plaintiffs’ claim were themselves common legal issues supporting class certification. According to that court, deciding exactly what the law required the plaintiff had to prove in common was an impermissible predetermination of the action’s merits, and thus fell afoul of the California Supreme Court’s decision in Brinker Restaurant Corp. v. Superior Court.
True, Brinker had disapproved a “free-floating inquiry into the validity of the complaint’s allegations” at the class certification stage. Yet the California Supreme Court also recognized that when “legal issues germane to the certification inquiry bear as well on aspects of the merits, a court may properly evaluate them”; indeed, [t]o the extent the propriety of certification depends on disputed threshold factual or legal questions, a court may, and indeed must, resolve them.”
It seems to me that, when one interpretation of a Wage Order would require resolution of myriad individualized issues, and the other interpretation would permit the same issues to be resolved in common, the “propriety of certification” under Brinker would depend on the correct legal standard. Not so, according to the Hall court, which viewed the very dispute over the legal standard as a common issue supporting class certification.
The Hall opinion would seem to allow a plaintiff to obtain class certification simply by advancing a theory of liability that omits inherently individualized elements such as causation and injury, on the ground that the validity of the plainly erroneous legal theory could be determined on a class-wide basis. And the Hall approach raises significant unanswered questions. The opinion suggests that defendants—especially employers whose policies are challenged—should want threshold legal questions to be decided after class certification so that the entire class is bound by the result. But if class counsel is wrong about the legal theory, and in fact the legality of the employer’s policy depends on individual circumstances, does the entire class lose because the class plaintiff’s overbroad theory fails, even though some or even many class members would have valid claims under the proper, more individualized standard? That might create adequacy and due process problems, elevating the interests of the class-action lawyers over those of their clients. But if determination of the legal issue on a class basis instead simply results in decertification of the class, allowing new actions under the correct theory, then it makes no sense to defer the decision as to what, exactly, plaintiffs must prove through common evidence.
The issue surfaced indirectly in the California Supreme Court’s recent unanimous decision in Duran v. US Bank NA (pdf), which we recently discussed. Duran rejected the use of questionable statistical sampling that swept away individualized issues and defenses in a wage-and-hour class action. The Court’s evaluation of the class-certification and trial-management issues hinged on a view of the governing law under which an employee’s exempt status under the overtime laws hinged on whether the employee actually spent more than half-time carrying out duties that were exempt (there, sales outside the employer’s facility). Justice Liu’s concurring opinion suggested a possible legal test—different from the Court’s view—that would turn on the employer’s reasonable expectations about the balance of exempt or nonexempt activity within a particular job classification, not on the employees’ actual work practices. If that test correctly stated the obligation, Justice Liu suggested, the application of the exemption could be determined as a common issue without the need for statistical sampling. Hall raises the troubling possibility that a litigant could seek to avoid individualized issues by restating the governing legal test along the lines of Justice Liu’s concurrence in Duran, and then claim that the choice between Justice Liu’s formulation and the formulation adopted in the Court’s opinion itself was a common issue of law. In my view, such an approach would be inconsistent with Duran and Brinker.
In Duran v. U.S. Bank N.A. (pdf), the California Supreme Court recently addressed an important question in the context of state-court class actions: Can plaintiffs invoke statistical sampling in an attempt to prove class-wide liability and overcome the presence of individual questions that ordinarily would defeat class certification?
The court’s answer to that question is a mixed bag for business. The court firmly rejected the haphazard approach to sampling used by the trial court in the lawsuit against U.S. Bank. But the court left open the troubling possibility that sampling might be used in support of class certification in the future. Continue Reading California Supreme Court Rejects Exceptionally Poor Sampling Method, But Leaves Open Many Questions About Sampling And Class Certification
The hostility of some California courts to arbitration—and their resistance to preemption under the Federal Arbitration Act (FAA)—has produced nearly three decades of U.S. Supreme Court reversals. The most recent is AT&T Mobility LLC v. Concepcion, which held that the FAA preempted the Discover Bank rule, under which the California Supreme Court had blocked enforcement of consumer arbitration agreements that required individual rather than class arbitration. Last week’s decision in Imburgia v. DirecTV, Inc. (pdf) demonstrates that resistance to Concepcion lives on in the California courts, even at the cost of creating a split with the Ninth Circuit on the same issue in the same contract used by the same company.
Specifically, DirecTV’s arbitration agreement—like many others—provides that the arbitration agreement shall not be enforced if a court invalidates the ban on class arbitration. Taking advantage of the specific wording of the agreement, a panel of the California Court of Appeal in Los Angeles held that the preemptive effect of Concepcion did not apply and the agreement could be invalidated on the basis of the very Discover Bank rule that Concepcion held was preempted.
The arbitration clause at issue in Imburgia appeared in Section 9 of DirecTV’s customer agreement; the arbitration clause expressly precluded class actions and class arbitration. Section 10 provided that “Section 9 shall be governed by the Federal Arbitration Act.” Section 9 also stated, after the sentence that waived class procedures: “If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.”
The Imburgia court held that the reference to “the law of your state” should be read to invalidate the arbitration agreement if the class waiver would be unenforceable under state law without regard to the preemptive effect of the FAA. That is, the court held, the agreement was subject to state-law rules that are invalid under the FAA even though the arbitration agreement explicitly provided that the FAA would govern. That holding takes an idiosyncratic view of the Supremacy Clause, which mandates that federal law—including the FAA—trumps contrary state law. Under the Supremacy Clause, once state law has been displaced by federal law, the state law cannot survive in some shadow universe. Rather, state law is not “law” when it has been declared unconstitutional, whether because it violates the First Amendment or the Supremacy Clause because it is preempted by a federal statute.
Imburgia also expressly conflicts with the Ninth Circuit’s decision in Murphy v. DIRECTV, Inc., 724 F.3d 1218 (9th Cir. 2013), which enforced the same clause and rejected the same argument. The Ninth Circuit explained that “Section 2 of the FAA, which under Concepcion requires the enforcement of arbitration agreements that ban class procedures, is the law of California and of every other state.” DirecTV may well seek further review in light of this conflict.
In the meantime, Imburgia offers businesses a pair of cautionary lessons. First, businesses that use arbitration clauses should not underestimate the pockets of resistance to Concepcion and other recent Supreme Court precedents—especially in some California state courts.
Second, the decision underscores the importance of careful drafting of arbitration clauses that waive class actions. Even though the Supreme Court has made clear that any doubts concerning the scope of arbitral agreements should be resolved in favor of arbitration, the court here—like other courts hostile to arbitration—chose to construe the language of the arbitration clause against the drafter. And viewed in that (improper) light, it is easy to see why the wording of DirecTV’s clause, and in particular the use of the phrase—“[i]f … the law of your state would find …”—unnecessarily appeared to give state law special stature. Choice-of-law issues have bedeviled companies in the past—as detailed in an article (pdf) one of us has published, it is important for companies to address the governing law carefully in their agreements and thus minimize the risk that hostile courts will apply the wrong law to defeat arbitration.