Important Arbitration Decisions Rendered by the California Court of Appeal and Tenth Circuit

The California Court of Appeal and the Tenth Circuit issued significant rulings on arbitration issues this week, both highlighting that resistance to consumer arbitration clauses is not going away any time soon. 

The California decision, Imburgia v. DirecTV, Inc. (2d Dist. Case No. B239361, Apr. 7, 2014), affirmed the denial of a motion to compel arbitration, holding that language in the agreement’s severability clause required the court to disregard the Federal Arbitration Act (FAA) when ruling on enforceability.  In Imburgia, the arbitration provision contained a severability clause providing that the entire provision would be unenforceable if “the law of your state would find this agreement to dispense with class arbitration procedures unenforceable.”  The court concluded that “law of your state” meant California law without regard to the preemptive effect of the FAA, so the clause was unenforceable.  In doing so, the court construed the supposed ambiguity against the drafter and also reasoned that the severability clause was a specific provision that took precedence over a more general provision stating that the FAA governed.  Notably, the Imburgia court rejected the reasoning of a Ninth Circuit decision construing the same agreement, i.e., that “federal law is the law of every state.”  Murphy v. DirecTV, Inc., 724 F.3d 1218, 1228 (9th Cir. 2013). 

The Tenth Circuit case, Howard v. Ferrellgas Partners, L.P. (Case No. 13-3061, Apr. 8, 2014), blasted the practice of allowing extensive discovery on arbitration issues, and stated that factual disputes over agreements to arbitrate must be resolved expeditiously through summary proceedings, including trial if necessary.  In that case, the parties disputed whether they had agreed to arbitrate.  Over a period of nearly 18 months, the trial court allowed extensive discovery and heard several rounds of motion practice on this issue, ultimately denying arbitration because there was a factual dispute.  In a rather entertaining opinion, the Tenth Circuit held that this was error because arbitration motions are to be decided expeditiously, typically through a summary judgment-like procedure, but through a summary trial if necessary to resolve disputed issues of fact.  As Judge Gorsuch wrote, “[p]arties should not have to endure years of waiting and exhaust legions of photocopiers in discovery and motions practice merely to learn where their dispute will be heard.  The [FAA] requires courts [to] process the venue question quickly so the parties can get on with the merits of their dispute in the right forum.  It calls for a summary trial -- not death by discovery.”

Both of these cases confirm the importance of having a strong arbitration maintenance program.  Imburgia illustrates that class action lawyers (and result-driven judges) continue to look for creative ways to defeat arbitration clauses, so it is critical for companies to ensure that their agreements have been updated to reflect current best practices.  By the same token, Howard underscores the importance of having strong internal procedures in place to establish that consumers in fact agreed to arbitrate.  Without such procedures, it will be difficult to make the required showing in a summary trial.