Part II.A: Section 2 Express Preemption – Textual Analysis
by Philip J. Loree Jr.
Part I of this series (here) was published the day before the United States Supreme Court heard oral argument in AT&T Mobility, LLC v. Concepcion, No. 09-893 (blogged here, here, here and here). Now that the argument has taken place, and we have had a chance to review the transcript (here), and listen to the audio (here), it’s time to begin delving into the express and implied preemption issues discussed at the argument, and considering the extent to which, if at all, Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. ___, 130 S. Ct. 1758 (2010), bears on their resolution.
Both Disputing and the Loree Reinsurance and Arbitration Law Forum recently posted their preliminary post-argument analyses (see here and here). I believe the argument was basically a toss-up, and that it mainly confirmed what I already knew or had surmised: This is a very difficult case, and the eight Justices who asked questions appear to be divided along ideological lines. I expected no less in light of the 5-3 and 5-4 split decisions in Stolt-Nielsen and Rent-A-Center West v. Jackson, 561 U.S. ___, 130 S. Ct. 2772 (2010).
I was, however, quite impressed by how prepared and engaged the Court was, and was particularly impressed by the excellent job both counsel did in presenting their clients’ cases. (Andrew J. Pincus of the Washington, DC office of Mayer Brown LLP represented Petitioner AT&T Mobility, LLC and Deepak Gupta of the Public Citizen Litigation Group in Washington, DC represented Respondents, the Concepcions.)
Of the eight Justices who asked questions, the four more liberal ones (Associate Justices Ruth Bader Ginsburg, Stephen G. Breyer, Sonia M. Sotomayor and Elena Kagan) appear to be leaning in favor of finding that Section 2 of the Federal Arbitration Act does not preempt the Discover Bank rule, while the four more conservative ones (Chief Justice John G. Roberts, Jr. and Associate Justices Antonin G. Scalia, Anthony M. Kennedy, and Samuel J. Alito, Jr.) appear to be leaning the other way. That said, Justices Ginsburg and Breyer asked the Concepcions’ counsel some tough questions, while Justices Scalia and Kennedy asked AT&T Mobility’s counsel some equally tough ones.
The argument shed no meaningful light on what Associate Justice Clarence Thomas makes of this case. That came as no surprise; Justice Thomas only rarely questions counsel at oral argument, and that is undeniably his prerogative as a Supreme Court Justice. He joined in the Stolt-Nielsen and Rent-A-Center majority opinions, but those cases, unlike this one, did not directly concern the preemptive scope of the Federal Arbitration Act. Justice Thomas may well hold the deciding vote, but where he’ll ultimately cast it, nobody (at least outside the Supreme Court) knows or can predict with any reasonable degree of certainty.
It is difficult to analyze this complex case without a fairly comprehensive understanding of the legal landscape against which the Court will rule. A number of commentators predict a victory for the Concepcions, but to the extent these commentators’ analyses and arguments are based on legal sources – as opposed to public policy, ideological preference, or perceptions about certain Justices’ ideological preferences — they are mainly based on oral argument questions. Those are certainly important sources of clues concerning the likely outcome, but hardly the most persuasive or reliable ones.
The Court’s prior interpretations of Section 2’s savings clause are obviously relevant as they place in context what transpired at the argument, and may well presage how the Court will interpret the savings clause in this case. Accordingly, this Part II.A , and the upcoming Part II.B., will discuss the general principles of express preemption under Section 2, and how they bear on the question before the Court. Part II.A will focus on a textual approach to construction, and Part II.B on a purposive one. Both approaches, as we shall see, favor AT&T Mobility’s position.
II. Express Preemption under Section 2 of the Federal Arbitration Act
Section 2 of the Federal Arbitration Act declares that arbitration agreements within its scope “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Section 2 establishes federal law governing the enforceability of arbitration agreements that is applicable in both state and federal courts. Southland Corp. v. Keating, 465 U.S. 1, 16 (1984):
“[in] enacting § 2 of the federal Act, Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.”
Southland, 465 U.S. at 10.
The “central or primary purpose” of this federal substantive law “is to ensure that private agreements to arbitrate are enforced according to their terms.” See Stolt-Nielsen, 130 S. Ct. at 1773 (quotations and citations omitted). This “broad principle of enforceability” is limited in two respects only:
1. The arbitration “provisions” “must be part of a written maritime contract or a contract ‘evidencing a transaction involving commerce;’” and
2. “such clauses may be revoked upon [state-law] ‘grounds as exist in law and equity for the revocation of any contract.’”
Southland, 465 at 10-11 (quoting 9 U.S.C. §§ 1 & 2).
There is no dispute that AT&T Mobility’s arbitration agreement is “part of a. . . contract ‘evidencing a transaction involving commerce.’” The dispute is whether the Discover Bank rule is one for the “revocation of any contract” within the meaning of the savings clause. To answer that question, the Court will need to consider, among other things, whether “any contract,” as used in the savings clause, was intended to mean “all contracts” or “contracts of whatever kind” — or whether it means “some contracts that are not agreements to arbitrate;” “contracts of the type containing the arbitration agreement;” or “dispute resolution contracts.”
III. A Textual Construction of Section 2’s Savings Clause
Justices Scalia and Thomas are textualists when it comes to statutory interpretation and construction. Chief Justice Roberts, Justice Kennedy and Justice Alito also tend to favor a textualist approach over a purposive one, but are not necessarily as committed to pure textualism as Justices Scalia or Thomas.
Textual construction generally begins and ends with the words of the statute. If those words, construed in the context of the enactment as a whole, have an ordinary meaning not reasonably susceptible to more than one interpretation, then the statute is construed as written. If the statute’s meaning is unclear, then rules of statutory interpretation and “canons of construction” are used to derive meaning. Pure textual construction eschews external sources of legislative intent and purpose.
A textual construction of the savings clause favors AT&T Mobility’s position. In a number of cases, the Court has interpreted the statutory term “any” — insofar as it modifies a word which, like “contract,” denotes a member of a particular class of things that are not necessarily identical, but share certain characteristics that link them to the class – broadly to mean a particular member or members of the class, without regard to characteristics that might distinguish one member of the class from another. See, e.g., Ali v.Federal Bureau of Prisons, 552 U.S. 214, 219 (2008) (discussing cases and concluding “Congress’ use of “any” to modify “other law enforcement officer” is most naturally read to mean law enforcement officers of whatever kind”) (Thomas, J.); United States v. Gonzales, 520 U.S. 1, 5 (1997) (“Read naturally, the word ‘any’ has an expansive meaning, that is, ‘one or some indiscriminately of whatever kind.’ Webster’s Third New International Dictionary 97 (1976). Congress did not add any language limiting the breadth of that word, and so we must read § 924(c) as referring to all “term[s] of imprisonment,” including those imposed by state courts.”) (emphasis added); United States v. James, 478 U.S. 597, 604-605 (1986) (“Congress’ choice of the language ‘any damage’ and ‘liability of any kind’ further undercuts a narrow construction [of the statute].”).
Suppose the universe of all contracts is comprised exclusively of three contract subtypes, A-type contracts, B-type contracts, and C-type contracts, each of which differs from the other in at least one respect, but all of which share the characteristics necessary to warrant their inclusion in the universe of contracts. Assume a state court formulated a rule that provided a basis to revoke A- and B-type contracts, but not C-type contracts. Nobody would characterize that law as a ground existing “in law and equity for the revocation of any contract,” for it is not a ground for revoking C-type contracts, which indisputably are encompassed within the universe of contracts. A ground “for the revocation of any contract” must necessarily apply equally and uniformly to A-type contracts, B-type contracts, and C-type contracts.
The United States Supreme Court has not expressly held that “any contract” as used in Section 2 means “a contract of whatever kind.” But in instances where the Court has construed Section 2’s savings clause, it has done so on a textual basis, emphasizing the term “any” by italicizing it and construing that term broadly to equate, for all intents and purposes, “any contract” with “all contracts” or “a contract of whatever kind.”
In Southland the Court endorsed a textual construction of Section 2’s savings clause quite similar to the one advocated by AT&T Mobility. The question before the Court was whether an arbitration agreement contained in a franchise agreement regulated by California’s Franchise Investment Law was enforceable under the Federal Arbitration Act in an action brought in state court. The franchisee argued, among other things, that the arbitration agreement was not enforceable because the California Supreme Court had interpreted the following non-waiver provision in the statute to prohibit waiver of “judicial consideration of claims brought under the. . . statute. . . .” 465 U.S. at 10:
Any condition, stipulation or provision purporting to bind any person acquiring any franchise to waive compliance with any provision of this law or any rule or order hereunder is void.
Id. (quoting Cal. Corp. Code Ann. § 31512 (West 1977)).
Like the Discover Bank rule, this statutory provision did not purport to apply exclusively to arbitration agreements, but was facially neutral in that it applied to all contracts within the scope of California’s Franchise Investment Law, irrespective of whether they contained arbitration agreements. Despite this the Supreme Court, without extensive discussion, concluded that California’s no-waiver provision was outside the scope of the savings clause. See 465 U.S. at 15.
Associate Justice John Paul Stevens dissented on the sole ground that Section 2 saved the California Supreme Court’s interpretation of the non-waiver provision from preemption:
I believe [the savings clause]. . . leaves room for the implementation of certain substantive state policies that would be undermined by enforcing certain categories of arbitration clauses.
. . . .
[G]iven the lack of a ‘clear mandate from Congress as to the extent to which state statutes and decisions are to be superseded, we must be cautious in construing the act lest we excessively encroach on the powers which Congressional policy, if not the Constitution, would reserve to the states.’
The textual basis in the Act for avoiding such encroachment is the clause of § 2 which provides that arbitration agreements are subject to revocation on such grounds as exist at law or in equity for the revocation of any contract. The Act, however, does not define what grounds for revocation may be permissible, and hence it would appear that the judiciary must fashion the limitations as a matter of federal common law.
. . . .
A contract which is deemed void is surely revocable at law or in equity, and the California Legislature has declared all conditions purporting to waive compliance with the protections of the Franchise Investment Law, including but not limited to arbitration provisions, void as a matter of public policy. Given the importance to the State of franchise relationships, the relative disparity in the bargaining positions between the franchisor and the franchisee, and the remedial purposes of the California Act, I believe this declaration of state policy is entitled to respect.
465 U.S. at 18-19 (Stevens, J., dissenting) (emphasis added) (citations omitted).
But then Chief Justice Warren E. Burger, writing for the majority, rejected Justice Stevens’ interpretation of Section 2, finding that the California no-waiver provision was “merely a ground that exists for the revocation of arbitration provisions in contracts subject to the California Franchise Investment Law:”
JUSTICE STEVENS dissents in part on the ground that § 2 of the Arbitration Act permits a party to nullify an agreement to arbitrate on ‘such grounds as exist at law or in equity for the revocation of any contract.’ We agree, of course, that a party may assert general contract defenses, such as fraud to avoid enforcement of an arbitration agreement. We conclude, however, that the defense to arbitration found in the California Franchise Investment law is not a ground that exists at law or in equity ‘for the revocation of any contract,’ but merely a ground that exists for the revocation of arbitration provisions in contracts subject to the California Franchise Investment Law. . . .
465 U.S. at 16 n.11 (majority opinion) (emphasis in original; citations omitted).
Subsequent cases discussing the savings clause have followed Southland’s lead, emphasizing the word “any” in the savings clause and declaring that only “general” contract defenses are saved from preemption. In Perry v. Thomas, 482 U.S. 483 (1987), the Court declined to hear a claim concerning unconscionability because it had not been raised below. Writing for the majority, then Associate Justice Thurgood Marshall explained that “the text of § 2 provides the touchstone for choosing between state law principles and the federal common law envisioned by the statute,” and provided the following guidance for the lower court on remand:
We note. . . the choice-of-law issue that arises when defenses such as Thomas’ so-called ‘standing’ and unconscionability arguments are asserted. In instances such as these, the text of § 2 provides the touchstone for choosing between state-law principles and the principles of federal common law envisioned by that statute: an agreement to arbitrate is valid, irrevocable and enforceable as a matter of federal law, ‘save upon such grounds as exist in law or equity for the revocation of any contract.” Thus state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability or enforceability of contracts generally. A state-law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with this requirement. A court may not, then, in assessing the rights of litigants to enforce an arbitration agreement, construe that agreement in a manner different from that in which it otherwise construes nonarbitration agreements under state law. Nor may a court rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what we hold today the state legislature cannot.
482 U.S. at 492 n.9 (emphasis in original).
Some years later the Court, in an opinion written Justice Breyer, re-emphasized that permissible state law rules were “general contract principles.” Once again the Court made its point by italicizing the modifier “any:”
States may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause ‘upon such grounds as exist at law or in equity for the revocation of any contract. What States may not do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause. The Act makes any such state policy unlawful, for that kind of policy would place arbitration clauses on an unequal footing, directly contrary to the Act’s language and Congress’s intent.
Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 281 (1995) (citations and quotations omitted; emphasis in original).
A year or so later the Court, in an opinion written by Justice Ginsburg, said that state law grounds for the revocation of “any contract” include “generally applicable contract defenses, such as fraud, duress, or unconscionability,” and that these defenses “may be applied to invalidate arbitration agreements without contravening § 2.” Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1996) (Ginsburg, J.) (emphasis added).
While Southland and its progeny are not necessarily dispositive of all the Concepcions’ arguments, the import of the Court’s decisions is that “any contract” does not mean “some contracts that are not agreements to arbitrate;” “contracts of the type containing the arbitration agreement;” or “dispute resolution contracts.” It means “all contracts” or “a contract of whatever kind.” Southland underscored this point by observing that “general contract defenses” – i.e., those applicable to all contracts – are saved from preemption. Perry further reinforced the point by specifying that a state-law ground for revocation was applicable “if that arose to govern contracts generally.” 482 U.S. at 492 n.9 (emphasis in original). All the decisions used phrases – e.g., “applicable to contracts generally,” “general contract law principles,” and “generally applicable contract defenses” – that refer to legal rules and standards that govern all contracts, not specialized rules that apply only to certain subclasses of contracts.
In addition, by rejecting Justice Stevens’ argument that the California no-waiver provision was saved because voidness is a ground for revoking “any contract,” Southland also tells us that simply classifying a particular legal rule under the rubric of a generally applicable contract defense – here, voidness – does not save the rule from preemption. The real question is whether the state applies the rule in the same manner to a contract of whatever kind. Cf. Perry, 482 U.S. at 492 n.9 (“A court may not. . . in assessing the rights of litigants to enforce an arbitration agreement, construe that agreement in a manner different from that in which it otherwise construes nonarbitration agreements under state law.”).
The most critical point is this: the Section 2 savings clause decisions to date have not looked beyond the text of that clause, and have construed its scope to be limited to state-law revocation rules that apply to all other contracts or a contract of whatever kind. None of the Justices who authored those opinions were textualists. Yet each opinion addressed the express preemption issue largely, if not entirely, based on the text of Section 2’s savings clause.
The decision in AT&T Mobility, however, will not necessarily turn solely on a textual construction of the savings clause. But even if the Court utilizes purposive interpretation and construction principles, I believe the result should be the same. Part II.B will explain why that is so.
Philip J. Loree Jr. is a partner in the Manhasset, New York based firm of Loree & Loree, which focuses its practice on commercial litigation, arbitration, and insurance- and reinsurance-related matters. Prior to forming Loree & Loree, Mr. Loree was a partner in the Litigation Department of New York City’s Cadwalader, Wickersham & Taft LLP, the oldest continuous law partnership in the United States. He was also a partner in the Insurance and Reinsurance Department of Rosenman & Colin LLP (now Katten Muchin Rosenman LLP), and a shareholder in the Litigation Department of Stevens & Lee, P.C.
He frequently comments on arbitration and reinsurance law at his firm’s blog, the Loree Reinsurance and Arbitration Law Forum, and in various trade and legal publications. He is owner and co-founder of LinkedIn’s Commercial and Industry Arbitration and Mediation Group, which provides an open forum for the discussion of commercial, industry and consumer ADR. He also owns and co-manages with other reinsurance professionals LinkedIn’s Reinsurance Claims group.