Part II.B: Section 2 Express Preemption – Purposive Analysis
by Philip J. Loree Jr.
In Part II.A, we considered a textual construction of Section 2’s savings clause and concluded that it supports AT&T Mobility’s position. This Part II.B examines the savings clause from a purposive interpretation and construction standpoint.
For the sake of convenience, the term “purposive” or “purposivism” is used here as a convenient way to describe in general terms the two principal methods of statutory construction which permit resort to non-statutory sources: (a) “intentionalism;” and (b) true purposivism. Intentionalism seeks to divine a legislative intent from the words of the statute; applicable interpretation and construction rules; and non-statutory sources, such as legislative history. Generally, if the text of the statute is unambiguous, then an intentionalist will not resort to non-statutory sources. But, unlike a pure textualist, an intentionalist will resort to such sources if the meaning of the statute is unclear.
Purposivism seeks to derive meaning from the purpose of the statute, interpreting it from the standpoint of (a fictional) “reasonable” member of the legislature. Even if the plain meaning of the statute, and statutory interpretation and construction principles, suggest a particular meaning, a true purposivist may conclude that a different – or at least a more nuanced – one best serves the purpose of the statute. Associate Justice Stephen G. Breyer is probably the only avowed true purposivist on the United States Supreme Court, although certain other members of the Court may be influenced by purposivism to at least some degree.
Since a textual construction would support AT&T Mobility’s position, this installment considers whether non-statutory sources of statutory intent and purpose may support a construction of the savings clause that supports the Concepcions’ position that the “equal footing” principle embodied in the savings clause is satisfied so long as the Discover Bank rule places arbitration agreements with class waivers on the same footing as contracts that bar class action litigation outside the arbitration context. We conclude that consideration of Congress’ intent and purpose as respects the savings clause not only does not support the Concepcions’ position, but confirms that the textual construction of the savings clause – i.e., that it saves from preemption only state revocation law that applies equally and in the same manner to all contracts – best reflects the intention of the legislature and best implements the purpose of the statute. By contrast, interpreting Section 2 in the manner suggested by the Concepcions would significantly undermine the purposes of the statute and render it largely ineffectual, all in contravention of the Court’s prior Federal Arbitration Act jurisprudence.
II. A Purposive Construction of Section 2’s Savings Clause
A. Sources of Legislative Intent and Purpose
The first step in a purpose- or intent-based statutory interpretation and construction analysis is to identify the relevant sources of legislative intent and purpose. As respects the Federal Arbitration Act there are three principal sources:
- The Act’s text;
- The legislative history; and
- The Court’s prior pronouncements of legislative intent and purpose based on its interpretations of the text and legislative history.
B. Divining the Legislative Intent or Purpose Relevant to Section 2’s Savings Clause
1. The Act’s Text
Part II.A discussed in some detail a textual interpretation of the savings clause based on the text and Court decisions construing it as written. That interpretation saves from preemption only state-law revocation grounds which apply equally to a contract of whatever kind, and thus to all contracts.
If we are to take the 68th Congress at its word, and assume it intended what it said back in 1925, we can infer that it intended to protect arbitration agreements from state laws that would render them unenforceable – or impair their enforceability – but not render unenforceable — or impair the enforceability of — all other contracts. Thus, the savings clause provides broad protection from state laws that discriminate against arbitration agreements, whether or not they also happen to discriminate against another type of agreement as well.
2. Legislative History
In Southland Corp. v. Keating, 465 U.S. 1 (1984), the Court analyzed the Federal Arbitration Act’s legislative history and concluded that the Act was designed to address two “large problems”:
- “the old common-law hostility toward arbitration;” and
- “the failure of state arbitration statutes to mandate enforcement of arbitration agreements.”
Southland, 465 U.S. at 14.
Of these, the problem of the “old common-law hostility to arbitration” is the one most pertinent to the interpretation of the savings clause. That “hostility” was a result of the infamous “ouster” doctrine developed by early English courts and incorporated into the common law of many or most of the states in existence as of 1925, the year Congress passed the Federal Arbitration Act. See Scherk v. Alberto-Culver Co., 417 U.S. 506, 510-11 & n.4 (1974); see also The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 9 & n.10 (1972). A basic premise of that doctrine was that private persons could not effectively divest court A of jurisdiction to hear a case by agreeing that the case would be submitted to court B or to arbitration panel C. See 417 U.S. at 510-11 & n.4; 407 U.S. at 9 & n. 10.
The rule thus targeted run-of-the-mill forum selection clauses in the litigation context as well as arbitration agreements, which are themselves forum selection agreements. See Scherk, 417 U.S. at 519 (“An agreement to arbitrate before a specified tribunal is, in effect, a specialized kind of forum-selection clause that posits not only the situs of suit but also the procedure to be used in resolving the dispute.”) So in what Judge Richard A. Posner aptly termed the “bad old days,” “[a]greements to arbitrate were not enforceable, because they deprived the objecting party of his right to litigate the parties’ dispute in court,” and “invoking a forum selection clause as a ground for dismissal of a suit brought in violation of the clause was considered an improper effort to ‘oust’ the court’s jurisdiction.” Northwestern National Ins. Co. v. Donovan, 916 F.2d 372, 375 (7th Cir. 1990) (Posner, J.).
Section 2 abrogated the “ouster” doctrine, whether its source was federal common law or state common or statutory law. First, it deemed arbitration agreements falling within the Act’s scope to be enforceable as a matter of federal law. The Court has interpreted that enforceability principle broadly, declaring that “the central or ‘primary’ purpose of the FAA is to ensure that ‘private agreements to arbitrate are enforced according to their terms” and according to “the contractual rights and expectations of the parties.” Stolt-Nielsen, S.A. v. AnimalFeeds, Inc., 130 S. Ct. 1758, 1773 (2010) (citations and quotations omitted); see, e.g., also First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947 (1995); Volt Info. Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 479 (1989). Second, consistent with that broad enforceability principle, it limited the universe of state laws saved from preemption to those that apply to all contracts, thereby excluding from that universe the ouster doctrine, and other state-law doctrines, rules and standards that apply to some — but not all — contracts.
There is an important snippet of legislative history that bears on this second point. It tells us that the Act “was designed to allow parties to avoid ‘the costliness and delays of litigation,’ and to ‘place arbitration agreements upon the same footing as other contracts. . . .’” Scherk, 417 U.S. at 610-11 (quoting H.R. Rep. No. 96, 68th Congress, 1st Sess. (1924)). The Court has never suggested that this bit of history meant that the Act placed arbitration agreements on the same footing as merely some contracts, or only similarly situated contracts, and in paraphrasing the snippet has sometimes expressly said that the Act “placed arbitration agreements on an equal footing with all other contracts.” Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006) (emphasis added) (Scalia, J.); Hall Street Assoc., LLC v. Mattel, Inc., 128 S. Ct. 1391, 1402 (2008) (quoting Buckeye, 546 U.S. at 443) (Souter, J.); but compare Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2776 (2010) (Section 2 “places arbitration agreements on an equal footing with other contracts”) (citing Buckeye, 546 U.S. at 443) (Scalia, J.); Arthur Andersen LLP v. Carlisle, 129 S. Ct. 1869, 1901 (Section 2 “creates substantive federal law regarding the enforceability of arbitration agreements, requiring courts ‘to place such agreements upon the same footing as other contracts.’”) (quoting Volt, 489 U.S. at 478) (Scalia, J.). And it has said “[a]s the ‘savings clause in § 2 indicates, the purpose of Congress in 1925 was to make arbitration agreements as enforceable as other contracts, but not more so.” Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 n.12 (1967) (emphasis added).
C. How Should Section 2’s Savings Clause be Interpreted so that it Best Advances Congress’ Intent and Purpose?
Interpreting the savings clause to mean what it says best reflects Congress’ intent and advances its purposes. Presumably every Justice would agree that Congress’ principal goal was to abrogate the “ouster” doctrine, at least in cases brought in federal court. Likewise presumably every Justice would agree that construing the savings clause to save from preemption only state revocation laws applicable to all contracts accomplishes that goal. If those relatively uncontroversial propositions are true, then – putting aside outcome-based political considerations – all Justices should agree that California must apply exactly the same standard for invalidating a class waiver in an arbitration agreement on unconscionability grounds as it would otherwise apply to invalidate a contract of whatever kind.
The Concepcions, however, contend that the savings clause should be interpreted to save the Discover Bank rule from preemption because it allegedly applies to class waivers in an arbitration clause in the same way it applies to waivers of class action proceedings in litigation. Thus, a centerpiece of the Concepcions argument – and of those of commentators and amicus curiae that agree with the Concepcions – is the following, slogan-like proposition, endorsed by the Ninth Circuit: the Discover Bank rule “placed arbitration agreements with class action waivers on the exact same footing as contracts that bar class action litigation outside the context of arbitration.” Shroyer v. New Cingular Wireless Serv., Inc., 498 F.3d 976, 990 (9th Cir. 2007) (citing Discover Bank v. Superior Court of Los Angeles, 36 Cal.4th 148,165-66 (2005)).
Like many great slogans, the proposition has a rhetorical ring to it — as well as a ring of truth – but it wilts under scrutiny. Even assuming the Discover Bank rule is the same one applied to class waivers outside the arbitration context (a question we will explore in one or more future installments), that doesn’t mean it is a rule that is applied to a contract of whatever kind. Nor does it mean – or even purport to mean – that the Discover Bank rule places an adhesive arbitration agreement with a class waiver on the same footing with all other contracts.
Take, for example, a contract pursuant to which A sells B a tract of land and which is silent on arbitration or litigation. Nobody would seriously contend that the Discover Bank rule has any application to such a contract, let alone provides any basis for not enforcing it. Because the Discover Bank rule would render an adhesive arbitration agreement containing a class waiver unenforceable, but would not render our hypothetical, garden-variety real estate contract unenforceable, it places the adhesive arbitration agreement on a very different footing than that garden-variety contract.
But depending on the facts surrounding the formation of our hypothetical real estate contract, perhaps B might have a general defense to enforcement, such as fraud in the inducement or unconscionability. Assuming the same legal standards apply to this defense as apply to all other contracts under applicable state law, applying that defense to arbitration agreements merely puts arbitration agreements on the same footing as all other contracts (including, of course, our hypothetical real estate contract).
All of this is consistent with a textual construction of Section 2’s savings clause, and serves to reinforce the validity of such a construction. But there is more: the Ninth Circuit’s narrow interpretation of the equal footing principle is inconsistent with one of the key goals of the Federal Arbitration Act – the elimination of the “ouster doctrine.”
Recall that the ouster doctrine rendered not only arbitration agreements, but non-arbitration forum selection clauses unenforceable. In that sense it certainly did not discriminate between forum selection clauses in the arbitration context and forum selection clauses in the litigation context. And to paraphrase the Ninth Circuit, the ouster doctrine unquestionably “placed arbitration agreements on the exact same footing as forum selection clauses outside the context of arbitration.”
But nobody says that Section 2’s equal footing principle was intended to save the ouster doctrine from preemption. Since the Ninth Circuit’s narrow interpretation of that principle would do exactly that, it cannot possibly be the correct one from a purposive (or any other) perspective.
Interpreting the equal footing guarantee of Section 2 as the Ninth Circuit does would also require reconsideration of the Court’s landmark Southland decision insofar as it held that the Federal Arbitration Act preempted the following no-waiver provision contained in California’s Franchise Investment Law:
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.
465 U.S. at 10 (quoting Cal. Corp. Code Ann. § 31512 (West 1977)).
As discussed in Part II.A, the Court concluded “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). Dissenting, then Associate Justice John Paul Stevens argued that “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.” 465 U.S. at 18-19 (Stevens, J., dissenting) (emphasis added) (citations omitted).
The Ninth Circuit’s “equal footing” interpretation essentially echoes the position that Justice Stevens unsuccessfully advanced in Southland more than 25 years ago. Indeed, it would support the conclusion – soundly rejected by Southland — that the Federal Arbitration Act does not preempt the no-waiver provision of California’s Franchise Investment Law, because the no-waiver provision, to paraphrase the Ninth Circuit, “places arbitration agreements on the exact same footing as other contracts that purport to waive the protections of the Franchise Investment Law outside the context of arbitration.”
Finally, the Ninth Circuit’s interpretation of the equal footing principle would save from preemption any number of no-waiver rules that apply equally in the arbitration and litigation context. For example, a state might conclude that, to ensure parties of lesser bargaining power receive a fundamentally fair hearing in a dispute with a more sophisticated party, the party with lesser bargaining power must have access to the same scope of document discovery permitted by state procedural rules, irrespective of whether the dispute is heard in state court or in arbitration. It might, in turn, pass a statute that declares void against public policy any provision in a contract of adhesion that purports to waive a party’s right to the same scope of document discovery permitted by state procedural rules.
Once again, if the Court adopted the Ninth Circuit’s interpretation of the equal footing principle, this hypothetical state statute would not be preempted by the Federal Arbitration Act. For it “places arbitration agreements waiving state court document discovery procedures on the exact same footing as contracts that bar such procedures outside the context of arbitration.”
In sum, an analysis of the intent and purpose of the savings clause simply underscores the necessity of interpreting Section 2 according to its plain meaning, and a purposive construction of the savings clause would thus be no different than the one a natural reading of the text requires.
III. So Where do We Go From Here?
Thus far, we have focused principally on the scope of express preemption based on the statutory language of Section 2, and the Supreme Court cases construing it. To properly analyze the express preemption question in AT&T Mobility we need to take a close look at the Discover Bank rule, with a particular focus on its scope and rationale. We also need to examine the bases for the California Supreme Court’s and Ninth Circuit’s conclusions that the Federal Arbitration Act does not expressly preempt the rule. And we need to consider the relevance of Stolt-Nielsen to the express preemption question, for the Court’s decision in Stolt-Nielsen was an important legal development that intervened between the Ninth Circuit’s decision in AT&T Mobility and the Court’s grant of certiorari.
The next installment of this series will thus begin with a discussion of the California Supreme Court’s Discover Bank decision insofar as it is relevant to the AT&T Mobility express-preemption question.
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.