Arbitration Wars: Supreme Court Continues To Affirm Supremacy of Federal Arbitration Act
The United States Supreme Court recently reversed a decision by the California Court of Appeal wherein the state court refused to enforce a class action waiver in an arbitration agreement. The Supreme Court enforced the class arbitration waiver holding that the Court of Appeal’s decision was pre-empted by the Federal Arbitration Act (FAA) as interpreted by the Court in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), which held that class arbitration waivers are enforceable unless grounds exist at law or in equity for the revocation of any contract.
The case, DIRECTV, INC. v. Imburgia, 577 U.S. ___ (2015), involved the interpretation of an arbitration clause and class action waiver in the service agreements between DIRECTV and its customers. Notably, the agreement also provided that if the “law of your state” makes the class action waiver unenforceable, then the entire arbitration clause is unenforceable. The agreement expressly stated it was governed by the FAA.
Two consumers sued DIRECTV alleging various claims based on allegations that DIRECTV had improperly charged early termination fees to its customers. DIRECTV, relying on the arbitration agreement, moved to compel the case to arbitration. The state trial court denied the motion, DIRECTV appealed, and the California Court of Appeal affirmed. In reaching its decision, the Court of Appeal relied on Discover Bank v. Superior Court 36 Cal.4th 148 (2005) which held that, under certain circumstances, class action waivers in consumer contracts were unconscionable and hence unenforceable. Although Discover Bank had since been overturned in 2011 by Concepcion – which held that the FAA pre-empted Discover Bank – the Court of Appeal held that Discover Bank was the applicable “law of [the parties] state” in determining whether the class waiver was enforceable under the arbitration agreement. In its reasoning, the Court of Appeal held that Discover Bank applied because it was the controlling law in California when the parties initially entered into the underlying agreement. The Court of Appeal held that the parties to a contract may “choose the law under which the enforceability of a class action waiver is to be determined.” Because the parties entered into the contract when Discover Bank was still controlling, the Court of Appeal found the parties intended for its rule to apply. The court also applied two general rules of contract interpretation in its decision. It interpreted the “law of your state” provision as more specific than the “general” provision stating that the FAA governs the contract, and thus found it controlling. The court also found that because DIRECTV drafted the agreement, “ambiguous” language should be construed against it.
The Supreme Court disagreed with the Court of Appeal’s analysis and holding. It questioned the court’s finding that the parties would intend the words “law of your state” to encompass “invalid” law (i.e., Discover Bank). The language was not ambiguous and the plain meaning encompassed valid state law. Further, general contract principles applied in California provide that reference to “California law” encompass changes to the state’s laws. The Supreme Court found the California court created a special rule for arbitration agreements – stating that “several considerations lead us to conclude that the court’s interpretation of this arbitration contract is unique, restricted to that field.” The Court once again emphasized the “Supremacy Clause forbids state courts to dissociate themselves from federal law because of disagreement with its content or a refusal to recognize the superior authority of its source.” Accordingly, the Court found that the California court’s interpretation of the terms of the agreement clearly disfavored arbitration and, therefore, the special rule was preempted by the FAA.
The case continues a trend of expanding the holding of Concepcion that requires states to enforce arbitration agreements except when the arbitration agreement is invalidated on grounds applicable generally to all contracts. This should give employers greater confidence that pre-Concepcion arbitration agreements including class action waivers will be enforced absent facts demonstrating the agreement is unconscionable for some reason that it no way frustrates the primary purposes of the FAA.