The U.S. Supreme Court yesterday reaffirmed the supremacy of the Federal Arbitration Act (“FAA”) over contrary state laws—and in particular those that purport to make arbitration provisions unenforceable when state law otherwise declines to recognize class-arbitration waivers. In DIRECTV, Inc. v. Imburgia, et al., No. 14-462, the Court held that the California courts’ interpretation of an arbitration provision was preempted by the FAA because the phrase “law of the state” could not be read to contemplate state law invalidated by the Court in AT&T Mobility v. Concepcion.
The case arose when DIRECTV customers brought a putative class action in California state court, seeking damages for early termination fees that they believed violated California law. Invoking an arbitration provision in DIRECTV’s service contract, DIRECTV moved to compel arbitration. That provision stated that “any Claim either [party] asserts will be resolved only by binding arbitration.” Notably, however, although the contract provided that it was governed by the FAA, the provision also stated that if the “law of your state” made the waiver of class arbitration unenforceable, then the entire arbitration provision would be unenforceable.
The trial court denied DIRECTV’s motion to enforce the arbitration provision, and the California Court of Appeal subsequently affirmed, reasoning that the phrase “law of your state” could be interpreted to refer to a California Supreme Court decision—Discover Bank v. Superior Court—holding that a waiver of class arbitration in a consumer contract of adhesion is unconscionable and may not be enforced. Although the U.S. Supreme Court’s decision in Concepcion later invalidated that rule, the court nonetheless concluded that Concepcion did not alter the result that the class action waiver is unenforceable under California law. According to the court, the parties were free to contract for the application of California law as it existed before Concepcion.
By a 6-3 vote, the U.S. Supreme Court reversed, holding that the “law of your state” provision could not bear an interpretation including invalid state laws, such as the now invalid Discover Bank rule. The Court began by noting that the FAA grants parties considerable latitude in choosing what law governs its provisions, including the law governing enforceability of a class-arbitration waiver. To that end, the Court articulated that the precise issue before it was whether the phrase “law of your state” could refer to California law, including the Discover Bank rule, irrespective of Concepcion’s subsequent invalidation of that rule. If it could, the Court continued, the question was whether that state law was consistent with the FAA.
The Court concluded that, although California courts are the ultimate authority on California law, the underlying question of state contract law when the Court of Appeal ruled could not have included invalid California law. Thus, the Court concluded that the provision was preempted by the FAA as inconsistent with the federal policy favoring arbitration.
The Court gave several reasons for this conclusion. For starters, the Court explained that the relevant contract language was not ambiguous, as the ordinary meaning of “the law of your state” could refer only to valid state law. In support, the Court pointed to California case law to that effect. In addition, the Court explained that nothing in the Court of Appeal’s reasoning suggested that it would apply the same interpretation of “law of your state” in any context other than arbitration. Finally, the Court dispensed with the lower court’s reasoning that invalid state arbitration law (i.e., Discover Bank) maintained legal force notwithstanding Concepcion— again noting that this principle was unlikely to be accepted in other contexts.
Justice Thomas dissented, stating only that (in his view) the FAA does not apply to proceedings in state courts. Justice Ginsburg likewise dissented, joined by Justice Sotomayor, reasoning that the majority improperly extended Concepcion and read the contract provision in a manner protective of the drafter, DIRECTV. In her view, the provision should have been read as the California appellate court read it—to give the customer the benefit of the doubt. She also highlighted that DIRECTV drafted the provision three years before Concepcion and reserved the right to modify the agreement unilaterally. As a result, she reasoned, the California court properly sought to construe the language in the customers’ favor.
The DIRECTV decision may not break any new ground, but it does serve to underscore the reach of Concepcion and its practical effect on arbitration provisions. The decision is the latest in a long line of Supreme Court decisions holding that the FAA preempts state-law efforts to circumvent the reach of the FAA. And if experience is any guide, it will not be the last.