The U.S. Supreme Court has once again spoken decisively in favor of class action waivers in arbitration agreements. In DirecTV, Inc. v. Imburgia, the Court explained in no uncertain terms that “[t]he Federal Arbitration Act is a law of the United States, and Concepcion is an authoritative interpretation of that Act. Consequently, the judges of every State must follow it.” The Court thus reversed a decision of the California Court of Appeals that invalidated an arbitration agreement with a class action waiver on the ground that the contract incorporated the (by that time invalidated) California ban on such provisions. This ruling again reaffirms the importance of including arbitration agreements with class action waivers in consumer contracts as an effective escape to class actions.
The agreement at issue in Imburgia specified that the entire arbitration provision was unenforceable if the “law of your state” (i.e. California) made class-arbitration waivers unenforceable. At the time the contract was executed, California law barred the use of arbitration agreements with class waivers. However, the U.S. Supreme Court expressly invalidated that bar in its landmark decision in AT&T Mobility LLC v. Concepcion, concluding that the Federal Arbitration Act (“FAA”) preempted California’s ban on class waivers and that arbitration agreements could only be invalidated based on grounds applicable to all contracts (i.e. fraud, duress, unconscionability).
The California court in Imburgia nevertheless gave effect to California law’s ban on class waivers. It reasoned that while the waiver was valid under federal law as a result of Concepcion, it could still be invalidated under California law. Thus, applying “state law alone,” as it believed it was bound to do by the contract, the California court held the class waiver and arbitration agreement as a whole unenforceable.
After the California Supreme Court denied review, the U.S. Supreme Court granted certiorari and reversed the decision. The U.S. Supreme Court did not decide whether the California court’s decision was a correct statement of California law, but analyzed only whether California law, as declared by the California court, was consistent with the FAA. To do so, the Court examined whether the California court’s decision placed the arbitration agreement on equal footing with other contracts, as required by Concepcion.
The U.S. Supreme Court held that it did not, because California would not allow an invalidated state law to maintain legal force and invalidate a contract outside the field of arbitration. Accordingly, the invalidated California ban on class action waivers could not strike down the arbitration agreement and class waiver here, and the California court’s decision to the contrary violated Concepcion.
Imburgia is the latest reminder of the importance of a fairly drafted class action waiver. It follows the U.S. Supreme Court’s Italian Colors decision, which rejected an attempt to carve out cases based on statutory violations from class action waivers, as yet another affirmation that Concepcion bars invalidation of class action waivers on any grounds other than general contract defenses such as fraud, duress, or unconscionability. Having failed in these previous battles against class action waivers, plaintiffs are likely to step up unconscionability attacks. Both Concepcion and the California Supreme Court’s recent Sanchez decision [previously covered here] provide helpful guidance on drafting arbitration agreements to survive such attacks. Companies should review their agreements closely to ensure that the real benefits of the strong preference in favor of arbitration are not lost as a result of a poorly drafted and unbalanced agreement.