DIRECTV v. Imburgia, No. 14-462, 577 U.S. __ (2015) [click for opinion]

Petitioner DIRECTV, Inc. and its customers, including Respondents, entered into a service agreement that included the following provision: “any Claim either of us asserts will be resolved only by binding arbitration.”  The agreement also set forth a waiver of class arbitration, and said that if the “law of your state” makes the waiver of class arbitration unenforceable then the entire arbitration provision “is unenforceable.”

At the time that Respondents, California residents, entered into the agree­ment with DIRECTV, California law made class-arbitration waivers unenforceable under the Discover Bank decision.  But the Supreme Court subsequently held in Concepcion that California’s Discover Bank rule was pre-empted by the Federal Arbitration Act (“FAA”).

When Respondents sued DIRECTV in state court in California, the trial court denied DIRECTV’s request to order the matter to arbitration and the California Court of Appeal affirmed.  The court said that California law would render class-arbitration waivers unenforceable, so it held the entire arbitration provision was unenforceable under the agreement.  The court further held that the fact that the FAA pre-empted that California law did not change the result.  

This state court decision was inconsistent with a decision from the Ninth Circuit Court of Appeals, which reached the opposite result with respect to the same contract clause.  The Supreme Court therefore granted certiorari, and reversed the state court decision.

As the Supreme Court explained, the issue was not whether the state court’s decision was a correct statement of California law; the issue was whether the decision was consistent with the FAA.  Under Supreme Court jurisprudence, answering that question required the court to decide whether the decision of the California court places arbitration contracts “on equal footing with all other contracts.”  Or, more specifically, in other contexts besides interpreting an arbitration clause, would the phrase, “law of your state” include invalid California law?

The Supreme Court stated that the Court of Appeal did not explain why parties might generally intend the words “law of your state” to encompass a state law that has been determined to be invalid.  To the contrary, the court said, the contract refers to “state law” that makes the waiver of class arbitration “unenforceable,” while an invalid state law would not make a contractual provision unenforceable.

The Supreme Court also questioned the Court of Appeal’s reasoning that invalid state arbitration law—namely the Discover Bank rule—maintained legal force despite the Supreme Court’s holding in Concepcion.  “The view that state law retains independent force even after it has been authoritatively invalidated by this Court is one courts are unlikely to accept as a general matter and to apply in other contexts.”  And the Supreme Court noted that there was no other principle invoked by the Court of Appeal that suggested that California courts would reach the same interpretation of the words “law of your state” in other contexts.

These were among the reasons that the Supreme Court ultimately concluded that the state court’s interpretation of the phrase “law of your state” to include invalidated state law, did not place arbitration contracts “on equal footing with all other contracts.”  The Supreme Court held that the Court of Appeal’s interpretation was pre-empted by the FAA and that it was required to enforce the arbitration clause.