U.S. Supreme Court Rejects California Court’s Attempt to Invalidate Class-Arbitration Waivers

SUMMARY

The U.S. Supreme Court reiterated today in DirecTV, Inc. v. Imburgia that the Federal Arbitration Act (FAA) preempts state-law judicial interpretations that do not place arbitration contracts on an equal footing with other types of contracts. The contract at issue provided that the arbitration provision would be unenforceable if the “law of [the customer’s] state” declared a class-arbitration waiver unenforceable. The California Court of Appeal held that California law made class-arbitration waivers unenforceable under Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005), even though the Supreme Court had held the Discover Bank rule preempted in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). In other words, the California Court of Appeal interpreted the parties’ contract to incorporate even invalid state law. The Supreme Court accepted that state-law interpretation of the contract, but held  it preempted by the FAA because California courts would not interpret contracts other than arbitration contracts in the same way. The Court’s decision continues to push back against judicial hostility toward arbitration provisions generally and class-arbitration waivers specifically, and it may signal greater scrutiny of state-court interpretation of such provisions.

BACKGROUND

In its service agreement with customers, DirecTV included both a mandatory arbitration provision and a waiver of class arbitration.1 To prevent courts from enforcing the agreement to arbitrate but striking the class-arbitration waiver, DirecTV inserted an additional clause providing that if the “law of [the customer’s] state” makes the  waiver of class arbitration unenforceable, then  the entire  arbitration provision “is unenforceable.”2    At the time of the contract, the California Supreme Court had held in Discover Bank3  that a class-arbitration waiver in a consumer contract was unenforceable, but  the Supreme Court subsequently invalidated the Discover Bank rule in Concepcion as inconsistent with the FAA.4

In 2008, two customers sued DirecTV in state court.5 DirecTV did not seek to enforce the arbitration agreement at that time, because waivers of class arbitration were then unenforceable under Discover Bank.6 When the Supreme Court decided Concepcion, however, DirecTV moved to compel arbitration on the ground that the class-arbitration waiver had become enforceable (and, as a result, the entire arbitration agreement had become enforceable).7 The state trial court denied DirecTV’s motion to compel arbitration.8 The California Court of Appeal then affirmed, on the ground that the “law of [the customer’s] state”—i.e., California law—included the Discover Bank rule, even if that rule was preempted by federal law and the FAA.9  The California Supreme Court declined discretionary review.10

THE SUPREME COURT’S DECISION

In a 6-3 decision, the Supreme Court again reminded the California courts that the FAA preempts state-law judicial interpretations that uniquely disadvantage arbitration contracts. The Supreme Court expressed skepticism about—but ultimately accepted—the California Court of Appeal’s view that, as a matter of state law, the parties’ contractual reference to the “law of [the customer’s] state” incorporated even invalid state doctrines like the Discover Bank rule.11     But the Supreme Court concluded “that California courts would not interpret contracts other than arbitration contracts the same way.”12 Because the state court’s “interpretation of this arbitration contract is unique, restricted to that field [of arbitration],” the Supreme Court held that interpretation preempted by the FAA.13

Several considerations led the Supreme Court to conclude that California courts would not interpret other contracts to incorporate invalid state law. First, according to the Court, the ordinary meaning of a contractual reference to state law is valid state law.14 Second, the California Supreme Court has held that, under general contract principles, references to state law mean the law as it stands at the time of contract interpretation.15    Third, nothing in California law indicates that state courts would hold in other contexts that contractual references to state law incorporate invalid state law.16    Fourth, the California

Court of Appeal’s language “focused only on arbitration,” which “suggests that the Court of Appeal could well have meant that its holding was limited to the specific subject matter of this contract—arbitration.”17 Fifth, the Court of Appeal incorrectly reasoned that invalid state arbitration law (i.e., the Discover Bank rule) retained independent force even after being invalidated by the Supreme Court in Concepcion.18 “Taking these considerations together,” the Supreme Court concluded that “California’s interpretation of the phrase ‘law of [the customer’s] state’ does not place arbitration contracts on equal footing with all other contracts” and therefore “does not give due regard to the federal policy favoring arbitration.”19

In a one-paragraph dissent, Justice Thomas reiterated his long-held view that the FAA does not apply to proceedings in state courts.20 In a separate lengthy dissent, Justice Ginsburg, joined by Justice Sotomayor, argued that the Court had failed to defer to the California court’s reasonable interpretation  based on state contract law.21 Justice Ginsburg emphasized that the parties had anticipated at the time of contract and even at the time of suit that the arbitration agreement would be unenforceable in light of the Discover Bank rule.22 She criticized the Court’s continued efforts to reduce the availability of class arbitration, and argued that the decision sets a “dangerous” precedent as the first time the Court has reversed a “state-court decision on the ground that the state court misapplied state contract law when it determined the meaning of a term in a particular arbitration agreement.”23

IMPLICATIONS

In the wake of this decision, arbitration agreements that are contingent on the effectiveness of class-arbitration waivers should be enforced, notwithstanding a State’s prior opposition to such agreements. Today’s decision also signals the Court’s increasing willingness after Concepcion  to scrutinize anti-arbitration decisions of state courts. In the wake of Concepcion and DirecTV, state courts should not be able to use state contract law as a guise for hostility to arbitration agreements generally and class-arbitration waivers specifically.