On December 14, 2015, the Supreme Court of the United States ruled in DirecTV, Inc. v. Imburgia that a class arbitration waiver clause in DirecTV's customer service contracts was enforceable under the Federal Arbitration Act (FAA). The decision joins a growing line of cases in which the Supreme Court has consistently asserted the preemptive power of the FAA to invalidate anti-arbitration state court decisions that contravene federal laws supporting arbitration.
The FAA strongly favors arbitration as a means to settle disputes that arise between parties to a private contract. Broadly speaking, arbitration clauses in contracts are considered valid and enforceable under the FAA unless a rule of general contract interpretation exists that would otherwise allow the agreement to be revoked. If a state law -- or judicial interpretation of a state law -- contradicts the FAA, then the state law is preempted and the federal law prevails.
In 2008, two DirecTV customers in California filed a class action lawsuit in state court alleging that DirecTV had improperly charged its customers early termination fees. At the time, DirecTV's standard customer service agreements contained a binding arbitration clause, under which the parties agreed to submit contract-related disputes to arbitration rather than litigating the disputes in court. DirecTV's customer service agreements also included a class arbitration waiver, under which customers agreed to arbitrate disputes solely on an individual basis, and not as part of a class. The agreements stated that the class action waiver was enforceable unless the "law of your state" (meaning the customer's state) made the waiver unenforceable.
When the plaintiffs initially filed their lawsuit, California law prohibited class arbitration waivers in consumer contracts, on grounds that such waivers were unconscionable. But in 2011, when the DirecTV class action litigation was still ongoing, the U.S. Supreme Court decided in AT&T Mobility LLC v. Concepcion that state laws prohibiting certain arbitration contract provisions as per se unenforceable were pre-empted by, and therefore enforceable under, the FAA. The Concepcion decision specifically invalidated California's "unconscionability" rule barring class action waivers in consumer contracts.
Because California law no longer prohibited class arbitration waivers in consumer agreements after Concepcion, DirecTV asked a California Superior Court to compel the plaintiffs to arbitrate their claims, as required by terms of the services agreement. After the Superior Court and a state Court of Appeals both denied DirecTV's request, the company appealed its case to the U.S. Supreme Court. The Supreme Court reversed the California Court of Appeals in a 6-3 decision favoring DirecTV.
The Supreme Court's Decision and How it Affects Employers
The Supreme Court held that the class arbitration waiver in DirecTV's customer service agreement was enforceable, and criticized California for attempting (again) to do an end-run around the FAA. Writing for the majority, Justice Breyer emphasized that the FAA gives contracting parties significant latitude in choosing what law governs their agreements, as long as the contract is clear about what law is being selected. DirecTV's customer service agreement referenced simply "the law of [the consumer's] state," which the Supreme Court interpreted to unambiguously mean current, valid state law. The California Court of Appeals therefore should have applied valid (post-Concepcion) state law, under which DirecTV's class arbitration waiver was valid.
Although the DirecTV decision focuses on the enforceability of arbitration provisions in consumer contracts, it nonetheless provides some important takeaways for all employers who use, or want to use, mandatory arbitration and class waiver provisions in their employee agreements.
- The simplest, but perhaps most important, takeaway from the DirecTV decision is that it is a good one for employers! Even as state courts (especially in California) exhibit increasing distaste for arbitration agreements in the consumer context, the Supreme Court continues to consistently interpret the FAA as embodying federal policy favoring arbitration, and to use the FAA to preempt contrary state laws that frustrate that policy.
- DirecTV serves as a reminder that there is no substitute for clear and understandable language in contracts. This is true for all agreements, of course, but is especially important when it comes to frequently-litigated contract provisions. Properly drafted arbitration provisions can short-circuit unenforceability challenges, discourage employees from pursuing meritless claims in a class context, and provide a more cost-effective and efficient process for handling employee claims and disputes. The Court's DirecTV opinion provides useful guidance for drafting arbitration provisions that are more likely to survive enforceability challenges in state court.
- While the DirecTV decision technically turned on details of contract law and interpretation, the case seems to more broadly signal that a majority of Justices on the Supreme Court remain prepared to scrutinize and invalidate anti-arbitration decisions by state courts where the Court thinks state contract law is being used to circumvent the FAA's pro-arbitration terms.
- Both Concepcion and DirecTV dealt with arbitration provisions in consumer service contracts. Although the Supreme Court has not yet addressed whether, or how, those cases might apply in the context of employment agreements, we may not have to wait long. Challenges to the enforceability of class arbitration waivers in the employment context are working their way through lower courts.
The National Labor Relations Board, for example, has held on several occasions that class arbitration waivers violate employee rights guaranteed in Section 7 of the National Labor Relations Act. It maintains this stance, even though the interpretation was rejected by a federal court on review.
Another case to watch is Mohamed v. Uber Techs., Inc., a California class action suit in which a district court recently held that an arbitration agreement and class action waiver in Uber's service agreement with drivers was unconscionable and therefore unenforceable. The case is currently pending appeal in the Ninth Circuit.
- Employers should use the DirecTV decision as an opportunity to review their agreements with employees and independent contractors to ensure that any arbitration provisions clearly specify what law is applicable. In some cases, employers may want to expressly state whether the chosen law will apply even if it is later invalidated.