In its recent decision in DirecTV v. Imburgia, the Supreme Court once again rebuked a lower court for undermining an agreement to arbitrate. Writing for the six-member majority, Justice Breyer rejected a California state court’s interpretation of a class arbitration waiver in a way that invalidated an entire arbitration agreement. The Court found that the state court’s interpretation violated the Federal Arbitration Act’s requirement that agreements to arbitrate be placed on the same footing with all other contracts. While the ruling does not make new law, it serves notice that efforts by courts to circumvent arbitration agreements will not be tolerated. It also cautions parties to draft arbitration agreements with care, as the Court will not intervene in matters of pure contract interpretation.
At issue in the case was a provision in DirecTV’s customer agreement requiring that disputes between DirecTV and its customers be resolved through binding arbitration. The agreement prohibited any party to “join or consolidate claims in arbitration,” and added that the entire arbitration provision would be unenforceable if the “law of your state” voided the class arbitration prohibition.
In 2008, two DirecTV customers brought suit against DirecTV in California state court seeking damages for early termination fees that the customers believed violated California law. Three years before, the California Supreme Court had decided in Discovery Bank v. Superior Court, 36 Cal. 4th 148 (2005) that a waiver of class arbitration in a consumer contract of adhesion was unenforceable. As a result, DirecTV did not seek to compel arbitration and instead proceeded in state court. In 2011, however, the Supreme Court decided in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) that the rule in Discover Bank was pre-empted by the FAA. DirecTV promptly sought to compel arbitration on grounds that, under Concepcion, the law of California no longer barred class arbitration waivers.
The state trial court denied DirecTV’s motion, and the California Court of Appeal affirmed. Imburgia v. DirecTV, Inc., 225 Cal. App. 4th 338 (2014). The court concluded that the term “law of your state” adopted California law without regard to the operation of FAA pre-emption. The court further found that the specific term “law of your state” controlled the more general provision in the customer agreement requiring that it be governed by the FAA. The court bolstered its conclusion by finding that, to the extent the agreement was ambiguous, it was to be construed against the drafter, DirecTV. The California Supreme Court denied discretionary review, and the U.S. Supreme Court granted certiorari.
The Court began its analysis by acknowledging its precedents holding that parties to a contract requiring arbitration are free to choose the rules governing that arbitration. The Court observed: “In principle, they might choose to have portions of their contract governed by the law of Tibet, the law of pre-revolutionary Russia, or (as relevant here) the law of California including the Discover Bank rule and irrespective of that rule’s invalidation in Concepcion.” The Court found that the state court had adopted the latter interpretation, and observed that the “interpretation of a contract is ordinarily a matter of state law to which” the Court will defer. That observation did not end the inquiry, however, because the Court was still required to weigh whether state law as applied and interpreted by the state court “is consistent with the Federal Arbitration Act.”
Turning to that inquiry, the Court framed the issue as whether interpreting the words “law of your state” to include invalid state law discriminated against arbitration in violation of the FAA. The Court found that it did, concluding that “California courts would not interpret contracts other than arbitration contracts the same way.” The Court rejected the notion that the term “law of your state” is ambiguous, finding that the term’s ordinary meaning encompasses only valid state law. The Court also found that the language of the state court’s decision “focused only on arbitration,” and found no indication that a California court would interpret “law of your state” to encompass invalid law in any context but that of arbitration. Indeed, the Court found “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.”
The Court’s opinion carves a careful middle path between two competing priorities. At oral argument, Justice Scalia expressed concern that the Court should avoid “reinterpret[ing] every State interpretation . . . that ends up invalidating an arbitration agreement.” On the other hand, Justice Breyer—who had dissented inConcepcion—expressed concern that the Court must “be pretty firm on saying you can’t run around our decisions.” By grounding its decision on the FAA, the Court avoided federalizing contract interpretation while serving notice that it would police efforts by state courts to undermine its recent arbitration jurisprudence.
While DirecTV plows no new theoretical ground, it offers sound practical guidance to those seeking to craft or refine arbitration agreements. First, the opinion counsels that arbitration provisions—and in particular class arbitration waivers—be drafted with caution as there are limits to the Court’s willingness to intervene in arbitration disputes. Specifically, while the Court ultimately rejected a strained interpretation of DirecTV’s arbitration agreement on grounds that it conflicted with the FAA, the Court also confirmed that it would not decide pure state-law questions of contract interpretation. Accordingly, parties should continue to exercise care when crafting arbitration agreements to avoid ambiguous or conflicting language that could be seized upon by an opposing party to challenge the scope or enforceability of the agreement.
Second, the Court reiterated that parties retain the power to agree upon whatever legal regime they wish to govern their arbitration agreements, be that California law without regard to FAA pre-emption, or the law of “Tibet” or “pre-revolutionary Russia.” In light of this statement, had the DirecTV agreement read, “the law of your state without regard to federal law,” there could be little doubt that the Court would have decided the case quite differently (had it taken the case at all). Parties should take care, then, when selecting the law that will govern their arbitration agreements to fully understand the impact of that law on the scope and enforceability of their agreements.