By reputation, California is known as more protective of consumers than most states. One result is the reluctance of California courts to enforce arbitration agreements in consumer contracts, viewing these arbitration provisions as favorable to business and unfavorable to consumers. But recently the U.S. Supreme Court applied federal law to strike down a California ruling refusing to enforce arbitration in a consumer contract for the second time in four years.
On December 14, 2015, the Supreme Court of the United States overturned a California court's refusal to enforce a class arbitration provision in a television service agreement. The decision follows AT&T Mobility LLC v. Concepcion, 563 U.S. 333(2011), in which the Supreme Court of the United States held that California's Discover Bank rule, holding that class-arbitration waivers are unenforceable, was pre-empted by the Federal Arbitration Act, 9 U.S.C. § 2.
In the decision reviewed by the Supreme Court of the United States in DirecTV, Inc. v. Imburgia, et al., No. 14-462 (Dec. 14, 2015), the Court of Appeal of California for the Second Appellate District found that a binding arbitration provision with a class-arbitration waiver found in the service agreement between DirecTV, Inc. and its customers was unenforceable. This ruling was despite the preemption of California'sDiscover Bank rule (holding class-arbitration waivers unenforceable) by the U.S. Supreme Court in Concepcion.
The Court of Appeal of California cited the language of the service agreement, providing that "[i]f . . . the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 [the arbitration section] is unenforceable." It reasoned that "law of your state" meant the law of California for the customers which were California residents.
It pointed to California's Consumer Legal Remedies Act (rather than the Discover Bank rule) which provides that a waiver of a right to bring a class action under such Act is invalid. It thus held that the Consumer Legal Remedies Act rendered the class-arbitration waiver unenforceable and, under the terms of the service agreement, the arbitration section was rendered unenforceable. The California Supreme Court denied discretionary review and DirecTV, Inc. filed a writ of certiorari to the Supreme Court of the United States. So the U.S. Supreme Court had still another opportunity to strike down a California decision preventing arbitration in consumer contracts.
The Supreme Court of the United States did just that. The Court reasoned that the cited provision of the Consumer Legal Remedies Act embodied the Discover Bankrule and, accordingly, was preempted by the Federal Arbitration Act. Under its interpretation, the "law of your state" takes its ordinary meaning of "valid state law" and does not include "invalid state law." Further, it is unlikely that other courts will apply the Court of Appeal's finding that state law retains independent force after being deemed preempted under a decision of the Supreme Court of the United States. Accordingly, because the decision of the Court of Appeal was preempted by the Federal Arbitration Act (similar to Concepcion), the arbitration section of the service agreement was deemed enforceable.
Unfortunately for California, federal law, embodied in the Federal Arbitration Act, enforces arbitration provisions without regard to consumer or non-consumer contracts. So Imburgia represents the second time in four years that the U.S. Supreme Court has applied the supremacy of federal law to require the application of arbitration provisions in consumer contracts, even those in California.