Last week, in DIRECTV v. Imburgia, the United States Supreme Court issued a decision once again re-affirming the strong federal policy in favor of arbitration.

At issue in this case was a service agreement entered into between DIRECTV and its customers many years earlier. The agreement included an arbitration provision which, in relevant part:

  • Stated that any claim asserted by either party “will be resolved only by binding arbitration;”
  • Included a waiver of class arbitration;
  • Stated that if the “law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision “is unenforceable;”
  • Stated that the contract was governed by the Federal Arbitration Act.

In 2008, two customers brought a putative class action against DIRECTV in a California state court, seeking damages for early termination fees they claimed violated California law. After approximately three years of litigation, DIRECTV, citing the arbitration provision, asked that the court send the matter to arbitration. The court denied that request, and DIRECTV appealed to the California Court of Appeal.

The California Court of Appeal determined that under California law the class arbitration waiver was unenforceable, and therefore, pursuant to the contract terms, the entire arbitration provision was unenforceable. The United States Supreme Court disagreed, and reversed that decision.

In doing so, the Supreme Court noted that under previous California law, the California Court of Appeal’s decision would have been correct. Specifically, in 2005, the California Supreme Court issued a decision, Discover Bank v. Superior Court, 36 Cal. 4th 148, holding that class-arbitration waivers in consumer contracts such as DIRECTV’s were unenforceable. In the years since, the California courts routinely invalidated such provisions pursuant to this precedent.  In 2011, however, the United States Supreme Court issued a decision, AT&T Mobility LLC v. Concepcion, 563 U.S. 333, holding that the Discover Bank rule was pre-empted by the Federal Arbitration Act (“FAA”) and no longer valid.

The Supreme Court noted that the California Court of Appeals’ determination that California law would find the class arbitration waiver unenforceable failed to take Conception into account. The FAA, it observed, allows parties “considerable latitude” to choose what law governs various provisions of a contract, including, “in principle, the law of Tibet [or] the law of pre-revolutionary Russia.”  Here, it noted, the California Court of Appeals had decided that the parties had decided that the waiver provision at issue was governed by “the law of California including theDiscover Bank rule and irrespective of that rule’s invalidation in Conception.”  This interpretation, it held, was not consistent with the FAA.  The phrase “the law of your state,” in other words, did not include invalid state law.

Critical to this finding was its determination that the California Court of Appeal would not interpret other contracts in a way that took into account invalid state law. Because the California Court of Appeals interpreted the phrase “the law of your state” differently for arbitration contracts, it did not place arbitration contracts “on equal footing with all other contracts,” and failed to give due regard to the federal policy favoring arbitration.

This decision re-affirms once again the longstanding federal policy favoring the arbitration of private contractual disputes. Employers should be aware, however, that, as we have previously reported, the National Labor Relations Board has ruled repeatedly that employee arbitration agreements containing class action waivers violate employees’ rights under Section 7 of the National Labor Relations Act to join with other employees to challenge terms and conditions of employment. Because the Supreme Court’s ruling in Imburgia does not address employee rights under the NLRA, employers should assume that the Labor Board will continue to treat class action waivers as unlawful unless and until the courts hold otherwise.