On December 14, 2015, the United States Supreme Court in a 6-3 decision inDirecTV, Inc. v. Imburgia, 577 U.S. __ (2015) confirmed and enforced the validity of consumer class-arbitration waiver clauses under Federal Arbitration Act (“FAA”) by preempting and invalidating contract interpretations that would enforce state laws prohibiting such waivers. In reaching this decision, the Supreme Court emphasized its decision in AT&T Mobility L.L.C. v. Concepcion, 563 U.S. 333 (2011)—which invalidated a California law that declared class arbitration waivers unenforceable, reversed another California court opinion invalidating an arbitration agreement containing a class-arbitration waiver, and closed another avenue that sought to limit the impact of Concepcion.
In Imburgia, Plaintiff Amy Imburgia and others in her proposed class (“Plaintiffs”) entered into a service agreement with DirecTV. The service agreement contained a binding arbitration clause as well as a class-arbitration waiver. The class-arbitration waiver stated that if the “law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision is also unenforceable. The contract also stated that the arbitration provision “shall be governed by the Federal Arbitration Act.”
Plaintiffs brought suit against DirecTV in California state court, claiming that DirecTV’s early termination fees violated California law. DirecTV moved to enforce the arbitration provision. The trial court denied the motion and DirecTV appealed. The California Court of Appeal held that despite the Concepcion decision, which invalidated the California law holding consumer class-arbitration waivers unenforceable, California law continued to deem class-arbitration waivers unenforceable. According to the DirecTV contract, if the class arbitration waiver is unenforceable under the “law of your state,” the entire arbitration provision is also unenforceable. Applying contract principles to the interpretation of the phrase “law of your state,” the California Court of Appeal concluded that the phrase referred to California law as it exists before application of the federal preemption analysis inConcepcion. The court reasoned that, because parties are free to “refer to the laws of different States or different nations” in a contract, they can also agree to rely on invalidated California law. The court further explained that the specific reference to “law of your state” in the arbitration provision coupled with the principle that contract ambiguities must be construed against the drafting party, supported this interpretation. As a result, the Court of Appeal affirmed the denial of DirecTV’s motion to enforce the arbitration provision and the California Supreme Court denied discretionary review. DirecTV filed a petition for a writ of certiorari. The United States Supreme Court granted certiorari, reversed the California Court of Appeal in a 6-3 decision and ordered the California court to enforce the arbitration agreement.
The Supreme Court began its analysis by strongly confirming its Concepciondecision: “The Federal Arbitration Act is a law of the United States, and Concepcionis an authoritative interpretation of that Act. Consequently, the judges of every State must follow it.” Despite that admonition, the Supreme Court agreed that contracting parties could choose to have an arbitration provision governed by an invalidated California law and, under those circumstances, a state court’s interpretation of those contract terms is a matter of state law entitled to deference. The Supreme Court explained, however, that it still must determine whether the state law itself is consistent with the FAA.
Under that narrowed scope of review, the Supreme Court held that the California Court of Appeal’s interpretation of California contract law, as applied to DirecTV’s contract, was inconsistent with the FAA and therefore was preempted by federal law. The Court cited six reasons to support its holding: (1) the contract term at issue was unambiguous and should be presumed to refer only to valid state law; (2) California Supreme Court precedent holds that, under general contract principles, references to California law include the legislative power to change the law or adopt new laws; (3) the absence of California precedent in any context which interpreted the term “law of your state” to include invalidated laws; (4) the Court of Appeal’s decision to frame the issue with a focus on arbitration—whether “law of your state” means the law of your state to the extent it is not preempted by the FAA; (5) the argument that California law remains in force even after being invalidated by the United States Supreme Court is not likely to be applied in other contexts; and (6) the absence of any legal principle suggesting that California courts would interpret the phrase “law of your state” similarly in other contexts.
For these reasons, the Supreme Court concluded that the California Court of Appeal’s interpretation of the “laws of your state” clause in DirecTV’s arbitration provision was different than the interpretation of that clause in non-arbitration contracts. Because the arbitration provision was not placed “on equal footing” with other contracts and the court failed to “give due regard . . . to the federal policy favoring arbitration,” the Court of Appeal’s interpretation was preempted by the FAA.
The dissenting judges voiced their concern that the Court’s opinion will ultimately deprive consumers of adequate redress for losses and will “insulate powerful economic interests from liability for violations of consumer protection laws.” It is unclear, at this time, how these concerns may impact the public discourse on amending the FAA.
If your business utilizes consumer contracts containing arbitration provisions and class-arbitration waivers, you should be aware of this decision and follow its guidance in how best to draft those provisions: (1) be certain that all provisions are unambiguous to avoid deferential state law interpretations; (2) understand how general contract principles may be applied in the governing jurisdiction because those principles should apply equally to arbitration provisions; (3) anticipate that the laws of any referenced state may change between the date the contract is executed and the date it is enforced and draft the provision to accommodate any such changes; and (4) place additional emphasis on contract formation principles to be sure that any class-arbitration waivers can be deemed enforceable under the FAA.