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Another Supreme Court Rebuff To California Arbitration Rule

PillarsBy Michael A. Scodro

Issued on December 14, 2015, DirectTV v. Imburgia represents the newest in a line of Supreme Court decisions applying the Federal Arbitration Act (FAA) to enforce contractual arbitration provisions.  Here, a service agreement between DirectTV and its customers requires arbitration of any future disputes and expressly waives either party’s right to initiate arbitration on a class-wide basis, with the exception that, if the “law of your state” prohibits the waiver of class arbitration, then the arbitration provision as a whole “is unenforceable.”  Two customers sued DirectTV, seeking to proceed in court rather than arbitration on the theory that the “law of” their “state,” California, does indeed prohibit class-action waivers in arbitration.  It was this theory—requiring application of the term “law of your state” to California—that divided lower courts and attracted Supreme Court review. 

The confusion arose from that fact that, while California law bars class arbitration waivers, the Supreme Court had ruled in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), that the FAA preempts California’s bar and therefore invalidates it.  Here, the California Court of Appeal held that state law, for purposes of the “law of your state” exception, means California law without regard to federal preemption.  Because that law prohibits class waivers, the Court of Appeal concluded, the exception applies, and the arbitration provision therefore is unenforceable.  The U.S. Supreme Court reversed.  Justice Breyer, writing for a six-Justice majority, acknowledged that parties to an arbitration agreement may contract to apply “the law of Tibet, the law of pre-revolutionary Russia, or (as is relevant here) the law of California including [California’s rule barring class arbitration waivers] irrespective of that rule’s invalidation in Concepcion.”  But the Court determined that the phrase “law of your state” in DirectTV’s service contract most naturally refers only to valid (i.e., non-preempted) California law.  The California court reached its contrary construction, the Supreme Court continued, only by treating arbitration clauses differently from all other contract provisions, in violation of the FAA’s requirement that courts enforce arbitration clauses “save upon such grounds as exist at law or in equity for the revocation of any contract.”  9 U.S.C. 2 (emphasis added).  The upshot is that the arbitration clause, and its attendant class-arbitration waiver, are enforceable in California.

DirectTV, Inc. v. Imburgia (U.S. 14-462, opinion issued Dec. 14, 2015)