U.S. Supremes Enforce Arbitration Agreement, Reversing California Appellate Court

The U.S. Supreme Court in Direct TV Inc. v. Imburgia (opinion here) took on the California Court of Appeal in a test of the Federal Arbitration Act's preemptive force. Guess who won?

This case involves Direct TV's attempt to include a class-action waiver in an arbitration agreement as part of its service contract with customers.  Before the U.S. Supreme Court in AT&T Mobility LLC v. Concepcion, 563 U. S. 333 (2011), ruled that such waivers were valid under the Federal Arbitration Act, state courts (like California's) could invalidate class actions waivers as "unconscionable" or invalid against public policy. See Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005).

So, Direct TV inserted a provision in its arbitration agreement that hedged against the possibility of invalidation by a state court, as explained by the Supreme Court in its opinion:

if the “law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision “is unenforceable.” Id., at 129. Section 10 of the contract states that §9, the arbitration provision, “shall be governed by the Federal Arbitration Act.”

This way, if California held that a class waiver is invalid, the whole case (class action and all) would be heard in court. 

Then, of course, the U.S. Supreme Court decided a case that preempted California law invalidating class-action waivers.  Even the California Supreme Court had to agree that if the Federal Arbitration Act applies, class action waivers in arbitration agreements are OK.  Therefore, one might say, the "law of the state" about class-waivers was gone.  What happened to this clause then? Well that's what this case is about.

The Court of Appeal interpreted the above language to say that the "state law" would continue to apply without regard to federal preemption.  That is, the "law of your state" would continue to prohibit class action waivers under this agreement, despite the preemption of the law by the Supreme Court.  And, despite the arbitration agreement's specific provision that the Federal Arbitration Act applies. 

6-3, the Supreme Court rejected the Court of Appeal's decision.  The Court decided that for the Court of Appeal to be correct, the term "law of your state" had to include "invalid" state law.  The Court then decided that the Court of Appeal would never have interpreted the term "law of your state" to include "invalid" state law unless this contract were an arbitration agreement. Therefore, because the Court of Appeal disfavored arbitration agreements, its decision violated the Federal Arbitration Act. 

nothing in the Court of Appeal’s reasoning suggests that a California court would reach the same interpretation of “law of your state” in any context other than arbitration. The Court of Appeal did not explain why parties might generally intend the words “law of your state” to encompass “invalid law of your state.” To the contrary, the contract refers to “state law” that makes the waiver of class arbitration “unenforceable,” while an in- valid state law would not make a contractual provision unenforceable. Assuming—as we must—that the court’s reasoning is a correct statement as to the meaning of “law of your state” in this arbitration provision, we can find nothing in that opinion (nor in any other California case) suggesting that California would generally interpret words such as “law of your state” to include state laws held invalid because they conflict with, say, federal labor statutes, federal pension statutes, federal antidiscrimination laws, the Equal Protection Clause, or the like. 

And as for disfavoring arbitration:

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.

Justice Thomas believes the Federal Arbitration Act does not preempt any case brought in state court and would have affirmed the court of appeal. So he dissented on that special ground. 

Justices Ginsburg (writing) joined by Justice Sotomayor dissented on the merits, arguing that  Direct TV should be held to its original intent: to enforce the agreement only if state law (without regard to federal preemption) would allow the class waiver. The agreement was written before the Supreme Court ruled class action waivers were allowed and state laws to the contrary were preempted; therefore, the agreement's intent was not to include federal law in the mix.  

So, another anti-arbitration case goes by the wayside. But California's anti-arbitration case law remains on the books and strong because Armendariz and its progeny are still in force.  Therefore, it remains important to draft arbitration agreements in employment settings carefully.