On Monday, the United States Supreme Court in DIRECTV, Inc. v. Imburgia, 577 U.S. ___, No. 14-462, slip op. at 1 (Dec. 14, 2015), doubled down on its previous holdings that the Federal Arbitration Act (“FAA”) preempts state law judicial interpretations that do not place arbitration contracts “on an equal footing with all other contracts.” Imburgia is the Supreme Court’s latest rebuke of state courts that are hostile to arbitration clauses and class-arbitration waivers, and signals to lower courts that they may not utilize state contract law principles to interpret arbitration provisions so as to end-run the mandates of the FAA.
In 2005, the California Court of Appeal held in Discover Bank v. Superior Court that class-arbitration waivers were unenforceable in “consumer contract[s] of adhesion” that “predictably involve[d] small amount of damages” and met certain other criteria (known as the Discover Bank rule). In 2011, the Supreme Court decided AT&T Mobility LLC v. Concepcion, which held that the FAA preempts state law that bars enforcement of arbitration agreements if such agreements do not permit parties to utilize class-action procedures in arbitration or in court, thus invalidating the Discover Bank rule. The Supreme Court found that the Discover Bank rule stood as an “obstacle to the accomplishment and execution of the full purposes and objectives” of the FAA.
Compounding on its holding in Concepcion, the Supreme Court in Imburgia declared that Section 2 of the FAA preempts state law interpretation of a contract’s arbitration provision based on a rule that the state’s courts had applied only in the arbitration context, concluding that such a ruling “does not rest ‘upon such grounds as exist . . . for the revocation of any contract.’”
In Imburgia, Petitioner DIRECTV, Inc. entered into a service agreement with customers containing an arbitration provision governed by the FAA that provided for a class-arbitration waiver reading: “if the ‘law of your state’ makes the waiver of class arbitration unenforceable, then the entire arbitration provision ‘is unenforceable.’” Following a class action brought by Respondents in California state court, DIRECTV moved to compel arbitration, which was denied by the trial court. The California Court of Appeal affirmed, holding that the “law of your state” language in the arbitration provision meant that that the parties had agreed that California’s Discover Bank rule would govern, notwithstanding the holding of Concepcion.
The Supreme Court, by a 6-3 vote, reversed and remanded, finding that because such an interpretation of the arbitration clause was “unique, restricted to that field,” and because “California courts would not interpret contracts other than arbitration contracts the same way,” the interpretation was impermissible as preempted by the FAA. Going forward, the Supreme Court has made explicit that arbitration agreements, and specifically class-arbitration waivers, should be enforced by state courts—even in the face of a state’s former invalidation of such waivers. Imburgia stands as the latest in a series of pro-arbitration rulings under Chief Justice Roberts, and instructs states that its courts may not use novel interpretations of state contract law to intrude on otherwise valid arbitration agreements.
For more information on the FAA or implications of DIRECTV, Inc. v. Imburgia, please contact Kathleen Barnett Einhorn, Esq., Director of the firm’s Complex Commercial Litigation Group, at email@example.com.