Ahead of the Class

The United States Supreme Court has reversed a California appellate court’s refusal to enforce an arbitration provision in a contract, concluding that the court’s decision is incompatible with the Federal Arbitration Act and prior Supreme Court precedent.

The case, DirecTV, Inc. v. Imburgia, __ S. Ct. __, 2015 WL 8546242 (Dec. 14, 2015), involved two DirecTV customers who sued the company in California state court claiming early termination fees in their service agreements violated California law.  DirecTV moved to compel arbitration, citing a provision in the service agreement that called for binding individual arbitration of all disputes between DirecTV and its customers.  The trial court denied the request and DirecTV appealed.

The California Court of Appeal affirmed the trial court’s order, relying on a separate provision in the service agreement that stated, “if the law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision “is unenforceable.”  The Court of Appeal reasoned that because the California Supreme Court in Discover Bank v. Superior Court, 113 P.3d 1100, 1110 (Cal. 2005), had held that waivers of class arbitration are unenforceable before the contract was made in 2007, the parties must have intended to invoke California law as it was at that time—nixing class arbitration waivers. Or if they didn’t, the phrase “law of your state” was at least ambiguous and should be construed against DirecTV.

After the California Supreme Court denied discretionary review, DirecTV filed a petition for a writ of certiorari, which the United States Supreme Court granted. In a 6-3 decision, the Supreme Court reversed the Court of Appeal.  Although the California Supreme Court had held that waivers of class arbitration are unenforceable in Discover Bank, the United States Supreme Court rejected, and invalidated, that holding in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).  “The view that state law retains independent force even after it has been authoritatively invalided by this Court is one courts are unlikely to accept as a general matter and to apply in other contexts,” wrote Justice Breyer for the majority.  2015 WL 8546242, at *7.  Thus, California law (as the Court of Appeal construed it) singled out and disfavored arbitration clauses, which the Federal Arbitration Act prohibits.

As the majority saw it, even though the service agreement provided that its arbitration provision was unenforceable if “the law of [California]” made class arbitration unenforceable, that provision could not be interpreted to include the “invalid law” of California—the now invalid Discover Bank rule.  To rule otherwise would be inconsistent with, and frustrate the purpose of, the Federal Arbitration Act, 9 U.S.C. § 2, which embodies a national policy favoring arbitration and placing arbitration agreements on equal footing with all other contracts.

The Supreme Court’s decision is notable for the new way the Justices lined up in an arbitration case with class action or class arbitration waivers.  The four liberally inclined justices dissented in Concepcion, and four likely would have dissented in In American Exp. Co. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), had Justice Sotomayor participated.  But here, Justice Breyer, previously a dissenter, wrote the majority opinion and Justice Kagan, another usual dissenter, joined.  In addition, Justice Breyer did his best to stop state court judges from resisting Concepcion.  “No one denies that lower courts must follow this Court’s holding in Concepcion. The fact that Concepcion was a closely divided case, resulting in a decision from which four Justices dissented, has no bearing on that undisputed obligation.”  2015 WL 8546242, at *5.

Only Justice Sotomayor joined Justice Ginsburg’s impassioned dissent, which cast arbitration clauses as tools of “powerful economic enterprises” that bring “deprivation of consumers’ rights to seek redress for losses ….” Id. at *9, *14 (Ginsburg, J., dissenting).  She quoted from the recent New York Times series criticizing consumer arbitration clauses and cited the Consumer Financial Protection Bureau’s study that inspired it.  Id. at *14 & n.4.

But the message from a growing majority of the Justices is clear:  arbitration agreements that waive class actions or class arbitration are enforceable.  And state-court judges must enforce them.