SCOTUS Shoots Down Another Anti-Arbitration Decision Issued by a California Court

SCOTUS Shoots Down Another Anti-Arbitration Decision Issued by a California Court

By Jennifer Suberlak and Jenna Leyton-Jones

In DIRECTV, Inc. v. Imburgia, (2015) 577 U.S. __, No. 14-462, the United States Supreme Court reversed a decision issued by a California Court of Appeal, concluding that the state court’s interpretation of an arbitration agreement was preempted by federal law because a non-arbitration contract would not have been interpreted in the same way.

Respondent customers entered into a service agreement with Petitioner DIRECTV.   The service agreement required all disputes to be resolved via binding arbitration, and explicitly provided that the Federal Arbitration Act (“FAA”) would govern the arbitration provision.  The contract also included a waiver of class arbitration, but stated that if the “law of your state” renders the class waiver unenforceable, then the entire arbitration provision is unenforceable.

Respondents filed suit in California state court, alleging that DIRECTV charged improper fees for early termination.  DIRECTV’s motion to compel arbitration was denied.  On appeal, a California Court of Appeal concluded that the “law of your state” provision referred, in this case, to California law.  According to the appellate court, the class waiver was unenforceable under California law pursuant to the rule set forth in Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 162-63 (holding that a waiver of class arbitration in a consumer contract of adhesion was unconscionable).  The Court of Appeal acknowledged that in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 352, the U.S. Supreme Court held that the Discover Bank rule was preempted by the FAA.  Nonetheless, the appellate court concluded that the parties were free to agree to the application of invalid state law.  The Court of Appeal reasoned that the contract’s “law of your state” language was ambiguous as to whether valid and/or invalid California law would apply.  Because ambiguities must be construed against the interest of the contract’s drafter, the court construed this particular language against DIRECTV’s interest, and voided the arbitration provision in accordance with the Discover Bank rule.

After the California Supreme Court denied review, the U.S. Supreme Court granted a writ of certiorari.  The U.S. Supreme Court explained that state courts must place arbitration agreements “on equal footing with all other contracts,” and may only invalidate arbitration agreements on the basis of general contract defenses.  Here, the lower court’s decision was motivated by the fact that an arbitration contract was at issue; because other state courts would not interpret non-arbitration contracts in the same way, the Court of Appeal’s decision violated the FAA.  Accordingly, the U.S. Supreme Court reversed the appellate court’s decision.

The U.S. Supreme Court set forth six reasons for reversing the Court of Appeal.  First, the “law of your state” language was not ambiguous—absent any indication that the parties intended to apply invalid state law, the term must be interpreted according to its plain meaning: valid state law.  Second, California law provides that references to “California law” incorporate the state legislature’s power to retroactively change the law—in the absence of any indication to the contrary, this principle applies to the interpretation of the “law of your state” language.  Third, there is no other California case law interpreting language such as “law of your state” to include state laws invalidated by other federal statutes or constitutional provisions.  Fourth, the Court of Appeal’s language expressly focused only on arbitration, limiting the question presented to whether “law of your state” means “the law of your state to the extent it is not preempted by the [FAA].”  Fifth, the appellate court’s determination that the Discover Bank rule retained legal force despite Concepcion’s contrary holding reflects a view unlikely to be applied in non-arbitration contexts.  Finally, the Court of Appeal held that the “law of your state” phrase constituted a “specific exception” to the agreement’s “general adoption of the [FAA]”—this holding, expressly limited to the arbitration context, provides no indication that California courts would reach the same interpretation in other contexts.  In light of these considerations, the Court concluded that the appellate court’s decision was preempted by the FAA.

This decision reflects the ongoing tension between California and federal courts regarding the enforceability of arbitration agreements.  California courts routinely attempt to invalidate arbitration contracts, paying lip service to binding federal authority while ignoring the mandatory force of such precedent.  This decision may finally send a message to California courts that the U.S. Supreme Court will no longer tolerate California’s distaste for arbitration.