Article: February 2016: Class Action Litigation Update

Supreme Court Upholds Arbitration Agreement in DIRECTV Case. The Supreme Court recently added another decision to a growing body of law reversing state courts for refusing to enforce arbitration agreements. The decision, DIRECTV v. Imburgia, 135 S. Ct. 1547 (2015), concerned the validity of a contractual waiver of class arbitration. The Court held the arbitration waiver enforceable despite a clause in the agreement incorporating California law, which at the time of drafting had made class arbitration waivers unenforceable.

The plaintiff in DIRECTV was a California consumer who had agreed to DIRECTV’s service contract. The contract contained an arbitration agreement, which among other things waived class arbitration by stating “[n]either you nor we shall be entitled to join or consolidate claims in arbitration.” The contract, however, further stated that the arbitration waiver would become invalid if such a waiver was unenforceable under the “law of your state.” Thus, under the terms of the contract, the entire arbitration agreement would become invalid if California state law made class arbitration waivers unenforceable.

At the time the DIRECTV litigation commenced, California state law made class arbitration waivers unenforceable. But in AT&T Mobility v. Concepcion, decided in 2011, the U.S. Supreme Court held that the Federal Arbitration Act preempted and invalidated California’s prohibition against class arbitration waivers. The central question in DIRECTV was thus whether the reference to “the law of your state” in DIRECTV’s contract referred to California state law as it existed before Concepcion, or California state law after it had been invalidated by Concepcion.

In state court litigation underlying the DIRECTV decision, the California Court of Appeal held DIRECTV’s arbitration agreement invalid by its own terms pursuant to California’s prohibition of class arbitration waivers. The Court of Appeal acknowledged the holding of Concepcion, but held that the DIRECTV contract referred to California law as it existed before Concepcion. The Court of Appeal consequently affirmed the trial court’s denial of DIRECTV’s motion to enforce the arbitration agreement. The California Supreme Court denied discretionary review.

The U.S. Supreme Court reversed the California Court of Appeal in a 6-3 decision written by Justice Breyer. Although the Supreme Court acknowledged that California courts are the final authority on California contract law, it observed that the Federal Arbitration Act requires arbitration contracts to be placed “on equal footing with all other contracts,” and only permits invalidation of arbitration contracts on grounds generally applicable to the “revocation of any [other type of] contract.” 9 U.S.C. § 2. The Supreme Court therefore deemed it unnecessary to decide whether the Court of Appeal had correctly applied California law, and rather assessed whether the Court of Appeal’s reasoning and decision were generally applicable outside the context of arbitration. In her dissent, Justice Ginsburg characterized the question as whether the California Court of Appeals decision “suggest[ed] discrimination against arbitration.”

The Supreme Court held that the Court of Appeal’s decision was invalid because it had been based on reasoning unique to arbitration agreements rather than reasoning generally applicable to contract interpretation. First, the Court held that the DIRECTV contract’s reference to the “law of your state” unambiguously referred only to valid state law. Second, the Court cited California case law pursuant to which contractual references to California law are deemed to incorporate retroactive changes to the law. Third, the Court found nothing in the Court of Appeal’s decision to suggest that, outside the arbitration context, a California court would interpret phrases like the “law of your state” to mean the “invalid law of your state.” Fourth, the Court noted that the language of the Court of Appeal’s decision focused only on arbitration, further suggesting that “its holding was limited to the specific subject matter of . . . arbitration.” Fifth, the Court deemed it unlikely that California courts would give continued force to invalidated state law outside the arbitration context. Sixth, the Court observed that the Court of Appeal’s holding did not identify a general principle of contract interpretation, but rather had been framed in a manner specific to arbitration agreements.

For all these reasons, the Supreme Court concluded that the Court of Appeal’s decision was preempted by federal law because it failed to place arbitration agreements on equal footing with all other contracts as required by the Federal Arbitration Act. The Court therefore reversed and remanded for enforcement of the contract’s arbitration waiver. In so holding, the majority rejected the concerns of Justices Ginsburg and Sotomayor whose dissent criticized the majority’s opinion as a “further step” empowering “powerful economic enterprises” to “disarm consumers, leaving them without effective access to justice,” and further highlighted parties’ freedom to agree to arbitrate.