Facing yet another issue involving the arbitration of consumer disputes, the United States Supreme Court on December 14, 2015 held that a class action waiver clause was valid even when the contract incorporated state law standards that would have voided the waiver. The decision continued the Court’s trend toward enforcement of arbitration clauses, including those banning class action proceedings in arbitration. See, e.g., AT&T Mobility LLC v. Conception, 563 U.S. 333 (2011) and American Express Corp. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013).
The case, DIRECTV, Inc. v. Imburgia, No. 14-462 (Dec. 14, 2015), was a putative class action filed in California state court seeking damages for early termination fees imposed on consumers in connection with their DIRECTV service contracts. The form contract contained an arbitration clause, which also waived class arbitration. Key to the issue ultimately before the Supreme Court, the contract further provided that if the “law of your state” makes waiver of class arbitration unenforceable, the entire arbitration clause would be void.
At the time the case was filed in 2008, DIRECTV did not invoke the arbitration clause, because, in 2005, the California Supreme Court had held in Discover Bank that an arbitration clause waiving class proceedings was unenforceable as a matter of state law. In 2011, however, the United States Supreme Court overturned the Discover Bank rule, in AT&T Mobility v. Conception. Following Concepcion, DIRECTV sought to compel arbitration. The California intermediate appellate court ultimately ruled that arbitration was not required, notwithstanding Concepcion, because the parties’ choice in the contract that the governing law on class action waivers would be the “law of your state” had adopted California state principles, including the old Discover Bank rule, shorn of any preemptive effect of the Federal Arbitration Act.
In a six to three decision, the Supreme Court reversed. The opinion, authored by Justice Breyer, reasoned that the reference to the “law of your state” meant the “valid law of your state,” and hence the Discover Bank rule had not been incorporated into the consumer contract. It rejected the contrary conclusion reached by the California appellate court, finding the parties’ intentions unambiguous in the absence of a clear statement that they had intended to govern their relationship by invalid legal principles.
The Supreme Court cited a large number of additional reasons in support of its conclusion that the waiver was valid. Among others, the opinion pointed out that its reading was consistent with other California decisions, which had held that when state law is incorporated into an agreement that ordinarily includes an intention to incorporate any subsequent changes in that law. After an analysis of other state contract cases, the Court further found California courts likely would not interpret the phrase “law of your state” as the California intermediate appellate court had if the case had arisen in any context outside arbitration. To conclude that the appellate court’s interpretation of “law of your state” to refer even to invalid law thus placed the parties’ arbitration clause on a different footing than other California contracts, and so was fatally inconsistent with the recognized principle that a state law may not discriminate against arbitration.
There were two dissents, one by Justice Thomas based on his longstanding view that the Federal Arbitration Act does not apply to state suits, and a second by Justice Ginsburg and joined by Justice Sotomayor. Two of the four dissenters in Concepcion (Justices Breyer and Kagan), were in the majority.
While DIRECTV arose in a somewhat unique context, the decision is important because it reflects the Supreme Court’s continued adherence to enforcing arbitration clauses. And, having taken and decided the case on the merits, the decision reflects the Court’s willingness to police attempts by lower courts to try and sidestep the force of its prior pro-arbitration rulings.
The Court’s decision is a significant victory for arbitration advocates, for at least three reasons. First, it may put the final nail in the coffin of the Discover Bank rule (and any other similar caselaw or statutes that had invalidated class action waivers).
Second, and relatedly, the decision removes doubt about the law in California. This is important not only given the State’s prominence, but also given its size; DIRECTV settles the question of the validity of arbitration waivers even where arbitration clauses (like the one at issue) have a choice of law clause picking California law or where choice of law principles might point towards application of California law.
Third, the decision strengthens the Buckeye Check Cashing rule, under which anti-arbitration precedents must fall if the decision “does not place arbitration contracts “on an equal footing with all other contracts’.” DIRECTV, slip op. at 10, quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006). As noted above, citing Buckeye, the Court dismissed the California appellate court’s analysis because it could find no precedent for the conclusion and it was at least potentially inconsistent with other decisions outside of the context of arbitration. This part of the DIRECTV decision sets a high bar for advocates who might try to use state law to argue that a class action waiver is invalid, for it suggests that Buckeye requires a court to find affirmative precedent in state law that invalidated contract terms under closely-similar circumstances before such a court could invalidate an arbitration waiver of judicial protections.