On Monday December 14, 2015, in a 6-3 decision, the U.S. Supreme Court reversed a California state court's refusal to enforce a class action waiver clause in an arbitration agreement between DIRECTV and a consumer, holding that the Federal Arbitration Act (FAA) requires enforcement of the class action waiver. A full copy of the Court's decision in DIRECTV, Inc. v. Imburgia is available here.
Previously, in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the Supreme Court invalidated California's per se rule against class action waivers in arbitration agreements governed by the FAA on the ground that the FAA preempts such a rule. In DIRECTV, the lower court refused to applyConcepcion, ruling that DIRECTV's arbitration agreement chose California law rather than the FAA. Specifically, the arbitration agreement stated that the parties agreed to waive participation in a class action unless the "law of your state" prohibits such a waiver. According to the lower court, the "law of your state" language allowed the court to apply the pre-Concepcion California state rule that class action waivers are unenforceable without reference to the FAA.
The Supreme Court disagreed. Justice Breyer, writing for the Court, held that although the interpretation of an arbitration agreement is a matter of state law in which the Court normally would not intervene, here, the state court displayed an impermissible bias against enforcing arbitration agreements according to their terms. According to the Court, it was patently unreasonable for the state court to read the "law of your state" clause to include invalid state law, such as California's per se rule against class action waivers.
The Court further noted that California courts generally interpret "law of your state"-type contractual language to include only the valid laws of the state in question, not laws that were on the books at the time of the contract, but subsequently invalidated by a court or legislature. It was therefore clear that the state court was not applying general California contract law, but rather was displaying hostility to class action waivers. Because the FAA requires that arbitration agreements be applied according general state contract law and does not permit the application of laws or interpretations hostile to arbitration, the state court's interpretation of the "law of your state" clause was preempted by the FAA.
This is the latest in a series of Supreme Court decisions demonstrating the Court's hostility to class arbitration and, particularly, to state laws and court decisions promoting class arbitration. The DIRECTV decision is significant because of the Supreme Court's refusal to defer to a state court interpretation of a choice of law clause, which would normally be the province of state law. The Court's reversal of that interpretation suggests that the Court will be increasingly suspicious of attempts to use contractual language referencing state law to circumvent the Court's interpretations of the FAA.
The primary takeaway for business and corporate counsel is to use extreme care in drafting arbitration agreements so as to include an ironclad class action waiver and to provide no room for arguments that state law, rather than the FAA, should be used to interpret the agreement.