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DIRECTV, Inc. v. Imburgia - 136 S. Ct. 463 (2015)

Rule:

In 2005, the California Supreme Court held that a waiver of class arbitration in a consumer contract of adhesion that predictably involves small amounts of damages and meets certain other criteria is unconscionable under California law and should not be enforced. But in 2011, the United States Supreme Court held that California’s Discover Bank rule stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress embodied in the Federal Arbitration Act. The Federal Arbitration Act therefore preempts and invalidates that rule.

Facts:

Petitioner DIRECTV, Inc., and its customers entered into a service agreement that included a binding arbitration provision with a class-arbitration waiver. It specified that the entire arbitration provision was unenforceable if the “law of your state” made class-arbitration waivers unenforceable. The agreement also declared that the arbitration clause was governed by the Federal Arbitration Act. At the time that respondents, California residents, entered into that agreement with DIRECTV, California law made class-arbitration waivers unenforceable. The Supreme Court of the United States subsequently held in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 131 S. Ct. 1740, 179 L. Ed. 2d 742, however, that California's Discover Bank rule was pre-empted by the Federal Arbitration Act, 9 U.S.C.S. § 2.

When the residents sued DIRECTV, the trial court denied DIRECTV's request to order the matter to arbitration, and the California Court of Appeal affirmed. The court thought that California law would render class-arbitration waivers unenforceable, so it held the entire arbitration provision was unenforceable under the agreement. The fact that the Federal Arbitration Act pre-empted that California law did not change the result, the court said, because the parties were free to refer in the contract to California law as it would have been absent federal pre-emption. The court reasoned that the phrase “law of your state” was both a specific provision that should govern more general provisions and an ambiguous provision that should be construed against the drafter. Therefore, the court held, the parties had in fact included California law as it would have been without federal pre-emption.

Issue:

Does a reference in an arbitration provision to "the law of your state" render a waiver of class arbitration unenforceable under California's anti-waiver rule, which had been held to be preempted by the Federal Arbitration Act?

Answer:

No

Conclusion:

The sUnited States Supreme Court held that the state court's incorporation into the arbitration provision of invalid California law was unique and restricted to the arbitration field. There was no indication that the state court would generally interpret a "law of your state" contract provision to include state laws that had been invalidated by federal law. Because the state court's interpretation of "law of your state" did not place arbitration contracts on equal footing with all other contracts, that interpretation was preempted, and the arbitration provision had to be enforced under 9 U.S.C.S. § 2.

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