On December 14, 2015, in DirecTV, Inc. v. Imburgia, No. 14-462, the United States Supreme Court reversed a California state court’s refusal to enforce an arbitration clause in a contract between DirecTV and its customers. The contract provided that “any Claim either of us asserts will be resolved only by binding arbitration,” but neither “shall be entitled to join or consolidate claims in arbitration.” It added that if the “law of your state” makes the waiver of class arbitration unenforceable, the entire arbitration provision “is unenforceable.”
The case began in 2008, when two customers sued DirecTV in California state court for hefty early termination fees they believed violated California’s consumer protection laws. At the time, the California Supreme Court’s decision in Discovery Bank v. Superior Court, 113 P.3d 1100, 1110 (Cal. 2005) made clear that class-arbitration waivers were unenforceable under California law. So, pursuant to the terms of their contract with DirecTV, the two customers were permitted to pursue their claims against the company in court, rather than through binding arbitration.
Fast Forward to 2011: The U.S. Supreme Court found that the Federal Arbitration Act pre-empts California’s Discovery Bank rule because that rule “‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress’” as embodied by the Federal Arbitration Act. AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 352 (2011). Relying on the Supreme Court’s invalidation of Discovery Bank, DirecTV halted the litigation and moved to compel binding arbitration. The trial court denied DirecTV’s request, and it appealed. The California Court of Appeals affirmed, finding that the waiver of class arbitration was unenforceable under California law, notwithstanding the Supreme Court’s recent ruling in Concepcion, and that it could not compel arbitration. Because the Ninth Circuit — the federal circuit in which California sits — had reached the opposite conclusion, DirecTV petitioned the U.S. Supreme Court.
Writing for the majority, Justice Breyer framed the issue as “whether the decision of the California court places arbitration contracts ‘on equal footing with all other contracts.’” He answered that question in the negative, finding that the California court’s “interpretation of this contract is unique.” The California court effectively had interpreted the phrase “law of your state” to mean California’s pre-Concepcion law. The Supreme Court found that interpretation untenable, reasoning that “[a]bsent any indication in the contract that this language is meant to refer to invalid state law, it presumably takes its ordinary meaning: valid state law.” It also noted that the California Supreme Court recently had held that “under ‘general contract principles,’ references to California law incorporate the California Legislature’s power to change the law retroactively.” It added that nothing in the California court’s opinion suggested that the phrase “law of your state” would refer to anything other than valid laws in any other context; rather, the California court had framed its reasoning to suggest that its holding was limited to arbitration. For these reasons, the Supreme Court concluded that the California court’s interpretation of the phrase “law of your state” did not put arbitration contracts “on equal footing with all other contracts” or give “due regard ... to federal policy favoring arbitration,” and it found that the California court’s interpretation was pre-empted by the Federal Arbitration Act.
Justice Thomas wrote a short dissent, repeating his view that the Federal Arbitration Act should not apply in state courts. And Justice Ginsburg, joined by Justice Sotomayor, wrote an impassioned dissent expressing her belief that the majority’s decision further “disarms consumers, leaving them without effective access to justice.” She argued that the phrase “law of your state” should be given the meaning it had when written or, at the very least, should be deemed ambiguous and construed against DirecTV as the contract’s drafter.
Bottom Line: If the Supreme Court’s decision in Concepcion weren’t clear enough, its decision in DirecTV is: Binding arbitration clauses in your contracts are enforceable, and it increasingly is unlikely that state contract law — or other creative arguments— can undermine them. Transactional lawyers should consider whether to include binding arbitration clauses in their contracts, and litigators should consider enforcing them to reduce costs and reach a more effective and efficient — and private — result.