In a 6-3 decision yesterday, the Supreme Court in DirecTV, Inc. v. Imburgia, 577 U.S. ___, S. Ct. (2015) reversed a decision of the California Court of Appeals that refused to enforce a class action arbitration waiver on unconscionability grounds. At issue in that case was a class action arbitration waiver that contained a provision stating that the entire arbitration provision was unenforceable if “the law of your state” made class action waivers unenforceable. At the time the contracts were entered into, class action waivers were unenforceable in California under the Discover Bank rule (which, of course, was later overruled by the Supreme Court in Concepcion). The lower California courts in Imburgia sought to escape Federal Arbitration Act preemption by seizing on the “law of your state” clause in the contract, holding that Sections 1751 and 1781 of the California Remedies Act – rather than the Discover Bank case itself – rendered the class action arbitration waiver invalid under California state law. Therefore, to the lower courts, the entire arbitration provision was unenforceable by its own terms notwithstanding any preemptive force of the FAA.
The Court roundly rejected this analysis. Under the FAA, federal courts must adhere to the state courts’ interpretation of contracts provided that the analysis places arbitration provisions “on equal footing with all other contracts.” (Slip op. at 9, citing Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 43 (2006)). Here, the Court held that for a number of reasons, the court of appeals’ decision had treated the arbitration provision in this case differently than it would other contracts, did not therefore give “due regard … to the federal policy favoring arbitration,” and would be therefore preempted by the FAA. Chief among these reasons was the Court’s interpretation of the “law of your state” clause: “absent any indication that this language is meant to refer to invalid state law, it presumably takes its ordinary meaning: valid state law.” (Slip op. at 9) (emphasis in original). Notwithstanding the California courts’ citation to the California Remedies Act, the majority saw the real source of authority for the California courts’ position being Discover Bank, which was preempted by the FAA in Concepcion. Thus, any California state law deeming class action waivers unenforceable was “invalid” and not the “law of your state” for purposes of determining the applicability of the arbitration provision.
The case drew two dissents. The first, by Justice Thomas, repeated his view that the FAA does not apply at all to state court proceedings. The second, by Justice Ginsburg and joined by Justice Sotomayor, pushed back on what she termed a “routine … for powerful economic enterprises to write into their form contracts with consumers and employees no-class-action arbitration clauses” and held that she would have given the “benefit of the doubt” to the consumer. (Slip op. at 15).
The case was also noteworthy as a rebuke to the California courts for trying to stray from Concepcion. Justice Breyer began the opinion by reinforcing the Supremacy Clause and the state courts’ obligation to follow authoritative decisions of the Supreme Court, even if they disagree with them. And, of course, it is relatively uncommon for the Supreme Court to accept certiorari in a case decided by an intermediate appellate state court when that state’s supreme court declines to review the case.