In DirecTV v. Imburgia, No. 14-462, 2015 U.S. LEXIS 7999 (December 14, 2015) the United States Supreme Court reversed a California Court of Appeal decision interpreting, and invalidating, an arbitration clause containing a class arbitration waiver, holding that the Court of Appeal’s interpretation was preempted by the Federal Arbitration Act (the “FAA”).  The Court then ordered the Court of Appeal to enforce the arbitration agreement at issue.  The Court’s opinion, which was decided 6-3 with two dissenting opinions, reinforces earlier Supreme Court precedent holding that state courts cannot avoid the preemptive effect of the FAA by applying facially neutral state contract principles in a way that disfavors arbitration. 

Plaintiffs filed a putative class action complaint against DirecTV in California state court, alleging a variety of claims including violation of the Consumers Legal Remedies Act and California’s Unfair Competition Law.  DirecTV’s service agreement with its customers included an arbitration clause and a class arbitration waiver.  The class arbitration waiver further provided that if the “law of your state” makes the waiver unenforceable, the entire arbitration provision is unenforceable.  When DirecTV petitioned to compel arbitration, the trial court denied the request.  DirecTV appealed.

The California Court of Appeal affirmed. The Court of Appeal’s opinion focused on the meaning of the phrase the “law of your state,” and noted that, when the contract was signed, the law of California, as set forth in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), made the class arbitration waiver unenforceable.  The Court of Appeal conceded that AT&T Mobility LLC v. Concepcion, 563 U. S. 333, 352 (2011) later invalidated California’s Discover Bank rule, but nevertheless held that the class arbitration waiver was unenforceable under “California law.”  The court reasoned that, since the parties’ contract could incorporate the laws of different states, they were free to refer to California law as it would have been without Concepcion.  The court also applied two general rules of contract interpretation in its decision.  First, it read the “law of your state” provision as more specific than the “general” provision stating that the FAA governs the contract, and thus found it controlling.  Second, the court held that, since DirecTV had drafted the provision, any “ambiguous” language should be construed against it.

The Supreme Court reversed and remanded. In its decision, the Court reiterated that lower courts must follow its holding in Concepcion.  The Court also noted that it would not disturb the Court of Appeal’s determination that the “law of California” includes invalid state law.  To be consistent with the FAA, however, the California court’s interpretation must have placed arbitration contracts “on equal footing” with other contracts.

The Court concluded that lower court had not done so. First, the relevant contract language, referring to the “law of your state,” was not ambiguous.  The language took its ordinary meaning:  valid state law.  Second, California law provides that, under “general contract principles,” references to California law incorporate later changes to those laws.  Third, there was no indication that a California court would interpret the phrase “law of your state” the same way in a non-arbitration context.  Fourth, the lower court had framed the question before it as one related to “arbitration,” instead of contract interpretation generally.  Fifth, the notion that preempted state law retained force after being invalidated by the Supreme Court was unlikely to be accepted as a general matter.  Sixth, the Court of Appeal did not invoke any principle suggesting that California courts would reach the same interpretation in a non-arbitration context.  The Court also rejected the Court of Appeal’s rationale that “ambiguous language” should be construed against the drafter, noting that the canon has limits.  Given the foregoing, the Court held that the California court’s interpretation of “law of your state” disfavored arbitration and therefore was preempted by the FAA.

The Supreme Court’s decision in DirecTV v. Imburgia makes it clear that the Court will not tolerate attempts to side-step Concepcion.  Plaintiffs will find it even more difficult going forward to avoid class arbitration waivers in consumer contracts.