Arguing that, in an Arbitration Agreement Falling Under the Federal Arbitration Act, a Reference to State Law with Respect to the Enforceability of a Class Arbitration Waiver Does Not Displace the Federal Arbitration Act’s Mandate to Enforce Such a Waiver.
At issue in this Supreme Court case was whether, in an arbitration agreement falling under the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (“FAA”), a reference to state law with respect to the enforceability of a class arbitration waiver displaced the FAA’s mandate to enforce such a waiver.The arbitration provision at issue was in satellite television provider DIRECTV’s customer agreement in 2007 with Amy Imburgia. The agreement required binding arbitration of any future disputes and also prohibited class-wide procedures. However, while the arbitration provision recited that it “shall be governed by the Federal Arbitration Act,” it also stated that enforcement of the class action waiver, and indeed of the entire arbitration provision, would depend on the law of each customer’s state: “If, however, the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire [arbitration agreement] is unenforceable.” Id. (emphasis added).
The California Court of Appeals interpreted “the law of your state” as referring to the law of California without regard to the preemptive force of federal law and read the 2007 contractual language as intending to oust the FAA’s mandate to enforce the class arbitration waiver, as announced four years later in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). On that basis, the California court invalidated the class arbitration waiver under the California law that bars class action waivers in consumer actions and, giving effect to the arbitration agreement’s so-called “jettison” clause, voided the entire arbitration agreement, in essence forcing the parties to litigate in court.
From NELF’s point of view, the case raised one central issue: Did the parties to the disputed agreement intend to elevate state law over the FAA on the subject of class arbitration waivers? NELF argued that reference to “the law of your state” in the 2008 agreement was never intended to oust the FAA in favor of state law. Rather, it reflected the understanding, current in 2007, that, under the FAA, the enforceability of class action waivers in arbitration agreements was governed by state law. That is, the 2007 agreement was intended to comply with the FAA as then understood. This understanding, however, was dispelled by the Supreme Court in 2011 in Concepcion, which held that state law cannot impede the enforcement of class arbitration waivers under the FAA. NELF argued that, since “the law of your state” was not intended to oust the FAA, and since “the law of your state” cannot, after Concepcion, impede enforcement of the class arbitration waiver, DIRECTV’s motion to compel arbitration of Imburgia’s individual claims should have been allowed.
In its decision of December 14, 2015, a six-member majority of the Court agreed with NELF and enforced the class arbitration waiver, although for slightly different but nonetheless compelling reasons. In a skillful opinion written by Justice Breyer, the Court held that the FAA preempts the lower court’s opinion, which singles out arbitration agreements for unfavorable treatment and interprets “the law of your state” as referring presumptively to invalid state law. The Court explained that, since the FAA limits the states to applying general contract law principles to arbitration agreements, “the law of your state” must be interpreted under California general contract law. The Court observed that, as an empirical matter, California cases interpreting such contract language (along with cases from every other state) read “the law of your state” as referring presumptively to the valid law of a state. This means that “the law of your state” in this pre-Concepcion agreement evolves with the times and reflects any intervening changes made by a state Legislature, a state supreme court, or, as in this case, any pronouncements of controlling federal law by the Supreme Court under the Supremacy Clause, as announced in Concepcion.
Therefore, once the Court in Concepcion held that the FAA preempted California’s Discover Bank rule (which had effectively invalidated all class arbitration waivers in California consumer form agreements and had required the availability of class arbitration), “the law of your state” no longer included the invalidated Discover Bank rule. Thus, the class arbitration waiver in the pre-Concepcion agreement at issue must be enforced under the FAA, and the jettison clause is never reached.
Notably, the Court explained that, while indeed the FAA allows parties to apply any body of law, even preempted state law, to their arbitration agreements, this is not what “the law of your state” means on its face. To override the presumptive meaning of “the law of your state,” then, parties would have to refer expressly to preempted state law in their arbitration agreements (an unlikely but nonetheless enforceable contract clause).