UNITED STATES – The Supreme Court has once again spoken decisively in favor of class action waivers in arbitration agreements. In DirecTV, Inc. v. Imburgia, the Court explained in no uncertain terms that “[t]he Federal Arbitration Act is a law of the United States, and Concepcion is an authoritative interpretation of that Act. Consequently, the judges of every State must follow it.” The Court thus reversed a decision of the California Court of Appeal that invalidated a class action waiver based on the California court’s belief that the contract incorporated the (by that time invalidated) California ban on class action waivers. This ruling again reaffirms the importance of including arbitration agreements that include class action waivers in consumer contracts.
The agreement at issue in Imburgia specified that the entire arbitration provision was unenforceable if the “law of your state” (i.e. California) made class-arbitration waivers unenforceable. It also provided that the arbitration clause was governed by the Federal Arbitration Act. At the time the contract was entered, California law barred the use of arbitration agreements with class waivers. This law was expressly invalidated by the landmark Supreme Court decision in AT&T Mobility LLC v. Concepcion, that concluded the Federal Arbitration Act preempted California’s ban on class waivers and that arbitration agreements could only be invalidated based on grounds applicable to all contracts (i.e. fraud, duress, unconscionability).
The California court nevertheless gave effect to California law’s ban on class waivers. It reasoned that while the waiver was valid under federal law as a result of Concepcion, it could still be invalidated under California law. Thus, when the California court applied “state law alone”, as it believed it was bound to do by the contract, it held the class waiver and arbitration agreement as a whole unenforceable.
After the California Supreme Court denied review, the U.S. Supreme Court granted cert and reversed the opinion. The Supreme Court made clear that it did not decide whether the California court’s decision was a correct statement of California law, on which it would defer to California courts. Instead, the Court analyzed only whether California state law, as declared by the California court, was consistent with the Federal Arbitration Act. To do so, the Court examined whether the California court’s decision placed the arbitration agreement on equal footing with other contracts, as required by Concepcion. Because the California ban on class action waivers was no longer valid state law post-Concepcion, the issue turned on the effect that a California court would give to a contract purporting to incorporate invalid state law.
The Supreme Court concluded that California would not allow an invalidated state law to maintain legal force and invalidate a contract outside the field of arbitration. Because arbitration contracts must be treated equally with other contracts, the invalidated ban on class action waivers could not strike down the arbitration agreement here. The California court’s decision to the contrary thus failed to place arbitration contracts on equal footing with other contracts and violated Concepcion.
Imburgia is the latest reminder of the importance of a fairly drafted class action waiver. It follows the Supreme Court’s Italian Colors decision, which rejected an attempt to carve out cases based on statutory violations from class action waivers, as yet another affirmation that Concepcion bars invalidation of class action waivers on any grounds other than general contract defenses including fraud, duress, or unconscionability. Having failed in these previous battles against class action waivers, plaintiffs are likely to step up unconscionability attacks. Thankfully, both Concepcion and the California Supreme Court’s recent Sanchez decision provide helpful guidance on how to prepare arbitration agreements to survive these attacks. Companies should review their agreements closely to ensure that the real benefits of the strong preference in favor of arbitration are not lost as a result of a poorly drafted and unbalanced agreement.
