On March 23, the U.S. Supreme Court granted certiorari in DirecTV, Inc. v. Imburgia, agreeing to resolve a split between the Ninth Circuit and California state courts on how to interpret the same DirecTV arbitration agreement. Although the issue before the Court is narrow, it nevertheless is important for companies whose arbitration clauses do not clearly require the Federal Arbitration Act (FAA), rather than state law, to govern the agreement.

Before the Supreme Court decided AT&T Mobility LLC v. Concepcion, ruling that the FAA preempts state law that would invalidate class action waivers on unconscionability grounds, it was common to include “blow-up” severability clauses to prevent courts from invalidating class action waivers and then ordering class-wide arbitration. These clauses provide that the entire arbitration clause is to be stricken if the class action waiver is invalid. The DirecTV agreement had such a severability clause, but it provided that the entire arbitration agreement would be unenforceable if “the law of your state would find this agreement to dispense with class arbitration procedures unenforceable.”

In the case now before the Supreme Court, the California Court of Appeal concluded that “law of your state” meant only California state law, excluding federal laws such as the FAA. Thus, because California deems some class action waivers to be unconscionable, the court affirmed the denial of a motion to compel arbitration. In doing so, it diverged from a 2013 Ninth Circuit decision in Murphy v. DirecTV, Inc.—involving the same agreement—holding that “federal law is the law of every state,” and therefore California unconscionability law was preempted.

Although the Supreme Court’s decision in Imburgia will have limited application, it may give the Court an opportunity to define further the parameters of FAA preemption, a subject it has addressed on several occasions over the past few years. In addition, it highlights the importance of expressly and unambiguously requiring the FAA to govern arbitration agreements.

Ballard Spahr’s Consumer Financial Services Group pioneered the use of pre-dispute arbitration provisions in consumer financial services agreements. It is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, Mark J. Levin at 215.864.8235 or levinmj@ballardspahr.com, or Scott M. Pearson at 424.204.4323 or pearsons@ballardspahr.com.

Copyright © 2015 by Ballard Spahr LLP.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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