Resolving a split between the California Court of Appeal and the Ninth Circuit concerning the enforceability of the same DirectTV arbitration agreement, the U.S. Supreme Court ruled that the California Court of Appeal’s interpretation of the agreement is preempted by the Federal Arbitration Act (FAA). Although the issue decided by the Court in DirectTV, Inc. v. Imburgia  is narrow, it nevertheless is important for companies whose arbitration clauses do not clearly require the FAA, rather than state law, to govern the agreement.

In its 2011 landmark ruling in AT&T Mobility LLC v. Concepcion, the Supreme Court ruled that the FAA preempts state laws that invalidate class action waivers in consumer arbitration agreements on unconscionability grounds. California was among the states that deemed some class action waivers to be unconscionable. Before Concepcion, it was common to include “blow-up” severability clauses to prevent courts from invalidating class action waivers and then ordering class-wide arbitration. The DirecTV agreement had such a severability clause, which 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.''

The California Court of Appeal affirmed the trial court’s denial of DirecTV's post-Concepcion motion to enforce the arbitration agreement, concluding that ''the law of your state'' meant  California state law as it would have been had it not been invalidated by Concepcion. 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. The California Supreme Court denied review, but the U.S. Supreme Court granted certiorari.

Observing that contract interpretation is ordinarily a state law matter to which it must defer, the Supreme Court assumed that the Court of Appeal had correctly stated California law and limited its analysis to whether it was consistent with the FAA for ''the law of your state'' to include invalidated state law. After examining the grounds relied on by the Court of Appeal for its decision, the Supreme Court concluded that California courts would not similarly interpret contracts other than arbitration agreements and that the Court of Appeal's interpretation was ''unique, restricted to [arbitration contracts.]'' Among the six considerations on which the Supreme Court based its conclusion was that it could ''find nothing in [the Court of Appeal's] opinion (nor in any other California case) suggesting that California would generally interpret words such as 'law of your state' to include state laws held invalid because they conflict with, say, federal labor statutes, federal pension statutes, federal antidiscrimination laws, the Equal Protection Clause, or the like.'' Having concluded that ''California's interpretation of the phrase 'laws of your state' does not place arbitration contracts 'on equal footing with all other contracts,''' and therefore did not give ''due regard…to the federal policy favoring arbitration,'' the Supreme Court held in a 6-3 decision that the Court of Appeal's interpretation was preempted by the FAA.

Although the Supreme Court’s decision is technically a reversal of a Court of Appeal decision that the California Supreme Court declined to review, it nevertheless appears to be yet another rebuke of the California courts' continuing efforts to find exceptions to Concepcion.

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 Consumer Financial Services Group Practice Leader Alan S. Kaplinsky, Mark J. Levin, Scott M. Pearson, or the Ballard Spahr attorney with whom you work.

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