On December 14, 2015, the U.S. Supreme Court ruled that the Federal Arbitration Act trumps California state law when it comes to a company enforcing arbitration agreements with its customers in the state.
The case — DirecTV v. Imburgia — involved a service agreement between DirecTV and its customers that included a binding arbitration clause and class action waiver. The clause noted that the waiver was not valid if “the law of your state” made class action waivers unenforceable.
Class action waivers in arbitration agreements are prohibited by California law per the Discover Bank rule, named after the California Supreme Court decision in 2005 in Discover Bank v. Superior Court that held a waiver of class arbitration in a consumer contract is unconscionable under California law. DirecTV customers filed a class action suit in 2008 against the company in California, citing the Discover Bank rule as grounds for nullifying the enforceability of the entire arbitration clause, including the class action waiver.
DirecTV maintained that the U.S. Supreme Court’s 2011 decision in AT&T Mobility v. Concepcion, which held that state laws that limit or prohibit class action waivers in service agreements are preempted by the Federal Arbitration Act (“FAA”), invalidated California state law. A California appeals court disagreed, finding that the arbitration agreement’s reference to “the law of your state” enabled the court to consider any state law, including those preempted by the FAA.
In a 6-3 decision, the Supreme Court reversed the California appeals court ruling, stating, “The phrase ‘law of your state’ is not ambiguous and takes its ordinary meaning: valid state law…The view that state law retains independent force even after it has been authoritatively invalidated by this court is one courts are unlikely to accept as a general matter and to apply in other contexts.”
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