Directv, Inc. v. Imburgia
136 S. Ct. 463, 193 L. Ed. 2d 365, 63 Communications Reg. (P&F) 1442 (2015)
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Rule of Law:
The Federal Arbitration Act (FAA) preempts state court interpretations of arbitration agreements that treat arbitration contracts differently from other contracts, particularly when such interpretations effectively revive state laws that have been invalidated by the FAA. State courts cannot interpret contractual references to "the law of your state" to include state laws that have been authoritatively held invalid due to federal preemption, unless a general principle of state contract law would apply this interpretation to all other types of contracts.
Facts:
- DIRECTV, Inc. entered into service agreements with its customers, including Amy Imburgia and Kathy Greiner.
- These service agreements contained an arbitration provision in Section 9, which included a waiver of class arbitration.
- Section 9 further stipulated that if "the law of your state" would find the class-arbitration waiver unenforceable, then the entire arbitration provision would be unenforceable.
- Section 10 of the contract stated that Section 9 (the arbitration provision) "shall be governed by the Federal Arbitration Act."
- At the time these contracts were formed, California law, under the Discover Bank rule, deemed class-arbitration waivers in consumer contracts of adhesion unconscionable and unenforceable.
- Subsequently, in 2011, the U.S. Supreme Court's decision in AT & T Mobility LLC v. Concepcion held that California's Discover Bank rule was preempted and invalidated by the FAA.
Procedural Posture:
- Amy Imburgia and Kathy Greiner brought a lawsuit against DIRECTV, Inc. in a California state trial court, seeking damages for early termination fees they believed violated California law.
- DIRECTV, citing the arbitration provision in its service agreements, asked the state trial court to compel the matter to arbitration.
- The state trial court denied DIRECTV's request.
- DIRECTV appealed the trial court's decision to the California Court of Appeal.
- The California Court of Appeal affirmed the trial court's denial of DIRECTV's motion to enforce the arbitration provision.
- The California Supreme Court denied discretionary review of the California Court of Appeal's decision.
- DIRECTV then filed a petition for a writ of certiorari with the Supreme Court of the United States.
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Issue:
Does the Federal Arbitration Act (FAA) preempt a state court's interpretation of an arbitration agreement that construes a "law of your state" provision to include state laws that have been authoritatively invalidated by the FAA, thereby making a class-arbitration waiver unenforceable?
Opinions:
Majority - Justice BREYER
Yes, the Federal Arbitration Act preempts a state court's interpretation of an arbitration agreement that construes a "law of your state" provision to include state laws that have been authoritatively invalidated by the FAA, thereby making a class-arbitration waiver unenforceable, because such an interpretation does not place arbitration contracts on an equal footing with all other contracts. The Court held that the California Court of Appeal's interpretation of the phrase "law of your state" to include California's Discover Bank rule (which was invalidated by Concepcion) was pre-empted by the FAA. The Court reasoned that lower courts must follow Supreme Court holdings, and Concepcion authoritatively interpreted the FAA to pre-empt the Discover Bank rule. While parties can choose what law governs their contracts, the California court's interpretation was not a general principle of California contract law. The Court found the contract language "law of your state" not ambiguous; it ordinarily refers to valid state law, and neither party nor the dissent could point to any case where such language was interpreted to refer to invalid state law. Furthermore, California law itself, under Doe v. Harris, suggests that references to state law incorporate the state's power to change the law and that judicial construction of a statute applies retroactively. The Court concluded that the California court's reasoning appeared unique to arbitration, treating these contracts differently by effectively retaining the force of a state law that federal law had invalidated, thus failing to place arbitration contracts "on equal footing with all other contracts" as required by the FAA.
Dissenting - Justice THOMAS
No, the Federal Arbitration Act does not require state courts to order arbitration in this case, because the FAA does not apply to proceedings in state courts. Justice Thomas reiterated his long-held view that the FAA does not apply to state court proceedings. Therefore, he would affirm the California Court of Appeal's judgment, as state courts are not bound by the FAA.
Dissenting - Justice GINSBURG
No, the Federal Arbitration Act does not preempt the California court's interpretation, because the state court's reading of the "law of your state" clause as referring to California law at the time the contract was formed (before Concepcion) was reasonable and consistent with traditional principles of state contract law, particularly construing ambiguous terms against the drafter. Justice Ginsburg argued that the California court's interpretation was entirely reasonable and that the Supreme Court historically defers to state courts on contract interpretation. She emphasized that DIRECTV itself originally intended the "law of your state" clause to refer to un-preempted California law (e.g., the CLRA) at the time of drafting in 2007, before Concepcion was decided. Parties should be free to choose state law to govern their agreements, even if the FAA would otherwise displace it. She noted that DIRECTV could have used clearer language to exclude class arbitration but chose an ambiguous phrase. Given the unequal bargaining power in adhesion contracts, the contra proferentem rule (construing ambiguity against the drafter) should apply to protect the consumers' reasonable expectations at the time the contract was formed. She criticized the majority for further expanding the FAA's scope beyond its original intent to commercial disputes, thereby "disarming consumers" and insulating powerful economic entities from liability, in contrast to international approaches to consumer arbitration.
Analysis:
This case significantly reinforces the supremacy of federal arbitration law over state contract interpretation, particularly when state courts attempt to circumvent federal preemption. It clarifies that state courts cannot use unique contract interpretation rules for arbitration agreements that would not apply to other contracts, even when interpreting terms like "law of your state." The ruling limits the ability of parties, especially drafters of adhesion contracts, to implicitly incorporate state laws that federal law has deemed invalid, thereby further strengthening the enforceability of class-action waivers in arbitration agreements. This decision continues the Supreme Court's trend of broadly interpreting the FAA to favor arbitration, further impacting consumer rights and access to class-action litigation.
