On December 14, 2015, the U.S. Supreme Court handed down an unusual decision in DIRECTV, Inc. v. Imburgia, 2015 LEXIS 7999 (2015). Normally, the Court hears cases from the federal appeals courts, federal administrative agencies, or state supreme courts. State cases usually come from prisoners who file writs of habeas corpus, seeking review of a conviction or sentencing on constitutional grounds. In DIRECTV, however, the Court reviewed and reversed a California state appeals court decision.

Although the Court’s grant of review was atypical, the underlying dispute was all too common. A customer files suit against a corporation on behalf of himself and all others similarly situated (potentially thousands or even hundreds of thousands of people) for alleged “unfair” or “unlawful” business practices (in this case, unfair early termination fees). The amount in dispute is small (unless multiplied by the number of potential class members). The product or service could be a credit card, securities account, mobile phone, car lease or the like. The customer agrees to arbitrate any disputes, and waives the right to pursue a class-action in arbitration (called a “class action waiver”). The corporation moves to compel arbitration of the individual case only. If granted, the court dismisses the class action allegations, leaving the absent class members (potentially thousands of other aggrieved customers) to fend for themselves.

The trial court here denied Directv’s motion to arbitrate plaintiff’s claims. (Judge John Shepard Wiley, Jr., Los Angeles Superior Court). The court relied on language in the contract stating that “if the law of your state” makes class action waivers unenforceable, then the entire arbitration agreement “is unenforceable.” At the time of this contract, the California Supreme Court had ruled that class action waivers in certain contracts were not enforceable because they were unconscionable (so one-sided and unfair, both in substance and procedure, as to make the contract invalid). Discover Bank v. Superior Court, 36 Cal.4th 148 (2005). The problem is the U.S. Supreme Court had effectively overturned Discover Bank, finding that it conflicted with the purpose and objective of Congress in passing the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq. AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) and American Express Co. v. Italian Colors Restaurant, 570 U. S. ___ (2013).

In light of Concepcion, the “law of your state” clause was ambiguous. The trial court believed the parties had adopted the Discover Bank rule. Imburgia v. DIRECTV, Inc., 225 Cal. App. 4th 338, 347 (Cal. App. 2d Dist. 2014). The Supreme Court was asked to review the state court’s interpretation to determine if it conflicted with the FAA. The FAA is the supreme law of the land when it comes to contracts involving interstate commerce and thus “the Judges in every State shall be bound” by “the Laws of the United States.” U.S. Const., Art. VI, cl. 2.

According to the Supreme Court, the decision of the trial court, as later upheld by the court of appeals, rested on grounds which only impacted arbitration agreements, not all contracts entered in the state. The Discover Bank rule conflicted with the FAA because it rendered invalid large numbers of arbitration agreements. For the same reason, the state court’s interpretation was unconstitutional because it relied on and implemented the discredited Discover Bank rule, when it would not normally interpret other contracts the same way. The state court thus ran afoul of section 2 of the FAA which states that arbitration agreements shall be “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”
Arbitration agreements can be challenged based on lack of consent (forgery, fraud, duress), unconscionability, or any other defenses applicable to all contracts. Courts cannot single out arbitration agreements for discriminatory treatment.

The bottom line of this decision is that an otherwise valid arbitration agreement that includes a class action waiver must be enforced.