Last week, the United States Supreme Court issued its opinion in DirecTV v. Imburgia, 577 U.S. ___ (2015). This decision is important for manufacturers of consumer products because it fortifies the ability to incorporate and rely upon arbitration clauses as a way to reduce risk and overall litigation cost.
As most are well aware, arbitration clauses push contractual disputes and related claims out of court and into the realm of alternative dispute resolution. If binding and enforced, such clauses can provide faster adjudication and reduce litigation costs. With the increasing trend in class action consumer product litigation, arbitration agreements have evolved to include class arbitration waivers. Some states however, like California, prohibited such waivers. The Supreme Court in Imburgia made clear, once and for all, that the enforceability of unambiguous arbitration clauses is not a decision that is left to the states, but one that is governed by the Federal Arbitration Act.
In Imburgia, the Supreme Court reversed a California Court of Appeal decision (the California Supreme Court refused to hear the appeal) which refused to enforce a binding arbitration provision with a class arbitration waiver that specified that the entire arbitration provision was unenforceable if the “law of your state” made class-arbitration waivers unenforceable. In reversing that decision, the Supreme Court held that a group of consumers could not form a class action in arbitration and instead were required to pursue individual arbitrations despite a clause in the contract to the contrary.
By way of background, on September 7, 2008, Amy Imburgia filed a class action lawsuit against DIRECTV, Inc. (DIRECTV), and argued that DIRECTV had improperly charged early termination fees to its customers. In 2011, the U.S. Supreme Court decided AT&T Mobility LLC v. Concepcion, in which the Court held that the Federal Arbitration Act preempted California precedent that had previously held that, in certain circumstances, arbitration clauses in customer agreements were unenforceable. Less than one month after that decision, DIRECTV moved to stay or dismiss the plaintiffs’ case and compel arbitration, which DIRECTV argued it had not done previously because it thought the arbitration clause in its customer agreement was void under California precedent. The trial court denied the motion and the California Court of Appeal for the Second District affirmed and refused to enforce the provision by holding that the language of the customer agreement subjected the arbitration clause to state law.
In finding that the refusal to enforce the arbitration provision was preempted by the Federal Arbitration Act, the Supreme Court in Imburgia concluded that the Court of Appeal’s decision did not rest “upon such grounds as exist…for the revocation of any contract”. The Supreme Court noted that “the issue here is not whether the court’s decision is a correct statement of California law but whether [the state law] is consistent with the Federal Arbitration Act.” On this point, the Court found that “the California court’s interpretation of the contract language does not place arbitration contracts “on equal footing with all other contracts” because California courts “would not interpret contracts other than arbitration contracts the same way.” For that reason, the Court held, California law “does not give due regard…to the federal policy favoring arbitration.” The California Court of Appeal was ordered to enforce the arbitration agreement on remand.