Atlantic Legal Asks Supreme Court to Overturn California Law That Limits Arbitration

Atlantic Legal Foundation (ALF), on its own behalf and on behalf of the International Association of Defense Counsel, today asked the U.S. Supreme Court to overturn a decision from the California Court of Appeal that interpreted a class arbitration waiver in DirecTVs standard Customer Agreement as a basis to negate the entire arbitration agreement. In a brief filed in the U.S. Supreme Court today in DIRECTV, Inc. v. Imburgia, ALF urged the Supreme Court to reaffirm the primacy of federal arbitration law over inconsistent state laws or court decisions that would limit the availability of arbitration.

The dispute arises from class actions alleging that DirecTV violated California law by charging subscribers a cancellation fee when they cancelled their service before the end of the contract term. DirecTV moved to compel arbitration under the arbitration clause of the Customer Agreement, but the trial court refused to do so. The California Court of Appeal affirmed the trial courts refusal to compel arbitration, finding the arbitration clause ambiguous and interpreting it as the parties agreement to be bound by California law rather than by the Federal Arbitration Act. The California Court of Appeal read the phrase the law of your state to include state laws the U.S. Supreme Court and lower federal courts in California and elsewhere have held to be preempted by federal law, and it then found the entire arbitration agreement to be unenforceable under California law.

In the brief, ALF argues the California appeals court engaged in sophistic reasoning to avoid decisions of the federal appellate court and two federal district courts interpreting the very same DirecTV Customer Agreement as requiring individual arbitration and the state court erred in refusing to enforce the parties agreement to arbitrate their dispute in individual arbitration. ALFs principal argument is that the California appeals courts interpretation of the phrase the law of your state to mean the (non-federal) law of your state without considering the preemptive effect of federal law ignores settled federal law that applies to state law both prospectively and retroactively; we argue further that and state law that is preempted by federal law is a legal nullity.

The California Court of Appeals decision in this case does precisely what AT&T Mobility LLC v. Concepcion (2011), the Supreme Courts recent leading case on enforceability of arbitration agreements, prohibits: it applies state law to invalidate an arbitration agreement solely because that agreement includes a class-action waiver. The California Court of Appeal (the states intermediate appellate court) purported to reconcile that result with Concepcion by holding that the parties contractually opted out of FAA preemption, even though they specified that their arbitration agreement shall be governed by the Federal Arbitration Act. The California court based its holding on a non-severability clause designed to prevent class arbitration; under that clause, the parties agreed that the arbitration agreement as a whole would be unenforceable if the law of [the customers] state would find the class-action waiver unenforceable. The California court seized on that clause to find that the parties intended to rely on a state law to avoid enforcement of an arbitration agreement governed by the FAA even though the state law is preempted by the FAA .

That reasoning, the Ninth Circuit explained in another case interpreting the very same language in the same customer agreement, is nonsensical. Murphy v. DIRECTV, Inc., 724 F.3d 1218, 1226 (9th Cir. 2013). Under the Supremacy Clause, a state law that is preempted by federal law is a nullity. Thus, Concepcion made clear that the Discover Bank rule [disallowing class-action waivers] is not, and indeed never was, California law.

Arbitration is an effective, efficient and comparatively inexpensive alternative to costly and time consuming litigation, but plaintiffs have increasingly sought to use class-action arbitration as a replacement for lucrative class action lawsuits even where the arbitration agreement explicitly bars class arbitration.

We ask the Supreme Court to reiterate its teaching one the clear mandate of the Federal Arbitration Act and that the Court will not tolerate the very judicial hostility to arbitration the Federal Arbitration Act was intended to overcome.

To see our brief, click here.