United States Supreme Court Rejects California State Courts’ Attempt to Sidestep Federal Arbitration Act Preemption on Class Action Waivers

By: Andrew C. Glass, Robert W. Sparkes III, Roger L. Smerage

The U.S. Supreme Court has ruled that a California state court’s decision striking down a class action waiver in an arbitration agreement was an improper attempt to evade the Supreme Court’s 2011 landmark decision in AT&T Mobility LLC v. Concepcion. See DirecTV, Inc. v. Imburgia, 577 U.S. — (No. 14-462) (Dec. 14, 2015). Concepcion held that the Federal Arbitration Act (“FAA”) preempts state law to the extent it purports to bar the inclusion of class action waivers in arbitration agreements. Imburgia reiterates that holding and concludes that because the California court had interpreted the subject arbitration agreement in a manner “restricted to [the] field” of arbitration, as opposed to contracts generally, the interpretation could not withstand scrutiny under the FAA.

Imburgia arose from a dispute governed by an arbitration agreement under which both parties waived the right to proceed on a class basis in arbitration unless the “law of [the consumer’s] state” rendered such a provision unenforceable. The California Court of Appeal concluded that the “law” of California did so, even though Concepcion (which was decided after the parties had entered into the contract at issue) preempted such law. The California court reasoned that the contractual freedom afforded to parties under the FAA allowed the parties to choose to be bound by California law without the overlay of federal preemption law.

The Supreme Court rejected this reasoning in Imburgia. Justice Breyer (who authored the dissent in Concepcion) wrote for a 6-3 majority. The Court held that under the FAA, a court cannot construe language in an arbitration agreement as rendering the agreement unenforceable where it would not construe the same language in other types of contracts as having the same effect. The Court then examined the lower court’s interpretation of the parties’ agreement to waive class arbitration unless barred by California law. The Court found that at the time of the lower court’s decision, Concepcion had invalidated California law barring class arbitration waivers. Next, the Court found that in construing contracts generally, California courts would not presume the parties intended to submit to invalid state law absent an express provision to the contrary. The Court found, however, that in construing the subject arbitration agreement, the lower court had presumed the parties intended to submit to invalid state law even though the agreement lacked an express provision to that effect. Thus, the Court ruled that the lower court had improperly treated the arbitration agreement differently from contracts generally, in violation of the FAA.

Justice Ginsburg, joined by Justice Sotomayor, dissented on the basis that the interpretation of the subject arbitration agreement involved a question of state law which the Court does not sit to review and on the basis that the California court’s interpretation of California law was correct––namely that the parties did not have to specify they were only agreeing to abide by valid state law. Justice Thomas separately dissented, reiterating his belief that the FAA does not apply to proceedings in state courts.

The key lesson from Imburgia is that state courts, even those applying state contract law, cannot strike down arbitration agreements or class action waivers in a manner inconsistent with Supreme Court precedent. This includes abiding by Concepcion’s directive that a state court cannot bar class action waivers on grounds exclusively directed to arbitration agreements. In sum, as the Supreme Court explained, the FAA “is a law of the United States, … Concepcion is an authoritative interpretation of that Act,” and thus, “the judges of every State must follow it.”

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For further information regarding Concepcion, see R. Bruce Allensworth, Andrew C. Glass, and Robert W. Sparkes, III, “Waive of Change:” Class Arbitration in the Aftermath of the Supreme Court’s Decision in AT&T Mobility LLC v. Concepcion, K&L Gates LLP Mortgage Banking & Consumer Financial Products Alert (May 11, 2011) and Andrew C. Glass, R. Bruce Allensworth, Roger L. Smerage, “Everything Old Is New Again”: Following the Concepcion Decision, New Motions to Compel Individual Arbitration Are Granted in Old Class Actions, K&L Gates LLP Mortgage Banking & Consumer Financial Products Alert (Aug. 31, 2011).