SCOTUS Arbitration Preemption Cases: One Down, One to Go

This term the Supreme Court has taken two cases from California involving arbitration clauses. One has been decided, the other will be decided later this term. Both cases are of interest to states as they involve preemption of state law by the Federal Arbitration Act.

In DIRECTV v. Imburgia the Supreme Court held 6-3 that a California state court interpretation of California law, that class action arbitration is unenforceable, is preempted by the Federal Arbitration Act (FAA).

Two DIRECTV customers sued DIRECTV claiming its early termination fees violate California law. Their service agreement stated that all claims would be resolved by arbitration and that class arbitration would be prohibited. But, if the “law of your state” made waiver of class arbitration unenforceable, the entire arbitration provision was unenforceable.

The FAA governs the service agreement. It favors lawful, written arbitration provisions contained in contracts.

In 2008, when the DIRECTV customers sued DIRECTV a 2005 California Supreme Court case (Discover Bank v. Superior Court), holding class-arbitration waivers unenforceable, was good law. But in 2011 in AT&T Mobility v. Concepcion the U.S. Supreme Court held that the FAA preempted and invalidated that ruling.

In this case the California Court of Appeal concluded the “law of your state” was California law as it was before Concepcion. It therefore invalidated the entire arbitration agreement.

The U.S. Supreme Court ruled that the FAA preempts the California Court of Appeal interpretation of California law. While the Court agreed that parties could chose to have contracts governed by pre-Concepcion California law (or the law of Tibet or pre-revolutionary Russia), the ordinary meaning of “law of your state” is valid state law.

The issue in MHN Government Services v. Zaborowski is whether California courts’ refusal to sever unconscionable portions of an arbitration agreement and keep the rest of the arbitration agreement intact is preempted by the Federal Arbitration Act.

Consultants working for a military contractor which provides life-skills counseling to members of the military and their families sued the contractor for Fair Labor Standards Act violations rather than pursuing arbitration per their agreement.  

California courts refuse to sever when, as in this case, “multiple provisions of the contract permeate the entire agreement with unconscionability.” In a three-sentence analysis relying on a previous case raising the same issue, the Ninth Circuit refused to sever the unconscionable portions of the arbitration provision in this case.