By Daniel Aiken and Philippe Lebel
On December 14, 2015, the U.S. Supreme Court reaffirmed its previous ruling that any state law that treats arbitration agreements less favorably than other types of agreements is preempted by the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1 et seq. Specifically, in a decision handed down in DIRECTV, Inc. v. Imburgia, No. 14-462, reaffirmed its decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), that the Federal FAA, which embodies the federal policy favoring arbitration, preempts all special state law rules that uniquely burden arbitration agreements. Although the Imburgia decision was a consumer class action, the Court’s approach indirectly confirms its continued support for the enforceability of employment arbitration agreements, including those with class action waivers. While Imburgia suggests that class action waivers are here to stay, the Court’s simultaneous decision to deny review to a case challenging the California Supreme Court’s ruling in Iskanian v. CLS Transportation Los Angeles LLC, 59 Cal.4th 348 (2014), suggests that the Court may exercise some restraint when it comes to state-specific workarounds, at least for the time being.
DIRECTV and its customers entered into service contracts that included binding arbitration agreements with class action waivers. The agreements specified, however, that the entire arbitration provision would be unenforceable if the “law of your state” made class arbitration waivers unenforceable. At the same time, the agreements declared that they were governed by the FAA.
Plaintiffs Amy Imburgia and Kathy Griener (“Plaintiffs”) sued DIRECTV in California state court seeking damages, but DIRECTV moved to compel arbitration. The state trial court denied DIRECTV’s request and it appealed. The California Court of Appeal decided that the enforceability of the arbitration provision turned on the meaning and import of the language the “law of your state” in the agreements. It reasoned that even though Concepcion held that the FAA preempted the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal.4th 148 (2005), which invalidated class arbitration waivers, the parties had expressly incorporated the law of the State of California – not federal law. Relying on two provisions of the California Consumers Legal Remedies Act (“CLRA”), which invalidated any waiver of the right to bring class actions, the Court of Appeal found that the more specific language concerning the “law of your state” controlled over the more general language indicating that the agreements were governed by the FAA, and held that the arbitration provision was, thus, unenforceable. The California Supreme Court denied discretionary review and DIRECTV appealed.
The U.S. Supreme Court reversed the Court of Appeals’ decision and reaffirmed Concepcion’s central holding that arbitration-specific state law defenses to enforcement are preempted by the FAA. The majority noted that the contract language was not ambiguous and presumably only meant to incorporate valid state law. Thus, because Discover Bank was no longer valid, that case’s holding was not incorporated. The majority also noted that the Court of Appeals’ approach was different than in any other context – i.e., it would not have incorporated invalid state law in deciding the enforceability of any other type of contract. The majority further explained that the Court of Appeals’ decision was rooted in the (erroneous) notion that an invalid state law remained in effect even after it had been authoritatively invalidated by the U.S. Supreme Court, as was the case here.
In 2014, in Iskanian, the California Supreme Court held a state law that prohibits waiver of the right to bring non-class representative actions pursuant to California’s Private Attorneys General Act (“PAGA”), California Labor Code §§ 2698 et seq., was not preempted by the FAA. The U.S. Supreme Court denied review of Iskanian and, in January 2015, the Ninth Circuit Court of Appeals applied Iskanian’s holding in federal court.
Earlier this year, CarMax Auto Superstores California LLC (“CarMax”) petitioned for certiorari in CarMax Auto Superstores California LLC v. Wahid, effectively asking the U.S. Supreme Court to review Iskanian’s holding, arguing that it was at-odds with Concepcion and its progeny. However, despite its favorable ruling in Imburgia the same day, the U.S. Supreme Court denied CarMax’s petition for certiorari.
Although Imburgia’s holding reconfirms that employers can rely on arbitration agreements with class action waivers so long as the current Roberts court majority exists, the Court’s refusal to hear a challenge to Iskanian suggests that some level of interference with arbitration agreements will be permitted. California employers will have to wait until the Ninth Circuit or California Supreme Court again tee up the issue to determine how cases like Iskanian can be reconciled with Imburgia and Concepcion, if at all. Meanwhile, this uncertainty will permit California plaintiffs’ lawyers continued opportunities to engage in costly, large-scale representative actions.