Cruz-Alvarez and Canfield Analyze Supreme Court's Latest Ruling on Federal Preemption

Shook, Hardy & Bacon Partner Frank Cruz-Alvarez and Associate Rachel Canfield have authored a Washington Legal Foundation (WLF) Legal Pulse article on the U.S. Supreme Court's decision to remand a California Court of Appeal’s refusal to enforce an arbitration clause contained in DirecTV's service agreement with certain customers. According to the article, the agreement included "a class-action waiver which rendered the entire provision unenforceable if the waiver clause was deemed unenforceable under the law of the customer’s state."

The authors explain that when DirecTV drafted the service agreement, "California law deemed such class-action waivers unenforceable." After the lawsuit was filed, however, the Supreme Court ruled in AT&T Mobility LLC v. Concepcion that the Federal Arbitration Act (FAA) preempts state laws "which per se prohibit the enforcement of class-action waivers." 

Although it acknowledged Concepcion, the California court in DirecTV Inc. v. Imburgia, et al. applied general contract principles, concluding that "the contractual language 'law of your state' established that state law, as opposed to the FAA, governed," and directing parties to "refer to California law as it would have been prior to Concepcion." Responding to DirecTV's petition for a writ of certiorari, the U.S. Supreme Court disagreed with this reasoning and "reiterated the importance and effect of the Supremacy Clause." As Cruz-Alvarez and Canfield write of the decision: 

Concepcion effectively rendered invalid the applicable California law at the time the appeal was decided. Hence, the crux of the Court’s decision turned on whether the contractual phrase “law of your state” included invalid California law. First and foremost, the Court emphasized that the contractual language unambiguously refers to valid state law. Flowing from that basic premise, the Court underscored that California case law itself dictates that courts must consider retroactive changes in the law when interpreting contractual language and noted that nothing in the decision on review suggested that California’s courts would interpret the contractual phrase “law of your state” to encompass invalid law in any context other than arbitration. The Court concluded that the California’s interpretation of “law of your state” was preempted by the FAA because the result of that arbitration-specific decision prevented arbitration contracts from being “on equal footing with all other contracts.” The case was reversed and remanded.