Earlier this week, the United States Supreme Court issued a legal smackdown to courts in California that were asserting that state arbitration law took precedence over federal case law. The 6-3 ruling is not a sweeping change that is going to impact all arbitration agreement everywhere, but a reminder that the Supremacy Clause exists for a reason.
At issue in the case, DirecTV Inc. v. Imburgia, is DIRECTV’s contract with its customers, which provided for individual arbitration except if the “law of your state” makes the arbitration clause unenforceable.
California’s Supreme Court had previously held that a waiver of class-based legal action was unenforceable because it is “unconscionable.” This ruling was later overturned by the United States Supreme Court in AT&T Mobility v. Concepcion.
The plaintiffs in this case got creative and argued that the “law of your state” they had agreed to was California law, not federal law post-Concepcion, so their arbitration causes should be found invalid and they should be allowed to litigate their case as a class action.
In an opinion by Justice Breyer (which is notable since he was the author of the dissent in the Concepcion case), the court ruled that “Absent any indication in the contract that [“law of your state”] is meant to refer to invalid state law, it presumably takes its ordinary meaning: valid state law.” Thus, the plaintiffs are not able to rely on the pre-Concepcion California law.
Citing the Supremacy Clause, the Court noted, “No one denies that lower courts must follow this Court’s holding in Concepcion. The fact that Concepcion was a closely divided case, resulting in a decision from which four Justices dissented, has no bearing on that undisputed obligation. Lower court judges are certainly free to note their disagreement with a decision of this Court. But the ‘Supremacy Clause forbids state courts to dissociate themselves from federal law because of disagreement with its content or a refusal to recognize the superior authority of its source.’ The Federal Arbitration Act is a law of the United States, and Concepcion is an authoritative interpretation of that Act. Consequently, the judges of every State must follow it.” (citations omitted).
The Court also reminded California that thought states are allowed to interpret arbitration clauses through the lens of state contract law, they must do so in the same way they interpret any other contract. Arbitration contracts must be placed “on equal footing with all other contracts.”
This ruling should serve as guidance, and perhaps a warning, to New Jersey’s Supreme Court as it crafts its opinion its latest arbitration-related case: states simply cannot create their own law in this area.
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