Arbitration clauses are protected under the Federal Arbitration act.
The US Supreme Court confirmed this authority in the decision in 2011 in the case entitled AT&T Mobility LLC v. Concepcion.
The Supreme Court held that the Federal Arbitration Act preempted California law that, in certain circumstances, arbitration clauses in customer agreements are unenforceable.
The Supreme Court deemed this California law to be unconstitutional.
The Supreme Court ruling means: A state law restricting arbitration clauses cannot supersede the Federal Arbitration Act.
In layman’s terms, arbitration clauses are protected by Federal Law.
The United States Supreme Court upheld a binding arbitration clause in a consumer service agreement that included a waiver of class arbitration.
That decision reaffirmed the US Supreme Court’s view of the supremacy of the Federal Arbitration Act and its application even in contracts nominally governed by state law.
The background to the Supreme Court’s Decision
DirecTV entered into a form service agreement with two California residents (the clients) Concepcion and Imburgia, that included a clause committing the parties to binding arbitration.
The arbitration clause included a waiver of the parties’ right to class arbitration. However, it also stipulated that the waiver could only be activated if the “laws of your state” did not make class arbitration waiver unenforceable.
The clause also provided that the entire arbitration clause would be unenforceable if the laws of the customer’s state invalidated class-arbitration waivers.
Direct TV and the clients entered into the service agreement at a time when class-arbitration waivers were unenforceable under California law.
The situation was based on a ruling by the California Superior Court in the 2005 case Discover Bank vs Superior Court. The clients sued DirecTV, and the court turned down DirecTV’s request to refer the case to arbitration.
The court cited the Discover Bank ruling and found that its application to class-arbitration waivers invalidated the entire arbitration clause.
The U.S. Supreme Court’s Reasoning
The US Supreme Court stated that the Federal Arbitration Act is clear that a “‘written provision’ in a contract providing for ‘settle[ment] by arbitration’ of ‘a controversy… arising out of’ that ‘contract … shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.'” Id. at 13 (citing 9 U.S.C. § 2) (Ginsburg, J., dissenting).
The U.S. Supreme Court was equally clear in Imburgia that the FAA requires that arbitration contracts must be treated on equal grounds to other contracts. Therefore, arbitration agreements can only be invalidated on the grounds that exist for invalidation of any contract in general.
The Supreme Court was openly sceptical that the California court interpreted the arbitration contract as it would any other contract.
The U.S. Supreme Court set aside the California court’s judgment invalidating the arbitration clause. It had plenty of grounds on which its decision rested.
- The Supreme Court justification for its decision was that in the terminology of the contract, reference to “laws of your state” was unambiguous and meant valid, not invalidated.
- Consistent with California case law, judicial construction of a statute generally applies retroactively. Likewise, it would retroactively apply to contracts.
- The Supreme Court found that the California court reached its interpretation of “laws of your state” based on an arbitration context rather than applying contract principles as they would with ordinary contracts and as required by the FAA.
- The California court’s language focused only on how “laws of your state” would apply in the arbitration context rather than in generally applicable terms.
- The California Court of Appeal continued to apply invalid state arbitration law (the Discover Bank rule)as if it retained independent force even after it was “authoritatively invalidated by this Court.” Again, such application would not be accepted in other contract contexts.
- Finally, the California court failed to address whether “laws of your state” encompass invalid state laws and how such words would be interpreted in other contexts.
Arbitration is rapidly gaining traction as an alternative to the law courts and in fact, the Department of Transportation, under law (49 CFR 375.211) mandates that moving companies must include an arbitration clause when moving across state lines.
The US Supreme Court ordered the California Court to enforce the arbitration agreement.
Importance of the U.S. Supreme Court’s decision
The biggest takeaway of the decision is that arbitration clauses are protected under the Federal Arbitration Act.
The decision in the Imburgia case not only confirms the Court’s previous statements on the supremacy of the Federal Arbitration Act, but it also in a more general sense bolsters the Federal Policy favoring arbitration.
Put simply, the decision means that arbitration clauses in contracts are enforceable and state contract law is unlikely to undermine them.
For business owners, the court decision provides peace of mind that the highest court in the land favors arbitration, and has decided that arbitration clauses are protected under the Federal Arbitration Act.
The Imburgia case places the burden on courts invalidating arbitration clauses to do so in ways that are applicable to other contracts and show no hostility to arbitration.
The Imburgia decision will provide comfort to businesses using arbitration clauses and class-arbitration waivers in standard consumer contracts, even where those provisions are governed by state law.
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