Facts
- DIRECTV’s consumer service agreement required arbitration of “all disputes and claims,” barred class arbitration, and stated the arbitration clause was governed by the Federal Arbitration Act (FAA).
- The agreement included a contingency provision stating that if “the law of your state” would find the class-arbitration waiver unenforceable, then the entire arbitration provision would be unenforceable.
- At the time customers signed, California’s Discover Bank rule treated certain class-arbitration waivers as unconscionable and unenforceable.
- After the Supreme Court held in Concepcion that the Discover Bank rule was preempted by the FAA, customers filed a putative class action in California state court challenging DIRECTV’s early termination fees under state consumer-protection statutes.
- DIRECTV moved to compel arbitration; the California trial court denied the motion, and the California Court of Appeal affirmed, reading “law of your state” to mean California law as it would exist absent federal preemption.
Issues
- Whether the FAA permits a state court to interpret an arbitration agreement’s reference to “the law of your state” as incorporating state decisional law that has been held invalid because it is preempted by the FAA.
- Whether construing an arbitration clause to apply preempted state law violates the FAA’s requirement that arbitration agreements be placed on the same footing as other contracts.
Decision
- The Supreme Court reversed and remanded.
- The Court held that the California Court of Appeal’s interpretation of “law of your state” to incorporate preempted Discover Bank–type law was inconsistent with the FAA.
- The Court reasoned that the most reasonable reading of “law of your state” is “valid state law,” meaning state law as constrained by federal law, including federal preemption.
- Because the state court’s approach treated arbitration agreements differently from other contracts by assigning “state law” an arbitration-specific meaning, the FAA preempted that interpretation.
- Justice Thomas dissented on the ground that the FAA does not bind state courts.
- Justice Ginsburg, joined by Justice Sotomayor, dissented, viewing the state court’s contract reading as reasonable in a standard-form consumer agreement and criticizing the Court’s FAA jurisprudence.
Legal Principles
- FAA § 2 requires arbitration agreements to be enforced according to their terms and treated like other contracts under generally applicable contract law.
- State courts may not apply contract-interpretation principles in a manner that uniquely disfavors arbitration, including by construing an arbitration clause to incorporate state rules that are invalid due to FAA preemption when similar constructions would not be used for non-arbitration contracts.
- Contract references to “state law” in arbitration provisions are ordinarily read to mean valid state law, not state rules rendered unenforceable by federal preemption.
Conclusion
The Court held that the FAA preempts state-court interpretations that single out arbitration by reading “the law of your state” to incorporate preempted state restrictions on class-arbitration waivers, and required enforcement of the arbitration agreement under valid state law and the FAA.