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The U.S Supreme Court on Dec. 14 issued a decision in a nonemployment case that should encourage employers to use arbitration agreements in employment contracts.
The court ruled that satellite provider DirecTV can avoid a class-action lawsuit in California over early termination fees and can force customers into private arbitration hearings instead (DIRECTV Inc. v. Imburgia, No. 14-462).
In a 6-3 decision, the justices reversed the decision of a California appellate court that denied arbitration to the company. The high court concluded that the California courts violated the Federal Arbitration Act (FAA) by applying special rules to an arbitration contract that the state wouldn't apply to contracts generally.
“This decision will apply to all arbitration agreements, not just those involving customers or that were signed in California,” Michael Droke, an attorney with Dorsey and Whitney in its labor and employment division, told SHRM Online. The decision will change the landscape of arbitration agreements, he said.
In addition to encouraging companies to require arbitration agreements in employment agreements, the decision should result in more widespread inclusion of class-based waivers in those agreements, Droke said.
Agreement Included Class-Action Waiver
A form agreement between the company and its subscribers required arbitration of all contract disputes, and it prohibited either party from combining claims in arbitration or joining in a class action.
But an addition to the arbitration clause said that if the “law of your state” banned class-action waivers, then the entire arbitration provision was “unenforceable.” California law bans class-action waivers.
Two past subscribers to DirecTV, which is headquartered in Segundo, Calif., sued the business over the imposition of early cancellation fees. The company moved to compel arbitration in the pending case, which had been certified for class action.
A state trial court denied arbitration, reasoning that the contract’s reference to state law meant the parties had intended to follow California law, which bans class-action waivers. The California Court of Appeal affirmed the denial of arbitration.
The Supreme Court on March 23, 2015, granted DirecTV’s petition to review the state appeals court decision, and oral arguments were held on Oct. 6.
Federal Arbitration Law Governs
Writing for the majority, Justice Stephen Breyer said the court wasn't interpreting the arbitration contract, a task which remains the province of state courts. But, he said, the FAA bars state courts from placing arbitration contracts “on a different footing” from contracts generally, which is what the state court did in DirecTV's case.
In dissent, Justice Ruth Bader Ginsburg said that the court was incorrectly reading the DirecTV agreement in favor of “the powerful economic enterprises” that force arbitration and class-action waivers onto consumers and employees. Instead, by applying the traditional contract law principle of construing ambiguous terms against the drafter, this would mean the state court reasonably interpreted the DirecTV agreement to bar arbitration in California.
In a separate dissent, Justice Clarence Thomas said that he would hold that the FAA doesn't apply to proceedings in a state court.
Joanne Deschenaux, J.D., is SHRM’s senior legal editor.
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