In reinforcing the federal policy favoring arbitration under the Federal Arbitration Act (FAA), the U.S. Supreme Court reversed a California decision that failed to enforce the terms of an arbitration agreement.

In DIRECTV, the service agreement contained an arbitration provision that included a class action waiver. This provision specified that the enforceability of the arbitration clause and class action waiver would be interpreted according to the “law of the state” where the consumer resides. A separate provision of the agreement indicated that the contract would be governed by the FAA.

The California trial court and Court of Appeal denied DIRECTV’s motion to compel arbitration on the basis that the “law of the state” in California was that class action waivers are unconscionable and unenforceable.

Upon review, the U.S. Supreme Court acknowledged that states have the authority to interpret contracts according to state law. With that said, under the FAA, states cannot apply contract principles that have an impact only on arbitration agreements, as opposed to other contracts.

Specifically, the Supreme Court focused on whether the California court decision placed arbitration contracts on equal footing with other contracts.

In its analysis, the Supreme Court found no other example in California of a contract being deemed unenforceable on the basis of an invalid statement of law. The high court stated that there was nothing in the Court of Appeal decision that would suggest the same decision would be reached in any contract other than one for arbitration.

Accordingly, the U.S. Supreme Court determined that California had not given due regard to the federal policy favoring arbitration, and therefore the Court of Appeal decision was pre-empted under the FAA.

The DIRECTV decision by the U.S. Supreme Court is a further indication as to the federal pre-emption in this area and the inability for states to target or discriminate against arbitration agreements. That being said, if you would like to make binding arbitration a condition of employment, you should consult with an attorney because how it is written will be critical as to its enforceability.