The Supreme Court recently issued a decision addressing the enforceability of arbitration clauses in contracts.

The Court ruled that binding arbitration clauses must be honored, regardless of whether California’s law says otherwise, because the Federal Arbitration Act requires that arbitration agreements included in company contracts be honored.

Arbitration Agreements

Often, in service agreements, businesses will include a clause requiring that any disputes be resolved through arbitration. Arbitration is an alternative dispute resolution process in which a neutral third party acts as a judge by hearing a case and issuing a binding ruling. The process, however, occurs out of court and is generally faster and less expensive than filing a lawsuit.

The Case

In 2008, Amy Imburgia filed a class action lawsuit against DirecTV regarding the termination fees charged to customers who cancelled their service. Imburgia argued that she and other customers were wrongly assessed high cancellation fees of up to $480. DirecTV countered that her service contract included a clause requiring arbitration unless the state’s law prohibited the clause from being enforced. At the time Imburgia filed her suit, California law did just that.

A Los Angeles judge and a California state appeals court agreed with Imburgia and refused to enforce the arbitration clause. The state supreme court declined to hear the appeal, but the Supreme Court took up the case and issued its opinion on December 21.

The Opinion

In its opinion in DirecTV v. Imburgia, the Supreme Court held that consumers who have signed contracts including arbitration clauses must adhere to those clauses. Thus, consumers who have a dispute with a business must resolve it individually, before an arbitrator, rather than joining a class-action lawsuit. The Court based its ruling on the Federal Arbitration Act, which requires arbitration agreements to be honored. It stated that the fact that California provided otherwise was irrelevant.

Dissenting Opinions

Justices Clarence Thomas and Ruth Bader Ginsburg each wrote a dissent in the case. Justice Thomas disagreed with the ruling on the basis that the Federal Arbitration Act applies only to disputes in federal and not state courts. Justice Ginsburg, joined by Justice Sonia Sotomayor, said that the ruling kept consumers from justice. These “take-it-or-leave-it” contracts, she wrote, should not be treated as if both parties had equal bargaining power.

Often, the amount in dispute in a consumer complaint is small enough to deter consumers from actually going through the arbitration process. It is a fairly simple process, however, to join a class-action lawsuit. If consumers with relatively small wrongs cannot join a class-action suit, they often will never be heard. Consumer advocacy groups have decried the decision as giving more power to businesses over consumers.

If you have a business law question or concern, please contact The Law Offices of Steven E. Springer online or at 408-779-4700 for a free 20-minute initial consultation with an experienced Morgan Hill business law attorney, in Morgan Hill, San Jose or Fremont.


Posted in Business Law

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