Supreme Court prohibits states from banning arbitration clauses

The Supreme Court ruled today that consumers in California cannot rely on state law to get out of an arbitration clause that a business inserts in their contract. The court reasoned that the Federal Arbitration Act allows businesses to prohibit customers from filing a lawsuit against them, and instead require all disputes to be settled in private arbitration.

A recent New York Times series detailed how mandatory arbitration clauses are becoming ubiquitous—from applying for a credit card, to buying a cellphone, and getting cable or Internet service. Instead, the arbitration clauses require consumers who have a dispute with the company to bring their grievance to a private arbitrator—often paying large fees for doing so.

The case, DirecTV v. Imburgia, involved two customers who objected to DirecTV’s early termination fees. DirecTV argued that its customers cannot join together to bring a class-action lawsuit because its contract required disputes to be arbitrated. Two different state courts refused to enforce DirecTV’s arbitration clause because California law does not require enforcing “unconscionable” contracts.

Today, the Supreme Court disagreed, saying that California law does not comply with its 2011 decision in AT&T v. Concepcion, which declared mandatory arbitration clauses to be legal under federal law.

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