Employers seeking to avoid costly and often hostile juries have increasingly relied upon mandatory arbitration agreements with employees. Under these provisions, the parties agree to submit any disputes involving the employment relationship to arbitration instead of using the judicial process. In recent years, employers have gone beyond these simple arbitration clauses, drafting agreements that require employees to arbitrate any such disputes as individuals instead of through class or collective action proceedings. These changes resulted from the waves of class action employment discrimination, wage and hour, and other legal actions filed over the past decade.

A number of state courts have proven resistant to class action arbitration waivers, finding that such provisions violate state law governing acceptable arbitration agreement provisions. Plaintiffs argue that the costs involved in arbitrating small claims make such actions impractical absent class representation. Last week the U.S. Supreme Court sent state courts a strong message by rejecting California’s holding that class arbitration waivers violate state law.

DirecTV v. Imburgia was not an employment case, but dealt with a class action lawsuit filed on behalf of DirecTV customers claiming that the company’s early termination fees violate California consumer protection laws. DirecTV’s customer agreements contain a mandatory arbitration provision including a class arbitration waiver. California state courts concluded that the agreement specifically incorporated California law, which prohibits class action arbitration waivers, therefore invalidating the entire agreement and allowing the plaintiffs to proceed in court.

In a 6-3 decision, the Supreme Court rejected this reasoning, upholding both the arbitration agreement and the class arbitration waiver. The Court concluded that the Federal Arbitration Act preempts California law regarding the enforceability of class arbitration waivers. Therefore, the incorporation of California law into the DirecTV agreement had no impact on the validity of the waiver provision.

In a string of decisions over the past decade, the Supreme Court has consistently upheld the validity of mandatory arbitration agreements invalidated by state courts and state laws. The Court has recognized that under the FAA, arbitration agreements hold a favored position under the law, and it has repeatedly rejected use of state contract law and commercial practices statutes to avoid their application. The Imburgia decision sends yet another message to state courts and state legislatures that absent extraordinary circumstances, mandatory arbitration agreements are not subject to state law challenge.

This decision may embolden employers to increase their use of such agreements. Large employers subject to potentially expensive and distracting class or collective action lawsuits may view such agreements as the best way to assure individual resolution of employment disputes. The National Labor Relations Board has taken the position that class arbitration waivers with employees violate the NLRA, but this Supreme Court decision casts further doubt on the eventual validity of that position.