By Lukas Clary
The California Supreme Court has struck back in its ongoing battle with the United States Supreme Court as to the enforceability of arbitration agreements in consumer contracts. On April 7, 2017, in McGill v. Citibank, the California Supreme Court held that a contractual waiver of the right to seek public injunctive relief—i.e., relief that serves primarily to benefit the public at large rather than redress private wrongs—is contrary to public policy and thus unenforceable under California law. The McGill court further held that the Federal Arbitration Act (FAA) does not preempt its holding. Pending a very possible review by the United States Supreme Court, the McGill holding serves to further limit the rights that parties may waive in arbitration agreements.
In 2001, plaintiff Sharon McGill opened a credit card account with Citibank and purchased a “credit protector” plan. The credit protector plan required Citibank to defer or credit certain amounts on McGill’s credit card account when a qualifying event such as a job loss or divorce occurred. Shortly thereafter, Citibank sent McGill a Notice of Change in Terms Regarding Binding Arbitration to Your Citibank Card Agreement (the “Notice”). The Notice amended McGill’s original agreement by adding an arbitration provision allowing either party to elect mandatory arbitration of any claims arising out of McGill’s account. The arbitration provision required arbitration of all claims, “no matter what legal theory they are based on or what remedy (damages, or injunctive or declaratory relief) they seek.” It further precluded McGill from pursuing any claim or obtaining any relief as part of a class action or on behalf of others, whether in arbitration or in any forum. McGill did have the right to opt out of the agreement by a certain date, but never did so and continued using her card.
In 2011, McGill filed a class action against Citibank based on its marketing of the credit protector plan and the handling of a claim she made when she lost her job in 2008. McGill alleged claims under California’s consumer protection statutes: the Consumer Legal Remedies Act (CLRA; Civ. Code, § 1750 et seq.); the unfair competition law (UCL; Bus. § Prof. Code, § 17200 et seq.); and the false advertising law (id., § 17500 et seq.). Among the relief McGill sought was “an injunction prohibiting Citibank from continuing to engage in its allegedly illegal and deceptive practices.” Citibank then petitioned to compel arbitration pursuant to the arbitration agreement. The trial court granted the petition in part, but denied it as to the claims brought under the consumer protection statutes. The trial court applied the Broughton-Cruz rule, which holds that agreements to arbitrate claims for public injunctive relief under the CLRA, UCL, or the false advertising law are not enforceable in California. The Court of Appeal reversed, holding that the U.S. Supreme Court’s holding in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333 (“Concepcion”) preempts the Broughton-Cruz rule. In Concepcion, the court held that the FAA preempts state law that prohibits the enforcement of arbitration agreements containing class action waivers.
The California Supreme Court reversed the appellate court, but did not reach the issue of whether Broughton-Cruz rule survived Concepcion. The Court first determined that the Broughton-Cruz rule was not even invoked by the Citibank arbitration agreement. Specifically, the Citibank agreement did not purport to require arbitration of the consumer protection claims, but instead precluded McGill from seeking public injunctive relieve in any forum. That provision functioned as an outright waiver, not a mandate to arbitrate. According to the Court, such a waiver is invalidated by California Civil Code section 3513, which provides that “a law established for a public reason cannot be waived by a private agreement.” The Court held that the consumer protection laws, insofar as they allowed McGill to seek an injunction precluding Citibank from engaging in deceptive advertising practices, existed for a public reason and could not be waived. If allowed, the Court reasoned, pre-dispute arbitration agreements waiving the right to seek public injunctive relief “would seriously compromise the public purposes [the CLRA, UCL, and false advertising law] were intended to serve.” The Court held that such a waiver was therefore contrary to public policy and unenforceable under California law.
The Court next held that the FAA did not preempt this rule. In asserting preemption and citing to Concepcion, Citibank argued that the FAA requires courts to “place arbitration agreements on an equal footing with other contracts and to enforce them according to their terms.” The Court rejected Citibank’s argument, holding that the FAA only precludes courts from invalidating arbitration agreements based on defenses that apply only to arbitration. By contrast, the defense at issue—Civil Code section 1513’s mandate that a law established for public reason cannot be waived by contract—applied to contracts generally, not solely to arbitration agreements. That is, “a provision in any contract—even a contract that has no arbitration provision—that purports to waive” the right to public injunctive relief under the consumer protection laws is unenforceable. According to the Court, the FAA does not require enforcement of such a provision.
The Court also distinguished the issue at hand from arbitration agreements waiving parties’ right to pursue class actions, which were addressed and allowed in Concepcion. Whereas class action waivers only waive procedural rights—i.e., the mechanism by which substantive rights are pursued—a waiver of the right to seek public injunctive relief in any forum waived the substantive right to bring the claim at all. That waiver went too far according to the Court.
Takeaway from McGill
For now, the McGill holding means that arbitration agreements purporting to waive a party’s right to pursue public injunctive relief in any forum are void. But while the McGill court did not see the FAA as preempting this rule, the U.S. Supreme Court may disagree. Also, because the McGill court concluded that the Broughton-Cruz rule was not invoked, it did not reach the issue of whether that rule was preempted by the FAA in light of Concepcion. Unless and until the Supreme Court weighs in on these issues, businesses are advised to craft arbitration agreements carefully to ensure the desired provisions will be enforceable. This includes provisions that address how to treat claims for injunctive relief under the CLRA, UCL, and false advertising laws.