Today, many businesses use arbitration as a means of resolving claims that arise. Indeed, many California consumer agreements contain arbitration clauses.
However, the California Supreme Court recently narrowed the protection of arbitration agreements with class action waivers. Financial services entities and other businesses will be required to review their current contractual provisions to ensure compliance in the Golden State.
In McGill v. Citibank, the California Supreme Court issued the latest in an ongoing series of cases resisting preemption of California state law under the Federal Arbitration Act (FAA) and again testing the limits of the U.S. Supreme Court’s jurisprudence under the FAA. Stating that arbitration agreements may not preclude public injunctive relief; i.e. “injunctive relief that has the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public”, the Court found that the combination of an agreement to arbitrate plus the agreement to forego public injunctive relief in arbitration means that there is no forum in which a plaintiff could obtain public injunctive relief. In other words, the arbitration agreement improperly interferes with a remedy that is primarily for the benefit of the public.
The facts of the case are as follows… A credit card holder sued Citibank, claiming that Citibank’s credit insurance program violated California’s unfair competition laws, false advertising law, and insurance code, to name a few, and sought an injunction banning Citibank from continuing its allegedly unlawful practices.
The trial court granted the bank’s motion to compel arbitration based on the arbitration clause in the credit card agreement and denied the motion as it related to the request for injunctive relief under the Broughton-Cruz rule (which holds unenforceable agreements to arbitrate claims for public injunctive relief under the Consumer Legal Remedies Act (CLRA), UCL, or false advertising law).
The court of appeal reversed, noting that the Broughton-Cruz rule was preempted by the U.S. Supreme Court’s ruling in AT&T Mobility v. Concepción, which stated that state laws cannot impede on the Federal Arbitration Act’s strong presumption toward arbitration.
As indicated earlier, the California Supreme Court dismissed the idea that its holding is preempted by the Federal Arbitration Act by characterizing Concepcion as a “principal of California law that governs contracts generally” as opposed to an arbitration-specific holding. Therefore, an arbitration agreement’s bar of public injunctive relief “is contrary to California public policy … [and] unenforceable under California law”.
After reviewing the statutory language of the UCL and CLRA and the various limitations placed on private actions under those statutes, the Court concluded that they do not bar a plaintiff with standing from pursuing public injunctive relief on a representative basis. Furthermore, the Court noted that under general California law a party may waive statutory protections intended solely for its own benefit, but may not waive by a private agreement “a law established for a public reason.” As the protections of public injunctive relief in the UCL, CLRA, and Insurance Code are laws for the benefit of the public, the Court determined that an arbitration agreement could not waive these rights.
The Court shot down Citibank’s efforts to save the arbitration agreement through preemption, concluding that because the rule against a private waiver of a public statutory protection was a “generally applicable contract defense”, its application to the arbitration agreement at issue was not barred by Concepción.
Finally, the Court overruled the bank’s argument that the prohibition of public injunctive relief at issue was not dissimilar to the class action waivers the U.S. Supreme Court held enforceable in two other cases: Concepción and Italian Colors. In response, the California Court clarified that the waiver of rights to pursue a class action is a waiver of a procedural right and that the substantive right to pursue individually the underlying claims remains.
In McGill, however, the waiver at issue was “a waiver of the right to pursue statutory remedies—rather than of a procedural path to vindicating the statutory claim.” Therefore, this complete denial of the right to pursue such a claim was inconsistent with and distinguishable from the blessing of class action waivers in Concepción and Italian Colors.
The CLRA and the UCL are extensively invoked in California class actions and as a result, this ruling has the potential to significantly alter the playing field in California. Defendants may find themselves confronted with a choice—keep all claims in a single forum and forego the protections of an arbitration agreement and class waiver or risk a split of forums by arbitrating the majority of the claims individually while litigating in court the public injunctive relief claims.
To discuss how your business should approach this challenge, contact experienced business attorney Drew E. Pomerance today.