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Litigation Alert: CA Supreme Court Holds Arbitration Provisions Waiving Right to Seek Public Injunctive Relief "In Any Forum" Are Unenforceable

In a closely-watched case, the California Supreme Court recently held in McGill v. Citibank, N.A. that arbitration clauses that foreclose a plaintiff’s right to pursue public injunctive relief in any forum are invalid and unenforceable. Many practitioners hoped the case would address whether California’s Broughton-Cruz rule—under which agreements to arbitrate certain claims for public injunctive relief are not enforceable—remains viable. The Court decided the case on much more narrow grounds, however, focusing on the arbitration clause in that case, which not only required arbitration, but prohibited bringing any claim for public injunctive relief. In doing so, the California Supreme Court in its April 6 decision likely avoided any conflict with the U.S. Supreme Court’s rule in AT&T Mobility v. Concepcion favoring the enforcement of arbitration provisions.

Case Background and Procedural History

In 2011, plaintiff Sharon McGill filed suit against Defendant Citibank, N.A. alleging Citibank violated California’s Unfair Competition Law, Consumer Legal Remedies Act, False Advertising Law, and Insurance Code based on Citibank’s marketing of its credit protector plan and the handling of a claim McGill made under it. Citibank moved to compel McGill’s claims to arbitration on an individual basis. The trial court granted in part and denied in part Citibank’s petition based on the California Supreme Court’s holdings in Cruz v. PacifiCare Health Systems, Inc., 30 Cal. 4th 303 (2003), and Broughton v. Cigna Healthplans, 21 Cal. 4th 1066 (1999), which established that agreements to arbitrate claims for public injunctive relief under the CLRA, UCL, or FAL are not enforceable in California (the “Broughton-Cruz rule”). The trial court ordered McGill to arbitrate all claims other than those for injunctive relief under the CLRA, UCL, and FAL.

The Court of Appeal reversed and remanded for the trial court to order all of McGill’s claims to arbitration on the basis that the United States Supreme Court decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), preempts the Broughton-Cruz rule. McGill filed a petition for review with the Supreme Court asserting (1) the Court of Appeal erred in finding the Federal Arbitration Act preemption of the Broughton-Cruz rule; and (2) the arbitration provision is invalid and unenforceable because it waives her right to seek public injunctive relief in any forum.

California Supreme Court Analysis

As a threshold matter, the California Supreme Court held that the Broughton-Cruz rule was not at issue in the case. While the Broughton-Cruz rule applies to agreements to arbitrate claims for public injunctive relief under the CLRA, UCL, or FAL, in this action, McGill asserted that the arbitration provision precluded her from seeking public injunctive relief in arbitration, in court, or in any forum. As a result, the question before the Court was whether the arbitration provision is valid and enforceable insofar as it purports to waive McGill’s right to seek public injunctive relief altogether.

The Court first concluded that McGill’s complaint sufficiently alleged she was seeking public injunctive relief and that the alleged misconduct was ongoing. Next, the Court held that post-Cruz amendments to the UCL and FAL under Proposition 64 did not eliminate the ability of private plaintiffs to seek public injunctive relief under such laws. Having determined that public injunctive relief remained a remedy available to private plaintiffs under the UCL, FAL, and CLRA, the Court next concluded that the arbitration provision at issue is invalid and unenforceable under state law insofar as it purports to waive McGill’s statutory right to seek such relief. The Court held that the waiver in a pre-dispute arbitration agreement of the right to seek public injunctive relief under the consumer protection statutes at issue would “seriously compromise” the public purposes the statutes were intended to serve.

The Court rejected Citibank’s argument that a California rule precluding enforcement of the waiver would be preempted by the FAA. Citibank argued that the FAA requires enforcement of the arbitration provision as written and that a court may not avoid the FAA by applying state-law rules of contract interpretation to limit the scope of an agreement to arbitrate. The Court held that the Supreme Court’s interpretation of section 2 of the FAA established that arbitration agreements, like other contracts, may be invalidated by generally applicable contract defenses.  The Court held that the contract defense at issue—that a law established for a public reason cannot be contravened by a private agreement (Cal. Civil Code § 3513)—is a generally applicable contract defense, not a defense applicable only to arbitration. The Court elaborated that a provision in any contract (even one with no arbitration provision) that purported to waive the right to seek a public injunction is invalid and unenforceable. As a result, the Court held the FAA does not require enforcement of a provision in an arbitration agreement that, in violation of generally applicable California contract law, waives the right to seek in any forum public injunctive relief.

Finally, the Court rejected Citibank’s argument that the anti-waiver rule interferes with the fundamental attributes of arbitration in the same way as the Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005) anti-waiver rule regarding class procedures. The Court noted that Concepcion and its high court progeny support drawing a distinction between class claims and public injunctions, as public injunctions are a substantive statutory remedy and class actions are procedural devices that enforce substantive law without changing the substantive law. A waiver of the right to pursue statutory remedies is distinguishable from a waiver of class procedures.  The Court further held that the invalidation of the waiver would not interfere with any of the arbitration’s attributes as the arbitration of claims the parties agreed to arbitrate may proceed pursuant to the procedures specified in the arbitration agreement, unaffected by any subsequent proceedings made necessary by invalidation of the waiver.

The Court remanded the matter to the Court of Appeal to determine whether, in light of its holding, the remainder of the arbitration clause is rendered unenforceable.

Takeaways

The Court’s holding in this matter is narrow, and should be limited to arbitration provisions that foreclose a plaintiff’s right to seek public injunctive relief in any forum—in court, in arbitration proceedings, etc. In effect, the arbitration provision relating to public injunctive relief was not a mandatory arbitration provision, but instead a loophole in the agreement to deny a form of substantive relief. For this reason, the Court’s decision is not inconsistent with the Ninth Circuit’s holding in Ferguson v. Corinthian Colleges, Inc., 733 F.3d 928 (9th Cir. 2013), which held that the FAA preempts the Broughton-Cruz rule that claims for public injunctive relief cannot be arbitrated. In sum, while an arbitration provision that waives a plaintiff’s right to seek public injunctive relief in any forum is unenforceable under McGill, an arbitration provision requiring the parties to arbitrate all claims for injunctive relief, including injunctive relief that benefits the public, remains permissible under Ferguson.​