Ahead of the Class

Last month the California Supreme Court ruled that an arbitration clause in a credit card agreement that waives the statutory right to seek public injunctive relief in any forum violates California public policy and is unenforceable.  In McGill v. Citibank, 2 Cal. 5th 945, 393 P.3d 85, 2017 WL 1279700, at *1 (2017), the court unanimously ruled that the Federal Arbitration Act (“FAA”) does not preempt this state-law rule under AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).  This decision is significant because consumer arbitration agreements must allow consumers to seek public injunctive relief – i.e., injunctive relief for the benefit of all consumers in court under California’s consumer protection laws.

McGill involved a credit card consumer who brought a class action against Citibank for allegedly misrepresenting the benefits of a credit card insurance plan. The complaint alleged that Citibank violated the state’s Consumers Legal Remedies Act (“CLRA”), the Unfair Competition Law (“UCL”), and the False Advertising Law (“FAL”).  For relief, the consumer sought, among other things, public injunctive relief to enforce California unfair competition laws.  The cardholder’s agreement provided that all claims related to the card were subject to arbitration regardless of the legal theory or the remedy sought, but permitted the arbitrator to award only individual relief – not an injunction in favor of consumers who are not parties.  Citibank moved to compel arbitration under the consumer’s card agreement.

The trial court compelled arbitration of all claims except those that sought injunctive relief under the CLRA, the UCL, and the FAL.  The trial court ruled that “[a]greements to arbitrate claims for public injunctive relief under the CLRA, the UCL, or the false advertising law are not enforceable in California” – the so-called Broughton-Cruz rule.  As background, the California Supreme Court had previously ruled in Broughton and Cruz that claims for public injunctive relief cannot proceed in arbitration because public injunctions primarily benefit the general public rather than the party bringing the action.  The Court of Appeal reversed the trial court and ruled that the FAA preempts the Broughton-Cruz rule in accordance with Concepcion, which held that “[w]hen a state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.” Concepcion, 563 U.S. at 341.  The consumer appealed (1) the Court of Appeal’s ruling that the FAA preempted the Broughton-Cruz rule; and (2) whether the arbitration provision at issue is invalid because it waives consumer’s right to seek public injunctive relief in any forum.  Id. at *2.

Addressing only the latter issue, the California Supreme Court unanimously held that an arbitration clause is unenforceable to the degree that it purports to waive a consumer’s right to seek public injunctive relief in any forum.  Id. at *4.  In so ruling, the court relied on California Civil Code § 3513, which provided that “a law established for a public reason cannot be contravened by a private agreement.”  Id. at *7.  In applying prior California precedent, the Court ruled that “the public injunctive relief available under the UCL, the CLRA, and the false advertising law . . . is primarily for the benefit of the general public.”  Id. at *7 (internal quotation marks and citations omitted). The court concluded that any benefit to the individual plaintiff is incidental to the general public benefit of eliminating a deceptive practice, and thus, a waiver of public injunctive relief would compromise the purpose the consumer protection laws were intended to serve.

Citibank argued that “a California rule precluding enforcement of the waiver would be preempted by the FAA” and that the court was circumventing the FAA by applying a California rule of contract interpretation to limit the scope of arbitration agreements.  Id. at *8.  Rejecting this argument, the California high court reasoned that Congress intended to place arbitration agreements on par with other contracts, but not more so.  Id.  The court noted the FAA’s saving clause “permits arbitration agreements to be declared unenforceable upon such grounds as exist at law or in equity for the revocation of any contract.”  Id. (citing Concepcion, 563 U.S. at 339) (quotation marks omitted).  Thus, like other contracts, the court noted that arbitration agreements are subject to regular contract defenses, such as fraud, duress, or – as in this case – the rule that “a law established for a public reason cannot be contravened by a private agreement.”  Id.

Citibank also contended that an antiwaiver rule aimed at public injunctive relief “interferes with the fundamental attributes of arbitration” in the same way as an antiwaiver rule concerning class-wide relief.  Id. *10.  But unlike the procedural right to bring a class action, public injunctive relief is a “statutory substantive remedy” that the legislature created through the UCL, the CLRA, and the FAL.  Strikingly, the California Supreme Court ruled that invalidation of the waiver will not “interfere with any of arbitration’s attributes” because the parties agreed to exclude public injunctive relief from arbitration and the court is not forcing arbitration of such relief.  The parties are free to arbitrate all of their claims except the claims for public injunctive relief under the UCL, CLRA, and FAL, which California public policy forbids waiving.  Id.

Due to uncertainty over which version of the arbitration provision’s severability clause was in force – one saying all other claims would proceed in arbitration if any was found unenforceable, and another saying no claims would be arbitrated in such a case – the court remanded for a determination of whether the entire arbitration agreement is invalid or only the provision waiving public injunctive relief.  Id. at *11.

McGill makes it impossible to enforce waivers of the right to seek public injunctions in California for alleged UCL, CLRA, and FAL violations.  With a good severability clause, damage and restitution claims will proceed in arbitration, and a court can determine if public injunctive relief is available.  But a bad severability clause creates the possibility of a court finding an entire arbitration clause that includes such a waiver unenforceable and allowing a class action for damages, restitution, and injunctive relief to proceed in court.  To avoid this, businesses should examine their severability provisions to make sure the rest of the agreement remains in force if a clause prohibiting public injunctive relief in any forum is found unenforceable.  Businesses should also consider whether federal courts in California will take a broader view of the FAA’s preemptive power and thus may be a better forum, if available.