On June 28, 2019, the U.S. Court of Appeals for the Ninth Circuit weighed in on consumer arbitration agreements and found that part of the arbitration clause in Blair v. Rent-A-Center, Inc., WL 2701333 (9th Cir. June 28, 2019) (alleging claims under California law relating to rent-to-own payment amounts) was unenforceable because it waived the right to seek public injunctive relief in any forum. The Ninth Circuit reached this decision despite the U.S. Supreme Court’s decisions in cases such as AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), which found that the Federal Arbitration Action (FAA) preempted California’s rule prohibiting class action waivers in consumer arbitration agreements.

For companies that provide services and products to consumers pursuant to terms and conditions that include arbitration clauses and class action waivers, the Rent-A-Center opinion serves as an important reminder that courts in California continue to scrutinize consumer arbitration agreements and are reluctant to enforce those in which consumers forfeit rights deemed to be “substantive” under state law. Companies should review the language in their arbitration agreements in light of the Rent-A-Center decision and consider prudent modifications to avoid similar challenges.

Procedural Background

In 2017, the California Supreme Court created the “McGill Rule” in McGill v. Citibank, N.A., 2 Cal.5th 945 (2017). In McGill, plaintiff requested, among other things, injunctive relief. The California Supreme Court unanimously held that the arbitration clause in plaintiff’s credit card agreement was unenforceable to the extent it purported to waive plaintiff’s statutory right to seek injunctive relief on behalf of other consumers in any forum, finding such a waiver to be contrary to California public policy. The court distinguished between private injunctive relief, which rectifies individual wrongs, on the one hand, and public injunctive relief, which benefits the general public but does not otherwise benefit the plaintiff who has “already been injured allegedly, by such practices and [is] aware of them,” on the other hand. The California Supreme Court reasoned that since California’s public policy on public injunctive relief applied equally to all contracts, the FAA did not preempt a finding that the arbitration clause was unenforceable.

In Rent-A-Center, the Ninth Circuit was asked to decide whether the FAA preempted California’s McGillRule. The court held it did not. Plaintiffs brought a putative class action alleging that defendant charged excessive prices for its rent-to-own plans for household items in violation of state law. The operative complaint included claims under the Karnette Act, Unfair Competition Law, Cal. Bus. & Prof. Code §§ 17200 et seq. (UCL), the Consumers Legal Remedies Act, Cal. Civ. Code §§ 1750 et seq. (CLRA) and California’s anti-usury law, Cal. Const. art. XV, § 1(1). Plaintiffs sought, among other relief, a public injunction on behalf of the people of California to enjoin future violations of the law and to require that defendant provide an accounting of monies obtained from California consumers and individualized notice to those consumers of their statutory rights. Rent-A-Center filed a motion to compel arbitration of all claims arising out of Plaintiff’s arbitration agreement.

That agreement, included in pertinent part, a clause stating:

You and RAC agree that arbitration shall be conducted on an individual basis, and that neither you nor RAC may seek, nor may the Arbitrator award, relief that would affect RAC account holders other than you. There will be no right or authority for any dispute to be brought, heard, or arbitrated as a class, collective, mass, private attorney general, or representative action. ... If there is a final judicial determination that applicable law precludes enforcement of this Paragraph’s limitations as to a particular claim for relief, then that claim (and only that claim) must be severed from the arbitration and may be brought in court.

The district court found that the arbitration agreement violated the McGill Rule because it constituted a waiver of plaintiff’s right to seek public injunctive relief in any forum, and application of the McGill Rule was not preempted by the FAA. Further, in reliance on the severance clause, the district court held that the claims under the Karnette Act, UCL and CLRA needed to be severed from the arbitration of the usury claim, which was not subject to public injunctive relief. Finally, the district court refused to grant defendant’s motion to stay proceedings on claims not sent to arbitration.

Ninth Circuit Decision

In a unanimous decision, the Ninth Circuit found the district court correctly ruled that the part of the arbitration agreement that would prohibit public injunctive relief was invalid under the McGill Rule and that the McGill Rule was not preempted under the FAA.

First, the court held that the McGill Rule is a generally applicable contract defense that applies equally to arbitration and nonarbitration agreements. The Ninth Circuit reasoned that it does not prohibit the arbitration of public injunctions; it merely prohibits the waiver of them in any forum.

Second, the Ninth Circuit determined that the McGill Rule does not deprive the parties of the benefits of arbitration. The court explained that in its view, the concern in Concepcion was that compelling classwide arbitration required a complex procedural process that interfered with the arbitration process. According to the Ninth Circuit, public injunctive relief does not require formalities inconsistent with arbitration because in McGill the California Supreme Court “expressly held that claims for public injunctive relief need not comply with state-law class procedures.” The practical realities of how an arbitrator will resolve and handle claims for public injunctive relief is yet to be seen.

Third, the court determined that the arbitration of a public injunction does not interfere with the bilateral nature of a consumer arbitration. It reasoned that there is nothing in the McGill Rule that would require a switch from bilateral arbitration to multiparty arbitration. The named plaintiff seeking public injunctive relief does so in his or her individual capacity and retains sole control over the lawsuit.

Finally, the Ninth Circuit dismissed as unpersuasive concerns that arbitrating public injunctive relief claims would create the potential for multiple injunctions against the same defendant imposing conflicting obligations. Nor did the Ninth Circuit find credible arguments that ongoing injunctions need monitoring or modification citing to the AAA Commercial Arbitration Rules, which grant arbitrators the right to grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement.

Having concluded that the FAA did not preempt the McGill Rule, the Ninth Circuit turned to the severance clause. Rent-A-Center argued that the agreement required plaintiff to submit her Karnette Act, UCL and CLRA claims to arbitration for determination of liability as an initial matter, and thereafter, plaintiff could proceed in court to seek the remedy of public injunction. The Ninth Circuit disagreed.

The severance clause stated:

If there is a final judicial determination that applicable law precludes enforcement of this Paragraph’s limitations as to a particular claim for relief, then that claim (and only that claim) must be severed from the arbitration and may be brought in court.

While the Ninth Circuit agreed that parties are able to split decision making between a court and arbitrator such that the arbitrator decides liability first, the court found that the parties did not do so here. By using the terms “that claim” and “claim for relief,” the court broadly read the severance clause to provide that the entire cause of action (or claim) had to be severed for judicial determination.

Key Takeaways

While the impact of this decision remains to be seen, the ruling is likely to affect both the enforceability of mandatory arbitration clauses and the relief plaintiffs may seek. Practitioners should remain cognizant of the nuances in California state law when drafting arbitration clauses and class action waivers.