The California Supreme Court has narrowed the protection of arbitration agreements with class action waivers with its holding in McGill v. Citibank that arbitration agreements may not preclude public injunctive relief .

In McGill, Citibank was sued by a credit card holder who claimed that its credit insurance program violated the California UCL, CLRA, false advertising law, and insurance code. Among other things, the consumer sought an injunction prohibiting Citibank from continuing the challenged practices. The trial court granted in part the bank’s motion to compel arbitration based on the arbitration clause in the credit card agreement. It denied the motion as it related to the request for injunctive relief by applying the pre-Concepción California Broughton-Cruz rule which holds unenforceable agreements to arbitrate claims for public injunctive relief under the CLRA, UCL, or false advertising law.

The court of appeal reversed, reasoning that the Broughton-Cruz rule was preempted by the U.S. Supreme Court’s ruling in AT&T Mobility v. Concepción that state laws cannot interfere with the FAA’s strong presumption in favor of arbitration.

The California Supreme Court reversed again and held that the arbitration agreement’s bar of public injunctive relief “is contrary to California public policy … [and] unenforceable under California law” and that this rule of California law was not preempted by Concepción.

The court began its analysis by defining public injunctive relief as relief that “has the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public” instead of benefitting the individual plaintiff. The court next recognized that the arbitration agreement barred the pursuit of class claims and injunctive relief (including public injunctive relief). This meant that the plaintiff was (i) barred from court altogether by the arbitration agreement, and (ii) further barred from pursuing class-wide injunctive relief in arbitration (the only available forum for her claims). As a result, the issue properly framed was that the plaintiff was denied entirely the ability to assert public injunctive relief claims in any forum, not that she was forced to arbitrate claims for public injunctive relief (which would have implicated the Broughton-Cruz rule applied by the court of appeals).

After examining the statutory language of the UCL and CLRA and the limitation on private actions under those statutes imposed by Proposition 64, the court concluded that those statutes do not bar a plaintiff with standing from pursuing public injunctive relief on a representative basis. The court next recognized 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.” Because the protections of public injunctive relief in the UCL, CLRA and Insurance Code are laws for the benefit of the public, the court concluded that this right could not be waived by the arbitration agreement.

The court rejected the bank’s attempt to save the arbitration agreement through preemption. The court agreed that the FAA, as applied by Concepción, “requires courts to place arbitration agreements on an equal footing with other contracts.” Unpacking this rule, the court explained that this meant that arbitration agreements could be invalidated only by generally applicable contract defenses, not by defenses applicable only to arbitration agreements. The court concluded by reasoning 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 rejected the bank’s argument that the bar of public injunctive relief at issue here was no different than the class action waivers the U.S. Supreme Court held enforceable in Concepción and Italian Colors. The court explained 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. Here, however, the waiver at issue “is a waiver of the right to pursue statutory remedies—rather than of a procedural path to vindicating the statutory claim.” The court explained that this denial entirely of the right to pursue this claim is inconsistent with and distinguishable from the blessing of class action waivers in Concepción and Italian Colors.

Because the CLRA and the UCL are widely invoked in California class actions, this ruling has the potential to change dramatically 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. Stay tuned to this space for further updates on the development of this doctrine and the enforceability of arbitration agreements generally.