The U.S. Court of Appeals for the Ninth Circuit has passed on an opportunity to fix the so-called McGill problem in California, affirming the denial of a motion to compel arbitration of a claim for public injunctive relief in Blair v. Rent-A-Center and two companion cases. 

In its 2017 decision in McGill v. Citibank, the California Supreme Court held that an agreement preventing a party from seeking public injunctive relief in any forum is unenforceable under state law, notwithstanding the Federal Arbitration Act (FAA) and ample United States Supreme Court case law holding that parties properly may restrict the scope of an arbitration to the parties’ individual claims.  As a result, class action plaintiffs have been flocking to California courts to seek public injunctive relief in an attempt to avoid individual arbitration.

Although the defendants in Blair and the two companion cases are likely to seek rehearing en banc or review by the United States Supreme Court, McGill will continue to undermine the value of class action waivers in consumer and employment contracts for the time being.  Companies employing arbitration therefore should revisit their agreements as soon as possible to mitigate McGill risk.

What happened

Paula Blair and two other California residents filed suit against Rent-A-Center, alleging that the company structured its rent-to-own agreements in violation of state law. Specifically, the plaintiffs brought claims under California’s Karnette Rental-Purchase Act, Unfair Competition Law (UCL), Consumers Legal Remedies Act (CLRA) and the state’s anti-usury law.

As a remedy, the plaintiffs requested a “public injunction” on behalf of state residents to enjoin future violations and to require that Rent-A-Center provide an accounting of monies obtained from California consumers, as well as individualized notice to those consumers of their statutory rights.

Rent-A-Center moved to compel arbitration based on a clause found in Blair’s 2015 rent-to-own agreement for an air conditioner. As relevant here, the provision mandated that arbitration be conducted on an individual basis and that neither party could seek “relief that would affect [Rent-A-Center] account holders other than you.”

The district court denied the motion to compel, relying on McGill. The agreement violated the McGill rule because it waived Blair’s right to seek public injunctive relief in any forum, the court held.  The court also ruled that the McGill rule was not preempted by the FAA.

Rent-A-Center appealed but the Ninth Circuit affirmed. In McGill, the California Supreme Court explicitly found that public injunctive relief available under the UCL and CLRA was, “[b]y definition … primarily ‘for the benefit of the general public,’” and therefore, the waiver in Blair’s contract was invalid and unenforceable under state law, the court said.

The court relied heavily upon its 2015 decision in Sakkab v. Luxottica Retail North America, Inc., where it considered whether the FAA preempted another California Supreme Court ruling on arbitration in an employment dispute, Iskanian v. CLS Transportation (https://www.manatt.com/Insights/Newsletters/Employment-Law/Employers-Win,-Lose-in-Latest-California-Supreme-C#Article1).

In Iskanian, the state’s highest court prohibited the waiver of representative claims under the state’s Private Attorneys General Act (PAGA). The panel found many similarities between PAGA claims and those requested by Blair.

Unable to avoid the application of McGill to the plaintiff’s asserted claims, Rent-A-Center attempted a frontal attack on the rule, arguing that the FAA preempted application of the decision. But the Ninth Circuit again disagreed. A state law rule can be preempted by the FAA in two ways, the court said: if it is not a “generally applicable contract defense” that applies equally to arbitration and non-arbitration agreements, or if it “stand[s] as an obstacle to the accomplishment of the FAA’s objectives.”

Unfortunately for Rent-A-Center, the panel rejected both contentions.

First, the McGill rule “is a generally applicable contract defense,” the court wrote, applying equally to arbitration and non-arbitration agreements. The McGill rule “shows no hostility to, and does not prohibit, the arbitration of public injunctions,” the court said. “It merely prohibits the waiver of the right to pursue public injunctive relief in any forum.”

Nor does the McGill rule express a preference as to whether public injunction claims are litigated or arbitrated, the panel added, as “it merely prohibits the waiver of the right to pursue those claims in any forum.” The rule also derives from a “general and long-standing prohibition on the private contractual waiver of public rights,” the court said, noting cases that invalidated contracts waiving the rights of police officers and teachers pursuant to state law.

“In sum, the McGill rule is a generally applicable contract defense derived from long-established California public policy,” the panel wrote. “It is a ‘ground[] … for the revocation of any contract’ and falls within the FAA’s savings clause at the first step of the preemption analysis.”

As a second step, the court concluded that the McGill rule did not stand as an obstacle to the accomplishment of the FAA’s objectives. “Crucially, arbitration of a public injunction does not interfere with the bilateral nature of a typical consumer arbitration,” the panel wrote. “The McGill rule leaves undisturbed an agreement that both requires bilateral arbitration and permits public injunctive claims.”

The Ninth Circuit was not concerned with the potential for multiple injunctions against the same defendant imposing conflicting obligations, calling the situation “conjectural” and “unpersuasive,” as “[w]e are unaware of a single such conflict in the decades public injunctive relief has been available in California courts.”

If the situation arose, a defendant could simply explain the situation to the arbitrator, the court said; similarly, the monitoring and modification sometimes required for an ongoing injunction would not be incompatible with arbitration. The court was also not persuaded by Rent-A-Center’s argument that arbitration of a public injunction would require expansive discovery and presentation of class-wide evidence.

“[T]he McGill rule does not ‘mandate procedures that interfere with arbitration,’” the panel wrote. “Arbitration of public injunctive relief accordingly need not ‘sacrifice[] the principal advantage of arbitration – its informality.’ We hold that the FAA does not preempt the McGill rule.”

With that conclusion, the court determined that the severance clause in the 2015 rent-to-own agreement required it to sever Blair’s Karnette Act, UCL and CLRA claims from the scope of arbitration and permit them to be brought in court.

To read the opinion in Blair v. Rent-A-Center, Inc., click here.

Why it matters

The California Supreme Court’s McGill rule strikes again (https://www.manatt.com/Insights/Newsletters/Financial-Services-Law/California-Arbitration-Decision-Highlights-McGill), this time with the Ninth Circuit refusing to enforce an arbitration agreement where a plaintiff requested a “public injunction.”

The Ninth Circuit’s ruling poses challenges for companies doing business in California, not only because it ignores the fact that claims for public injunctive relief are effectively class action claims requiring procedures inconsistent with individual arbitration, but also because the Ninth Circuit dismissed the substantial risk of arbitrators issuing conflicting rulings on the same public injunction issues in different cases.  We have seen this happen repeatedly, albeit in the nonpublic setting of arbitration.

For the moment, companies employing arbitration provisions with class action waivers are likely to see more cases filed in California.  Unless those provisions contain McGill safeguards, there will be a substantial risk of an arbitrator issuing a costly public injunction that cannot be appealed, or even having the entire provision invalidated.  It therefore is critical that companies consult with counsel to evaluate their arbitration language as soon as possible.