Consistent with the historical reluctance of California courts to enforce arbitration provisions in consumer contracts, on April 6, 2017, the California Supreme Court ruled that an arbitration provision that waived an individual’s right to bring claims for public injunctive relief is invalid and unenforceable. In McGill v. Citibank, N.A., S224086 (Apr. 6, 2017), the California high court overruled a lower court’s determination requiring arbitration of claims arising under various California consumer protection statutes. The court’s decision bucks the trend of US Supreme Court cases enforcing arbitration agreements by their terms and instead opens an avenue by which potential plaintiffs can bring certain claims in litigation despite agreements to arbitrate.
This is not the first time a California court has invalidated an arbitration agreement on the basis that it violates California state law. In AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), the US District Court for the Southern District of California, applying California law, found an arbitration agreement unconscionable because it disallowed class-wide arbitration procedures. The US Court of Appeals for the Ninth Circuit affirmed but the Supreme Court reversed, finding that the California law interfered with a “fundamental attribute of arbitration” and thus was preempted by the Federal Arbitration Act (FAA). Then, in DirectTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015), the US Supreme Court reversed a California court decision invalidating an arbitration provision in a consumer contract because the contract referenced state law, which the California court interpreted as disallowing class action waivers. Like Concepcion and Imburgia, McGill involves the issue of whether an arbitration agreement is valid. While Concepcion and Imburgia dealt with whether arbitration agreements could preclude a particular type of proceeding for resolution of a case, McGill involves the type of remedy.
In McGill, the plaintiff sued Citibank, alleging that the credit protection plan she purchased violated various California consumer protection statutes. Each of the statutes provides for public injunctive relief as a remedy, which instead of preventing harm to an individual plaintiff, authorizes a court to enjoin an activity deemed harmful to the public. In response to the complaint, Citibank invoked the arbitration provision McGill signed as part of her agreement. The trial court ordered the plaintiff to arbitrate all claims, except those for public injunctive relief, which could not be waived and compelled to arbitration under California’s Broughton-Cruz rule. The Broughton-Cruz rule provides that an individual plaintiff may not waive his or her right to bring, or be forced to arbitrate, a claim for public injunctive relief since such an injunction would benefit the public rather than just the individual. The California Court of Appeal reversed, finding that the Broughton-Cruz rule, as applied to an arbitration contract, was preempted by the FAA. The Court of Appeal noted that the US Supreme Court had declared in Concepcion that the FAA preempts all state law rules that prohibit arbitration of a particular type.
The California Supreme Court subsequently reversed the Court of Appeal, finding that the FAA did not preempt the Broughton-Cruz rule. The court cited the FAA’s “savings clause,” which “permits arbitration agreements to be declared unenforceable upon such grounds as exist at law or in equity for revocation of any contract.” The court reasoned that the Broughton-Cruz rule is a basis on which to invalidate any contract, not just agreements to arbitrate. In the court’s view, holding that the FAA preempted the Broughton-Cruz rule would mean arbitration agreements would be more enforceable than other contracts and not simply on equal footing with other contracts, which was the intent of Congress in passing the FAA.
Given the US Supreme Court cases upholding arbitration agreements in the face of contrary California law, Citibank may petition the high court for review of the McGill decision. The outcome could differ from previous cases because McGill involves foreclosing a type of remedy as opposed to precluding class arbitration. Nonetheless, the US Supreme Court has shown a willingness to reverse decisions based on California law that are inconsistent with the goals of the FAA. Also, the Ninth Circuit, in Kilgore v. KeyBank, No. 09-16703 (Mar. 7, 2012), has already upheld an arbitration clause in an injunctive relief case brought under California’s Unfair Competition Law on the basis that the California Broughton-Cruz rule is preempted by the FAA.
In the meantime, the McGill decision contributes to the uncertainty around enforceability of arbitration provisions in California. It also makes it easier for potential plaintiffs and their counsel to do an end-run around arbitration agreements by pleading violations of California consumer statutes where the prescribed remedy is in the form of a public injunction. While the decision is troubling for businesses employing arbitration agreements, it is important to note that the California high court’s holding applies to a specific type of public injunctive relief available under certain California consumer statutes and does not exempt all injunction claims from arbitration.