Back to the class-action waiver drawing board: California Supreme Court holds arbitration agreement cannot extinguish a claimant’s right to seek a public injunction By: Jon Michaelson

Takeaway: Businesses operating in California now face another hurdle in drafting enforceable arbitration agreements. The California Supreme Court has invalidated a provision in an aggressive class action waiver purporting to preclude any relief on behalf of non-parties, on the ground that it prohibits injunctive relief for the benefit of the public. If such a provision cannot be severed from the remainder of the arbitration agreement, a business with an otherwise enforceable arbitration provision may find itself facing a full-blown class action in court.

The California Supreme Court once again targeted class action waivers in arbitration agreements in McGill v. Citibank, No. S224086, 2017 WL 1279700 (Cal. Apr. 6, 2017). But beyond echoing a theme which often puts California jurisprudence at odds with directives of the U.S. Supreme Court, McGill offers an important lesson in how efforts to craft comprehensive waiver provisions can backfire.

The facts in McGill are hardly extraordinary. In 2001, the plaintiff purchased credit protection when she opened a credit card account with Citibank. Under that plan, the bank agreed to defer or credit certain amounts if a qualifying event (such as loss of employment) occurred. The plan included arbitration provisions containing class waivers. Over several years, terms were changed slightly and with each such modification plaintiff was offered the opportunity – but declined – to opt out of the program.

In 2008, plaintiff lost her job but did not receive what she later alleged were promised benefits of the plan. She later sued, claiming that in marketing the credit protection plan and in handling her claim, Citibank had violated California’s Unfair Competition Law, false advertising statute, Consumer Legal Remedies Act, and insurance code. In addition to damages, plaintiff sought an injunction to prevent Citibank from continuing to engage in its allegedly illegal and deceptive practices.

Citibank petitioned to compel arbitration of plaintiff’s claims on an individual basis. The Superior Court granted the petition with respect to plaintiff’s damages claims, but denied it to the extent the complaint sought injunctive relief. In refusing to compel arbitration of the injunctive relief claims, the trial court cited Broughton v. Cigna Healthplans, 21 Cal. 4th1066 (1999), and Cruz v. Pacificare Health Systems, Inc., 30 Cal. 4th 303 (2003), which together invalidate agreements to arbitrate claims for public injunctive relief under the UCL, CRLA, or false advertising law.

On appeal, the District Court of Appeal reversed and remanded. The intermediate court directed the trial court to compel arbitration of all of plaintiff’s claims, ruling that AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), had interpreted the Federal Arbitration Act in a manner which preempted the Broughton-Cruz rule.

At oral argument before the District Court of Appeal and in a request for reconsideration, the plaintiff challenged the enforceability of the arbitration agreement not only under Broughton-Cruz, but also because it prevented her from pursuing public injunctive claims in any forum. The intermediate court did not address this argument in its opinion or in its order denying plaintiff’s request for rehearing. The California Supreme Court, however, took up the issue on review. In its holding, the unanimous California Supreme Court found in favor of plaintiff on the public injunction waiver basis alone, and therefore did not reach the question of whether Broughton-Cruz remained good law following Concepcion.

The underlying agreement between McGill and Citibank made all claims arising from or related to the credit protection plan subject to compulsory arbitration, regardless of the legal theory asserted or remedy sought (including, specifically, injunctive or declaratory relief). The waiver provisions in the agreement stated: (1) “[a]n award in arbitration shall determine the rights and obligations between the named parties only, and only in respect of the Claims in arbitration, and shall not have any bearing on the rights and obligations of any other person, or on the resolution of any other dispute”; (2) “[t]he arbitrator will not award relief for or against anyone who is not a party”; (3) “the arbitrator may award relief only on an individual (non-class, representative) basis”; and (4) “neither you, we, or any other person may pursue the Claims in arbitration as a class action, private attorney general action, or other representative action.” These waiver provisions, as McGill argued and Citibank conceded, purported to extinguish McGill’s right to seek public injunctive relief – relief which would cause Citibank to halt allegedly improper practices and misleading representations rather than directly benefit the plaintiff – in any forum whatsoever (including in arbitration).

The California Supreme Court had little difficulty finding such a broad waiver to be illegal and unenforceable. California Civil Code section 3513 states that “[a]ny one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” And as the Court itself already had held in Broughton and Cruz, the UCL, CRLA, and false advertising law serve to “‘remedy a public wrong,’” rather than to “‘resolve a private dispute.’” 2017 WL 1279700, at *7 (quoting Broughton, 21 Cal. 4th at 1080). Thus, “any benefit to the plaintiff requesting such relief ‘likely…would be incidental to the general public benefit of enjoining such a practice.’” Id. (quoting Broughton, 21 Cal. 4th at 1080 n.5).

Citibank did not argue the validity of the waiver language. Instead, it contended the FAA preempted application of Civil Code section 3513: “‘[A] court,’ Citibank asserts, ‘may not avoid the FAA by applying state-law rules of contract interpretation to limit the scope of an agreement to arbitrate.’” 2017 WL 1279700, at *8. The McGill court rejected this contention based on its reading of U.S. Supreme Court precedents. Based on Concepcion, for example, the court found Civil Code section 3513 fell within the definition of a statute which applied to all contracts, and thus was covered by the FAA’s savings clause (permitting arbitration agreements to be invalidated on the same grounds as any contract). Id.

Relying on Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), and American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), the McGill court emphasized that “‘by agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute.’” 2017 WL 1279700, at *8 (quoting Mitsubishi, 473 U.S. at 628). By insisting on a waiver of public injunction claims, the court reasoned, Citibank sought to limit a consumer’s rights under California’s statutory law. Id. at *8-*9.

And based on Concepcion and Italian Colors, the California Supreme Court rejected Citibank’s argument a request for public injunctive relief could be equated with a procedural device (such as a class action) impairing the benefits of an arbitration protected by the FAA: “Under Italian Colors, because the waiver at issue here is a waiver of the right to pursue statutory remedies – rather than of a procedural path to vindicating the statutory claim – it is … distinguishable from a waiver of class procedures.” 2017 WL 1279700, at *10. The McGill court then cited additional U.S. Supreme Court authorities as holding the bifurcation of proceedings between arbitrable and non-arbitrable claims did not offend the FAA. Id.

Having found the public injunction waiver unenforceable, McGill briefly addressed whether the entire arbitration agreement should be invalidated. The last modification of the agreement provided: “‘If any portion of the arbitration provision is deemed invalid or unenforceable, the entire arbitration provision shall not remain in force.’” 2017 WL 1279700, at *11. Because the parties had not discussed this language on appeal, the Supreme Court remanded to the District Court of Appeal to determine the enforceability of the remainder of the arbitration agreement.

Assuming the U.S. Supreme Court does not review the decision, the McGill ruling sends class-action waiver drafters back to the drawing board. The California Supreme Court’s reasoning does not bar all class action waivers, only waivers that purport to preclude public injunctive relief. And even the inclusion of such waivers would not necessarily invalidate the entire clause, assuming it could be severed. The ultimate lesson of McGill may be to limit the scope of class action waivers to no more than absolutely necessarily to avoid class litigation or class arbitration.