In McGill v. Citibank, No. S224086 (2017), the California Supreme Court recently held that an arbitration clause that precludes a plaintiff’s right to pursue public injunctive relief in any forum is invalid and unenforceable under state law. According to one commentator, “the court’s analysis provides an interesting blueprint for other states to develop consumer and employee protection statutes that can avoid the steamroller of FAA preemption.”
The plaintiff, Sharon McGill, filed suit against Citibank in 2011, alleging the company violated various California consumer protection laws through its credit insurance program. Her lawsuit sought, inter alia, an injunction prohibiting Citibank from continuing to engage in allegedly fraudulent practices. McGill’s pre-dispute arbitration agreement with Citibank included a waiver of the right to seek public injunctive relief in any forum, whether in arbitration, litigation, or any other setting.
Citibank moved to compel McGill’s claims to arbitration. The trial court granted in part and denied in part Citibank’s petition based on the California Supreme Court’s holdings in Cruz v. PacifiCare Health Systems, Inc. (2003) and Broughton v. Cigna Healthplans (1999), which established that agreements to arbitrate claims for public injunctive relief under a number of state consumer protection statutes are not enforceable (known as the “Broughton-Cruz rule”). The trial court ordered McGill to arbitrate all claims other than those for public injunctive relief.
The Court of Appeal reversed and remanded for the trial court to order all of McGill’s claims to arbitration – including claims for public injunctive relief – pursuant to AT&T Mobility LLC v. Concepcion (U.S. 2011), which the Court of Appeal held preempts the Broughton-Cruz rule and requires arbitration of McGill’s claims under the FAA.
McGill filed a petition for review with the California Supreme Court asserting (1) the Court of Appeal erred in finding the FAA preemption of the Broughton-Cruz rule; and (2) the arbitration provision is invalid and unenforceable because it waives her right to seek public injunctive relief in any forum.
The California Supreme Court took a narrow approach, limiting its focus to McGill’s second contention that arbitration provisions which foreclose a plaintiff’s right to seek public injunctive relief in any forum are invalid and unenforceable.
While Citibank argued that the Court could not bypass the FAA by applying state rules of contract interpretation to invalidate the waiver, the Court noted that Section 2 of the FAA establishes that arbitration agreements can be invalidated by generally applicable contract defenses. The Court found one such defense – that a law established for a public reason cannot be contravened by private agreement – in Cal. Civil Code § 3513. The Court held that pre-dispute arbitration agreements which prohibit seeking public injunctive relief in any forum under the consumer protection statutes at issue would “seriously compromise” the public purposes the statutes were intended to serve, and that such waivers are invalid and enforceable as a matter of state contract law.
The Court also noted that the invalidation of the public injunctive relief waiver would not interfere with any attributes of arbitration as a forum, an argument that has been made in response to invalidation of class action waivers. The Court held that arbitration of claims the parties agreed to arbitrate could proceed unaffected by any subsequent proceedings made necessary by invalidation of the waiver.
According to one commentator, the Court’s narrow approach “likely avoided any conflict with the U.S. Supreme Court’s rule in AT&T Mobility v. Concepcion favoring the enforcement of arbitration provisions” because the Court saw the clause in McGill’s case as a way for Citibank to deny a form of substantive relief entirely. In this way, the Court’s decision is not inconsistent with the Ninth Circuit’s holding in Ferguson v. Corinthian Colleges, Inc. (2013), which only held that the FAA preempts the Broughton-Cruz rule that claims for public injunctive relief cannot be arbitrated. As a result, an arbitration provision requiring the parties to arbitrate all claims for injunctive relief, including injunctive relief that benefits the public, remain permissible. What is not permissible is a waiver of the right to seek injunctive relief entirely.
This summary was prepared for ArbitrationInfo.com by Samantha Groark, a second-year student at the University of Missouri School of Law.