California Supreme Court Holds Arbitration Clause Unenforceable, But the Decision’s Impact On Future Cases May Be Limited

Apr 27, 2017 | Topics: Product Liability, Class Actions, Business Litigation

Recently, the California Supreme Court found in McGill v. Citibank, N.A. that an arbitration agreement was unenforceable because the agreement effectively denied the plaintiff the right to seek public injunctive relief (i.e. relief that is primarily designed to stop unlawful acts that threaten future injury to the general public).  However, the ripple effect of McGill may ultimately be limited, given that Citibank conceded that its arbitration agreement barred the plaintiff from seeking public injunctive relief, which was likely fatal to its position in McGill. 

Factual Background

In McGill, the plaintiff filed a putative class action alleging Citibank’s marketing and administration of its “Credit Protector” insurance plan (the “Citibank Plan”) violated the California Consumers Legal Remedies Act (“CLRA”), the Unfair Competition Law (“UCL”), the False Advertising Law (“FAL”), and the insurance code.  Based on these alleged violations, the plaintiff requested, in part, “an injunction prohibiting Citibank from continuing to engage in its allegedly illegal and deceptive practices.”  McGill v. Citibank, N.A., 2017 Cal. LEXIS 2551, *1, 6 (Apr. 6, 2017).  However, all litigation related to the Citibank Plan was subject to an arbitration provision.  See id. at *3–5.  Citibank filed a motion requesting the plaintiff to arbitrate her claims on an individual basis.  Id. at *6. 

The Trial and Appellate Courts’ Decisions

The trial and appellate courts analyzed the arbitration agreement at issue in McGill based on N.A. Broughton v. Cigna Healthplans, 21 Cal. 4th 1066 (1999) and Cruz v. Pacificare Health Systems, Inc., 30 Cal. 4th 1157 (2003).  These cases established the following rule:  Agreements to arbitrate claims for public injunctive relief under the CLRA, the UCL, or FAL are not enforceable in California.  Id. at *6.  Applying this rule—known as the Broughton-Cruz rule—the McGill trial court granted the motion in part and denied it in part, and ordered the plaintiff to arbitrate all of her claims, except those for injunctive relief under the UCL, CLRA, and the FAL.  Id.  Subsequently, the court of appeal reversed the trial court’s decision on the basis that the Federal Arbitration Act (“FAA”) preempted the Broughton-Cruz rule, and ordered plaintiff to arbitrate all of her claims.  Id.  The court of appeal based its decision on AT&T v. Concepcion, 131 S. Ct. 1740 (2011), which found that the FAA preempts all state-law rules that prohibit arbitration of a particular type of claim because an outright ban interferes with the FAA’s objective of enforcing arbitration agreements according to their terms.

The California Supreme Court Decision

The plaintiff in McGill appealed based on two grounds.  McGill, 2017 Cal. LEXIS 2551 at *7.  First, that the court of appeal erred in holding the FAA preempted the Broughton-Cruz rule and, second, that the arbitration provision was unenforceable because it waived the plaintiff’s “right to seek public injunctive relief in any forum,” not just arbitration.  Id.  The California Supreme Court, however, did not address the issue of whether or not the Broughton-Cruz rule was preempted, because Citibank conceded that the arbitration provision barred the plaintiff from seeking “public injunctive relief in arbitration, in court, or in any forum.”  Id. *13.  As such, the McGill court “did not independently analyze [Citibank’s] arbitration provision but proceed[ed] based on the parties’ shared view that it purports to preclude McGill from seeking public injunctive relief in arbitration.”  Id. at *13 (emphasis added).  The California Supreme Court therefore only examined “whether the arbitration provision is valid and enforceable insofar as it purports to waive McGill’s right to seek public injunctive relief in any forum.”  Id. at *13–14.

The California Supreme Court Side Steps the FAA

Citibank argued that the FAA would preempt a California rule precluding enforcement of the waiver.  Id. at *16.  According to Citibank, the FAA required enforcement of the arbitration provision “‘as written, regardless of what it says or implies about claims seeking public injunctive relief.”  “[A] court,” Citibank asserted, “may not avoid the FAA by applying state-law rules of contract interpretation to limit the scope of an agreement to arbitrate.’”  Id. at *24. 

The Court disagreed.  The Court looked to the “saving clause” of the FAA, which permits arbitration agreements to be declared unenforceable upon such grounds that exist at law or in equity for the revocation of any contract.  Id. at *24–25.  The Court then determined that California Civil Code Section 3513, which provides that a law established for a public reason cannot be contravened by a private agreement, was grounds existing at law for the revocation of a contract and thus, within the saving clause of the FAA.  Id. at *25–32.  Accordingly, the Court found that a “waiver in a predispute arbitration agreement of the right to seek public injunctive relief under the [CLRA and UCL] would seriously compromise the public purposes the statutes were intended to serve.”  Id. at *24.  The Court therefore held that “insofar as the arbitration provision purports to waive McGill’s right to request in any forum such public injunctive relief, it is invalid and unenforceable under California law.”  Id.  Notably, however, McGill does not invalidate class action waivers and distinguished between procedural devices to enforce substantive law (like class actions) and substantive statutory remedies (such as the right to seek public injunctive relief).  See id. at *33–34.

Waivers of The Right to Public Injunctive Relief Unenforceable in California

After determining that any waiver of the right to request public injunctive relief in any forum is invalid and unenforceable under California law, the Court confirmed that the arbitration agreement at issue in McGill was unenforceable.  In particular, the Court found that the complaint appeared to seek the type of public injunctive relief that Broughton and Cruz identified, because the relief sought by the plaintiff was generally for the benefit of the public, not plaintiff.  The plaintiff’s UCL, CLRA, and FAL claims focused on unfair, deceptive, untrue, and misleading advertising that misled consumers into purchasing the Citibank Plan and Citibank’s deceptive business practices in denying or delaying benefits to consumers who purchased the Citibank Plan.  While private injunctive relief is relief that primarily “resolve[s] a private dispute” between the parties “rectif[ies] individual wrong”, and that benefits the public, if at all, only incidentally, in McGill, the plaintiff sought relief in the form of injunctions to prevent Citibank from continuing these actions.  Broughton, 21 Cal. 4th at 1080 and fn. 5.  The McGill Court found that the plaintiff would only incidentally benefit from the injunctive relief she sought, because she had already allegedly been  injured by the unlawful practices and thus, knew about them.  Accordingly, any post-injury injunctive relief would be primarily to ensure that the public did not suffer the same fate as the plaintiff, therefore, making the injunctive relief she sought public and not private.  McGill, 2017 Cal. LEXIS 2551 at *10–16.

Only time will tell if McGill will significantly affect the legal landscape for arbitration agreements in California.  But since McGill turned primarily on Citibank’s concession that its arbitration agreement precluded the plaintiff from bringing her claims for public injunctive relief in any forum—a concession that defendants will likely not make in the future—the impact of this case might be minimal.