On April 6, 2017, in the matter Sharon McGill v. Citibank, N.A., the California Supreme Court ruled unanimously that an arbitration agreement that waives a statutory right to seek public injunctive relief in any forum, is contrary to California public policy and is therefore unenforceable under California law. In arriving at its ruling, the Court distinguished between class action waivers and the waiver of the right to public injunctive relief. The Court held that class actions are a procedural device that enforces substantive law, while the right to public injunctive relief is an unwaivable substantive statutory remedy that the Legislature has expressly made available under certain laws. Although this is not an employment case, the Court’s holding is important in the employment context because it distinguishes between the waiver at issue in the agreement, which it ruled was unenforceable, and class action waivers, which many employers include in their mandatory arbitration agreements.
The McGill case involves consumer and plaintiff Sharon McGill who opened a credit card account with defendant Citibank and purchased a credit protector plan in 2001. The original account agreement did not contain an arbitration provision. However, Citibank sent her a notice of change in terms of the agreement, which amended the original agreement to include an arbitration provision subjecting all claims arising out of the agreement to arbitration. The notice also provided that claims and remedies sought as part of a class action, private attorney general or other representative action, would also be subject to arbitration on an individual basis only, and that the arbitrator could award relief “only on an individual (non-class, non-representative) basis.”
The notice provided Plaintiff with the option to decline the arbitration provision and continue using her credit card under the existing terms until the end of her current membership year or the expiration date on her card. Plaintiff did not decline the terms. Plaintiff received additional documents notifying her about the terms of the arbitration provision, but Plaintiff did not opt out and continued to use her Citibank card.
The Trial Court Denies Citibank’s Motion To Compel Arbitration As To Plaintiff’s Claims For Public Injunctive Relief, Citing The Broughton-Cruz Rule
In 2011, Plaintiff filed a putative class action against Citibank, alleging that Citibank’s marketing and administration of its creditor protector insurance plan violated California’s consumer protection laws. Plaintiff sought monetary and punitive damages, and public injunctive relief under California’s unfair competition law (“UCL”; Bus. & Prof. Code, § 17200 et seq.), the false advertising law (“FAL”; Bus. & Prof. Code, § 1750 et seq.), and the Consumer Legal Remedies Act (“CLRA”; Civ. Code, § 1750 et seq.).
Citibank moved to compel arbitration. Plaintiff opposed the motion, arguing that the arbitration agreement was unenforceable under the Broughton-Cruz rule, established by the California Supreme Court in Brougthon v. Cigna Healthplans, 21 Cal.4th 1066 (1992) and Cruz v. PacifiCare Health Systems, Inc., 30 Cal.4th 303 (2003). Plaintiff argued that pursuant to the rule, arbitration provisions that require arbitration of UCL, FAL, or CLRA injunctive relief claims brought for the public’s benefit are against California public policy and therefore unenforceable. The trial court agreed with Plaintiff in part, and denied Citibank’s motion as to Plaintiff’s claims for public injunctive relief under the CLRA, UCL, and False Advertising Law.
The Court Of Appeal Overturns The Trial Court’s Ruling And Compels Arbitration Of All Of Plaintiff’s Claims
On appeal, Plaintiff argued that the arbitration agreement was unenforceable as to Plaintiff’s claims for public injunctive relief because the agreement precluded her from seeking public injunctive relief in any forum, including arbitration. In support of this, Plaintiff pointed to the requirement in the agreement that she waive her right to pursue claims in arbitration on behalf of a class, as a private attorney general action, or other representative action. Citibank agreed with this interpretation of the agreement. The appellate court rejected Plaintiff’s argument and overturned the trial court’s ruling. The court held that the Federal Arbitration Act, as construed in AT&T Mobility LLC v. Concepcion, 563 U.S. 33 (2011), preempted the California Supreme Court’s Broughton-Cruz rule and that under the FAA, all of Plaintiff’s claims should have been sent to arbitration, including those claims for public injunctive relief.
The California Supreme Court Overturns The Appellate Court Decision And Denies Citibank’s Motion To Compel Arbitration
The ruling was appealed to the California Supreme Court, which overturned the appellate court’s ruling. The California Supreme Court held that a provision in a pre-dispute arbitration agreement that waives the right to seek public injunctive relief in any forum, is contrary to California public policy and unenforceable. The Supreme Court held that the FAA does not preempt this rule of California law or require enforcement of the waiver provision in the arbitration agreement.
In reaching this ruling, the California Supreme Court reviewed the public policy surrounding the UCL, FAL, and CLRA. The Court pointed out that the language in each of these laws expressed a strong interest in protecting consumers and that one of the primary sources of relief under each of these laws was the ability to seek an injunction. The Court also noted that the CLRA “expressly declares that ‘[a]ny waiver by a consumer’ of the CLRA’s provisions ‘is contrary to public policy and shall be unenforceable and void.” McGill, California Supreme Court Case No. S224086 at * 4-5. Further, the Court explained that pursuant to California Civil Code section 3513, “any 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.” The Court held that this was a valid defense to enforcement of the provision of the arbitration agreement that prohibited Plaintiff from seeking injunctive relief under the UCL, CLRA, and FAL. The Court explained that public injunctive relief available under the UCL, CLRA, and FAL was for the benefit of the general public and accordingly, the waiver of the right to seek public injunctive relief would “seriously compromise the public purposes the statutes were intended to serve.” McGill at *14.
The Court rejected Citibank’s argument that a California rule precluding enforcement of the waiver would be preempted by the FAA. The Court found that under Concepcion, section 2 of the FAA permits arbitration agreements to be declared unenforceable “‘upon such grounds as exist at law or in equity for the revocation of any contract.’” Id. at *15 (citing Concepcion, 563 U.S. at 339). The Court concluded the FAA supported a determination that the agreement, which purported to waive Plaintiff’s statutory right to seek public injunctive relief under the CLRA, UCL, and FAL, was unenforceable.
Importantly, the Court held that the U.S. Supreme Court’s ruling in Concepcion and its progeny supported the drawing of a distinction between class claims and public injunctions. The California Supreme Court explained that public injunctions are a substantive statutory remedy that the Legislature has made available to certain eligible individuals, while a class action is a procedural device that enforces substantive law by aggregating many individual claims into a single claim. The Court explained that under the U.S. Supreme Court’s ruling in Italian Colors, because the waiver at issue here is waiver of the right to pursue statutory remedies, rather than a waiver of a procedural path to vindicate the statutory claim, the provision waiving Plaintiff’s right to seek injunctive relief under the UCL, FAL, and CLRA was distinguishable from a typical waiver of class procedures.
The Court’s conclusions appear to be inconsistent with U.S. Supreme Court decisions holding that the scope of arbitration under the FAA is broad, that state laws must not single out arbitration clauses for disfavored treatment, and that the purpose of arbitration is to streamline the resolution of disputes, not extend them.
In sum, the California Supreme Court’s ruling in McGill upholds the right to include class action waivers in mandatory arbitration agreements, by distinguishing between class action waivers, and the waiver of the right to pursue public injunctive relief under the UCL, FAL, and CLRA. Companies with arbitration agreements in the consumer context must be careful to preserve the consumer’s right to pursue public injunctive relief under these statutes. The trial court’s ruling reflects a risk that arbitration provisions that seek to limit the right to seek public injunctive relief to the arbitration forum, may also be ruled unenforceable. However, the California Supreme Court did not rule on the enforceability of an arbitration provision requiring that public injunctive relief be sought through arbitration only. Rather, the Supreme Court’s ruling prohibited the complete waiver of the right to seek public injunctive relief as permitted by statute, in any context.
Sheppard Mullin has extensive experience drafting such agreements and we can help review or revise arbitration agreements in the employment and consumer contexts. For more information on arbitration agreements in the employment context, you can review other blog posts we have posted by clicking here.