A predispute arbitration agreement that waived the statutory right to seek, in any forum, public injunctive relief under California’s consumer protection laws, was not preempted (and therefore saved) by the Federal Arbitration Act.
McGill v. Citibank, N.A., 2 Cal. 5th 945 (Cal. April 6, 2017).
In 2001, plaintiff Sharon McGill (“McGill”) opened a credit card account with defendant Citibank, N.A. (“Citibank”) and purchased a “credit protector” plan (the “Plan”). Under the Plan, Citibank agreed to defer certain amounts on McGill’s credit card account when a qualifying event occurred, such as long-term disability, unemployment, divorce, military service, or hospitalization. The Plan was later amended to add an arbitration provision, allowing either party to elect mandatory, binding arbitration for any claim relating to McGill’s account, including claims relating to the enforceability of such arbitration provision. In 2011, McGill filed a class action lawsuit based on Citibank’s marketing of the Plan and the handling of a claim she made under it when she lost her job in 2008. The complaint alleged claims under the following California consumer protection laws: the Unfair Competition Law (UCL), the Consumers Legal Remedies Act (CLRA), and the false advertising law. For relief, the complaint requested, among other things, an injunction prohibiting Citibank from continuing to engage in its allegedly illegal and deceptive practices.
Pursuant to the arbitration provision in McGill’s account agreement, Citibank petitioned to compel McGill to arbitrate her claims on an individual basis. The trial court granted the petition in part and denied it in part, based on California’s Broughton-Cruz rule, which requires that agreements to arbitrate claims for public injunctive relief under the CLRA, the UCL or the false advertising law are not enforceable in California. Applying this rule, the trial court ordered McGill to arbitrate all claims other than those for injunctive relief under the CLRA, the UCL and the false advertising law. The Court of Appeal subsequently reversed and remanded for the trial court to order all of McGill’s claims to arbitration, concluding that the Federal Arbitration Act (“FAA”) preempts the Broughton-Cruz rule, particularly in light of the U.S. Supreme Court’s recent decision in AT&T Mobility LLC v. Conception, 563 U.S. 333 (2011). After granting review, the California Supreme Court (the “Court”) made it clear that because the parties elected to exclude public injunctive relief from arbitration, the Broughton-Cruz rule – which applies only when parties have agreed to arbitrate requests for such relief – was not at issue. Instead the Court sought to address the question of whether the arbitration provision was valid and enforceable insofar as it purported to waive McGill’s right to seek public injunctive relief in any forum.
The Court concluded that post-Cruz amendments to California’s consumer protection laws did not preclude a private individual who had standing to file a private action from requesting public injunctive relief in connection with that action. Furthermore, because public injunctive relief available under California’s consumer protection laws was primarily for the benefit of the general public, McGill could not waive such a right through a private arbitration agreement with Citibank. Accordingly, the Court held that a waiver in a predispute arbitration agreement of the right to seek public injunctive relief under these statues would seriously compromise the public purposes the statutes were intended to serve. Thus, insofar as the arbitration provision at issue purported to waive McGill’s rights to request in any forum such public injunctive relief, the Court held that it was invalid and unenforceable under California law.
However, Citibank did not argue that the waiver was valid under California law. Instead, it argued that a California law precluding enforcement of the waiver would be preempted by the FAA, as recently construed under the Conception decision. The Court, however, rejected that argument and cited to the FAA’s “saving clause” (also highlighted in Conception), which provides that an arbitration agreement may be declared unenforceable upon such grounds as exist at law or in equity for the revocation of any contract. Since the contract defense at issue in this case (i.e., a law established for a public reason cannot be contravened by a private agreement) was a generally applicable contract defense, such defense was sufficient under California law for revocation of such contract.
The Court concluded that by agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statue – it only submits to their resolution in an arbitral, rather than a judicial, forum. While Citibank cited to certain precedent to support its argument that the anti-waiver rule at issue in this case interfered with fundamental attributes of arbitration, the Court ultimately rejected such argument and held that a predispute arbitration agreement that waives the statutory right to seek, in any forum, public injunctive relief under California’s consumer protection laws, was not preempted (and therefore saved) by the FAA.
