California Supreme Court Finds Arbitration Agreement Waiver of 'Public Right' Unenforceable

by Pepper Hamilton LLP
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In light of this decision, providers of consumer products and services should review their existing arbitration agreements to determine whether the consumer’s ability to pursue a public injunction or other “public rights” is completely foreclosed.

On April 6, the California Supreme Court issued a unanimous opinion in McGill v. Citibank, finding that a pre-dispute arbitration agreement was unenforceable to the extent it required the plaintiff to waive her right to seek public injunctive relief. The parties had stipulated that the agreement barred the plaintiff from seeking such relief in any forum and not just in arbitration. A public injunction differs from a private injunction because its primary purpose is to prevent an alleged wrongdoer from engaging in conduct that is causing general, versus individualized, harm. According to the court, the right to pursue a public injunction constitutes an “unwaivable public right” under California law. Therefore, “a provision in any contract ― even a contract that has no arbitration provision ― that purports to waive, in all fora, the statutory right to seek public injunctive relief . . . is invalid and unenforceable under California law.”

In arriving at this conclusion, the California Supreme Court distinguished the U.S. Supreme Court’s landmark decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), in which the Court upheld a waiver in an arbitration agreement of the right to pursue class action lawsuits. Defendant Citibank cited Concepcion for the proposition that, when the parties to a contract have designated arbitration as their exclusive means for seeking redress, “the FAA [Federal Arbitration Act] requires enforcement of the arbitration provision ‘as written, regardless of what it says or implies about claims seeking public injunctive relief.’”

The California court rejected this position as an overly broad interpretation of the FAA that is at odds with Concepcion. The court noted that, in Concepcion, the U.S. Supreme Court acknowledged that the FAA contains a “savings clause,” pursuant to which arbitration agreements may be found unenforceable “upon such grounds as exist in law or equity for the revocation of any contract.” The court held that, as with any contract, “an arbitration agreement may be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability,” which include forcing a party to relinquish “unwaivable public rights.”

The California court further explained that its partial unenforceability finding is consistent with the U.S. Supreme Court’s decision in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985). In that case, the Court stated that “[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitrable, rather than a judicial forum.”

In the California court’s view, this statement highlights a key difference between plaintiff McGill’s claim challenging Citibank’s arbitration agreement and Concepcion. To this end, the court noted that class action litigation “is a procedural device that enforces substantive law by aggregating many individual claims into a single claim . . . [but] does not change that substantive law.”

The court then noted that the U.S. Supreme Court recognized a material difference between the waiver of “a party’s right to pursue statutory remedies” and the waiver of “a procedural path to vindication of a claim” in American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), which was decided after Concepcion. Because in plaintiff McGill’s case the waiver resulted in her complete inability to seek a public injunction, the court concluded that it was plainly distinguishable from “a waiver of class procedure.”

The decision rejected Citibank’s claims that an unenforceability finding would interfere with the FAA. First, based on the analysis summarized above, the court found unpersuasive Citibank’s position that a request for a public injunction should be considered analogous to a request for class certification because both involve a representative action. Second, the court disagreed with Citibank that allowing the plaintiff’s other arbitrable claims to proceed to arbitration would interfere with the FAA. It noted that “case law establishes that a stay of proceeding as to any inarbitrable claims is appropriate until the arbitration of any arbitrable claims is concluded.” On this point, the court elaborated that, when the parties agreed to arbitrate certain claims, the arbitration of those claims should be “unaffected by any proceedings made necessary by invalidation of the waiver regarding the public injunctive relief claims the parties did not agree to arbitrate.”

The court also acknowledged, but found no reason to address, the plaintiff’s related claim based on what is known under California law as the “Broughton-Cruz” rule, asserting that a request for a public injunction cannot be decided in arbitration. Finally, the decision remanded the case to the California Court of Appeals to consider ― if either party should raise the issue ― the question of whether the rest of the arbitration agreement remains enforceable in light of language contained in the most recent version of the underlying account agreement stating that, “if any portion of the arbitration provision is deemed invalid or unenforceable, the entire arbitration provision shall not remain in force.”

Pepper Points

  • The decision of the California Supreme Court in McGill v. Citibank will likely be appealed. The question of whether an arbitration clause in a consumer contract can force the consumer to waive “public rights” considered non-waivable under state law may ultimately be heard by the U.S. Supreme Court.

  • McGill v. Citibank calls into question the extent to which Concepcion can be relied on for the position that the FAA preempts all state laws that have the effect of preventing the enforcement of arbitration agreements. In light of this decision, providers of consumer products and services should review their existing arbitration agreements to determine whether the consumer’s ability to pursue a public injunction or other “public rights” is completely foreclosed.

  • McGill v. Citibank also highlights the risks of including language in an arbitration agreement (or in any contract) stating that the agreement will be invalid if any portion of the agreement is deemed invalid or unenforceable. Given the impossibility of predicting how courts may interpret even well-settled questions of law, standard severability language is always preferable unless different language is specifically mandated.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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