“California’s McGill Rule Not Preempted by the Federal Arbitration Act, says Ninth Circuit.”

On June 28, 2019, the Ninth Circuit held in three separate cases that the Federal Arbitration Act (FAA) does not preempt the California Supreme Court’s holding in McGill v. Citibank, N.A., 2 Cal.5th 945 (2017) — otherwise known as the “McGill rule”— that under California law, a contractual agreement purporting to waive a party’s right to seek public injunctive relief in any forum is unenforceable.  (See Blair v. Rent-A-Center, Inc., 928 F.3d 819 (9th Cir. 2019); Tillage v. Comcast Corp., 772 Fed.Appx. 569 (9th Cir. 2019); McArdle v. AT&T Mobility LLC, 772 Fed.Appx. 575 (9th Cir. 2019).)  These recent Ninth Circuit rulings are significant because of the potential conflict they pose with the U.S. Supreme Court’s precedent of favoring the enforcement of contractual terms in arbitration agreements.  (See AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 343 (2011) (finding that “nothing in [section 2 of the FAA] suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives”).)

In Concepcion, the Supreme Court addressed the issue of whether section 2 of the FAA preempted the “Discover Bank rule,” a rule established by the California Supreme Court in Discover Bank v. Superior Court, 36 Cal.4th 148 (2005), which deemed as unconscionable under California law class-wide arbitration waivers in consumer contracts.  (Id. at 340.)  In finding that the FAA preempted the “Discover Bank rule,” the Court recognized that “[t]he principal purpose of the FAA is to ensur[e] that private arbitration agreements are enforced according to their terms.”  (Concepcion, 563 U.S. at 344 [internal quotations omitted].)  “This purpose is readily apparent from the FAA’s text.  Section 2 makes arbitration agreements ‘valid, irrevocable, and enforceable’ as written (subject, of course, to the saving clause)[.]”^[1]  (Ibid.) “In light of these provisions, [the Supreme Court] ha[s] held that parties may agree to limit the issues subject to arbitration, [cite], to arbitrate according to specific rules, [cite], and to limit with whom a party will arbitrate its disputes[.]”  (Id. at 344 [emphasis omitted].)

However, the Ninth Circuit in Rent-A-Center, finding no FAA preemption, distinguished Concepcion by narrowly construing the case as not “requir[ing] the enforcement of all waivers of representative claims in arbitration agreements.”  (Rent-A-Center, Inc., 928 F.3d at 828 (citing Sakkab v. Luxottica Retail North America, Inc., 803 F.3d 425, 436 (9th Cir. 2015)).)  The Rent-A-Center Court noted: “Congress plainly . . . intend[ed] to preempt . . . only those [state contract defenses] that ‘interfere[] with arbitration.’”  (Ibid.)  Contrasting the rules struck down in Concepcion, which the Rent-A-Center Court found to require the procedural formality that would interfere with arbitration, public injunctive relief under the applicable California laws “does not require formalities inconsistent with arbitration.”  (Id. at 830 (“[T]he McGill rule does not ‘mandate procedures that interfere with arbitration.’ [Cite.]  Arbitration of public injunctive relief accordingly need not ‘sacrifice[] the principal advantage of arbitration—its informality.’”) (citing Concepcion, 563 U.S. at 348).)

Should the Supreme Court decide to review the Ninth Circuit’s findings, it will be important to see how the Court construes the FAA’s “liberal federal policy favoring arbitration agreements,” against the McGill rule.  (Id. at 825 (quoting Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)).)  But, for now, the McGill rule remains good law.