April 10, 2017

California Supreme Court Further Limits Reach of Arbitration Agreements

On April 6, 2017, the California Supreme Court, in McGill v. Citibank, N.A., No. S224086, ruled that a provision in Citibank’s arbitration agreement purporting to waive the right to seek “public” injunctive relief under California’s consumer protection statutes in any forum, was contrary to California public policy and was therefore unenforceable under California law. The Court further held that, notwithstanding the U.S. Supreme Court’s decisions on the subject, including in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), the Federal Arbitration Act (FAA; 9 U.S.C. §§ 1 et seq.) does not pre-empt this rule of California law or require enforcement of such a provision. The Court did not, however, go further and address whether the FAA would pre-empt a California rule, known as the Broughton-Cruz rule, which holds that agreements requiring arbitration of claims for “public” injunctive relief under California’s consumer protection statutes are also unenforceable. Thus, the issue of whether an individual can be required to arbitrate his or her claims for injunctive relief under those statutes is left for another day.

The Court discussed the nature of the injunctive relief available under California’s Consumers Legal Remedies Act (CLRA; Civ. Code §§ 1750 et seq.), Unfair Competition Law (UCL; Bus. & Prof. Code §§ 17200 et seq.) and false advertising law (id., §§ 17500 et seq.), noting that “public” injunctive relief under those laws has “‘the primary purpose and effect of’ prohibiting unlawful acts that threaten future injury to the general public.” It contrasted that type of relief with “private” injunctive relief – i.e., “[r]elief that has the primary purpose or effect of redressing or preventing injury to an individual plaintiff – or to a group of individuals similarly situated to the plaintiff.” The Court held that a complete waiver of the right to seek “public” injunctive relief is contrary to California public policy and unenforceable.  

The Court further held that the FAA does not pre-empt this rule of California law. While the FAA requires courts to “place arbitration agreements on an equal footing with other contracts and to enforce them according to their terms,” the United States Supreme Court qualified this statement in Concepcion by reference to the FAA’s “saving clause,” which “permits arbitration agreements to be declared unenforceable ‘upon such grounds as exist at law or in equity for the revocation of any contract.’” Thus, the Court explained, arbitration agreements, like other contracts, may be invalidated by generally applicable state contract law defenses, such as fraud, duress or unconscionability. They may not, however, be invalidated by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.  

The Court noted that the defense at issue in McGill – that a law established for a public reason cannot be contravened by a private agreement – is a generally applicable contract defense, i.e., it is a ground under California law for revoking any contract. Cal. Civ. Code § 3513. Thus, a provision in any contract – even a contract that has no arbitration provision – that purports to waive, in all forums, the statutory right to seek “public” injunctive relief under the UCL, the CLRA or the false advertising law is invalid and unenforceable under California law. Such a rule is not pre-empted by the FAA, nor does the FAA require enforcement of such a provision merely because the provision has been inserted into an arbitration agreement. To conclude otherwise, the Court explained, would be contrary to Congress’ intent and would make arbitration agreements not merely “‘as enforceable as other contracts, but . . . more so.’” Thus, applying the defense at issue to invalidate the waiver does not “modify the FAA,” the Court explained; it implements the FAA as written.    

The Court further explained, however, that the U.S. Supreme Court’s holding in Concepcion did create a limitation on the reach of the saving clause in cases where a generally applicable contract defense is applied in a fashion that disfavors arbitration or interferes with the fundamental attributes of arbitration, such as lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes. For those reasons, Concepcion held that the FAA did pre-empt California’s “Discover Bank” rule, which held that certain waivers of classwide arbitration procedures are unconscionable and unenforceable.  

Citibank argued that there was no reasonable basis for drawing a distinction between broad-based public injunctions and the classwide relief at the heart of the Discover Bank rule that Concepcion invalidated, because both aim to provide relief on behalf of others who are not parties to the proceeding in question, and both transform arbitration from a procedure involving distinct parties into a procedure involving and/or affecting numerous unknown persons, with the stakes in public injunctive relief actions often just as great as the stakes in class actions. The Court disagreed, explaining that Concepcion actually supports the drawing of a distinction between waiver of substantive statutory remedies, such as “public” injunctions, and waiver of procedural devices to enforce substantive law, such as class actions.  

The Court also disagreed with Citibank’s other objection that piecemeal litigation would interfere with arbitration’s attributes, noting that parties may limit by contract the issues that they will arbitrate. The FAA does not, the Court explained, prevent parties who agree to arbitrate from excluding certain claims from the scope of their arbitration agreement. Piecemeal litigation of claims the parties have agreed to arbitrate and claims they have not agreed to arbitrate, the Court went on to say, is consistent with the FAA, and case law has established that it is appropriate to stay proceedings as to any inarbitrable claims until arbitration is concluded.  

Since McGill addressed the enforceability of a complete waiver of statutory rights, as opposed to the enforceability of compelled arbitration of such rights (in an agreement governed by the FAA), it offers only a limited view of the post-Concepcion landscape.

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