The California Supreme Court has ruled that an arbitration agreement that waives the right to public injunctive relief is contrary to California public policy and is therefore unenforceable under California law. The court reversed an appellate court’s finding that the U.S. Supreme Court’s Concepcion decision overshadowed state rules barring some mandatory arbitration. In a unanimous decision, the California justices rejected Citibank’s contention that, under precedent set forth by the nation’s highest court in AT&T Mobility LLC v. Concepcion – which established that the Federal Arbitration Act (FAA) preempts all state-law rules that amount to an outright ban of arbitration – an arbitration agreement contained in a “credit protection plan” the bank sold to Sharon McGill and other consumers was enforceable.

Instead, the California justices sided with McGill, who had argued that the arbitration agreement was unenforceable because it sought to prohibit her from pursuing claims for public injunctive relief in any forum under California’s Unfair Competition law (UCL) and False Advertising law, and the Consumer Legal Remedies Act (CLRA). The California high court pointed out:

While Concepcion holds that the FAA requires courts to place arbitration agreements on equal footing with other contracts and to enforce them according to their terms, the U.S. Supreme Court qualified that statement with a “savings 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.

Under the savings clause, then, arbitration agreements may be invalidated by certain contract defenses, such as fraud or unconscionability, but can also be invalidated by the contract defense at issue here: that a law established for a public reason cannot be contravened by a private agreement, the California justices concluded. The court wrote:

A provision in any contract … that purports to waive … 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. The FAA does not require enforcement of such a provision, in derogation of this generally applicable contract defense, merely because the provision has been inserted into an arbitration agreement. To conclude otherwise would [be] contrary to Congress’s intent.

The California Supreme Court said that applying this defense to invalidate the waiver does not modify the FAA, as Citibank argued, but instead implements the FAA as written. The court pointed out that the language in Concepcion supports its analysis. In concluding that the arbitration provision was unenforceable insofar as it purports to waive McGill’s statutory right to seek public injunctive relief in any forum, California’s high court overruled a lower appellate panel, which had found Concepcion established that the FAA preempts all state-law rules that amount to an outright ban of arbitration.

McGill had filed the putative class action in 2011, claiming Citibank’s marketing and administration of its “credit protector” insurance plan violated California’s consumer protection laws. She sought monetary and punitive damages, as well as injunctive relief.

Citibank attempted to force the case into arbitration based on its contract language, but met only partial success as the trial court ordered the arbitration of only a portion of the claims, while suspending it for others based on a rule that agreements to arbitrate claims for public injunctive relief under the CLRA, UCL or False Advertising Law are not enforceable in California. However, the appellate court overturned that order, on the grounds that the federal arbitration rules overshadowed state arbitration rules.

In reversing, the California Supreme Court sent back to the appeals court the question of whether the remainder of Citibank’s arbitration provision was enforceable. Glenn Danas of Capstone Law APC, a lawyer McGill, told Law360:

This unanimous decision invalidating forced waivers of consumers’ right to seek broad injunctive relief under the California consumer protection statutes gets the issue right, and preserves a vital tool in leveling the playing field between consumers and corporations, holding the latter accountable. This is a robust, pro-consumer ruling, and we’re proud to have played a part in obtaining it.

McGill is represented by Glenn A. Danas and Liana Carol Carter of Capstone Law APC. The case is McGill v. Citibank NA, (case number S224086) in the Supreme Court of the State of California.


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