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California Supreme Court Continues to Resist Arbitration

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Lauren M. BurnetteMs. Burnette joins Barron & Newburger with a strong background in consumer credit litigation, compliance and appellate practice representing creditors, collection agencies, debt purchasers and law firms.

On April 6, 2017, the California Supreme Court invalidated a contractual arbitration provision on the basis that California state law prohibits enforcement of arbitration agreements that would bar claims for public injunctive relief.  Its decision – California’s latest in a series of decisions aimed toward invalidating  contractual arbitration provisions –appears inconsistent with the “national policy favoring arbitration” and the “liberal federal policy favoring arbitration” embodied in the Federal Arbitration Act, and suggests further review by the U.S. Supreme Court may be inevitable.

In McGill v. Citibank, N.A., No. S224086, 2017 Cal. LEXIS 2551 (Cal. Apr. 6, 2017), Sharon McGill sued Citibank under California’s unfair competition and false advertising laws for claims regarding Citibank’s credit insurance plan.  The contract between the parties contained an arbitration provision from which McGill did not opt out, despite having multiple opportunities to do so.  After McGill lost her job, she filed a putative class action against Citibank based upon its marketing of the plan and its handling of her claim.  Citibank petitioned to compel arbitration in accordance with the terms of the contract.  The trial court granted the petition in part and denied it in part, holding that under the Broughton-Cruz rule, agreements to arbitrate claims for public injunctive relief, such as that available under California’s Consumers Legal Remedies Act, its unfair competition law, and its false advertising law, are unenforceable in California.  The Court of Appeals reversed and remanded with instruction that the trial court order all of McGill’s claims to arbitration, holding that the FAA preempts the Broughton-Cruz rule.  On further appeal, the California Supreme Court held that the FAA does not preempt California law so as to require enforcement of the waiver provision.

The arbitration agreement stated that

Claims must be brought in the name of an individual person or entity and must proceed on an individual (non-class, non-representative) basis. The arbitrator will not award relief for or against anyone who is not a party. If you or we require arbitration of a Claim, neither you, we, nor any other person may pursue the Claim in arbitration as a class action, private attorney general action or other representative action nor may such Claim be pursued on your or our behalf in any litigation in any court.

The California Supreme Court determined that strict enforcement of the arbitration clause would divest litigants of the public injunctive relief available under multiple California consumer protection statutes – relief that the Court says by and large benefits the general public.  Rejecting Citibank’s argument that the FAA preempts California law, even if the effect of such preemption is that public injunctive relief would not be available to McGill, the Court justified its position based upon SCOTUS’ holding in AT&T Mobility LLC v. Concepcion that the FAA requires courts to place arbitration agreements on an equal footing with other contracts and to enforce them according to their terms. In spite of this, the McGill Court held that the FAA does not require enforcement of a pre-dispute arbitration agreement that waives the right to seek public injunctive relief under the UCL, the CLRA, or California’s false advertising law. On this basis, the Court reversed the judgment of the Court of Appeals and remanded the matter for further proceedings consistent with the Court’s determination that only certain of McGill’s claims are arbitrable.

This decision certainly invites scrutiny by SCOTUS which, in its 2015 opinion in DirecTV, Inc. v. Imburgia, broadcast its displeasure with the California Court’s willingness to invalidate arbitration contracts and skirt the FAA.    The McGill decision invites the United States Supreme Court, yet again, to reiterate that under the FAA, litigants can opt to contractually forfeit the right to litigate in certain fora or seek certain types of relief, even in states disfavoring such limitations.