Nor Is There Federal Arbitration Act Preemption.
In a long-awaited and important decision, the California Supreme Court addresses the validity of a provision in a predispute arbitration agreement that waives the right to seek "public injunctive relief" as a statutory remedy in any forum. McGill v. Citibank, N.A., No. S224086 (Sup. Ct. 4/6/17). Reversing the Court of Appeal, the Court unanimously holds, in an opinion authored by Justice Chin,"such a provision is contrary to California public policy and is thus unenforceable under California law." The Court further holds "that the Federal Arbitration Act (FAA; 9 U.S.C. § 1 et seq.) does not preempt this rule of California law or require enforcement of the waiver provision."
The plaintiff had brought claims against Citibank under California Unfair Competition Law, under the California Consumer Legal Remedies Act, under false advertising statutory provisions, and under the Insurance Code, in connection with Citibank's alleged violation of a "consumer protection" plan intended to protect credit card holders who missed payments because of certain qualifying events, such as long-term disability, or unemployment. One element of relief sought by the plaintiff was public injunctive relief, namely, injunctive relief that would benefit not only the plaintiff, but the public. A very broad arbitration provision, however, swept just about every conceivable claim under the arbitration rug.
The parties in McGill agreed that the arbitration provisions, as drafted, prevented the plaintiff from seeking public injunctive relief in arbitration, because the plaintiff would only be able to seek relief as to her own claim, and not obtain any broader injunctive relief that would benefit other persons.
The Court invokes California Code of Civil Procedure section 3513, providing: "Any one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement." As interpreted by the Supreme Court, the UCL, the CLRA and the false advertising statutory provisions (Bus. & Prof. Code § 17500) are established for a public purpose, and thus a waiver of the right to obtain public injunctive relief under those statutes is contrary to California public policy.
So why isn't this result preempted and precluded by the Federal Arbitration Act, which generally requires the enforcement of arbitration clauses? The answer is that the FAA only requires that arbitration provisions be placed on an equal footing with other contracts, and the California Supreme Court explains that such a waiver of the right to obtain public injunctive relief would be equally unenforceable whether the waiver applied to an arbitration proceeding or to a judicial proceeding.
The Court also relies on a distinction applied by SCOTUS in the Italian Colors Restaurant case (see my June 25, 2013 post) – the distinction between waiver of a statutory remedy that is substantive, and waiver of a procedural path to vindicate a statutory remedy. The Italian Colors majority ruled that waiver of a procedural path to vindicate a statutory right is acceptable, so long as there is no waiver of the substantive right. (Because the substantive right may be ineffective without a procedural path to vindicate it, some may believe that the distinction between waiver of a substantive right and waiver of the procedural path, e.g., class action, to vindicate that right, is a distinction without a practical difference.) In McGill, however, enforcement of the arbitration clause would have required waiver of the substantive right to obtain public injunctive relief: not acceptable.
The California Supreme Court avoided having to decide whether the so-called Broughton-Cruz rule applied in McGill. As stated by the Court, that rule provides: "Agreements to arbitrate claims for public injunctive relief under the CLRA, the UCL, or the false advertising law are not enforceable in California." The Court distinguished McGill on the grounds that it is a case where no public injunctive relief could be obtained in any forum, in contrast to a Broughton-Cruz scenario where the parties have agreed to arbitrate claims for public injunctive relief.
COMMENT: The practical effect of the ruling in McGill may be diminished if the parties have to arbitrate the arbitrable claims, and the superior court stays judicial determination of the right to public injunctive relief. In the future, arbitration clauses could be drafted allowing for obtaining public injunctive relief through the arbitration process. While that approach would put the Broughton-Cruz rule at issue again, it would seemingly avoid the holding of McGill, in which the holding depends on the unavailability of public injunctive relief in any forum.