Arbitration, Public Policy: An Arbitration Provision Purporting To Waive Consumer's Right To Seek Public Injunctive Relief Is Invalid And Unenforceable

McGill Is Still Good Law.

        The action in Joe Maldonado v. Fast Auto Loans, Inc., G058645 (4/3  2/8/21) (O'Leary, Aronson, Thompson) centered on whether McGill v. Citibank, N.A., 2 Cal.5th 945  (2017) is still good California law and whether it has been preempted by the Federal Arbitration Act. McGill, which we posted about on April 6, 2017, held that an arbitration provision was invalid and unenforceable because it required consumers to waive their right to pursue public injunctive relief. See also the September 29, 2020 post on Mejia v. DACM Inc., 54 Cal.App.5th 691 (2020).

        Maldonado and others brought a putative class action alleging Fast Auto Loans, Inc. charged unconscionable interest rates on loans in violation of the  Financial Code. Fast Auto Loans moved to compel arbitration, based on a broad arbitration provision that  would have resulted in a waiver of class actions and the plaintiffs' ability to bring an action for public injunctive relief. The trial court held that the McGill rule made the arbitration provisions unenforceable, and the Court of Appeal affirmed the order denying the motion to compel arbitration.

        The Court of Appeal concluded that  McGill is good law. Fast Auto Loans' argument that FAA preemption applied foundered, because SCOTUS recently denied review of Ninth Circuit cases applying McGill, leaving the Court of Appeal to apply McGill, a case decided by the California Supreme Court.

        COMMENT: What is the reasoning that explains why McGill is not preempted by the  FAA?  "The contract defense at issue here—'a law established for a public reason cannot be contravened by a private agreement' (Civ. Code, § 3513)—is a generally applicable contract defense, i.e., it is a ground under California law for revoking any contract. . . . It is not a defense that applies only to arbitration or that derives its meaning from the fact that an agreement to arbitrate is at issue." McGill v. Citibank, N.A., 2 Cal. 5th 945, 962 (2017). In short, the defense does not unduly burden an arbitration agreement, because it would also apply to another contract.