California Supreme Court Invalidates Arbitration Agreement That Purports To Waive Injunctive Relief

In a unanimous decision released April 6, 2017, the California Supreme Court held an arbitration agreement that waives the right to public injunctive relief in any forum is contrary to state public policy and therefore unenforceable. McGill v. Citibank, No. S224086 (April 7, 2017). The Court also held that public injunctive relief remains a remedy available to a private plaintiff under the state’s consumer protection statutes.

Case Background

In 2011, Plaintiff ­­Sharon McGill filed a putative class action against her credit card company alleging causes of action for violations of California’s Consumer Legal Remedies Act, Civil Code § 1750 et seq. (“CLRA”), Unfair Competition Law, Business and Professions Code § 17200 et seq. (“UCL”), and the False Advertising law, Business and Professions Code § 17500 et seq. (“FAL”). She sought money damages, restitution, and injunctive relief.

Applying an arbitration provision in her Citibank account agreement, the California Court of Appeal had held that the lender was entitled compel the plaintiff to arbitrate all claims — including claims for injunctive relief under the CLRA and UCL. The California Supreme Court reversed last Thursday, and remanded to the Court of Appeal the question of whether the remainder of the arbitration provision was enforceable.

The California Supreme Court’s Holdings And Rational

Arbitration Agreements That Waive Right To Pursue Public Injunctive Relief In Any Forum Are Unenforceable

In oral argument, the parties agreed that McGill’s arbitration provision “purports to preclude [her] from seeking public injunctive relief in arbitration, in court, or in any forum.” McGill, No. S224086, slip op at 8 (Cal. April 6, 2017). The question before the California Supreme Court was thus “whether the arbitration provision is valid and enforceable insofar as it purports to waive McGill’s right to seek public injunctive relief in any forum.” Id. (emph. orig.).

The Supreme Court rejected Citibank’s argument that a California rule precluding enforcement of McGill’s right to request public injunctive relief in any forum would be preempted by the FAA. The FAA requires courts to place arbitrations agreements on “equal footing with other contracts.” Id. at 15 (quoting Concepcion, 563 U.S. at 339)). The U.S. Supreme Court qualified that statement, however, with a “savings clause,” which “permits arbitration agreements to be declared unenforceable ‘upon such grounds as exist in law or in equity for the revocation of any contract.’” Id.

Under the savings clause, the California Supreme Court found, a law established for a public reason cannot be contravened by a private agreement and arbitration agreements which purport to do so may be invalidated. Id. (citing Civ. Code § 3513). “A provision in any contract . . . that purports to waive, in all fora, the statutory right to seek public injunctive relief under the UCL, the CLRA, or the [FAL] 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 had been inserted into an arbitration agreement. To conclude otherwise would, contrary to Congress’s intent, make arbitration agreements not merely ‘as enforceable as other contracts, but . . . more so.” Id. at 16 (citing Prima Paint, 338 U.S. at 404 n.12).

Proposition 64 Does Not Apply To Claims For Public Injunctive Relief

The Court also appears to have found that a plaintiff who otherwise meets the standing requirements of California’s Proposition 64 — a private individual who as “suffered injury in fact and has lost money or property as a result of” a violation of the CLRA, UCL, or FAL — may seek public injunctive relief without satisfying the statutory requirements for class certification.

Voters passed Proposition 64 in 2004 to amend California’s Business and Professions Code and limit lawsuits under the statute to members of the public who have suffered injury and lost money or property due to the alleged statutory violation. See, e.g., Bus. & Prof. Code § 17204. Proposition 64 additionally authorized injured individuals to “pursue representative claims or relief on behalf of others only if [he or she] meets the standing requirements . . . and complies with” California’s class action requirements found in Section 382 of the Code of Civil Procedure. See, e.g., id. § 17203.

In McGill, the Court found that “requests to enjoin future wrongful business practices that will injure the public” need not satisfy the requirements for class certification. McGill, slip op at 13. The Court reasoned that “representative claims” do not include claims that seek public injunctive relief, but rather include only claims that seek monetary remedies, such as disgorgement or restitution, on behalf of others. Id. The Court relied on its 2000 opinion in Kraus v. Trinity Management Services, which defined a “representative action” to mean a “UCL action that is not certified as a class action in which a private person is the plaintiff and seeks disgorgement and/or restitution.” Id. (citing 23 Cal.4th 116, 121 (2000)). In light of that definition, the Court reasoned voters who passed Proposition 64 just a few years later likely interpreted “representative claims” to mean those claims seeking monetary relief on behalf of others. Voters were not attempting to limit claims like McGill’s that seek public injunctive relief. Id.

What’s Next

The ramifications of the decision will play out over the next several years as we wait to see whether federal courts in California will fall in line with the state Supreme Court or separately find that the FAA preempts claims for public injunctive relief. Regardless, the Court’s decision in McGill raises immediate questions as to the validity and enforceability of arbitrations provisions contained in consumer contracts and will almost certainly result in an expansion of consumer litigation. Businesses will need to review the language of consumer contracts to determine whether arbitration provisions waive the right to pursue public injunctive relief altogether.