Outsourcing Justice

California: The Wild, Wild West of Arbitration Law

The California Supreme Court recently issued a decision following its tradition of finding creative ways to avoid FAA preemption.  The court’s analysis provides an interesting blueprint for other states to develop consumer and employee protection statutes that can avoid the the steamroller of FAA preemption.

In McGill v. Citibank, No. S224086 (Cal. Apr. 6, 2017) (click here for a copy of the decision), the California Supreme Court held that “a provision in a predispute arbitration agreement that waives the right to seek [public injunctive relief] in any forum” is not enforceable under California law, and the FAA does not preempt this California rule.

The plaintiff in this case, a Citibank cardholder, filed a class action against Citibank regarding its credit insurance program.  Under this program, a customer’s credit card payments are deferred or forgiven based on certain events like disability or unemployment.   The plaintiff’s lawsuit sought, inter alia, an injunction prohibiting Citibank from continuing to engage in allegedly deceptive business practices regarding its credit insurance program.

The arbitration clause at issue precluded Citibank customers from seeking public injunctive relief in any manner, whether in arbitration, in court, or any other forum.  The California Supreme Court held that this waiver of the right to seek public injunctive relief is invalid under California law.  The court reached its decision by relying on a general California statute providing that “a law established for a public reason cannot be contravened by a private agreement.”  The court explained that the public injunctive relief available under several California consumer protection statutes is primarily for the public benefit.  As a result, because a law established for the public cannot be contravened by a private agreement, the court reasoned that a waiver of the right to assert public injunctive relief is invalid and unenforceable.

Regarding the court’s analysis of FAA preemption, the court reasoned that the anti-waiver law at issue (“a law established for a public reason cannot be contravened by a private agreement”) applies to any contract.  In other words, a waiver of the right to seek public injunctive relief is invalid, regardless of whether the waiver is found in an arbitration clause or in any other contract.  Because this state law defense or anti-waiver law applies to ALL contracts, not just to arbitration clauses, the California Supreme Court held that the FAA does not preempt this state law due to the savings clause in section 2 of the FAA.

Also, aside from the California anti-waiver law, the California Supreme Court creatively relied on the effective vindication doctrine from the U.S. Supreme Court’s American Express case, which suggested that an arbitration clause cannot waive statutory rights or remedies.  Citing this Amex decision, the California Supreme Court explained that the arbitration clause at issue violated the effective vindication doctrine because the arbitration clause improperly waived the right to pursue public injunctive relief.

The US Supreme Court’s landmark decision in AT&T v. Concepcion, which sets forth a very broad doctrine of FAA preemption, was of course a concern in this case.  But the California Supreme Court found a creative way to distinguish Concepcion.  The state law at issue in Concepcion involved the procedural device of a class action, and imposing class action procedures on an arbitration would transform the fundamental nature of arbitration according to the Concepcion decision.  However, the state law at issue in McGill does not involve procedural devices which could interfere with the procedural simplicity of arbitration and instead involves the remedy of a public injunction.  The court reasoned that allowing parties to seek public injunctive relief will not interfere with the fundamental attributes of arbitration.

If this case survives US Supreme Court review, other states could adopt similar consumer and employee protection statutes allowing for public injunctive relief and avoid the juggernaut of FAA preemption.

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