California Supreme Court Issues Consumer-Friendly Arbitration Ruling

The year 2017 has brought in several consumer-friendly arbitration rulings, with several federal appellate courts refusing to enforce arbitration clauses.   Today, the California Supreme Court followed suit, ruling that a Citibank arbitration provision did not bar its customers from proceeding in court with claims seeking a public injunction under California consumer protection law.

Dating back to 1999, in its decision in Broughton v. Cigna Healthplans of California, 21 Cal.4th 1066 (1999), the California Supreme Court has held that California law does not permit arbitration of claims brought for broad, public injunctive relief.  The Court reaffirmed that principle in 2003 in Cruz v. PacifiCare Health Systems, Inc., 30 Cal.4th 303 2003).  And it has remained in effect, at least in California state courts, ever since.

The US Supreme Court’s Concepcion decision in 2011 engendered doubt as to whether the Broughton and Cruz decisions remain in effect, or whether they are instead preempted by the Federal Arbitration Act.  A series of district court decisions in 2011 and 2012 reached differing outcomes, and the Ninth Circuit ultimately ruled in Kilgore v. KeyBank N.A. that the FAA does preempt the Broughton-Cruz rule.

Today’s California Supreme Court ruling in McGill v. Citibank appeared poised to either contradict or fall in line with Kilgore.  In a bit of a surprise, the decision does neither.  It never references Kilgore and instead clarifies that “the Broughton-Cruz rule is not at issue in this case.”  The Court explained: Broughton-Cruz stood for the proposition that agreements to arbitrate claims for public injunctive relief under the CLRA, the UCL, or the false advertising law are not enforceable in California.  But in Citibank, both parties agreed that the arbitration clause did not seek to compel plaintiff to arbitrate her claim for public injunctive relief.  Instead, “the arbitration provision purports to preclude [plaintiff] from seeking public injunctive relief in any forum.”

The Court thus reframed the issue:

Because, as Citibank states, the parties “elected . . . to exclude public injunctive relief from arbitration,” the Broughton-Cruz rule — which applies only when parties have agreed to arbitrate requests for such relief — is not at issue, and we need not consider the rule‟s vitality in light of the high court‟s post-Cruz FAA decisions. Instead, the question before us is whether the arbitration provision is valid and enforceable insofar as it purports to waive [plaintiff’s] right to seek public injunctive relief in any forum.

With the issue reframed, the Court held that the arbitration provision was invalid and unenforceable under California law insofar as it purported to waive the statutory right to seek public injunctive relief.  The Court noted that under California law, when a law has been established for “a public reason,” it “cannot be contravened by a private agreement.”

The Court emphasized that under the FAA and Concepcion, arbitration agreements are merely on “equal footing” as other contracts, meaning state law principles that disfavor arbitration are preempted:

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. (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1079 (Little) [“long-standing ground for refusing to enforce a contractual term is that it would force a party to forgo unwaivable public rights”].) 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.

The court thus concluded that the FAA did not require enforcement of the provision, merely because it was 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.’”