California’s Supreme Court Holds Arbitration Clauses Cannot Waive Public Injunctive Relief

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In what will likely result in a certiorari petition, the Supreme Court of California unanimously ruled that consumers cannot contractually waive their right to pursue public injunctive relief through a pre-dispute arbitration clause. The court also held that the Federal Arbitration Act (FAA) neither preempts California law in this regard, nor mandates the enforcement of such a provision.

In McGill v. Citibank, the plaintiff brought a putative class action seeking public injunctive relief under California’s consumer protection statutes based on Citibank’s marketing and handling of a “credit protector” plan – a service by which a credit card holder pays a monthly fee in exchange for the deferral or crediting of certain charges upon the occurrence of a qualifying event, such as an employment termination.  Through various amendments to its cardholder agreement, Citibank added mandatory arbitration provisions for any claim arising out of its credit cards, including class action, private attorney general, and representative waivers.

Ruling on Citibank’s bid to compel arbitration, the trial court declined to hold that arbitration was mandatory for plaintiff’s claims for public injunctive relief based on the Broughton-Cruz rule, which prohibits the enforcement of mandatory arbitration clauses in cases seeking public injunctive relief. An appellate court reversed, however, finding the FAA preempted the Broughton-Cruz doctrine, and ordered all of the claims to arbitration.

In a unanimous decision, California’s Supreme Court held that the contractual waiver of public injunctive relief was unenforceable under California law and public policy.  The court first reasoned that the Broughton-Cruz rule was inapplicable because the waiver purported to bar such relief in any forum – not just arbitration. The court then turned to California’s anti-waiver statute, Civil Code section 3513, which provides that “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.”  Applying this rule to the arbitration clause at issue, the court held that the waiver was unenforceable because it would compromise the very public purposes that the various consumer protection statutes were designed to serve. The court also found that its decision did not conflict with the FAA because this defense is generally applicable to every contract, or in other words, a ground under California law to revoke any contract, not just an arbitration agreement.

Assuming the Supreme Court agrees to hear the case, it remains to be seen whether this ruling will remain viable.

 

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