California Supreme Court’s McGill Decision Creates Confusion Over the Enforceability of Arbitration Clauses That Limit Public Injunctive Relief

In McGill v. Citibank, N.A., the California Supreme Court unanimously held that arbitration clauses that waive the right to seek public injunctive relief in any forum are contrary to public policy and therefore unenforceable under California law. The decision is significant, as it potentially limits the type of the relief that is subject to arbitration. It also raises questions regarding the Federal Arbitration Act’s (“FAA”) preemption of California’s so-called Broughton-Cruz rule, which holds that agreements to arbitrate claims for public injunctive relief under the California’s Consumers Legal Remedies Act (“CLRA”), unfair competition law (“UCL”), or the false advertising law are unenforceable in California. Overall, however, the case raises more questions regarding the enforceability of arbitration clauses than it resolves.

Plaintiff Sharon McGill (“McGill”) opened a credit card account with Citibank, N.A. (“Citibank”) and purchased a “credit protector” plan (“Plan”) for a monthly premium, which deferred certain credit balances when a qualifying event, such as unemployment, occurred. Although McGill’s original credit card agreement did not contain an arbitration provision, Citibank sent McGill notices in 2001 and 2005 which stated that all claims were subject to arbitration, regardless of the remedy sought, and waived the cardholder’s right to bring any claims on a representative or class-action basis.

McGill filed a class action alleging violations of CLRA, UCL, false advertising law, as well as California’s Insurance Code. The CLRA, UCL, and false advertising laws provide statutory remedies of public injunctive relief, i.e. injunctive relief that has the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public. McGill sought, among other relief, an injunction prohibiting Citibank from continuing to engage in its allegedly illegal and deceptive practices.

Pursuant to the credit card agreement’s arbitration provision, Citibank moved to compel McGill to arbitrate her claims on an individual basis. The trial court, relying on California’s Broughton-Cruz rule, ordered McGill to arbitrate all claims, except for her claim for public injunctive relief. The Court of Appeals reversed and remanded, ordering McGill to arbitrate all claims, including those seeking public injunctive relief. Importantly, the Court of Appeals found that the Broughton-Cruz rule was preempted by the FAA based upon the Supreme Court’s construction of same in AT&T Mobility LLC v. Concepcion.

On appeal, the California Supreme Court focused primarily on the arbitration clause’s language that “purport[ed] to prohibit [McGill] from pursuing claims for public injunctive relief, not just in arbitration, but in any forum.” The court held that the arbitration provision was unenforceable because it violates public policy and reasoned that a law established for public purposes cannot be waived via a private agreement, such as an arbitration agreement. Of particular importance is the court’s finding that public injunctions are a substantive, statutory remedy, not a procedural device such as a class action, and therefore cannot be waived as part of an arbitration clause.

As to FAA preemption, relying on the United States Supreme Court’s decisions in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. and American Express Co. v. Italian Colors Restaurant, McGill concluded that “the FAA does not require enforcement of a provision in a predispute arbitration agreement that, in violation of generally applicable California contract law, waives the right to seek in any forum public injunctive relief.” Therefore, while the court did not explicitly rule on FAA preemption, it indicated that the waiver of substantive, statutory rights would not be preempted under the FAA.

McGill is notable in finding that arbitration agreements that waive a consumer’s right to seek a public injunction in any forum are unenforceable under California law. However, it fails to address whether arbitration clauses that waive the right to seek a public injunction in arbitration only are similarly unenforceable, creating potential confusion on this issue. Moreover, it leaves open the possibility for the United States Supreme Court to explicitly address the viability of California’s Broughton-Cruz rule under the FAA.

Lauren B. Cooper is an Associate in the Gibbons Business & Commercial Litigation Department.