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August 16, 2017 Top Story

Arbitration Clause Waiving Consumer Rights Declared Unenforceable

Consumer agreements that prohibit public injunctive relief violate public policy

By Amy Mattson

An arbitration agreement that waives a consumer's right to seek public injunctive relief in any forum is contrary to public policy and invalid according to the California Supreme Court. The court unanimously held that the Federal Arbitration Act (FAA) does not preempt state laws disfavoring arbitration provisions that waive substantive statutory remedies. The court declined to consider, however, whether the FAA preempts California's Broughton-Cruz rule, which provides that agreements to arbitrate certain claims for public injunctive relief are unenforceable.

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Credit Card Holder Seeks Injunctive Relief in Class Action

The dispute arose from a putative class action brought by Sharon McGill against Citibank regarding a credit protection plan she had purchased. Under that plan, Citibank agreed to defer or credit certain amounts to McGill's account if a qualifying event, such as job loss, occurred. The original agreement did not contain an arbitration provision, but subsequent modifications to the plan added arbitration provisions with class action waivers. With each change in terms, McGill had the opportunity to opt out of the program but declined to do so.

In 2008, McGill became unemployed but did not receive what she claimed to be the promised benefits of the credit protection plan. She sued Citibank based on California's three major consumer protection statutes: the Unfair Competition Law (UCL), False Advertising Law (FAL), and Consumer Legal Remedies Act (CLRA), as well as the Insurance Code. In addition to damages, McGill's complaint sought an injunction prohibiting Citibank from continuing to engage in allegedly illegal and deceptive practices in the marketing of its credit protection plan and its handling of claims under that plan. Citibank sought to compel arbitration of each of these claims on an individual basis.

Relying on California's Broughton-Cruz rule, the trial court agreed with Citibank that arbitration was mandatory and ordered McGill to arbitrate all claims other than those for public injunctive relief—i.e., claims for an injunction that would benefit members of the public at large. The appellate court reversed that ruling and ordered all of McGill's claims to arbitration, reasoning that the FAA preempted the Broughton-Cruz rule, which prohibits arbitration of claims seeking public injunctive relief under the UCL, FAL, and CLRA. McGill filed a petition for review, claiming the appellate court erred in finding preemption and asserting that the arbitration provision was unenforceable because it waived her right to seek public injunctive relief in any forum.

Arbitration Provision Violates Public Policy

The California Supreme Court granted review and reversed the appellate court in part, holding that the contractual waiver of McGill's right to seek public injunctive relief was unenforceable under California law and public policy. The appellate court stated that the waiver in McGill's pre-dispute arbitration agreement with Citibank "would seriously compromise the public purposes that [state consumer protection statutes] were intended to serve."

The agreement's language that prevented McGill from seeking "substantive statutory remedies" in any forum—arbitral or judicial—was central to the decision. The supreme court thus declined to address whether the Boughton-Cruz rule was preempted, reasoning that this rule applied only to cases in which parties had agreed to arbitrate claims for public injunctive relief.

The appellate court explained that Congress' purpose in enacting the FAA "was to make arbitration agreements as enforceable as other contracts, but not more so," thus holding that a provision in any contract that waived the right to seek a public injunction would be invalid and unenforceable. The court further supported its decision by referencing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., a U.S. Supreme Court case holding that courts are not required to enforce arbitration provisions that eliminate plaintiffs' rights to pursue statutory remedies. Whether the portion of the arbitration clause not waiving McGill's right to public injunctive relief was enforceable remained unclear, so the issue was remanded to the appellate court for further proceedings.

Looking Ahead for Litigators

This decision—despite its narrow scope—is one to keep in mind, say ABA Section of Litigation leaders. "Practitioners should remember that California's consumer protection statutes do not only protect California residents but also can apply to consumers nationwide when the defendant maintains its principal place of business in California," says Kathryn A. Honecker, Phoenix, AZ, cochair of the ABA Section of Litigation's Consumer Litigation Committee. "So, this ruling, while limited in scope, may have an impact on consumers across the country," notes Honecker

Whether clients are consumers or businesses, this case provides an important lesson for all litigators. "Read the statutes carefully. If there is a public policy argument that is being made or can be made, advise your client accordingly," suggests Louis F. Burke, New York City, NY, cochair of the Section of Litigation's Alternative Dispute Resolution Committee.

Further clarity on this issue may come from the federal courts. "It's worth keeping an eye on how the federal courts will look at the FAA preemption argument that the state supreme court avoided," advises Michael LeBoff, Newport Beach, CA, cochair of the Section's Commercial & Business Litigation Committee.


Amy Mattson is a contributing editor of Litigation News.

Keywords: arbitration, injunctive relief, consumer rights, class action

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