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Consumer Arbitration Clauses Continue to Be Attacked under McGill

Jay T Ramsey and Fred R Puglisi


  • Arbitration clauses with class action waivers are effective in addressing consumer class actions, but they face numerous legal challenges, particularly under California law.
  • The California Supreme Court's McGill decision differentiates between "private" and "public" injunctive relief, ruling that arbitration clauses barring public injunctive relief are unenforceable because they contravene public policy.
  • The Ninth Circuit's decision clarifies that arbitration agreements allowing all remedies available in individual lawsuits, including public injunctive relief, are enforceable, distinguishing them from clauses that explicitly limit relief to the parties involved.
  • Agreements with severability clauses may survive challenges under McGill, while those with poison pill clauses that void the entire agreement if any part is unenforceable are likely to fail.
Consumer Arbitration Clauses Continue to Be Attacked under McGill
Terry Vine via Getty Images

Arbitration clauses with class action waivers remain one of the most effective tools available to defendants for addressing consumer class actions. The importance of an enforceable arbitration clause has only grown as consumers continue to engage virtually and interact with an increasing number of companies online. At the same time, attacks against these clauses have been numerous and varied. This article looks at an attack under California law based on the California Supreme Court’s decision in McGill v. CitiBank, N.A., 2 Cal. 5th 945 (2017).

The McGill Rule

Under California’s consumer protection statutes—the Unfair Competition Law, Cal. Bus. & Prof. Code §§ 17200 et seq.; the False Advertising Law, Cal. Bus. & Prof. Code §§ 17500 et seq.; and the Consumer Legal Remedies Act, Cal. Civ. Code §§ 1750 et seq.—a consumer can obtain both “private” injunctive relief and “public” injunctive relief.

The line between “private” injunctive relief and “public” injunctive relief is blurry and often depends on the facts of the case. In McGill, the California Supreme Court described private injunctive relief as “relief that primarily resolves a private dispute between the parties and rectifies individual wrongs,” which may benefit the public “only incidentally.” McGill, 2 Cal. 5th at 955–56 (internal citations and quotation marks omitted). Public injunctive relief, by contrast, is relief that “by and large benefits the general public” by “eliminat[ing] deceptive practices” that threaten to harm others in the future. Id.

Whatever the difference between “private” and “public” injunctive relief, in McGill, the California Supreme Court held that a law allowing a consumer to seek and obtain public injunctive relief is a “law established for a public reason,” which “cannot be contravened by a private agreement.” Id. at 961 (citing Cal. Civ. Code § 3513). As a result, a contract that bars “public” injunctive relief in any forum is unenforceable. Id. at 961–62.

Under McGill, then, an arbitration agreement can be rendered unenforceable if it prevents the award of public injunctive relief in any forum. The plaintiffs’ bar has seized on this rule and challenged a variety of arbitration provisions, hoping to render them unenforceable. If successful, such a challenge could eliminate the class action waiver that those provisions generally include. But, as the law has developed, the scope of the McGill rule appears limited.

Does the Clause Bar Public Injunctive Relief?

The text of an agreement is the crucial first step. If it limits the relief that can be awarded in arbitration to relief affecting only the plaintiff, it likely bars the award of public injunctive relief and thus may run afoul of the McGill rule. But if it permits the award of any relief otherwise available in an individual action, it likely does not. This was confirmed by the Ninth Circuit’s recent decision in DiCarlo v. MoneyLion, 988 F.3d 1148 (9th Cir. 2021).

In DiCarlo, the arbitration provision stated that the arbitrator could “award all remedies available in an individual lawsuit under [California] law.” Id. at 1153. This contrasted with the provision in McGill, which could be interpreted to limit the scope of the relief that could be awarded: It provided that “the arbitrator will not award relief for or against anyone who is not a party.” McGill, 2 Cal. 5th at 955–56. As to the clause in DiCarlo, the Ninth Circuit held that it did not bar the arbitrator from awarding public injunctive relief because “litigants” in California “proceeding in individual lawsuits may request public injunctive relief.” DiCarlo, 988 F.3d at 1158.

Notably, in DiCarlo, the arbitration agreement included both a class action waiver and separate provisions precluding the consumer from acting in a representative capacity or as a private attorney general. These are all common terms in consumer arbitration agreements. The plaintiff in DiCarlo argued that the arbitration agreement barred public injunctive relief because, according to the plaintiff, consumers act as private attorneys general when they seek public injunctive relief. The Ninth Circuit noted that the argument was at least facially intuitive: “One would think that a person seeking a remedy that by and large benefits the general public and that benefits the plaintiff, if at all, only incidentally and/or as a member of the general public is vindicating the public’s rights,” and thus that person would seem to be “acting in the purest sense as a private attorney general.” Id. at 1157. But the Ninth Circuit rejected the argument, finding that because public injunctive relief is available under California law on individual claims, the plaintiff could seek that relief in arbitration under the specific wording of the provision. Id. at 1157–58.

Is the Provision Barring Public Injunctive Relief Severable?

Whether or not the arbitration provision includes a severability clause or a poison pill clause can make all the difference. If an arbitration agreement includes a provision that bars the award of public injunctive relief in any forum but also states that any provision deemed unenforceable can be severed, the arbitration agreement may survive. But if the arbitration agreement includes a poison pill that renders the entire arbitration agreement void if any part of it is deemed invalid, then the agreement will likely fail.

For example, in McGill, the parties “agree[d] that they elected . . . to exclude public injunctive relief requests from arbitration” and also separately agreed that “if any portion of the arbitration provision is deemed invalid or unenforceable, the entire arbitration provision shall not remain in force.” McGill, 2 Cal. 5th at 966–67. The California Supreme Court did not address whether this provision meant that the entire arbitration clause had to be invalidated, but the court noted the issue and remanded for the California Court of Appeal to address in the first instance. In two subsequent cases, the California Courts of Appeal have held that a poison pill clause can render an entire arbitration provision, including the class action waiver therein, unenforceable if the agreement otherwise violates the McGill rule. See Maldonado v. Fast Auto Loans, Inc., 60 Cal. App. 5th 710, 275 Cal. Rptr. 3d 82, 91–92 (2021); Mejia v. DACM Inc., 54 Cal. App. 5th 691, 704 (2020).

Although McGill, Maldonado, and Mejia all involved poison pill clauses, each decision strongly implies that the inclusion of a severability clause, rather than a poison pill clause, would have led to a different result. Nevertheless, not all severability clauses will do the trick. In Blair v. Rent-A-Center, Inc., 928 F.3d 819, 831 (9th Cir. 2019), the severability clause did not allow the court to strike out a provision of the arbitration agreement; instead, it provided: “If there is a final judicial determination that applicable law precludes enforcement of this Paragraph’s limitations as to a particular claim for relief, then that claim (and only that claim) must be severed from the arbitration and may be brought in court.” (Emphasis added.) Under this provision, rather than severing the aspect of the arbitration agreement that ran afoul of McGill, thereby saving the remainder of the provision, the Ninth Circuit held that the severability clause required that the claim be severed and tried in court. The net result was that the arbitration agreement, including the class action waiver, did not apply to the severed claims.

What’s Next?

Plaintiffs continue to attack arbitration clauses and class action waivers under the McGill rule. As the discussion above reflects, the precise wording of an arbitration agreement, including any severability clause, may make all the difference. Companies concerned about this issue should take a close look at their provisions. In doing so, companies can make choices about whether it is worth allowing prayers for public injunctive relief to be arbitrated rather than possibly losing the right to compel arbitration in total, or whether they want to craft clauses that would sever prayers for relief so that they can be adjudicated in separate forums.