California Breaks Further from Concepcion: Arbitration Agreements Face Further Challenge

Notwithstanding the Federal Arbitration Act (“FAA”), arbitration agreements that purport to waive a consumer’s right to seek public injunctive relief under California’s consumer protection statutes are contrary to California law and are unenforceable.  This rule, recently promulgated by the California Supreme Court, appears to be inconsistent with U.S. Supreme Court precedent that the permissible scope of arbitration agreements under the FAA is broad and not subject to state laws governing arbitration.  It also highlights a trend of California courts to limit the rights consumers can waive in arbitration agreements.  

In a unanimous decision, the California Supreme Court in McGill v. Citibank, No. S224086 (Cal. Sup. Ct. April 6, 2017) (“McGill”) held that notwithstanding preemption under the Federal Arbitration Act, an arbitration provision that waives the right to seek public injunctive relief in any forum contravenes California public policy and is thus unenforceable. 

The petitioner in McGill initiated an action against Citibank for claims under California’s consumer protection statutes, alleging that Citibank misrepresented its “credit protector” plan to its customers.  In addition to compensatory damages, McGill sought to enjoin Citibank from continuing to engage in its allegedly deceptive and unfair business practices.  Citibank subsequently sought an order compelling McGill to arbitrate her claims, arguing that the parties’ account agreement contained a provision that required arbitration of all claims, including those premised on injunctive relief.  The trial court rejected Citibank’s assertion, holding that provisions requiring arbitration of claims for public injunctive relief are unenforceable under California law.  On appeal, the California Court of Appeal sided with Citibank, holding that under the U.S. Supreme Court’s decision of AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333 (“Concepcion”), the FAA preempts any state law prohibition against arbitration of claims. 

In reversing the appellate decision, the California Supreme Court held that the FAA does not preempt a contract provision that seeks to waive the statutory right to seek public injunctive relief under California’s consumer protection statutes; namely, the Unfair Competition Law, Consumer Legal Remedies Act, and False Advertising Laws.  While the FAA does in fact preempt laws that apply only to arbitration, under the FAA’s so-called “saving clause,” the FAA does not preempt generally applicable state laws and contract defenses, the Court held.

The contract defense against waiver of the right to seek public injunctive relief under any forum constitutes a generally applicable contractual defense, and is thus, outside the scope of FAA preemption as set forth in Concepcion.  Accordingly, because the parties’ agreement sought to waive the right to seek public injunctive relief in contravention of generally applicable California law, the FAA did not preempt it, and the provision was unenforceable.  

Notably, the California Supreme Court’s decision centered on the fact that the arbitration provision sought to waive McGill from seeking public injunctive relief in any forum, not just in arbitration.  Thus, the Court did not address whether the FAA would preempt a provision that prohibited a party from seeking public injunctive relief in arbitration, an outcome that pre-Concepcion courts in California had held contravened California public policy.  Although McGill did not answer this important question, the decision is still notable as it clarifies the scope of FAA preemption and carves out an exception that allows consumers to pursue public injunctive relief in any forum despite an arbitration provision and notwithstanding FAA preemption.