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California Supreme Court Invalidates Arbitration Clause

Once again, the California Supreme Court has waded into the arbitration thicket.  This time, the Court found unenforceable an arbitration clause that prohibited a consumer from seeking injunctive relief on behalf of the public, not just in the arbitration, but in any forum whatsoever.  If nothing else, this latest decision highlights the dangers of over-reaching in drafting arbitration clauses in California.

For a number of years, the U.S. Supreme Court has issued decisions interpreting the Federal Arbitration Act and finding that the Act preempts state laws and procedures that limit the applicability of arbitration.  These pro- arbitration rulings are exemplified by AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (“Concepcion”).   Despite these cases, California courts continue to issue decisions that find exceptions or limitations to the broad pronouncements in Concepcion and other SCOTUS decisions.

On April 6, the California Supreme Court decided McGill v. Citibank (2017 DJDAR 2305).  In McGill, the plaintiff filed a class action based on Citibank’s marketing of a credit protection plan in connection with its credit cards.  The Complaint alleged claims under the California Unfair Competition statute, the Consumer Legal Remedies Act, and other laws.  Among other things, the Complaint sought an injunction prohibiting Citibank from continuing to engage in certain practices.

It was not disputed that the arbitration clause in the agreement signed by Plaintiff purported to waive her right to seek the statutory remedy of public injunctive relief in any forum.  In a unanimous opinion, the court held that such a provision is contrary to California public policy and is thus unenforceable under California law.   The Court reasoned that plaintiff could not waive a right that exists for the benefit of the public at large.  The Court further held that neither Concepcion nor the Federal Arbitration Act require preemption of this rule of California law or require enforcement of the waiver provision.  Notably, because the arbitration clause also included non-severability language (e.g. that if any portion of the clause was found to be invalid, then the entire clause would be deemed unenforceable), the Court remanded to the Court of Appeal for consideration of whether any part of the case should go to arbitration.

It is possible that Citibank will ask the U.S. Supreme Court to review this decision.   In the past, SCOTUS has rejected several attempts by California courts to limit the scope of the Federal Arbitration Act.  But the issue presented in this case is relatively narrow, and the high court may decide to pass.

In any event, while the facts here are unusual, the case does show that California courts will continue to protect consumers against arbitration clauses the courts deem one-sided.  If the clause in question had allowed the consumer to seek public injunctive relief from the arbitrator or in court, the result might have been different.