California Supreme Court’s latest slippery evasion of federal arbitration law

Worth the paper it’s printed on?

Sharon McGill sued Citibank under California’s consumer protection laws for alleged unfair competition and false advertising in offering a credit insurance plan she purchased to protect her Citibank credit card account. McGill signed a contract that contained an arbitration provision and twice was offered the opportunity to opt-out of the arbitration provision. She did not opt-out. Citibank therefore asked the court to compel McGill to arbitrate her claims, which were covered by the arbitration provision. The trial court held that she must arbitrate her claims for monetary damages and restitution, but that California law prohibits arbitration of public injunctive relief claims. That “California law” refers to California Supreme Court decisions in Broughton v. Cigna Healthplans and Cruz v. PacifiCare Health Sys., Inc. that render arbitration provisions unenforceable if they require arbitration of injunctive relief claims brought for the public’s benefit under the Unfair Competition Law, California Legal Remedies Act, or False Advertising Law. PLF filed an amicus brief supporting Citibank. Today, in McGill v. Citibank, the California Supreme Court invalidated the arbitration contract and did so in a decision that is particularly at odds with itself.

Authored by Justice Chin, the introduction to the unanimous opinion summarizes the holdings (1) that the waiver—which the court characterized as preventing litigation over public injunctive relief in any forum—violates California public policy and is thus unenforceable; and (2) that the Federal Arbitration Act does not preempt “this rule of California law” or require enforcement of the waiver provision. One would be forgiven for thinking that “this rule” referred to the Broughton-Cruz doctrine that was the primary subject of the petition for review and all of the briefing in the courts below except McGill’s petition for rehearing, but the Court later explains that “the Broughton-Cruz rule is not at issue in this case” and focuses instead solely on the “any forum” argument that McGill first raised during oral argument in the Court of Appeal.

The Court bases this surprising result on the standard language of the arbitration contract that provides that all disputes between the parties will be resolved in arbitration; that “the arbitrator will not award relief for or against anyone or is not a party”; and that arbitrations are conducted and awards are made on an individual basis instead of on a class-wide or representative basis. The combination of the agreement to arbitrate disputes plus the agreement to forego public injunctive relief in arbitration means that there is no forum in which McGill can seek public injunctive relief. In other words, although McGill agreed to submit her claims to arbitration, the Court invalidates the agreement because she also agreed to limit the remedies to which she would have been entitled if she prevailed on her claims. Because the public injunction remedy is considered “primarily for the benefit of the public” rather than for the plaintiff’s own benefit, the Court held that waiver of this remedy is invalid and unforceable. Yet no law mandates plaintiffs to request public injunctive relief; they may choose to omit it without consequence. The Court then brushes aside the idea that its holding is preempted by the Federal Arbitration Act by characterizing the rule as a “principal of California law that governs contracts generally” as opposed to an arbitration-specific holding.

The Court’s decision has two foreseeable results. First, Citibank almost certainly will petition the U.S. Supreme Court to review this decision, and PLF will support that petition. Second, because the Court dodged entirely the question of whether the Broughton-Cruz doctrine remains viable in light of Supreme Court cases that undermine its premises, the law on this point remains in disarray in both federal and state courts. Some courts understand that Broughton-Cruz is defunct in light of Supreme Court decisions in AT&T Mobility v. Concepcion and American Express v. Italian Colors Restaurant, while other courts continue to apply it. The Supreme Court’s patience with the California Supreme Court’s ever-more-creative reasons to invalidate arbitration contracts grows thin. In DIRECTV, Inc. v. Imburgia (2015), the Supreme Court slapped down a California anti-arbitration theory for half a dozen reasons, noting that the case was governed by “present well-established law.” This case, too, could have and should have been similarly resolved. Instead, litigation goes on . . . ultimately right back to the Supreme Court.