On April 6, 2017, in a unanimous decision, the California Supreme Court held that an arbitration agreement in Citibank’s credit card contract that purportedly waived the plaintiff’s right to seek public injunctive relief under the Consumers Legal Remedies Act (CLRA), the Unfair Competition Law (UCL), and the False Advertising Law (FAL) in any forum was unenforceable as against California public policy.
The Court had originally granted review of the case to determine whether the Federal Arbitration Act (FAA) preempted the Court’s prior rulings in Broughton v. Cigna Healthplans (1999) 21 Cal.4th 1077 and Cruz v. PacifiCare Health Sys., Inc. (2003) 30 Cal.4th 303, which held that agreements to arbitrate claims for public injunctive relief under the CLRA, the UCL, and the FAL are not enforceable in California (the “Broughton-Cruz rule”). Notably, however, the Court determined that the “Broughton-Cruz rule is not at issue in this case” because the arbitration agreement precluded McGill from seeking public injunctive relief in any forum, not just arbitration. The Court then proceeded to find that the arbitration agreement’s waiver of McGill’s right to pursue public injunctive relief in any forum is invalid and unenforceable under California law. Because the waiver applied to any forum (not just arbitration) and because the Court found that such a waiver would be unenforceable in any contract (not just an arbitration agreement), the Court determined that “[t]he FAA does not require enforcement of such a provision, in derogation of this generally applicable contract defense, merely because the provision has been inserted into an arbitration agreement.”
Plaintiff brought this putative class action in 2011, claiming that Citibank’s marketing of a credit protection plan relating to her credit card account violated the CLRA, the UCL, the FAL and the Insurance Code and seeking, among other relief, an injunction. Pursuant to an arbitration agreement that had been added to her account, Citibank moved to compel McGill to arbitrate her claims on an individual basis. Applying the Broughton-Cruz rule, the trial court ordered Plaintiff to arbitrate all of her claims other than those for injunctive relief under the CLRA, the UCL, and the FAL. The court of appeal reversed finding that the United States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333 preempted the Broughton-Cruz rule. In Concepcion, the United States Supreme Court held that the FAA preempts state laws purporting to condition arbitration on the availability of procedures that interfere with the fundamental attributes of arbitration.
Sidestepping the question of whether the Broughton-Cruz rule conflicts with Concepcion and the United States Supreme Court’s 2013 decision in American Express Co. v. Italian Colors Restaurant (2013) 133 S. Ct. 2304, the California Supreme Court ruled that its decision here turned on the language in the arbitration agreement purporting to prohibit McGill from seeking public injunctive relief in any forum, not just arbitration. The Court reasoned that the arbitration agreement’s preclusion of public injunctive relief in any forum violated California contract law and public policy, which prohibit private agreements that contravene laws established for public reasons. According to the California Supreme Court, this is a generally applicable contract defense – and not one that applies just to arbitration – and thus falls within Section 2 of the FAA, known as the “savings clause.” For this reason, the California Supreme Court found Concepcion and Italian Colors inapplicable.
Regardless of how the California Supreme Court tried to couch the issue, however, this decision is nonetheless inconsistent with Concepcion and Italian Colors, which made clear that the FAA preempts state-law rules that stand as obstacles to arbitration. It remains to be seen whether this case will end up in the United States Supreme Court, especially now that Justice Gorsuch has joined the Court. However, for now, it is clear that defendants will continue to face hurdles enforcing arbitration agreements in California.