September 16, 2019

September 16, 2019

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Choose Your Forum Wisely: Save Your Arbitration Clause From California’s Prohibition on Pre-Dispute Waivers of a Plaintiff’s Right To Seek Public Injunctive Relief

The U.S. Supreme Court’s ruling in AT&T Mobility v. Concepcion, 563 U.S. 333 (2011) caused a shockwave in California’s class action bar when it held that the Federal Arbitration Act (“FAA”) preempted California’s former Discover Bank rule prohibiting arbitration clauses in consumer contracts from including a pre-dispute waiver a plaintiff’s right to seek class action relief. After the decision in Concepcion, mandatory arbitration and corresponding class action waivers became the norm in consumer contracts. Many of the arbitration clauses in these consumer agreements, however, also included language prohibiting the plaintiff from obtaining relief for anyone other than the plaintiff. Courts interpreted this language as a pre-dispute waiver of a plaintiff’s right to seek “public injunctive relief” (i.e. injunctive relief that has the primary purpose and effect of prohibiting acts that threaten future injury to the general public) under California’s consumer protection statutes. Recent decisions by the California Supreme Court and the Ninth Circuit, however, confirm that a plaintiff cannot waive his or her right to seek public injunctive relief under California’s consumer statutes. Consumer-focused businesses that include arbitration clauses in their account agreements should reevaluate their arbitration clauses in light of California’s prohibition on the waiver of a plaintiff’s right to seek public injunctive relief.

In McGill v. CitiBank, N.A., 2 Cal. 5th 945 (2017), the California Supreme Court held that the waiver of a plaintiff’s right to seek public injunctive relief under California’s consumer protection statutes is unenforceable. The California Supreme Court distinguished Concepcion by noting that public injunctive relief is a substantive right available to individuals. In contrast, the pre-dispute class action waiver at-issue in Concepcion merely involved the waiver of a procedural right to aggregate substantive claims. Under the FAA, an arbitration clause may only be invalidated upon such grounds that would be sufficient to invalidate any contract. The McGill court found that a pre-dispute waiver of an individual plaintiff’s substantive right to seek public injunctive relief under California’s consumer statutes would be illegal and, thus, a contractual defense of general applicability. Thus, the FAA does not preempt California’s rule prohibiting the waiver of a plaintiff’s right to seek public injunctive relief. Importantly, the McGill rule only applies to complete waivers of a plaintiff’s right to seek public injunctive relief. If an arbitration clause leaves open some forum for the plaintiff to obtain public injunctive relief (be it court or arbitration), then the McGill rule does not come into play.

After McGill, it remained an open question whether federal courts would adopt the preemption analysis set forth in McGill, which led to a split at the district court level. Some district courts found that the rule in McGill was preempted by the FAA. Others applied McGill to invalidate pre-dispute waivers of a consumer plaintiff’s right to seek public injunctive relief.

On June 28, 2019, the Ninth Circuit put the controversy to rest. In Blair v. Rent-A-Center, Inc., 928 F.3d 819 (9th Cir. 2019), the Ninth Circuit held that the FAA does not preempt the McGill rule. As a result, the McGill rule is now the law of the land. A pre-dispute waiver of a plaintiff’s right to seek public injunctive relief will not be enforced in California state or federal courts. Although the Ninth Circuit’s decision in Blair is now effective, the U.S. Supreme Court may decide to weigh in on the McGill rule should defendants further appeal Blair.

In light of the McGill rule, companies that employ arbitration clauses in their consumer-facing contracts should reexamine the language of their arbitration clause to ensure it cannot be read as containing a waiver of a plaintiff’s right to seek public injunctive relief. 

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Alejandro Moreno, Attorney, Sheppard Mullin,  Business Trial Practice
Associate

Mr. Moreno is an associate in the Business Trial Practice Group in the firm's San Diego office.

Areas of Practice

Mr. Moreno practices general business and commercial litigation in both state and federal courts. He has experience handling matters in a diverse array of industries, including the banking and finance, mortgage, hospitality, technology and telecommunications, energy and extraction, and pharmaceutical industries. He is also experienced in the law of receivership and has actively managed the legal affairs of businesses placed into receivership. He...

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