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More Questions Than Answers in Ninth Circuit's Examination of Critical California Arbitration Issue

Relying on the California Supreme Court's 2017 decision in McGill v. Citibank, class action plaintiffs increasingly have sought to circumvent class action waivers in arbitration agreements by filing lawsuits in California. In McGill, the court held that an arbitration provision precluding a consumer from pursuing claims for "public" injunctive relief in any forum, i.e., in court or in arbitration, is unenforceable under California law and that such a ruling does not conflict with the Federal Arbitration Act (FAA).

As a result, class action plaintiffs expressly have sought public injunctive relief, arguing that the entire arbitration agreement is unenforceable under McGill, or that the request for public injunctive relief must proceed in court. Indeed, with limited exceptions, California federal district courts have largely followed McGill and either denied motions to compel arbitration or held that the public injunctive relief claim is not arbitrable. Three such decisions denying motions to compel arbitration based upon McGill were argued before the U.S. Court of Appeals for the Ninth Circuit on February 12, 2019, spurring a host of questions, particularly regarding public injunctions. 

Although the facts of each case differ, the essential terms of the underlying arbitration agreements are the same: They waive the right to bring class actions and prohibit arbitrators from awarding any relief in favor of non-parties to the arbitration. Following McGill, the district courts declined to enforce the arbitration agreements, holding that the agreements precluded the plaintiffs from pursuing public injunctive relief "in any forum" and that the FAA does not preempt the McGill rule. 

While the panel heard separate arguments in each case, collectively the arguments raised the following questions, among others:

  • Is the McGill rule a "generally applicable" contract defense that falls within the "saving clause in Section 2 of the FAA, which permits courts to declare arbitration agreements unenforceable "upon such grounds as exist at law or in equity for the revocation of any contract," or a rule that impermissibly singles out arbitration agreements for disparate treatment? 
  • What is the scope of a "public" injunction and do the procedures needed to resolve "public" injunctive relief claims interfere with the fundamental attributes of arbitration?
  • Can the prohibition of public injunctive relief be severed from the rest of the arbitration agreement such that the parties can arbitrate the non-public injunctive relief claims and, if the consumer is successful in arbitration, return to the district court for resolution of the public injunctive relief claims?
  • To the extent there is any ambiguity in the arbitration agreement as to whether claims for public injunctive relief may be severed, should the court apply the state-law contract principle that ambiguities should be construed against the drafter, or the FAA's policy that any doubts concerning the scope of arbitrable issues be resolved in favor of arbitration?
  • Does the presence of an "opt out" right in an arbitration agreement alleviate McGill's concern that consumers may be left without the opportunity to pursue relief "in any forum" by allowing consumers the opportunity to opt out of arbitration and pursue public injunctive relief claims in court?

While the arguments in the cases overlapped, the panel repeatedly returned to the question of what a public injunction "might look like" and whether such relief would require "burdensome procedures" akin to class actions that could stand as an obstacle to the accomplishment of the FAA's objectives, i.e., enforcing arbitration agreements as written and achieving an expeditious and economical resolution of disputes. This is noteworthy because while McGill generally describes public injunctive relief as "relief that 'by and large' benefits the general public and that benefits the plaintiff, 'if at all,' only 'incidental[ly]' and/or as 'member of the general public,'" the decision does not provide practical guidance of what this means in an actual case. 

As characterized by counsel for the plaintiffs-appellees, a public injunction is nothing more than an order to "stop" the challenged conduct and there are no "incremental complexities" attendant to a "public" versus a "private" injunction that would interfere with the fundamental attributes of arbitration.  Conversely, counsel for the defendants-appellants argued that deciding whether to issue a public injunction requires consideration of "class-like evidence" and a detailed examination of the claims at issue since the scope of an injunction can be "as broad as all equity."  Thus, an arbitrator would need to make decisions about non-parties, including whether non-parties were exposed to the same misrepresentation or conduct in the same manner as the plaintiff, and whether there is a risk of future harm to non-parties.

Further complicating the analysis is how to fashion the relief.  For example, is a technological fix needed, will a new or different disclosure suffice, or is it simply a matter of ceasing the offending conduct?  The answers to these questions, and others, turn on the specific allegations and practices in each case.

The panel recognized these complications, noting the inherent differences between "negative" injunctions (i.e., "stop" doing something) and "affirmative" injunctions (i.e., requiring the defendant to undertake affirmative actions, such as corrective advertising campaigns).  The panel also recognized the risk of conflicting, overlapping, and inconsistent injunctions targeting the same conduct. 

Whatever the Ninth Circuit decides, the issue is likely to work its way to the U.S. Supreme Court, given the conflict between McGill and the long line of Supreme Court cases favoring arbitration. Those cases include AT&T Mobility, LLC v. Concepcion, in which the Court held that class action waivers in consumer arbitration agreements are valid under the FAA, notwithstanding California law holding such waivers to be invalid and against public policy.

Unless and until the McGill opinion gets overruled, it may be desirable for certain companies to modify language in their arbitration agreements used in California (and, perhaps in other states as well) in order to avoid having a court invalidate an arbitration agreement in its entirety or order arbitration of public injunction claims.

Copyright © by Ballard Spahr LLP

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Kaplinksy, partner, New York, finance
Partner

Alan S. Kaplinsky is Co-Practice Leader of the firm's Consumer Financial Services Group, which has more than 115 lawyers. Mr. Kaplinsky devotes his practice exclusively to counseling financial institutions on bank regulatory and transactional matters, particularly consumer financial services law, and defending financial institutions that have been sued by consumers in individual and class action lawsuits and by government enforcement agencies. Visit Mr. Kaplinsky's profile in Wikipedia.

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Mark Levin, Ballard Spahr Law Firm, Litigation Attorney
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Mark J. Levin is known for his work in complex commercial, insurance, and class-action litigation, with particular experience in consumer finance litigation, the structuring and enforcement of consumer arbitration clauses, and the defense of insurance companies in class actions. He testified in 2007 for the lending industry before a subcommittee of the U.S. House Judiciary Committee at an oversight hearing on whether mandatory arbitration in consumer contracts is fair to consumers.

Mr. Levin has represented banks in defending against the first private class-action lawsuits under the Federal Trust Indenture Act, nuclear power plant owners in a year-long arbitration against an international insurance consortium, and school districts in a major funding lawsuit to recover state funds. He is currently involved in defending banks, other lending companies, and insurance companies in a wide variety of consumer class actions, including numerous class actions brought under the Pennsylvania Unfair Trade Practices and Consumer Protection Law.

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Scott Pearson, Ballard Spahr Law Firm, Los Angeles, Business Litigation Attorney
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Scott Pearson focuses his practice on the defense of regulatory enforcement actions and class actions, other complex business litigation, and regulatory compliance counseling. Martindale-Hubbell rates Mr. Pearson "at the highest level of professional excellence." He has been called "a true expert in complex litigation and consumer class actions" and "a no-nonsense bulldog lawyer who is highly respected by his peers and the judiciary."

Prominent companies regularly entrust Mr. Pearson with matters involving bet-the-company exposure or extreme...

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Marcos Sasso, Ballard Spahr Law Firm, Los Angeles, Finance and Litigatio Law Attorney
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Marcos Sasso focuses on complex commercial litigation, with an emphasis on the representation of financial services companies. Marcos advises large national banks, credit card issuers, and other lenders in class actions, regulatory enforcement proceedings, and other complex litigation and arbitration matters in California and throughout the country. He also counsels clients on regulatory compliance matters. Marcos has significant experience with the range of consumer financial services laws, including, the Telephone Consumer Protection Act, the Fair Credit Reporting Act...

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