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Private Arbitration Agreements which Prohibit Public Injunctive Relief Violate Public Policy and are Unenforceable Under California Law

In an April 5, 2017 unanimous opinion, the California Supreme Court (the “Court”) held that private arbitration agreements which prohibit public injunctive relief in any forum are contrary to California public policy and unenforceable under California law. Furthermore, the court held that the Federal Arbitration Act (“FAA”) did not preempt this rule of California law nor did it require enforcement of the waiver provision.

Background

In McGill vs. Citibank, the plaintiff opened a credit card account and purchased a credit protection plan in 2001. The credit protection plan purported to defer or to credit amounts on the credit card in the event of certain circumstances. At three separate times after opening the account and purchasing the plan, Citibank sent notices of change in terms regarding arbitration and provided the plaintiff an opportunity to opt out. The plaintiff did not opt out at any time. The arbitration provisions included requirements that an award in arbitration: (1) only determines the rights and obligations of named parties and no one else; (2) will not include an award against anyone who is not a party; (3) may only award relief on an individual (non-class, non-representative) basis; and (4) may not include class action, attorney general, or other representative actions. Finally, Citibank’s terms provided that the arbitration provision was governed by the FAA. The plaintiff brought a class action suit based on Citibank’s marketing of the credit protection plan and the handling of her 2008 claim under the credit protection plan when she lost her job. Among other things, she alleged that Citibank engaged in illegal and deceptive practices.

Citibank sought to compel the plaintiff to arbitrate her claims on an individual basis. The plaintiff argued that the arbitration claim was unenforceable because it purported to prohibit her from pursuing claims for public injunctive relief not just through arbitration, but through any forum.

The Court stated that the California Consumers Legal Remedies Act, the California unfair competition law, and the California false advertising law all included provisions for injunctive relief aimed at prohibiting unlawful acts that threaten future injury to the general public. In that regard, the Court would not enforce a private arbitration agreement that violates public policy by not allowing the public injunctive relief provided by the legislature in the state law. The Court further stated that the aim of the FAA was to give arbitration clauses the same weight as any other contractual clause — not more. In short, the Court reasoned that because general contract provisions that violate public policy are not enforceable, arbitration provisions that violate public policy will also not be enforceable. Whether this reasoning can withstand potential review by the United States Supreme Court remains to be seen.

What does this mean for you?

You should review your arbitration provisions in your agreements governing California residents and consider whether they could be deemed as violating the policy against providing public injunctive relief. You should also consider whether you want your arbitration agreements to include a statement that if any portion of the arbitration provision is deemed invalid or unenforceable, the remaining arbitration provisions shall nevertheless remain in force. Absent such a provision, or if it includes a provision like the one at issue in McGill, the entire arbitration provision may be thrown out if any part of it is deemed inconsistent with public policy.

© 2017 Foley & Lardner LLP

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About this Author

Christi Lawson, Foley Lardner, Orlando Litigation Lawyer
Partner

Christi A. Lawson is a partner and litigation lawyer in the Orlando office of Foley & Lardner LLP. She has first chair experience representing Fortune 100 companies. Ms. Lawson is a member of the firm's Consumer Financial Services, Labor & Employment and Privacy, Security & Information Management Practices, as well as the Trade Secret/Noncompete Specialty Practice.

407.244.3235
Sharal L. Henderson, Foley, Consumer Finance Lawyer, Transactional Matters Attorney
Special Counsel

Sharal L. Henderson is a special counsel with Foley & Lardner LLP. Her practice focuses on transactional and regulatory matters, with an emphasis on consumer finance law. In addition to being a lawyer, Ms. Henderson is a Certified Public Accountant.

Prior to practicing law, Ms. Henderson gained experience in the finance and accounting fields holding positions as controller, director, and vice-president of financial reporting & accounting. She was also an auditor in a regional public accounting firm where she performed audits of local governmental entities, tax-exempt entities, for-profit entities, and employee benefit plans. While in law school, Ms. Henderson interned at the Florida Supreme Court for Justice Raoul G. Cantero, III.

407-244-3263