James R. McGuire and Lauren Lynn Erker
Banking + Financial Services, Consumer Litigation, Financial Institutions + Financial Services, and Financial Services Litigation
In McGill v. Citibank, N.A., 393 P.3d 85 (Cal. 2017), the California Supreme Court held that an agreement purporting to waive a party’s right to seek “public injunctive relief” in any forum is unenforceable under California law. The court reasoned that such a waiver violates California Civil Code § 3513, which provides that “a law established for a public reason cannot be contravened by a private agreement.”
In the wake of McGill, plaintiffs have sought to avoid arbitration agreements by adding claims for public injunctive relief under California’s consumer protection statutes and making variations of the following argument: (1) by requiring all claims to be arbitrated, but also forbidding public injunctive relief to be awarded in arbitration, the arbitration agreement waives the plaintiff’s right to seek public injunctive relief; (2) McGill invalidates that waiver; and (3) because the waiver is unenforceable, a “poison pill” clause voids the arbitration agreement or a severance clause requires particular claims to be severed for judicial determination.
Among the reasons offered by the district courts rejecting this argument was that McGill is preempted by the Federal Arbitration Act (FAA). In a trio of decisions issued on June 28, 2019, however, the Ninth Circuit ruled that the FAA does not preempt California’s McGill rule, leaving plaintiffs with another maneuver to evade their arbitration agreements for now.
In the lead decision of Blair v. Rent-A-Center, Inc. (Case No. 17-17221), Paula Blair, together with two other named plaintiffs, filed a putative class action against Rent-A-Center alleging that it structured its rent-to-own pricing in violation of California law. They asserted claims under the Karnette Rental-Purchase Act, Cal. Civ. Code §§ 1812.620 et seq. (the “Karnette Act”); Unfair Competition Law, Cal. Bus. & Prof. Code §§ 17200 et seq. (UCL); Consumer Legal Remedies Act, Cal. Civ. Code §§ 1750 et seq. (CLRA); and California’s anti-usury law, Cal. Const. art. XV, § 1(1). They sought a “public injunction” to enjoin future violations of those statutes, an accounting of monies obtained from California consumers, and individualized notices to those consumers of their statutory rights.
Rent-A-Center filed a motion to compel arbitration of Blair’s claims arising from her rent-to-own agreement. The district court held that the agreement violated the McGill rule and that the rule was not preempted by the FAA. Given the severance clause in Blair’s arbitration agreement, the district court severed her Karnette Act, UCL, and CLRA claims from the arbitration.
The Ninth Circuit affirmed. It explained that a state-law rule can be preempted in two ways. First, a state-law rule is preempted if it is not a generally applicable contract defense, meaning it prohibits outright the arbitration of a particular type of claim. Second, even a generally applicable rule may be preempted if it creates an obstacle to the accomplishment of the FAA’s objectives. The Ninth Circuit then concluded that its earlier decision in Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425 (9th Cir. 2015), all but decided Blair.
In Sakkab, the Ninth Circuit concluded that the FAA did not preempt California’s Iskanian rule, which bars contractual waiver in any fora of representative claims under California’s Private Attorneys General Act of 2004 (PAGA). The Ninth Circuit reasoned that the Iskanian rule is a generally applicable contract defense and did not conflict with the FAA or run afoul of the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), since it did not “deprive parties of the benefits of arbitration.” Because PAGA claims do not require classwide procedures, under the rule the parties could adopt the kinds of informal procedures normally available in arbitration, such as limited discovery.
The Ninth Circuit explained that, like the Sakkab rule, the McGill rule is a generally applicable defense because it applies equally to arbitration and non-arbitration agreements. Also like the Sakkab rule, the McGill rule does not raise the concerns present in Concepcion because arbitrating a claim for public injunctive relief does not require procedural formality, in particular, complying with state-law class procedures.
In its analysis, the Ninth Circuit brushed aside several concerns raised by its ruling, including:
The Blair decision means that plaintiffs will continue to attempt to evade their arbitration agreements by asserting claims for public injunctive relief. This will not be hard to do. In a footnote, the Ninth Circuit implied that any requests for injunctive relief under California’s consumer protection statutes amount to requests for public injunctive relief. This broad statement misstates California law regarding public injunctions, including as set forth in McGill itself, but there is no reason to despair.
The Ninth Circuit’s decision is clearly incompatible with Concepcion and is thus ripe for Supreme Court review. The court did not seriously consider the impairment to arbitration’s informality, cost effectiveness, and procedural simplicity caused by arbitrating a claim for injunctive relief as opposed to a claim seeking relief limited to an individual. In particular, claims for public injunctive relief open the door to a much broader scope of evidence and increase an arbitration’s complexity. As long as Blair stands, however, defendants in the Ninth Circuit attempting to rely on arbitration agreements to send consumer protection claims to arbitration may be disappointed.
 The companion cases are McArdle v. AT&T Mobility LLC (Case No. 17-17246) and Tillage v. Comcast Corporation (Case No. 18-15288), which the Ninth Circuit decided in unpublished memorandum dispositions.
Contact our world-class financial services lawyers.
©1996-2019 Morrison & Foerster LLP. All rights reserved.