(Article from Insurance Law Alert, April 2017)
For more information, please visit the Insurance Law Alert Resource Center. The California Supreme Court ruled that an arbitration provision that waives the right to seek public injunctive relief in any forum is contrary to public policy and thus unenforceable under California law. McGill v. Citibank, N.A., 2017 WL 1279700 (Cal. Apr. 6, 2017).
Sharon McGill filed a putative class action against Citibank, claiming that the marketing and administration of its “credit protector” insurance plan violated California consumer protection laws. She sought monetary relief, punitive damages and injunctive relief. Citibank moved to compel arbitration based on an arbitration clause in the consumer contract. A trial court granted the motion in part, ordering arbitration of the monetary claims, but suspended arbitration for the injunctive claims based on California common law which holds that agreements to arbitrate claims for public injunctive relief (i.e., injunctive relief that benefits the general public rather than just one individual) under certain statutes are unenforceable. An appellate court reversed, ruling that the Federal Arbitration Act preempts state law in this context. The California Supreme Court reversed.
Addressing a preliminary matter, the court held that McGill’s complaint sought public injunctive relief authorized under state statutory law. The court then concluded that the arbitration provision at issue was invalid under state law insofar as it purported to waive McGill’s statutory right to seek such relief. Citibank argued that even if California law precludes a waiver of the right to seek pubic injunctive relief, state law is preempted by the FAA. The court disagreed, finding Citibank’s view of the FAA “overbroad.” The court explained that the “saving clause” of the FAA permits arbitration agreements to be declared unenforceable “upon such grounds as exist at law or in equity for the revocation of any contract.” The saving clause applies here, the court concluded, because California law permits the revocation of contracts that purport to waive, in all fora, the statutory right to seek public injunctive relief.
In so ruling, the court distinguished
American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013) (discussed in our
July/August 2013 Alert) and
AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (discussed in our
May 2011 Alert). In both cases, the United States Supreme Court ruled that the FAA preempts state law that precludes class action waivers in arbitration. The California Supreme Court reasoned that
Concepcion reaffirmed that the “saving clause permits agreements to arbitrate to be invalidated by ‘generally applicable contract defenses’ under state law” and that in any event, the procedural issue of class action waivers is qualitatively different than waivers of substantive statutory remedies. The court remanded the matter for a determination of whether the remainder of the arbitration provision remains enforceable.