California Supreme Court finds waiver of statutory remedies unenforceable even as part of arbitration

McGill v. Citibank, N.A., No. S224086, 2017 WL 1279700 (Cal. Apr. 6, 2017)

Statutory remedies available for a violation of the CLRA, UCL, and FAL include public injunctive relief: injunctive relief that has “the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public.” Here, the California Supreme Court holds that a purported waiver in a predispute arbitration agreement that waives the right to seek this statutory remedy in any forum was contrary to California public policy, which was not preempted by the FAA.  McGill sued Citibank based on its credit protector plan and its handling of a claim under that plan when she lost her job. The trial court ordered her to arbitrate everything but her claims for public injunctive relief, and the court of appeals reversed on the injunctive relief based on Concepcion.  The agreement stated that any claims must be made on an “individual (non-class, non-representative) basis,” and the parties agreed that the agreement prevented her from seeking any public injunctive relief in any forum.

The CLRA expressly declares that “[a]ny waiver by a consumer” of the CLRA’s provisions “is contrary to public policy and shall be unenforceable and void.” Under the UCL, the primary form of relief is an injunction, whether prohibitory or restitutionary.  The FAL also allows injunctive relief.  Previously, the California Supreme Court distinguished between private injunctive relief — i.e., relief that primarily “resolve[s] a private dispute” between the parties and “rectif[ies] individual wrongs” and that benefits the public, if at all, only incidentally — and public injunctive relief — i.e., relief that “by and large” benefits the general public and that benefits the plaintiff, “if at all,” only “incidental[ly]” and/or as “a member of the general public.” An injunction under the CLRA against a defendant’s deceptive methods, acts, and practices “generally benefit[s]” the public “directly by the elimination of deceptive practices” and “will ... not benefit” the plaintiff “directly,” because the plaintiff has “already been injured, allegedly, by such practices and [is] aware of them.” A CLRA plaintiff’s private benefit, if any, is “incidental to the general public benefit of enjoining such a practice.” So too with the UCL and the FAL.

Because of the parties’ agreement that the arbitration provision “elected ... to exclude public injunctive relief from arbitration,” as well as barring non-arbitration relief, the question was whether the waiver of McGill’s right to seek public injunctive relief in any forum was valid.  It was not.

The court also held that Proposition 64 didn’t eliminate the ability of private plaintiffs to seek public injunctive relief.  Once a plaintiff has standing under Proposition 64, which McGill did because she lost money or property as a result of the alleged violations, she could continue to seek all authorized forms of relief, including the standard UCL remedy of an injunction.

Civil Code section 3513 provides: “Any one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” By definition, the public injunctive relief available under the UCL, the CLRA, and the false advertising law is primarily “for the benefit of the general public.” Waiver in a predispute arbitration agreement “would seriously compromise the public purposes the statutes were intended to serve.”  

Nor is this rule preempted by the FAA.  Citibank argued that the FAA required enforcement of the arbitration provision “as written, regardless of what it says or implies about claims seeking public injunctive relief.” But the FAA only requires courts to “place arbitration agreements on an equal footing with other contracts [citation] and [to] enforce them according to their terms.” The FAA’s “saving clause” “permits arbitration agreements to be declared unenforceable ‘upon such grounds as exist at law or in equity for the revocation of any contract.’ ” Concepcion explained that Congress’s “purpose” in enacting the FAA “was to make arbitration agreements as enforceable as other contracts, but not more so.”  Thus, arbitration agreements may not be invalidated “by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”

The defense at issue here — “a law established for a public reason cannot be contravened by a private agreement”— was a generally applicable contract defense, not a defense that applies only to arbitration or that derived its meaning from the fact that an agreement to arbitrate was at issue.  The Supreme Court previously said that, “[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.” The FAA thus does not require enforcement of a provision in an arbitration agreement that “forbid[s] the assertion of certain statutory rights” or that “eliminates ... [the] right to pursue [a] statutory remedy.”  Citibank argued that those statements only applied to forfeiture of federal statutory rights; the California Supreme Court disagreed. Under the FAA’s savings clause, “ ‘[s]tate law’ ... is applicable to determine which contracts are binding ... and enforceable under” the FAA, “ ‘if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally.’ ”

Concepcion found the FAA preempts even a “generally applicable” state law contract defense if that defense (1) is “applied in a fashion that disfavors arbitration”, or (2) “interferes with fundamental attributes of arbitration”, such as “ ‘lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.’ ” Concepcion found that requiring a class arbitration procedure, the rule (1) “sacrifices” arbitration’s “informality”, (2) “makes the process slower, more costly, and more likely to generate procedural morass than final judgment”, (3) “requires procedural formality”, and (4) “greatly increases risks to defendants.”  Citibank argued that there was little practical difference between “broad-based public injunctions and … class-wide relief” since neither were necessary to protect individual rights but just to help nonparties.

To the contrary, public injunctions were substantive statutory remedies made available to individuals, not procedural devices like the class action.  The Supreme Court has distinguished between the “ ‘waiver of a party’s right to pursue statutory remedies’ ” — such as “a provision in an arbitration agreement forbidding the assertion of certain statutory rights” — and the waiver of a “procedural path to the vindication of every claim” — such as a provision forbidding class action arbitration.  Nor would invalidation of the waiver interfere with any of arbitration’s attributes.  The FAA “does not ... prevent parties who ... agree to arbitrate from excluding certain claims from the scope of their arbitration agreement.” The parties elected to exclude public injunctive relief from arbitration, and requests for such relief need not be arbitrated contrary to the parties’ agreement.  A stay of proceedings as to any inarbitrable claims was also appropriate until arbitration of any arbitrable claims was concluded. The Supreme Court has accepted “ ‘piecemeal’ litigation” of claims the parties have agreed to arbitrate and claims they have not agreed to arbitrate.”

So, was the rest of the provision enforceable?  The different versions of the agreement Citibank provided contradicted each other—the 2001 version preserved the rest of the agreement if portions were invalidated, but the 2005 Notice and the 2007 account agreement explicitly stated that the rest of the agreement wouldn’t survive if any portion were deemed invalid or unenforceable.  This was an issue for remand.