Last week, David S. Reidy provided his analysis of the California Supreme Court’s recent decision invalidating an arbitration and class waiver provision in a credit card customer agreement.  We jumped at the chance to republish his McGuireWoods Legal Alert here.

On April 6, the California Supreme Court issued the latest in an ongoing series of cases resisting preemption of California state law under the Federal Arbitration Act (FAA) and again testing the limits of the U.S. Supreme Court’s jurisprudence under the FAA.

The decision purports to limit the enforceability in California of arbitration clauses that address injunctive relief, and will force financial services entities and others to review their current contractual provisions to ensure compliance in the state — assuming, that is, that the Supreme Court does not step in, as it has done on California arbitration cases in the past.

In McGill v. CitiBank, N.A., No. S224086 (Apr. 6, 2017), the court invalidated a Citibank credit card arbitration and class waiver provision that would have prevented the plaintiff from seeking public injunctive relief in any forum, holding that the bar on the plaintiff’s right to seek such relief violated California public policy and was therefore unenforceable.

McGill filed a class action against Citibank asserting violations of three California statutes that provide for injunctive relief: the Consumer Legal Remedies Act (CLRA), False Advertising Law (FAL) and Unfair Competition Law (UCL). Citibank sought to compel arbitration of McGill’s claims pursuant to an arbitration provision added to McGill’s customer agreement in 2001. The change-in-terms notice adding the new language would have permitted McGill to opt out and continue using her credit card under the existing terms for a defined period, but McGill did not opt out. The provision at issue included the following language:

All Claims are subject to arbitration, no matter what legal theory they are based on or what remedy (damages, or injunctive or declaratory relief) they seek. […] If you or we require arbitration of a Claim, neither you, we, nor any other person may pursue the Claim in arbitration as a class action, private attorney general action or other representative action, nor may such Claim be pursued on your or our behalf in any litigation in any court.

Ruling on Citibank’s motion to compel arbitration, the Superior Court declined to force McGill’s claims for injunctive relief into arbitration. The Court of Appeal disagreed, holding that the “Broughton-Cruz rule” — which states that agreements to arbitrate claims for public injunctive relief are unenforceable — was pre-empted by the FAA, and ruled that McGill’s claims should be arbitrated.

The California Supreme Court reversed. The court did not address the Broughton-Cruz rule directly; instead, it ruled that the arbitration provision purporting to waive McGill’s right to seek public injunctive relief in any forum was unenforceable because it prevented McGill from pursuing remedies to which she was entitled under California law if she prevailed on her claims. Citing the public benefit of such injunctive remedies, the court held that a contractual provision blocking the pursuit of such remedies was invalid as against California public policy.

As with other California Supreme Court rulings on the scope of enforceability of arbitration provisions, most observers expect the issue to be taken up by the U.S. Supreme Court.