McGill v. Citibank: Businesses Cannot Force CA Consumers to Waive Right to Seek Public Injunctive Relief

On April 6, 2017, in a unanimous decision, the California Supreme Court held that a provision in Citibank’s mandatory cardholder arbitration agreement that waives the statutory right to seek public injunctive relief is contrary to California public policy and is thus unenforceable under California law. McGill v. Citibank, N.A., No. S224086 (Cal. Sup. Ct. April 6, 2017) (slip op. available here). The court rejected Citibank’s “overbroad view” of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., and concluded that the FAA does not preempt California law on this issue or otherwise require enforcement of the waiver provision. Slip op. at 1, 15. The court also found that public injunctive relief remains a remedy available to private plaintiffs with standing under California’s consumer protection statutes, and is not restricted to the class action context. Id. at 11-13.

In McGill, the plaintiff was a Citibank cardholder who paid a monthly premium for its “credit protector” plan, a type of credit insurance that deferred or credited certain amounts to her account upon a qualifying event, such as unemployment. She brought a class action based on Citibank’s deceptive marketing of this plan and handling of her claim when she became unemployed, alleging claims under California’s Unfair Competition and False Advertising laws (the “UCL” and “FAL,” respectively), the Consumers Legal Remedies Act (the “CLRA”), and the Insurance Code. McGill sought public injunctive relief, along with other remedies, against Citibank’s unlawful business practices. Relying on arbitration provisions imposed against the plaintiff through a unilateral “Notice of Change in Terms” to her Citibank card, Citibank filed a petition to compel arbitration on an individual basis. The trial court ordered all claims to arbitration except those for injunctive relief under the UCL, FAL, and CLRA based on the Broughton-Cruz rule, which provides that claims for public injunctive relief under these consumer protection statutes are not arbitrable under California law. Slip op. at 3. The Court of Appeal reversed, holding that the Broughton-Cruz rule is preempted by the FAA, and instructing the trial court to order all claims to arbitration, including the injunction claims.

In an opinion authored by Justice Ming Chin, the California Supreme Court reversed. The court found that the Broughton-Cruz rule was not at issue, as the parties agreed that the arbitration agreement purported to preclude McGill from seeking public injunctive relief in any forum, arbitral or judicial, whereas the Broughton-Cruz rule applies only when parties have agreed to arbitrate requests for such public injunctive relief. Slip op. at 8. The court addressed whether such an arbitration provision, which completely waives the right to seek public injunctive relief under the UCL, FAL, and CLRA, was unenforceable under California law. Applicable California law under Civil Code section 3513 provides that “a law established for a public reason cannot be contravened by a private agreement.” Noting that the public injunctive relief available under the UCL, CLRA, and FAL is primarily for the benefit of the general public and to remedy a public wrong rather than resolve a private dispute, the supreme court found that such a waiver under these statutes “would seriously compromise the public purposes the statutes were intended to serve.” Slip op. at 14. As such, Citibank’s arbitration provision that purports to waive the right to such public injunctive relief in all fora is invalid and unenforceable under California law. Id.

The court further found that the FAA, as construed in Concepcion, did not preempt this rule of California law, and rejected Citibank’s views to the contrary. Slip op. at 14-15. Under the FAA’s “savings clause” and U.S. Supreme Court precedent, arbitration agreements are only “as enforceable as other contracts, but not more so,” and may be invalidated by generally applicable contract defenses. Id. at 15. The court held that the contract defense at issue here, Civil Code section 3513’s proscription that a law established for a public reason cannot be contravened by a private agreement, is grounds under state law for revoking any contract, not just arbitration agreements, and thus a generally applicable contract defense. Id. at 15-16. The court concluded that the FAA does not require enforcement of a provision that, in violation of generally applicable California contract law, waives the right to seek in any forum public injunctive relief under the UCL, FAL, or CLRA. Id. at 17. The FAA does not require such enforcement “merely because the provision has been inserted into an arbitration agreement. To conclude otherwise would [be] contrary to Congress’s intent.” Id. at 16. The court specified that this holding is in line with recent U.S. Supreme Court precedent indicating that the FAA does not require enforcement of arbitration provisions that forbid the assertion of certain statutory rights or eliminate the right to pursue a statutory remedy. Id. Significantly, the court rejected Citibank’s contention that this principle only applies to the forfeiture of a federal statutory right, as opposed to a state statutory right. Id. at 17.

The court also held that the 2004 amendments to the UCL and FAL ushered in by voters under Proposition 64 do not preclude a private plaintiff, who has standing to file a private action (e.g., “suffered injury in fact and has lost money or property as a result of” a violation of the UCL or FAL), from requesting public injunctive relief in connection with that action, even if the plaintiff does not allege class claims, answering a question that had been left unanswered since 2004. Slip op. at 11-13.

Requesting a broad injunction to require businesses to change their unlawful acts is often the primary form of relief for consumers challenging unfair and deceptive business practices. As such, McGill provides broad protections to consumers who cannot be forced by businesses like Citibank into contractually waiving their right to public injunctive relief under California’s consumer protection statutes.

Authored By:
Liana Carter, Senior Counsel
CAPSTONE LAW APC