On April 1, 2015, the California Supreme Court granted review of McGill v. Citibank to decide whether Citibank can use an arbitration clause to stymie a customer from pursuing public injunctive relief under California’s consumer protection statutes. If awarded, a public injunction allows a successful litigant to stop an unlawful business practice statewide. The stakes are high: if the Court sides with Citibank, this powerful tool for California consumers effectively will be eviscerated. However, many plaintiffs lawyers are hopeful that the California Supreme Court will demonstrate the same inclination to prevent the further erosion of public remedies in California as it did in Iskanian v. CLS Transportation (see infra). McGill v. Citibank N.A., 232 Cal. App. 4th 753 (2014), rev. granted, No. S224086 (Cal. April 1, 2015).
In McGill, the plaintiff (represented by Capstone Law APC) brought claims under California’s consumer protection statutes (the Consumer Legal Remedies Act, the Unfair Competition Law, and False Advertising Law) against Citibank for misrepresenting its “Credit Protector” insurance program to its cardholders. Along with damages, Ms. McGill sought to enjoin Citibank from engaging in this unfair business practice. The trial court partially granted Citibank’s motion to compel arbitration, but kept the public injunction remedy in court pursuant to the holding of two earlier Supreme Court decisions, Broughton v. Cigna Healthplans of California, 21 Cal. 4th 1066 (1999) and Cruz v. PacifiCare Health Systems, Inc., 30 Cal. 4th 303 (2003) (together referred to as having established the “Broughton-Cruz rule”). The Broughton-Cruz rule holds that, to the extent they seek public injunctive relief under California’s consumer protection statutes, claims must remain in court, even if all the other claims are sent to arbitration.
The appellate court reversed, holding that the Broughton-Cruz rule had been preempted by “the sweeping directive” of the Federal Arbitration Act (“FAA”) as stated in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), which struck down a California rule barring class action waivers. See McGill at 757. However, the intermediate court relied on passages from Concepcion that simply recited decades-old principles from Southland Corp. v. Keating, 465 U.S. 1 (1984) and Perry v. Thomas, 482 U.S. 483 (1987) precluding states from exempting private claims from being brought in the arbitral forum—cases that Broughton and Cruz carefully distinguished in lengthy analyses. In fact, the Court in Broughton and Cruz took its cue from a separate line of U.S. Supreme Court precedent meant to preclude an arbitration agreement from forcing a “prospective waiver of a party’s right to pursue statutory remedies.” Mitsubishi Motors v. Soler Chrysler-Plymouth (1985) 473 U.S. 614, 637 (1985); see also American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304, 2310 (2013).
Importantly, Broughton and Cruz recognized that arbitrators have no power to issue public injunctions, as they have no jurisdiction over nonparties. See Broughton at 1081, Cruz at 312. This “institutional shortcoming” precludes public injunctions from being issued by arbitrators at all—even if the claimant were completely successful in proving the merits of her claims in arbitration. Id. In other words, a plaintiff would waive his or her right to pursue public injunctions if it were not preserved in court; the remedy itself would be extinguished simply by virtue of its transfer from court to arbitration.
Broughton and Cruz also held that the FAA did not preempt a state law rule preserving wholly public claims or remedies such as the public injunction, which is not aimed at “resolv[ing] a private dispute but to remedy a public wrong.” Broughton, 21 Cal. 4th at 1079-80. This principle was just recently reaffirmed in Iskanian v. CLS Transportation Los Angeles LLC, 59 Cal. 4th 348, 387-88 (2014), which held that the FAA did not preempt a state law protecting public enforcement action like the Private Attorneys General Act representative action from forfeiture. Iskanian embodies the Court’s recognition that the FAA, as intended by Congress and construed by the U.S. Supreme Court, does not have unlimited preemptive reach. A decision upholding the Broughton-Cruz rule would be consistent with both Iskanian and the non-waiver principle only recently reaffirmed by the U.S. Supreme Court in Italian Colors.
However, the fate of the Broughton-Cruz rule may not even be reached in McGill. Unlike the agreements in Broughton and Cruz, Citibank’s arbitration agreement contains a term expressly precluding an arbitrator from awarding public injunctions. Thus, the California Supreme Court may well strike the offending term on unconscionability grounds or as a clear violation of the non-waiver principle, without reaching the broader issue of whether an arbitration agreement can be invalidated due to the inherent unavailability of certain remedies in the arbitral forum.
Ryan Wu, Senior Counsel
CAPSTONE LAW APC