McGill v. Citibank, 2 Cal. 5th 945 (Cal.S.C., Apr. 6, 2017) – Arbitration agreement that required credit card holders (consumers) to waive their right to seek public injunctive relief available under various consumer protection laws was deemed unenforceable as against California public policy.

In 2001, McGill opened a Citibank credit card account and purchased the Credit Protector Plan. At that time, the credit card agreement did not include an arbitration provision. In October 2001, Citibank sent McGill a notice regarding a change in the terms of her credit card agreement, which terms added a binding arbitration provision stating as follows:

  • “Either you or we may, without the other’s consent, elect mandatory, binding arbitration for any claim, dispute, or controversy between you and us (called “Claims”)…. All Claims relating to your account or a prior related account, or our relationship are subject to arbitration, including Claims regarding the application, enforceability, or interpretation of this Agreement and this arbitration provision. 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. This includes Claims based on contract, tort (including intentional tort), fraud, agency, your or our negligence, statutory or regulatory provisions, or any other sources of law; … and Claims made independently or with other clams …. Claims and remedies sought as part of a class action, private attorney general or other representative action are subject to arbitration on an individual (non-class, non-representative) basis. The arbitrator will not award relief for or against anyone who is not a party. If you or we require arbitration of Claims, 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.”
  • [Emphasis added to highlight the “waiver” language, effectively foreclosing McGill from bringing a PAGA claim in court.]

McGill lost her job in 2008 and made a claim under the Credit Protector Plan she had purchased. In 2011, McGill filed a class action based on Citibank’s marketing of the Credit Protector Plan and the manner in which Citibank had administered her claim under the plan. The complaint included claims for violation of California’s unfair competition law (“UCL”), violation of the false advertising law (“FAL”), violation of the Consumer Legal Remedies Act (“CLRA”), and improper sale of insurance. The relief McGill sought included injunctive relief enjoining Citibank from continuing to engage in its allegedly illegal and deceptive practices.

Citibank moved to compel arbitration of McGill’s claims on an individual basis as required by the arbitration agreement included in the Credit Protector Plan. The trial court that motion in part and denied it in part. Specifically, the trial court severed and stayed the claims for injunctive relief under the UCL, FAL and CLRA, and ordered McGill or arbitrate all other claims, including claims for restitution and damages under the aforementioned statutes. The trial court refused to order arbitration of the injunctive relief claims based on the Broughton-Cruz rule. Under that rule, arbitration provisions are unenforceable as against public policy if they require arbitration of UCL, FAL or CLRA injunctive relief claims brought for the public’s benefit.

On appeal to the Fourth District Court of Appeal, the court reversed the trial court’s order refusing to compel arbitration of McGill’s injunctive relief claims and remanded for the trial court to order McGill to arbitrate all of her clams. The Fourth District’s opinion was in line with several federal court decisions in concluding that the FAA preempts the Broughton-Cruz rule based on the United States Supreme Court holding in Concepcion.[1] The Fourth District reasoned that the Broughton-Cruz rule fell pretty to the sweeping directive in Concepcion because it is a state-law rule that prohibits arbitration of UCL, FAL and CLRA injunctive relief claims brought for the public’s benefit. McGill v. Citibank, N.A., Case No. G049838, 2017 WL 4382034 (4th Dist., Oct. 3, 2017), *2.

The California Supreme Court granted review and issued an opinion on April 6, 2017 reversing the Fourth District’s judgment and striking another blow in its contentious battled with the United States Supreme Court concerning the enforceability of arbitration clauses included in consumer contracts subject to the FAA. The California Supreme Court held that the arbitration clause in Citibank’s Credit Protector Plan purported to waive McGill’s right to seek public injunctive relief in any forum and was thus unenforceable as against California public policy. The Court further held that, notwithstanding the U.S. Supreme Court’s decisions on the subject, including Concepcion, the FAA did not preempt California’s policy. During oral argument in December 2016, as reported by the Daily Journal, Justice Liu asked a number of tough questions and at one point flatly said, “This is very different from Concepcion,” and “isn’t about arbitration at all.” According to the article, Justice Liu “hammered home his point … that even the Federal Arbitration Act, citing Concepcion, does not allow Citibank to take away the statutory rights of credit card holders just because the language is found in an arbitration agreement.”

As discussed above, the basis upon which the Fourth District had reversed the trial court’s ruling was its conclusion that the Broughton/Cruz rule was preempted by the FAA. The California Supreme Court side-stepped this issue and, instead, focused on the arbitration clause’s unusual language purporting to prevent plaintiff from seeking public injunctive relief in any forum (court or arbitration). Relying on the “savings clause” of the FAA, which “permits arbitration agreements to be declared unenforceable ‘upon such grounds as exist at law or in equity for the revocation of any contract[,]’” the Court reached three conclusions.

  • First: It determined that California Civil Code §3513—which provides that “a law established for a public reason cannot be contravened by a private agreement”— was a state law providing for revocation of any contract and thus within the savings clause. Notably, the Court cited no case law applying section 3513 to revoke a contract other than an arbitration agreement—and very little exists—but nevertheless concluded that the statute applies to “any contract—even a contract that has no arbitration provision—that purports to waive, in all fora, the statutory right to seek public injunctive relief …..” Id. at 16.
  • Second: The Court deemed a public injunction to be a “substantive statutory remedy” and not a procedural device like a class action. Such a right, it concluded, could not be waived as part of an arbitration clause or otherwise. Reasoning that Congress’ purpose in enacting the FAA “‘was to make arbitration agreements as enforceable as other contracts, but no more so[,]’” the Court held that Citibank’s arbitration clause was unenforceable. Id. at 15 (quoting Prima Paint v. Flood & Conklin, 388 U.S. 395, 404 n.12 (1967) (emphasis added)).
  • Third: The Court dismissed Citibank’s concerns about piecemeal litigation if plaintiff’s individual claim were arbitrated while her public injunction claim waited for later resolution by a court.

All three conclusions appear to be inconsistent with U.S. Supreme Court decisions holding that the scope of arbitration under the FAA is broad, that federal policy favors the enforcement of arbitration agreements, and that state laws and policies must not place arbitration agreements on weaker footing than other types of contracts. As recently explained by the United States Supreme Court in Kindred Nursing Centers, L.P. v. Clark, ___ U.S. ___, 137 S.Ct. 421 (2017), state courts and legislatures cannot fashion rules of contract on the pretense that they apply to “any contract” when, in practice, they are arbitration focused and merely encompass hypothetical contracts or “black swans.”

Note: The McGill case also raises the issue of severance and the differing views of the federal and state courts. 2 Cal. 5th at 966-967. Why not just strike the “offending” provision? The state court rule of thumb appears to be that if an agreement contains more than one substantively unconscionable term, then it is deemed to be so “permeated with unconscionability” that it is not eligible for application of the severance doctrine to save the enforceability of the arbitration agreement. See, e.g., Murphy v. Check ‘N Go Calif., Inc., 156 Cal. App. 4th 138, 149 (2007); Carbajal, v. CWPSC, Inc., 245 Cal. App. 4th 227 (4th Dist., Feb. 26, 2016). Whereas, the federal courts appear to be more willing to apply the doctrine of severance and enforce an arbitration agreement even in the face of several substantively unconscionable terms. See, e.g., Poublon v. C.H. Robinson, 846 F.3d 1251 (9th Cir. Feb. 3, 2017). In 2015, the United States Supreme Court granted certiorari to review the Ninth Circuit’s decision in Zaborowski v. MHN Government Services, 601 Fed. Appx. 461 (9th Cir. 2014), and address whether California’s “two strikes and you’re out” severability rule as applied to arbitration agreements disfavors such agreements and places them on unequal footing with other contracts in violation of the FAA. The Court’s answer to that question will have to wait because the case was dismissed shortly before oral argument due to the parties’ settlement. 136 S.Ct. 1539 (2016).