On April 6, 2017, the California Supreme Court handed down a unanimous decision that will likely become a seminal case on the subject of class-action waivers and arbitration clauses in consumer contracts.  In McGill v. CitiBank, N.A., No. S224086 (Apr. 6, 2017), the Court held that an arbitration clause in Citibank’s credit card agreement purporting to waive a plaintiff’s right to seek public injunctive relief in any forum was contrary to California public policy and therefore unenforceable.  The Court further held that the Federal Arbitration Act does not preempt California’s consumer protection statutes.

In 2011, McGill brought a putative class action against Citibank based on alleged violations of three well-known California consumer-protection statutes—the Consumers Legal Remedies Act (CLRA), the False Advertising Law (FAL), and the Unfair Competition Law (UCL)—each of which provides injunctive relief as a remedy.  Citibank responded by seeking to compel arbitration of each of these claims.

The trial court declined to force McGill to arbitrate her public injunctive relief claims, finding that agreements to arbitrate claims for public injunctive relief under the CLRA, FAL, or UCL are unenforceable.  The Court of Appeal, however, disagreed and ordered all of McGill’s claims to arbitration, reasoning that the Broughton-Cruz rule was preempted by the Federal Arbitration Act.  The California Supreme Court reversed, holding that the contractual waiver of McGill’s right to seek public injunctive relief in any forum was unenforceable.  The Court side-stepped the issue of whether the Broughton-Cruz rule was preempted by the Federal Arbitration Act, focusing instead on the fact that the arbitration clause at issue purported to prevent McGill from seeking public injunctive relief in any forum, be it a court of law or arbitration.  By agreeing to submit her claims to arbitration, therefore, McGill was in effect also agreeing to limit the remedies to which she would have been entitled if she prevailed on her claims, reasoned the Court.  Because the public injunction remedies are intended to benefit the public, the Court held that their waiver is invalid.

Two takeaways from the Court’s decision are apparent.  First, savvy companies should review their consumer contracts to ensure that they do not contain the arbitration language at issue in McGill, and should consider adding carve-outs for public injunctive relief, or else they risk a finding that an agreement to arbitrate is “permeated by unconscionability” and therefore unenforceable.  Second, given that the U.S. Supreme Court has repeatedly ruled against California’s High Court in recent cases centered on arbitration—most notably AT&T Mobility v. Concepcion in 2011—it is almost certain that Citibank will petition the Court to review this decision.  And with the recent confirmation of Judge Neil Gorsuch to the long-vacant ninth seat on the Court, efforts to limit what rights consumers may waive through arbitration agreements are entering treacherous waters.