California Supreme Court Won’t Enforce Arbitration Agreement Waiving Substantive Remedies

In its decision issued today in McGill v. Citibank, the California Supreme Court has unanimously held that arbitration agreements can't block consumers from seeking injunctive relief that benefits the general public under California's Consumers Legal Remedies Act (CLRA) and Unfair Competition Law (UCL). The decision strikes a blow against corporate efforts to use arbitration not just to secure a favorable forum, but also to prevent consumers from even asserting claims for relief available under state law.

The case was brought as a challenge to Citibank's practices in marketing "credit protection" plans to consumers. Citibank sought arbitration based on a clause in its credit-card agreement with the individual plaintiff. But the plaintiff sought "public injunctive relief" under the CLRA and UCL—that is, relief that would prevent Citibank from engaging in the same practices with respect to all California consumers—and a pair of earlier California Supreme Court decisions generally referred to in shorthand as Broughton and Cruz had held that claims for public injunctive relief are not arbitrable under California law. The issue in the case was initially framed as whether the Federal Arbitration Act (FAA), which generally requires enforcement of agreements to arbitrate particular claims, preempts the Broughton-Cruz rule.

But a funny thing happened on the way to the California Supreme Court. It turned out that Citibank's arbitration agreement didn't require arbitration of the claims for public injunctive relief, but purported to prevent the plaintiff from asserting such claims in any forum. Thus, as the California Supreme Court pointed out, the issue in the case wasn't really whether Broughton and Cruz remain good law, but rather whether an arbitration agreement can actually waive a state-law claim for a substantive remedy where the state's own law provides that that particular type of claim can't be waived.

The California court answered that question with a resounding no. Arbitration agreements, the court held, are choices of forum, not means of cutting off substantive rights and remedies. And an FAA provision that allows generally applicable contract principles to be applied to arbitration agreements makes clear that the generally applicable principle of contract law at issue here—namely, that rights under the CLRA and UCL can't be waived by contract—is fully applicable to arbitration agreements.

The California Supreme Court's opinion has a bonus ruling as well. At oral argument last December, a question arose as to whether a 2004 California ballot measure called Proposition 64 eliminated the ability of individual plaintiffs to seek public injunctive relief under the CLRA and UCL. The court requested supplemental briefing on that issue and decided it, too. That decision was likewise a win for consumers, as the court held that an individual consumer who has suffered a real injury can bring a suit that seeks the public injunctive relief authorized by California law.

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