Contractual Waiver of Public Injunctive Relief in Arbitration Agreements:

MCLE SELF STUDY

 

Conflicting Federal Interpretation of the McGill Rule

Public injunctive relief is injunctive relief that has the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public.[1]  In 2017, the California Supreme Court in McGill v. Citibank, N.A. held that contractual arbitration agreements waiving public injunctive relief arising under California’s unfair competition laws (“UCLs”) are contrary to California public policy and unenforceable under California law.[2]

The McGill court further held that the Federal Arbitration Act (“FAA”)[3] does not preempt this rule or require enforcement of such waiver provisions.  In doing so, the Court emphasized that (1) the FAA’s saving clause provides that an arbitration agreement may be declared unenforceable upon such grounds as exist at law or in equity for the revocation of any contract, (2) a law established for a public reason cannot be contravened by a private agreement, and (3) public injunctive relief under California’s UCLs are general contract defenses described in the FAA’s saving clause.[4]

The Court also acknowledged that the FAA preempts a generally applicable state law contract defense if the defense is applied in a fashion that disfavors arbitration or interferes with the fundamental attributes of arbitration.  However, the McGill Court rejected argument that the anti-waiver rule for public injunctive relief interferes with arbitration because the relief is a substantive statutory remedy under the UCLs and not a procedural device, such as class action arbitration.[5]

Other federal courts in California agreed that the FAA does not preempt the McGill Rule.[6]

However, in early 2019, the United States District Court for the Southern District of California held that the McGill Rule is preempted by the FAA and private contractual arbitration provisions purporting to waive public injunctive relief are enforceable because (1) the McGill Rule is not a ground for invalidating any contract and (2) the rule obstructs the FAA’s objectives to promote streamlined bilateral arbitration concerning only the plaintiff’s claims and relief that would make plaintiff whole. [7]

First, general contract defenses such as fraud, duress, or unconscionability may invalidate an arbitration agreement, but the FAA’s savings clause[8] does not preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.[9]

Second, the District Court stated that the McGill Rule is an obstacle to the FAA’s objectives and is therefore preempted[10] because California’s interest in providing a private plaintiff an avenue to seek public relief does not override the FAA’s support for streamlined bilateral arbitration concerning only the plaintiff’s claims and relief that would make plaintiff whole.[11]  The McGill Rule specifically prohibits streamlined bilateral arbitration of plaintiffs’ claims related to individual injuries, which runs counter to the overarching purpose of the FAA, and the liberal federal policy favoring arbitration outweighs any substantive or procedural State policies to the contrary.[12]

In addition, the District Court emphasized that the McGill court relied on California’s Maxims of Jurisprudence, which are not legal requirements but only aid in construing common-law principles or code sections.[13]  The Court also noted that the McGill Rule would effectively preclude settlement of any case where the plaintiff asserts an UCL claim because any settlement would almost certainly include a release of all rights to relief under the UCL, including the right to seek public injunctive relief.[14]

Nevertheless, in a trio of separate cases in 2019, the United States Court of Appeals for the Ninth Circuit subsequently held the McGill Rule is not preempted by the FAA.[15]

The Ninth Circuit stated that an agreement to waive the right to seek public injunctive relief violates California Civil Code § 3513, which provides that a law established for a public reason cannot be contravened by a private agreement.  Public injunctive relief is primarily for the benefit of the general public.  Waivers of such relief, therefore, are invalid and unenforceable under California law.[16]

Moreover, the Ninth Circuit found that the McGill Rule is a generally applicable contract defense and the rule does not obstruct the FAA’s objectives because it does not mandate procedures that interfere with arbitration.[17]

Petitions for certiorari to the Supreme Court of the United States are pending for two of those decisions, Tillage v. Comcast Corp. and McArdle v. AT&T Mobility LLC.  Given the high court’s recent trend of hearing arbitration disputes and generally favoring arbitration, California ADR practitioners should continue to closely monitor the status of these cases and their impact on the enforceability of arbitration provisions.

[1] McGill v. Citibank, N.A. (2017) 2 Cal. 5th 945, 951.

[2] McGill, 2 Cal. 5th at 951.

[3] 9 U.S.C. § 1, et seq.

[4] McGill, 2 Cal. 5th at 964.

[5] McGill, 2 Cal. 5th at 964.

[6] Delisle v. Speedy Cash, 2019 U.S. Dist. LEXIS 96981, *27 (S.D. Cal. June 10, 2019); Echevarria v. Aerotek, Inc., 2019 U.S. Dist. LEXIS 101062, *7-13 (N.D. Cal. June 17, 2019).

[7] McGovern v. United States Bank N.A., 362 F. Supp. 3d 850, *859-860, 862 n. 5 (S.D. Cal. Jan. 25, 2019), followed by Sponheim v. Citibank, N.A., 2019 U.S. Dist. LEXIS 100857, *12-14 (C.D. Cal. June 10, 2019).

[8] 9 U.S.C. § 2.

[9] McGovern, 362 F. Supp. 3d at 859-860.

[10] McGovern, 362 F. Supp. 3d at 862-864.

[11] McGovern, 362 F. Supp. 3d at 862-863.

[x12] McGovern, 362 F. Supp. 3d at 863.

[13] McGovern, 362 F. Supp. 3d at 860.

[14] McGovern, 362 F. Supp. 3d at 861.

[15] Tillage v. Comcast Corp., 772 Fed. Appx. 569 (9th Cir. 2019) (the FAA does not preempt the McGill rule), petition for certiorari filed Feb. 27, 2020 (No.19-1066); McArdle v. AT&T Mobility LLC, 772 Fed. Appx. 575 (9th Cir. 2019) (same), petition for certiorari filed Feb. 27, 2020 (No.19-1078); Blair v. Rent-a-Center, Inc., 928 F.3d 819, 822 (9th Cir. 2019) (same).

[16] Blair, 928 F.3d at 824 (emphasis added).

[17] Blair, 928 F.3d at 827, 830-831.

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