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April 24, 2017

Arnold & Porter Discusses Arbitration Battles

The CLS Blue Sky Blog

It's been five years since Concepcion made "clear" that the Federal Arbitration Act (FAA) preempts state laws that forbid class action waivers. Concepcion did not protect arbitration agreements from laws of general applicability (such as unconscionability), but it did confirm that the FAA preempts state laws that seek to limit or invalidate various arbitration provisions.

In its decision on April 6 in McGill v. Citibank, the California Supreme Court fired the latest salvo in the battle over arbitration clauses. In McGill, Citibank sought to compel arbitration of claims under California's Unfair Competition Law (UCL), False Advertising Law (FAL), and Consumers Legal Remedies Act (CLRA) asserted by one of its customers. Citibank's petition to compel arbitration turned on application of California's BroughtonCruz "rule," which makes agreements to arbitrate claims seeking an injunction that would benefit the public at large (and not just benefit an individual consumer) invalid. Applying this rule, the trial court denied the petition to arbitrate the plaintiff's claims for relief. The Court of Appeal reversed, finding that Concepcion preempts Broughton-Cruz. The California Supreme Court took the case, seemingly prepared to directly address the question of whether it views the Broughton-Cruz rule as still valid in light of Concepcion.

The Court avoided addressing that issue, however, by finding that the arbitration agreement at issue did NOT require arbitration of claims seeking an injunction that might benefit the public. Indeed, the Court determined that the agreement at issue precluded arbitrating such claims—and further precluded customers from asserting such claims in court as well. In other words, the arbitration provision "purports to preclude [McGill] from seeking public injunctive relief in any forum." That complete preclusion, the Court said, rendered the arbitration agreement invalid because California law prevents parties from waiving a right that is "established for a public reason." Since the public injunctive relief provisions of the UCL and CLRA are intended for the public benefit, the Court found that they cannot be waived, and the arbitration provision that stopped the customer from seeking such relief in any forum was improper.

It is not the first time the California Supreme Court has avoided the issue of continued validity of Broughton-Cruz in a case seemingly primed to address the question. In 2015, the California Court in Sanchez v. Valencia Holding Co. declined to address Broughton-Cruz, noting that the plaintiff chose not to argue against arbitration on that basis. Meanwhile, the Ninth Circuit has spoken, but only in a limited sense. In Kilgore v. KeyBank, a three-judge panel of the Ninth Circuit declared Broughton-Cruz dead. However, a later en banc ruling avoided the direct question, noting instead that "even assuming the continued viability of the Broughton-Cruz rule, Plaintiffs' claims do not fall within its purview." The issue therefore remains murky.

In light of the courts' ability to tip-toe around addressing the question of continued application of Broughton-Cruz in a post-Concepcion world (including in McGill), businesses are left in a difficult position. McGill highlights the need for businesses to think carefully about how to craft arbitration class action waiver provisions to meet their goals, including consideration of the forum in which customers will be permitted to seek injunctive relief.

This post comes to us from Arnold & Porter Kaye Scholer LLP. It is based on the firm's advisory, "Arbitration Battles Continue in McGill v. Citibank," dated April 13, 2017, and available here.

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