Two posts on arbitration law in one day! What?!? Is it your birthday?
No, no. (Well, maybe. And if so, happy birthday!) It’s just that I finished reading what I think are the three most significant and fascinating arbitration cases to be decided so far this year. I’m so excited that I had to write a second post today!
All three cases address whether a rule articulated by the California Supreme Court in McGill v. Citibank, N.A., 2 Cal.5th 945, 216 Cal. Rptr. 3d 627, 393 P.3d 85 (2017), is preempted by the FAA. Spoiler alert: the Ninth Circuit says the McGill rule isn’t preempted. That’s sure to raise some eyebrows, including by SCOTUS justices.
Deep breath! Let’s wade into this.
In McGill, the California Supreme Court held that an agreement waving 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.” (Liz wrote about McGill here.) To understand what this means, it helps to see the distinction between what California considers private injunctive relief and public injunctive relief.
Public injunctive relief has “the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public.” In contrast, private injunctive relief “resolve[s] a private dispute” between the parties and “rectif[ies] individual wrongs,” though such injunctions may benefit the general public incidentally. In a nutshell, the difference hinges on who primarily benefits from the relief, the public at large or only an individual. A number of California consumer protection statutes provide for public injunctive relief.
The contract at issue in McGill was an arbitration agreement waiving the plaintiff’s right to seek public injunctive relief in arbitration and requiring arbitration of all claims. Because this waiver prevented the plaintiff from seeking a public injunction in any forum, it was unenforceable.
I don’t want to get too lost in the weeds, but the issue of the arbitrability of public injunctive relief isn’t new in California. A prior set of cases, Broughton v. Cigna Healthplans of California, 549 Cal. 4th 1066, 90 Cal.Rptr.2d 334, 988 P.2d 67 (1999) and Cruz v. Pacificare Health Systems, Inc., 30 Cal. 4th 1157 (2003) (collectively referred to as Brougthton-Cruz) created a rule establishing that public injunctive relief in California was not arbitrable at all. The Ninth Circuit found that the Broughton-Cruzrule was preempted in the wake of AT&T v. Concepcion. See Ferguson v. Corinthian Colls., 733 F.3d 928 (9th Cir. 2013). So, anyone watching California law had to wonder about the fate of McGill.
The difference between Broughton-Cruz and McGill, however, is that the latter case doesn’t purport to prevent the arbitrability of public injunctive relief. It says, instead, that parties cannot waive the recourse to public injunctive relief in any forum. (If you think that sounds ominously similar to the Discover rule preempted by AT&T v. Concepcion – which said that parties couldn’t waive the right to class actions in any forum – you’re not wrong.)
The Ninth Circuit, however, bought the distinction. In Blair v. Rent-A-Center, Inc., WL 2701333 (9th Cir. June 28, 2019), the court concluded that McGill is not preempted by the FAA. That conclusion was reiterated in two concurrently released decisions: McArdle v. AT&T Mobility LLC(No. 17-17221) and Tillage v. Comcast Corp., 2019 WL 2713292 (9th Cir. June 28, 2019). Blair lays out the key logic of the Ninth Circuit, so I’ll focus on that decision here. According to the Ninth Circuit, the McGill rule does not run afoul of the FAA for essentially four reasons.
First, the McGill rule does not prevent the arbitrability of public injunctive relief, either expressly or covertly. So, it’s not openly hostile to arbitration. Instead, the McGill rule merely prevents waiver of the right to pursue public injunctive relief, regardless of forum.
Second, and critically, the court says that the arbitration of public injunctive relief doesn’t require the sort of formalities inconsistent with bilateral arbitration that class arbitration does. In this regard, the court explains how SCOTUS’s objection to class arbitration in AT&T v. Concepcion seems to rest on the notion that class actions require far more complex procedural processes, many of which are aimed at protecting the due process rights of absent class members. These complicated processes just don’t square with the hallmark informality of bilateral arbitration. In contrast, the arbitration of public injunctive relief does not require any sort of complicated process because the real party in interest is the state, not absent parties. So, nothing about the arbitrability of public injunctive relief, according to the Ninth Circuit, interferes with a fundamental attribute of arbitration.
Third, and relatedly, the fact that things could substantively get more complicated when litigating about public injunctive relief doesn’t matter. The Ninth Circuit draws a distinction between procedural complexity, which was the animating concern in AT&T v. Concepcion, and substantive complexity, which SCOTUS has said isn’t relevant when thinking about arbitration. See, e.g., Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 633 (1985) (considering the tangle of factual and legal issues associated with antitrust claims and stating that “potential complexity should not suffice to ward off arbitration”).
Finally, the Ninth Circuit wishes away, without a lot of analysis, two related concerns about injunctive relief generally. It dismisses a concern that “multiple injunctions [could be issued] against the same defendant imposing conflicting obligations” as “conjectural and unpersuasive.” It dismisses the concern that “[o]ngoing injunctions sometimes need monitoring or modification” as insignificant because “[a]rbitrators have long had the authority and ability to address requests for injunctive relief within bilateral arbitration.”
The consequences of Blair are momentous. Plaintiffs who are not able to band together to pursue class-wide relief in arbitration can still pursue injunctive relief on behalf of all harmed consumers, at least in California and at least for the moment. So, for instance, in Blair, the plaintiffs sought a public injunction against Rent-A-Center enjoining future violations of law, requiring an accounting of monies illegally obtained from California consumers, and requiring that Rent-A-Center provided individualized notice to those consumers of their statutory rights. While this isn’t quite the same as a class action, of course, the requested relief certainly constitutes an end-run around the class action waiver in the arbitration agreement.
It’s also worth noting, however, a strange consequence of the Blair holding. In Blair, the court concluded that the request for public injunctive relief was not arbitrable because of a severability clause in the arbitration agreement. That clause provided that “[i]f there is a final judicial determination that applicable law precludes enforcement of this Paragraph’s limitations as to a particular claim for relief, then that claim (and only that claim) must be severed from the arbitration and may be brought in court.” In the other two concurrently released cases, the court relied on severability clauses to conclude that the entire arbitration agreements were voided. See McArdle v. AT&T Mobility LLC (“If this specific provision is found to be unenforceable, then the entirety of this arbitration provision shall be null and void.”); Tillage v. Comcast Corp. (“THIS WAIVER OF CLASS ACTIONS AND COLLECTIVE RELIEF IS AN ESSENTIAL PART OF THIS ARBITRATION PROVISION AND CANNOT BE SEVERED FROM IT.”).
In combination, these cases raise some important and fascinating issues. If you have consumer, patient, or employment arbitration agreements in California, these decisions have immediate and significant relevance.
In fact, I go on record now: this issue’s going to SCOTUS! These particular cases might not tee up things cleanly enough, but SCOTUS’s abiding interest in class action waivers virtually guarantees that this matter has to be reviewed.