SAN FRANCISCO (Legal Newsline) - The California Supreme Court recently ruled that a provision in a predispute arbitration agreement is “contrary” to California public policy and is “unenforceable” under state law.

The state’s high court, in a decision filed April 6, reversed an appeals court’s judgment.

“... the waiver in a predispute arbitration agreement of the right to seek public injunctive relief under these statutes would seriously compromise the public purposes the statutes were intended to serve,” the Supreme Court wrote in its decision.

“Thus, insofar as the arbitration provision here purports to waive (plaintiff Sharon) McGill’s right to request in any forum such public injunctive relief, it is invalid and unenforceable under California law.”

The Supreme Court, in its 22-page ruling, also held that the Federal Arbitration Act, or FAA, does not preempt state law or require enforcement of the waiver provision in defendant Citibank N.A.’s account agreement.

“The FAA does not require enforcement of such a provision, in derogation of this generally applicable contract defense, merely because the provision has been inserted into an arbitration agreement,” the court wrote. “To conclude otherwise would, contrary to Congress’s intent, make arbitration agreements not merely ‘as enforceable as other contracts, but… more so.’”

In 2001, McGill opened a credit card account with Citibank and purchased a “credit protector” plan. Under the plan, Citibank agreed to defer or credit certain amounts on McGill’s account when a qualifying event occurred, such as long-term disability, unemployment, divorce, military service or hospitalization. Citibank charged a monthly premium for the plan based on the amount of McGill’s credit card balance.

McGill’s original account agreement did not contain an arbitration provision.

However, in an October 2001 notice sent to McGill, she was informed the original agreement was amended by adding various arbitration provisions. The notice stated she had the option to decline the provision and continue using her card under the existing terms until the end of her current membership year or the expiration date on her card. McGill did not decline.

Then, in February 2005, Citibank sent McGill another, updated notice. The notice contained an opt-out provision similar to that in the 2001 notice. Again, McGill did not opt out and continued using her card.

Six years later, in 2011, McGill filed a class action lawsuit against Citibank based on its marketing of the plan and the handling of a claim she made under it when she lost her job in 2008.

The complaint alleges claims under the state’s unfair competition law, or UCL; the Consumer Legal Remedies Act, or CLRA; and state’s false advertising law, as well as the state’s insurance code.

For relief, McGill asks for an injunction prohibiting Citibank from continuing to engage in its allegedly illegal and deceptive practices.

Pursuant to the arbitration provision, Citibank petitioned to compel McGill to arbitrate her claims on an individual basis.

The trial court granted the petition in part and denied it in part based on Broughton and Cruz, which together established the following rule: Agreements to arbitrate claims for public injunctive relief under the CLRA, the UCL or the false advertising law are not enforceable in California.

Applying this rule -- known as the Broughton-Cruz rule -- the trial court ordered McGill to arbitrate all claims other than those for injunctive relief under the UCL, the false advertising law and the CLRA.

The state Court of Appeal reversed and remanded for the trial court to order all of McGill’s claims to arbitration, concluding the FAA, as recently construed by the U.S. Supreme Court in AT&T Mobility LLC v. Concepcion, preempts the Broughton-Cruz rule.

In April 2011, the nation’s high court ruled that companies can enforce contracts that bar class action lawsuits. Meaning businesses that include arbitration agreements with class action waivers can require consumers to bring claims only in individual arbitrations, rather than in court as part of a class action.

Experts called the 5-4 decision a “game-changer” for class action litigation.

As the California Supreme Court points out in its decision, McGill, during oral argument before the appeals court, asserted the arbitration agreement is unenforceable because it purports to prohibit her from pursuing claims for public injunctive relief, not just in arbitration, but in any forum.

The appeals court did not mention this argument in its opinion, the high court notes. McGill made the argument again in a petition for rehearing, which the appeals court denied without addressing the merits of the issue.

McGill, in turn, filed a petition for review with the Supreme Court, asserting the appeals court erred in finding FAA preemption of the Broughton-Cruz rule and the arbitration provision is invalid and unenforceable because it waives her right to seek public injunctive relief in any forum.

The Supreme Court agreed with her latter claim, but did not address the former.

“Our invalidation of the arbitration provision insofar as it purports to waive McGill’s statutory right to seek public injunctive relief in any forum gives rise, under the terms of the parties’ agreement, to the following question: Is the rest of the provision enforceable? The arbitration provision contained in the 2001 Notice stated: ‘If any portion of the arbitration provision is deemed invalid or unenforceable, the entire arbitration provision shall nevertheless remain in force.’ However, the arbitration provision set forth in the 2005 Notice and the 2007 account agreement states: ‘If any portion of the arbitration provision is deemed invalid or unenforceable, the entire arbitration provision shall not remain in force,’” the high court explained. “Because the parties have not mentioned, let alone discussed, this language, we do not decide whether, in light of our holding, it renders the remainder of the arbitration provision unenforceable.

“But because our holding raises this question, we need not detail each respect in which McGill’s injunctive relief request constitutes a request for public injunctive relief. We leave these issues to the Court of Appeal on remand, should the parties raise them and should the court find it necessary to decide them.”

Justice Ming Chin authored the court’s opinion. Chief Justice Tani Cantil-Sakauye and fellow justices Kathryn Werdegar, Goodwin Liu, Mariano-Florentino Cuellar, Leondra Kruger and Judith Haller, an associate justice on the state’s 4th District Court of Appeal, concurred.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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