Trial News

The Federal Arbitration Act (FAA) does not preempt California law providing that a contract cannot waive a party’s right to seek public injunctive relief, the California Supreme Court has ruled. In a case involving violations of consumer protection statutes, the court held that California’s prohibition on such a waiver of rights does not conflict with the FAA because it is based on a generally applicable contract defense that the waiver is unconscionable. (Blair v. Rent-A-Center, Inc., 2019 WL 2701333 (Cal. June 28, 2019).)

Paula Blair entered into a rent-to-own contract with Rent-A-Center for an air conditioner and an Xbox. The contract stated that Blair would pay installments on the items and then take ownership once they were fully paid off. Blair and two other plaintiffs filed a class action against Rent-A-Center, alleging that its rent-to-own pricing plan violated the state’s Karnette Rental-Purchase Act, which prohibits “unfair or unconscionable conduct toward consumers” and sets maximum levels for what consumers can be charged for installment payments and the overall cost of a rent-to-own item. The plaintiffs also alleged violations of the state’s Unfair Competition Law (UCL), the Consumers Legal Remedies Act (CLRA), and anti-usury law. They sought a public injunction against the defendant to prevent future violations and to force the defendant to account for what it has charged consumers and to provide consumers notice of their rights under the consumer protection laws.

The defendant moved to compel arbitration for the claims related to the air conditioner since the plaintiff had opted out of arbitration for the Xbox rental. The lower court denied the motion based on California’s McGill rule, which stems from a 2017 state supreme court ruling (McGill v. Citibank, N.A., 393 P.3d 85) that held that a contract that waives the right to public injunctive relief is unenforceable. The court found that the FAA does not preempt this rule and that the plaintiff’s claims must be severed from the arbitration. The defendant appealed to the California Supreme Court.

The McGill court ruled that a waiver of the right to seek public injunctive relief violates California Civil Code §3513, which states that a party to a private contract can waive a right if “the statute does not prohibit doing so, the statute’s public benefit is merely incidental to its primary purpose, and waiver does not seriously compromise any public purpose that the statute was intended to serve.”

Since the UCL and CLRA provide for public injunctive relief, the California Supreme Court held that they fall within the scope of McGill. The court also held that following McGill does not violate FAA policy against interfering with the arbitration and determined that deeming all waivers of public injunctive relief unenforceable does not interfere with the aims of the FAA because it “does not deprive parties the benefits of arbitration.” It is not inconsistent with arbitration nor does it interfere with due process or raise the procedural concerns of class actions. The court also noted that “crucially, arbitration of a public injunction does not interfere with the bilateral nature of a typical consumer arbitration. . . . The McGill rule leaves undisturbed an agreement that requires both bilateral arbitration and permits public injunctive claims.”

Next, the court considered whether the FAA preempts the state laws and concluded that based on the saving clause of §2, it does not. Section 2 allows arbitration agreements to be invalidated when general contract defenses, such as fraud, duress, or unconscionability apply. Relying on the Supreme Court’s ruling in AT&T Mobility LLC v. Concepcion (563 U.S. 333 (2011)) and a Ninth Circuit holding in Sakkab v. Luxottica Retail North America, Inc. (803 F.3d 425 (2015)), the court held that the McGill rule falls squarely within §2 and invokes a “generally applicable contract defense derived from long-established California public policy.” Ultimately, the court held that the plaintiff’s public injunction claims could be severed from any other remedies sought that would require arbitration under the contract and that those claims could proceed in court before liability is determined on the arbitrable claims.

San Francisco attorney Michael Rubin, who argued the case before the Ninth Circuit, said, “The decision has enormous potential significance, not only in California but in consumer and employment cases throughout the country. The court held that companies cannot impose mandatory arbitration agreements that prohibit public injunctive relief—an injunction authorized by statute that furthers important public policies and principally benefits other consumers (or employees). Companies that may have felt emboldened by Epic Systems or Lamps Plus to prohibit class actions now face another difficult choice. Do they let the arbitrator decide, in an individual arbitration, whether to order public injunctive relief? Or do they allow their customers and employees to seek that non-waivable form of statutory relief in court? Most consumer and employment statutes, state and federal, expressly allow injunctive relief. . . . The question is what happens now that the Ninth Circuit has called the defendants’ bluff and told them that they can prohibit class actions if they want but cannot strip individual plaintiffs from asking the arbitrator to enjoin the defendants’ wrongful activity through an order granting a public injunction.”