Court of Appeals Strikes Exception to Arbitration

Neil Bardack
December 29, 2014

A California appellate court recently fell into line with federal courts in recognizing the Federal Arbitration Act’s preemption of agreements to arbitrate in McGill v. Citibank, N.A, holding that plaintiffs who bring claims for injunctive relief under state consumer statutes can be forced to arbitrate those claims.

The plaintiff brought a class action challenging a credit insurance plan to protect Citibank credit card account holders, alleging various claims of misrepresentation. Relying on California’s Broughton-Cruz rule, the plaintiff argued that her claims for injunctive relief under the state’s unfair competition law (UCL), false advertising law (FAL), and Consumer Legal Remedies Act (CLRA) were not arbitrable.

The trial court agreed holding that the Broughton-Cruz rule had been judicially established based upon public policy to protect the consumer.

Up until now, state courts routinely denied petitions to compel arbitration of claims under UCL, FAL, and CLRA from arbitration because such claims were for the benefit of the general public and the state legislature had never intended to allow arbitration of them.

But the Court of Appeals reversed on the basis of AT&T Mobile LLC v. Concepcion (2011) 131 S.Ct. 1740, in which the United States Supreme Court held that the Federal Arbitration Act preempts state laws that prohibit arbitration of a particularly type of claim.

“When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.” (p. 1747.) And even a states’ interest in enforcing its public policy must give way to the FAA.

Applying Concepcion, the McGill court is the first California appeals court to decide that the FAA preempts the Broughton-Cruz rule and that a plaintiff can be compelled to arbitrate injunctive relief claims.

Side note: The plaintiff argued the Broughton-Cruz rule was reaffirmed by Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, which held that claims under the Labor Code Private Attorneys General Act (PAGA) are not arbitrable. However, PAGA claims are brought by a plaintiff as a proxy for the state, and contractual agreements to arbitrate cannot interfere with the right of citizens to enforce the public good.

Iskanian, which is rejected by federal district courts, is being appealed to SCOTUS but it is doubtful that any resulting ruling will affect the striking of the Broughton-Cruz rule. After Concepion, it was only a matter of time until it happened.