In McGill v. Citibank, N.A., No., S224086 (Cal. Apr. 6, 1017), the California Supreme Court recently held that pre-dispute arbitration agreements that purport to waive the remedy of injunctive relief under California consumer statutes that have the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the public in any forum, are contrary to California public policy and are thus unenforceable under California law. The court further held that the Federal Arbitration Act (FAA) does not preempt California law nor require enforcement of such contractual waiver provision.
The dispute in McGill arose out of an account agreement for a “credit protector” plan to a Citibank credit card that contained a broadly worded agreement to arbitrate that sought to require arbitration of all claims related to the account no matter the theory or relief sought. Specifically, claims brought as a class action, private attorney general, or other representative action, could only be brought on an individual basis and relief awarded only to the individual and not to anyone not a party to the agreement. The provision also stated that such claims would be governed by the FAA.
McGill brought claims under the California consumer remedy statues (Unfair Competition Law, California Legal Remedies Act and False Advertising Law) seeking damages and injunctive relief prohibiting Citibank from continuing to engage in allegedly illegal and deceptive practices. The trial court severed and kept the injunctive relief cause of action but ordered arbitration of all other claims; the Court of Appeal reversed and remanded concluding that AT &T Mobility v. Concepcion preempted application of the Broughton-Cruz rule, which established that agreements to arbitrate claims for public injunctive relief under these or any other statutes, was unenforceable.
McGill petitioned the California Supreme Court claiming that there was no preemption of the Broughton-Cruz rule and that any arbitration agreement requiring submission of claims for public injunctive relief was unenforceable. McGill also raised an argument that had been ignored by the Court of Appeal but which had traction in the Supreme Court, which is that the clause was unenforceable as it sought to waive McGill’s right to seek public injunctive relief in any forum based upon language in the clause that claims under the consumer statutes could not be pursued “in any litigation in any court.” At the hearing, Citibank agreed with McGill that this clause would prevent McGill from seeking public injunctive relief in any forum.
In a nutshell, the Court held that it need not decide whether FAA preemption applied because Citibank agreed that public injunctive relief was excluded from the obligation to arbitrate, and the Broughton-Cruz rule “which applies only when the parties have agreed to arbitrate requests for such relief” was not at issue; thus, the continued validity of that rule after Concepcion need not be decided. The only question before the court was “whether the arbitration provision is valid and enforceable insofar as it purports to waive McGill’s right to seek public injunctive relief in any forum.
By focusing only on the specific language of an arbitration clause that prevented the plaintiff from seeking public injunctive relief in either arbitration or court, the California Supreme Court attempted to thread the needle to avoid taking on the obvious question of FAA preemption under Concepcion and later decisions that have upheld precluding class procedures in consumer arbitrations. The narrowness of this decision leaves open the question in California courts of the continued validity of the Broughton-Cruz rule and its prohibition against waiving claims for public injunctive relief by agreeing to individual arbitration
California’s Fourth Appellate District recently issued an interesting, but fact-specific, opinion regarding an arbitrator’s award in Emerald Aero, LLC v. Kaplan (2/28/17) 2017 DJDAR 1819.
In Emerald Aero, the plaintiff investors sued the defendant for breach of fiduciary duty in connection with a self-storage investment gone awry. Plaintiffs sought compensatory damages and declaratory relief, but did not seek punitive damages. The arbitrator held a telephonic arbitration merits hearing (i.e., trial), after which he awarded plaintiffs $30 million without specifying the grounds for the award. Although the award did not specify the nature of the damages, the parties agreed that a substantial portion consisted of punitive damages.
The Court’s decision is notable for several reasons:
First, it underscores the unusual nature of arbitration and private judging. When parties elect to litigate outside of the court system, they are bound by the rules and procedures of their chosen private alternative dispute resolution forum. Ordinarily, arbitrators follow the law and case administrators follow the forum’s internal procedures and processes. But this is not always the case. If arbitrators or case administrators do make a mistake, opportunities for appellate review are few. (Indeed, this arbitration was governed by the California Arbitration Act, which offers fewer bases to overturn arbitration awards than does the Federal Arbitration Act.) The grounds for reversal must be manifest and severe.
Second, it underscores the importance of correctly and completely pleading all claims, prayers for damages, and defenses in an arbitration. Practitioners tend to think of arbitral forums as being less formal than trial courts, and often, they are correct. Arbitrators sometimes (but not always) exercise a degree of “flexibility,” particularly with respect to evidence and pleading, that otherwise is absent from judicial forums. But as this case demonstrates, it’s best not to rely on the perceived informality of arbitrations. If plaintiffs in Emerald Aero asserted a claim that entitled them to punitive damages, they should have plainly asked for an award of such damages (or, if they did not want such damages, they should have made clear to the arbitrator that such damages were not being sought). Their failure to do so opened an expensive can of worms that ultimately unwound an advantageous award in their favor and forced them to incur fees litigating on appeal.
In the recent decision of the California Court of Appeal in Rice v. Downs, Second Appellate District, Div. One, B261860 (Filed 6/1/16), the Court held the drafters of an arbitration clause (the parties and their lawyers alike) were experienced and would not have chosen language that they would have expected to be interpreted differently than the judicial interpretations in then-existing California and Ninth Circuit case law where their chosen language was reviewed. That is, the drafting parties were presumed to know the law.
This decision provides a good review of how arbitration language is typically used and litigated. What is important is that most drafters borrow language from other contracts without much thought of what a court would do when a dispute arises over the scope and meaning or what claims are included or not. Having been presumed to know the law, it is important for drafters to read it.
In Rice, the Court parsed through a number of litigated arbitration clause permutations to decide whether certain claims for malpractice, breach of fiduciary duty, and rescission claims that plaintiff Rice brought against his attorney Downs arose out of limited liability operating agreements drafted by the defendant attorney and were properly arbitrated with other disputes between the parties. These claims were not found to have arisen from the agreement under the following language: “any controversy between the parties arising out of this agreement” as they were not contractual claims (and even tort claims) that arose from the agreement itself. In so holding, the appellate court reversed the trial court’s decision ordering Rice’s claims for malpractice to arbitration.
The Court affirmed that arbitration clauses are to be interpreted like any other contract to give effect to the parties’ intentions in light of the usual and ordinary meaning of the contractual language and circumstances under which the contract was made. The focus on whether a particular dispute is intended by the parties to be arbitrated turns on whether the clause is broad (“any claim arising from or related to this agreement or arising in connection with the agreement’). In that case, even tort claims that have their roots in the relationship of the parties to the contract could be ordered to arbitration, as the factual allegations need only “touch matters covered by the contract between the parties.”
Having said this, the Court found that any determination of whether the parties intended to arbitrate a specific dispute had to be resolved by determining whether the claims are controversies “arising out of” the agreements, that is, whether the disputes “have their roots in the relationship between the parties which was created by the contract in dispute that has the arbitration clause.”
Upon holding that the drafters were experienced and presumed to know the law, the Court held the parties to examine how courts had interpreted the scope of the language being used to determine if a particular claim arose out of or from the agreement.
The California Supreme Court surprisingly upheld an arbitration agreement in a pre-printed, non-negotiable employment agreement which broadly required the employee to arbitrate any employment-related disputes with the company in the case of Baltazar v. Forever 21 (S208345, March 28, 2016). Although the employee, Maribel Baltazar, at first refused to sign the agreement as she did not want to be bound to arbitrate, she begrudgingly relented, signed and was hired. She later resigned and sued the company for sexual harassment, sex discrimination, and retaliation.
The trial court denied a motion to compel arbitration, finding procedural unconscionability because the employee was required to sign a pre-printed, non-negotiable agreement as a condition of employment and she was not provided with a copy of the arbitration rules. The trial court also found substantive unconscionability because the agreement gave the employer greater protections with the right to seek injunctive relief to protect trade secrets and required arbitration under the rules of the American Arbitration Association even if the court found the agreement unenforceable. This was an expected result in a state trial court based upon the existing body of appellate decisions which are hostile to forced arbitration in employment and consumer settings.
However, the Court of Appeal reversed the trial court. Although agreeing that the employee did not have meaningful choice in signing the employment agreement, the appellate court disagreed with the trial court’s conclusion that the agreement was substantively unconscionable because it permitted either party to seek injunctive relief, even if such relief more often served the interests of the employer rather than the employee. Further, even if the AAA rules were found unenforceable, they could still could arbitrate under the California Arbitration Act.
Continue reading CA Supreme Court Enforces Broad, Non-Negotiable Arbitration Clause In Employment Agreement
In a 6-3 opinion authored by Justice Breyer, the Supreme Court reversed a California court of appeal decision that refused to enforce a class-wide arbitration waiver on the grounds the waiver—although unenforceable under California state law at the time of contracting—was preempted by the Court’s holding in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). DirecTV, Inc. v. Imburgia, 2015 WL 8546242 (Dec. 14, 2015) (“Imbrugia“). In Concepcion, the Court applied Federal Arbitration Act (“FAA”) preemption to strike down a California law that prohibited consumer class-arbitration waivers on unconscionability grounds.
At issue in Imbrugia was a provision in a DirecTV agreement that required binding arbitration to resolve any disputes but then voided the arbitration requirement “if the law of your state would find this agreement to dispense with class arbitration procedures unenforceable.” While the case was pending in the trial court, the Court issued its opinion in Concepcion. DirecTV then sought to compel arbitration because it could now avoid class-wide arbitration given that California’s prohibition on class-wide waivers was invalidated by Concepcion. Notwithstanding, the court of appeal affirmed the trial court’s denial of DirecTV’s motion to enforce the arbitration agreement reasoning that “law of your state” meant California law as it existed prior to Concepcion. The Ninth Circuit came to a conclusion directly opposite of that in Murphy v. DirecTV, Inc., 724 F.3d 1218 (9th Cir. 2013) on precisely the same issue involving a substantively identical arbitration agreement.
Continue reading SCOTUS Reminds CA Courts of the Strength of Preemption Under Concepcion
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.
Continue reading Court of Appeals Strikes Exception to Arbitration
Does waiting a whole year before moving to compel arbitration constitute a waiver? Not according to the Court in Gloster v. Sonic Automotive.
Continue reading Year-Long Delay to Compel Arbitration is Not Waiver