More Questions Than Answers in Ninth Circuit's Examination of Critical California Arbitration Issue
Relying on the California Supreme Court's 2017 decision in McGill v. Citibank, class action plaintiffs increasingly have sought to circumvent class action waivers in arbitration agreements by filing lawsuits in California. In McGill, the court held that an arbitration provision precluding a consumer from pursuing claims for "public" injunctive relief in any forum, i.e., in court or in arbitration, is unenforceable under California law and that such a ruling does not conflict with the Federal Arbitration Act (FAA).
As a result, class action plaintiffs expressly have sought public injunctive relief, arguing that the entire arbitration agreement is unenforceable under McGill, or that the request for public injunctive relief must proceed in court. Indeed, with limited exceptions, California federal district courts have largely followed McGill and either denied motions to compel arbitration or held that the public injunctive relief claim is not arbitrable. Three such decisions denying motions to compel arbitration based upon McGill were argued before the U.S. Court of Appeals for the Ninth Circuit on February 12, 2019, spurring a host of questions, particularly regarding public injunctions.
Although the facts of each case differ, the essential terms of the underlying arbitration agreements are the same: They waive the right to bring class actions and prohibit arbitrators from awarding any relief in favor of non-parties to the arbitration. Following McGill, the district courts declined to enforce the arbitration agreements, holding that the agreements precluded the plaintiffs from pursuing public injunctive relief "in any forum" and that the FAA does not preempt the McGill rule.
While the panel heard separate arguments in each case, collectively the arguments raised the following questions, among others:
- Is the McGill rule a "generally applicable" contract defense that falls within the "saving clause in Section 2 of the FAA, which permits courts to declare arbitration agreements unenforceable "upon such grounds as exist at law or in equity for the revocation of any contract," or a rule that impermissibly singles out arbitration agreements for disparate treatment?
- What is the scope of a "public" injunction and do the procedures needed to resolve "public" injunctive relief claims interfere with the fundamental attributes of arbitration?
- Can the prohibition of public injunctive relief be severed from the rest of the arbitration agreement such that the parties can arbitrate the non-public injunctive relief claims and, if the consumer is successful in arbitration, return to the district court for resolution of the public injunctive relief claims?
- To the extent there is any ambiguity in the arbitration agreement as to whether claims for public injunctive relief may be severed, should the court apply the state-law contract principle that ambiguities should be construed against the drafter, or the FAA's policy that any doubts concerning the scope of arbitrable issues be resolved in favor of arbitration?
- Does the presence of an "opt out" right in an arbitration agreement alleviate McGill's concern that consumers may be left without the opportunity to pursue relief "in any forum" by allowing consumers the opportunity to opt out of arbitration and pursue public injunctive relief claims in court?
As characterized by counsel for the plaintiffs-appellees, a public injunction is nothing more than an order to "stop" the challenged conduct and there are no "incremental complexities" attendant to a "public" versus a "private" injunction that would interfere with the fundamental attributes of arbitration. Conversely, counsel for the defendants-appellants argued that deciding whether to issue a public injunction requires consideration of "class-like evidence" and a detailed examination of the claims at issue since the scope of an injunction can be "as broad as all equity." Thus, an arbitrator would need to make decisions about non-parties, including whether non-parties were exposed to the same misrepresentation or conduct in the same manner as the plaintiff, and whether there is a risk of future harm to non-parties.
Further complicating the analysis is how to fashion the relief. For example, is a technological fix needed, will a new or different disclosure suffice, or is it simply a matter of ceasing the offending conduct? The answers to these questions, and others, turn on the specific allegations and practices in each case.
The panel recognized these complications, noting the inherent differences between "negative" injunctions (i.e., "stop" doing something) and "affirmative" injunctions (i.e., requiring the defendant to undertake affirmative actions, such as corrective advertising campaigns). The panel also recognized the risk of conflicting, overlapping, and inconsistent injunctions targeting the same conduct.
Whatever the Ninth Circuit decides, the issue is likely to work its way to the U.S. Supreme Court, given the conflict between McGill and the long line of Supreme Court cases favoring arbitration. Those cases include AT&T Mobility, LLC v. Concepcion, in which the Court held that class action waivers in consumer arbitration agreements are valid under the FAA, notwithstanding California law holding such waivers to be invalid and against public policy.
Unless and until the McGill opinion gets overruled, it may be desirable for certain companies to modify language in their arbitration agreements used in California (and, perhaps in other states as well) in order to avoid having a court invalidate an arbitration agreement in its entirety or order arbitration of public injunction claims.
Ballard Spahr's Consumer Financial Services Group pioneered the use of pre-dispute arbitration provisions in consumer financial services agreements. It is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.