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Calif. Justices Duck Big Question in Key Arbitration Battle

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In a case closely watched by the class action bar, the California Supreme Court has punted on deciding whether to jettison a long-standing rule that bars consumer suits seeking broad injunctive relief from being pushed into arbitration.

Thursday’s unanimous ruling, in McGill v. Citibank, sets the stage for a potential clash before the U.S. Supreme Court, which has repeatedly sided against California in key arbitration cases. One such case was the 2011 Supreme Court decision in AT&T v. Concepcion, which found that the Federal Arbitration Act pre-empted California’s ban on class-action waivers in arbitration clauses.

— (Related on ThinkAdvisor: Insurance regulators bemoan forced arbitration)

McGill addressed whether Concepcion and more recent U.S. Supreme Court decisions, such as a 2013 ruling in American Express v. Italian Colors, now require the California court to overrule its previous decisions allowing consumers to avoid arbitration when they bring injunctive relief claims on behalf of the public. Groups such as the U.S. Chamber of Commerce, Pacific Legal Foundation and the International Association of Defense Counsel urged the court to abandon what they view as a loophole in federal arbitration policy. Public Citizen and the AARP backed the plaintiff.

In its Thursday decision, the California Supreme Court declined to decide the fate of the so-called Broughton-Cruz doctrine, named for the two cases that established the rule forbidding compulsory arbitration of claims for public injunctive relief. Instead, the unanimous panel found that the arbitration contract at issue was unenforceable because it made it impossible for the plaintiff, Sharon McGill, to pursue injunctive relief “in any forum.”

In so ruling, the state’s high court leaned on a portion of the Italian Colors decision that found the FAA does not apply to an arbitration agreement that bans “the assertion of certain statutory rights.”

“Here, we likewise conclude that the FAA does not require enforcement of a provision in a predispute arbitration agreement that, in violation of generally applicable California contract law, waives the right to seek in any forum public injunctive relief” under California consumer laws, wrote Associate Justice Ming Chin.

The court thus distinguished the case from Concepcion, which dealt with the procedural tool of pursuing class actions, not statutory remedies.

McGill’s attorney, Glenn Danas, a partner at Capstone Law in Los Angeles, had argued against Citibank’s position that the FAA pre-empted the Broughton-Cruz rule. But he also presented the narrower view that Citibank’s arbitration provision at issue was unconscionable.

“We are very pleased that the California Supreme Court unanimously reversed the Court of Appeal in our favor, holding that corporations like Citibank cannot force California consumers to waive their right to seek public injunctive relief under California’s consumer protection statutes,” Danas wrote in an email. “This is the right result, and preserves a powerful tool for maintaining corporate accountability.”

Citibank’s attorneys, Stroock, Stroock & Lavan’s Julia Strickland, a partner, and Marcos D. Sasso, special counsel, both in Los Angeles, did not respond to a request for comment.

The Pacific Legal Foundation, which filed an amicus brief in support of Citibank, called the decision the “latest slippery evasion of federal arbitration law.”

The court’s “surprising result” will leave the Broughton-Cruz rule’s viability “in disarray,” wrote Deborah LaFetra, a principal attorney at the California-based advocacy group. Citibank, she wrote, “almost certainly will petition the U.S. Supreme Court to review this decision.”

McGill filed a class action in 2011, alleging that Citibank misled her in the marketing and handling of its “credit protector” plan, which, for a monthly premium cost, defers payment in the event of a major life event such as unemployment. She brought the case under California’s unfair competition law, false advertising law and Consumer Legal Remedies Act, asserting claims that included injunctive relief prohibiting Citibank from future illegal conduct.

A judge in Riverside, California, granted Citibank’s motion to arbitrate the case in part, but found the arbitration agreement unenforceable as to McGill’s claims for public injunctive relief. The decision relied on Broughton v. Cigna Health Plans, decided in 1999, and Cruz v. Pacificare Health Systems, decided in 2003. The California Supreme Court cases held that claims for injunctive relief on behalf of the general public cannot be forced into arbitration.

The Fourth District Court of Appeal reversed, concluding that the FAA pre-empted the Broughton-Cruz rule under Concepcion.

The U.S. Court of Appeals for the Ninth Circuit has also addressed the Broughton-Cruz rule in a series of cases, ruling in 2013 that the rule could not be squared with Concepcion.

On Jan. 24, after oral arguments, the California Supreme Court had asked lawyers to submit supplemental briefing on whether Proposition 65, a ballot measure passed in 2004 to curb abusive lawsuits brought on behalf of the public, eliminated the ability of private plaintiffs to seek public injunctive relief. In Thursday’s decision, the panel found that it did not.

— Read Witnesses Clash Over Mandatory Arbitration Clauses on ThinkAdvisor.


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