The California Supreme Court Continues Its Resistance To Arbitration

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Authors:
Donald J. Querio &
Erick W. Kemp

“Resistance” is now the battle cry of the self-anointed defenders of consumer rights.  But this is nothing new for the California Supreme Court, which for over 20 years has resisted the mandate in the Federal Arbitration Act (“FAA”) to enforce arbitration agreements despite their collateral effect on class actions.  Beginning with Southland Corp. v. Keating, 465 U.S. 1 (1984), and reaching its high watermark in Discover Bank v. Superior Court,  36 Cal. 4th 148 (2005), the California court repeatedly struck down traditional arbitration agreements so that class actions could proceed.  The sea change came with the United States Supreme Court’s decision in AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), which expressly condemned the Discover Bank decision.  Since then, the California Court has grudgingly acceded to the federal mandate.  See, e.g., Sanchez v. Valencia Holdings Co. LLC, 61 Cal. 4th 899 (2015).

But not so fast.  In its most recent encounter with the FAA, the California Supreme Court believes that it has found a clever way to carve out a major exception to Concepcion.  In McGill v. Citibank, N.A., 2 Cal. 5th 945 (2017), the court held that claims for injunctive relief that benefit the public in general do not require class certification and are, therefore, safe from the reach of Concepcion.  In order to reach this result, the court twisted the meaning of its own state law enacted by the public through the initiative process and reduced Concepcion to a mere procedural ruling with implications only for the procedural aspect of class actions.  It remains to be seen whether this latest affront to the Supremacy Clause will find its way to the United States Supreme Court, but, if it does, the High Court appears to be growing impatient with state efforts to evade the FAA, as Kentucky learned recently in Kindred Nursing Centers Ltd. Part. v. Clark, 137 S. Ct. 1421 (2017).

Undermining Proposition 64.  To understand how the California court rationalized the result in McGill, we must take a detour back to the election of November 2, 2004 and Proposition 64, which was enacted under the state initiative procedure.  Prior to Prop. 64, California’s Unfair Competition Law (Bus. & Prof. Code §§ 17200 et seq.) (“UCL”), allowed any unaffected person to bring an injunctive action on behalf of the general public without the necessity of class certification.  And to ensure that such claims could proceed in court, the California Supreme Court had issued two rulings that rejected any attempt to arbitrate such claims for injunctive relief under the UCL or its companion statute, the Consumer Legal Remedies Act (“CLRA”).  Cruz v. PacifiCare Health Systems, Inc., 30 Cal. 4th 303 (2003) (UCL); Broughton v. Cigna Healthplans, 21 Cal. 4th 1066 (1999) (CLRA).  The potential for abuse from such an unrestrained process was obvious.

Prop. 64 was designed to end this abuse, and was passed in a lopsided 60-40% vote by the same general public the UCL was supposedly protecting.  Prop. 64 reined in the UCL by adding a standing and class certification requirement that mirrored federal law.  A claimant seeking relief on behalf of the general public now had to show a personal loss of money or property and seek class certification under California’s class action statute (Cal. Code Civ. P. § 382).  As a setup for its anti-arbitration holding, the McGill court simply ignored the plain language of Prop. 64 and held that the pre-existing right to seek injunctive relief on behalf of the general public somehow escaped the requirement for class certification for any “representative action.”  While not explicitly reaffirming Cruz and Broughton, this legal sleight of hand effectively meant that, according to California law, an individual could seek injunctive relief on behalf of the public only in court.

Undermining the FAA.  But what about the FAA, Concepcion and the Supremacy Clause of the United States Constitution, you ask?  That takes us to the second part of the McGill decision.  According to the California Supreme Court, the right to seek a public injunction is not merely a procedural alternative to a class action—it actually creates a substantive right, the waiver of which is contrary to California policy.  And any contract, including an arbitration agreement, that purports to waive such a right is unenforceable.  The California court then used this “procedure v. substance” argument to brush aside Concepcion, which it narrowed to a holding dealing only with the tension between arbitration and class actions:

… contrary to Citibank’s assertion, Concepcion and its high court progeny actually support the “draw[ing]” of a distinction between class claims and public injunctions.  The latter is a substantive statutory remedy that the Legislature, though the UCL, the CLRA, and the false advertising law, has made available to those, like McGill, who meet the statutory standing requirements for filing a private action.  A class action, by contrast, “is a procedural device that enforces substantive law by aggregating many individual claims into a single claim … It does not change that substantive law.”  (In re Tobacco II Cases, supra, 46 Cal.4th at p. 313, italics added …)

Through this judicial rewriting of Prop. 64 and tortured interpretation of Concepcion, the California court has effectively allowed class type claims to once again trump legally binding arbitration clauses.  Since McGill, the class action bar has begun filing single plaintiff lawsuits seeking public injunctions based on alleged violations of consumer protection statutes, including injunctions against collection of debt by financial institutions.

The Kentucky Supreme Court attempted a similar end-run around the FAA and Concepcion by interpreting its power of attorney statute to require a power to expressly empower the attorney to enter into an arbitration agreement on behalf of a nursing home patient.  According to the Kentucky court, this was an enforceable substantive requirement of its statute.  In a 7-1 ruling (with Justice Thomas dissenting on other grounds), Justice Kagan wrote the opinion of the Court and disagreed, showing some obvious frustration with the states’ continuing attempt to undermine ConcepcionKindred Nursing Centers Ltd. Part. v. Clark, 137 S. Ct. 1421.  Let us hope that McGill gets similar treatment by the High Court.

For more information on the McGill decision and public injunctive relief, please contact Donald J. Querio at
djq@severson.com or 415-677-5621, or Erik Kemp at ek@severson.com or
415-677-5556.

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