California High Court Places More Limitations on Arbitration Agreements

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The California Supreme Court recently held that an arbitration agreement can't be used to waive the right to seek public injunctive relief under state law. This means employers should carefully review their arbitration agreements for compliance, especially since California law is sometimes at odds with the federal policy favoring arbitration.

The state high court's ruling in McGill v. Citibank, N.A., No. S224086, Cal. (April 6), underscores the trend in California to resist the U.S. Supreme Court's favorable view of resolving certain disputes through arbitration instead of in court. McGill involves a consumer arbitration agreement, but the case has important takeaways for employers.

The case highlights the constantly shifting legal landscape surrounding arbitration, said Johnny Yeh, an attorney with Emergent Law in San Francisco. "Employers can and should keep this ongoing uncertainty in mind."

[SHRM members-only HR Q&A: What are the California rules regarding mandatory arbitration agreements, and how do they differ from federal law?]

Public Injunctive Relief

The California Supreme Court said public injunctive relief is meant to prohibit activities that "threaten future injury to the general public."

Through this type of relief, plaintiffs can ask the court to prevent a defendant from engaging in allegedly unlawful practice in the future, explained Gabriel Rubin, an attorney with Kaufman Dolowich & Voluck in San Francisco.

This means that—in addition to awarding monetary damages—the court can order a business to no longer pay employees at rates below the minimum wage or to cease engaging in other improper wage practices, for example.

In this case, Citibank customer Sharon McGill asserted claims for false advertising and other state law violations.

She also asked the court to issue an injunction prohibiting Citibank from engaging in the allegedly illegal and deceptive activity in the future.

Citibank wanted to compel arbitration, but McGill argued that the applicable arbitration agreement was written in a way that impermissibly prevented her from seeking the injunction in any forum—whether that be in court or arbitration.

Siding with McGill, the California Supreme Court said a provision in an arbitration agreement isn't enforceable if it waives the right to seek public injunctive relief in any forum.

A waiver of this right "would seriously compromise the public purpose" of such injunctive relief, the court reasoned. However, the court did not address whether the provision would have been enforceable if it simply required that injunctive relief be sought in arbitration rather than in a courtroom.

The court rejected Citibank's argument that California's rule was pre-empted by the Federal Arbitration Act (FAA). The court applied a state law contract defense that it said would apply to any contract—not just an arbitration agreement: A law created for a public reason can't be waived by a private agreement.

"The holding in McGill is quite narrow and limited to those situations in which arbitration agreements preclude plaintiffs from seeking public injunctive relief in any forum whatsoever," Yeh said. "Precluding public injunctive relief entirely is a significantly greater stretch than simply restricting public injunctive relief to arbitration, which is likely enforceable."

More Limitations

"The FAA reigns supreme and pre-empts a lot of what the states can do," Rubin said. The U.S. Supreme Court has expanded the scope of enforceability for arbitration agreements, and California tries to find exceptions, he added.

The nation's high court has said that arbitration agreements should be on equal footing as any other contract, Rubin explained. Thus, in McGill, the state Supreme Court reasoned that it was applying principles of state contract law that would govern any contract—not just an arbitration agreement.

This isn't the first time the California Supreme Court has limited the reach of arbitration agreements under state law.

In a 2014 ruling, the court found that Private Attorneys General Act (PAGA) claims can't be waived because they are for the public benefit (Iskanian v. CLS Transportation Los Angeles, 59 Cal. 4th 348).

PAGA allows employees to step into the shoes of state regulators to recover civil penalties—75 percent of the penalties recovered goes to the state and 25 percent goes to the employees.

In Iskanian, the California Supreme Court decided that prohibiting PAGA waivers in arbitration agreements doesn't run afoul of the FAA because the FAA is designed to address arbitration agreements between private parties, Yeh said.

PAGA claims, however, represent a dispute between an employer and the California Labor and Workplace Development Agency, even though the PAGA claims are brought by employees as a proxy for the agency, he explained. "Since the dispute is therefore between an employer and the state, it is outside the FAA's coverage."

Supreme Court Review?

With the ninth seat on the U.S. Supreme Court now filled by Justice Neil Gorsuch, the court is back to a conservative majority.

Rubin said he would expect the high court to continue its trend of strongly favoring arbitration agreements.

Whether McGill will reach the U.S. Supreme Court is difficult to assess given the limited number of cases that the court agrees to review each year, Yeh noted. "While it would not be entirely surprising to see McGill reach the high court given the judicial activity surrounding arbitration agreements in recent years, the U.S. Supreme Court may elect to wait for a case with a less narrow holding."

Employer Takeaways

Decisions like Iskanian and McGill affect how employers should structure their arbitration agreements, Rubin said. Employers can't have sweeping agreements in California.

Businesses can take some comfort, however, from the fact that McGill does not disturb the now-established rule that class-action waivers are enforceable in arbitration agreements, Yeh said.

"Where the actual boundaries of the law are ambiguous, it is common practice to provide by agreement that the terms are enforceable to the extent permitted by law, and employers may wish to use such language to account for future changes in the legal landscape," he added.

Employers may also want to include a severability clause in their arbitration agreement, Rubin noted. This would state that if one portion of the agreement is found to be unenforceable or illegal, it can be severed, and the other provisions would remain in full force and effect.

 

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