Public injunctions remain alive and well

"There they go again," moaned a number of Supreme Court watchers and appellate lawyers, as news came down of another apparent "anti-arbitration" decision from California. This time, in Blair v. Rent-A-Center, Inc., 2019 DJDAR 6012 (9th Cir. June 28, 2019), the 9th U.S. Circuit Court of Appeals held that a contractual waiver of "public injunctions" wedged into an arbitration agreement is not enforceable. But isn't this waiver just like a waiver of class actions that the U.S. Supreme Court found enforceable time and again? Isn't it just a matter of time before the Supreme Court sets the 9th Circuit (and California) straight again?

But the commentariat's skepticism is unwarranted. Despite the uproar, Blair was not an "anti-arbitration" decision. The decision does hold that injunctive relief is "inarbitrable"; rather, it holds that a contractual waiver banning broad injunctive relief -- relief to stop an unlawful corporate practice -- cannot be enforced. This means that a consumer or employee would have the right to pursue injunctive relief in some forum -- that a corporation cannot just eliminate the remedy by tacking a waiver on to an arbitration agreement. This rule makes sense. Courts want to put a stop to corporations' cynical game with statutory waivers. These agreements say that you'll need to arbitrate all claims with us, but you also give up the right to bring some of these claims in arbitration, such as injunctive relief. Ergo, you can't pursue injunctive relief at all.

Blair extends to federal court the California Supreme Court's decision in McGill v. Citibank N.A., 2 Cal. 5th 945 (2017), which found waivers that operate to prohibit public injunctive relief to be unenforceable. Neither decision is contrary to the Federal Arbitration Act. Rather, both McGill and Blair grounded their holding in the FAA's saving clause that authorizes generally applicable contract defenses as well as decades of U.S. Supreme Court precedent stating that "by agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985). Under this non-waiver principle embodied in the FAA, a waiver of a statutory right and remedy -- a ban against recovery of unpaid overtime wages, for example -- do not become enforceable just because it is connected to an arbitration clause.

And unlike a class waiver, which prohibits a multi-party procedure that is inconsistent with the "fundamental attributes of arbitration," injunctive relief to stop an unlawful or abusive business practice does not require multi-party class procedures or force the defendant to arbitrate claims with a third party. It is bilateral. And the public injunction is a substantive statutory remedy authorized by California consumer law statutes, the Unfair Competition Law and the Consumer Legal Remedies Act, not a type of mass-joinder procedure, such as the class procedure, that can be waived.

The Blair and McGill decisions make sense. As a matter of California law, a consumer cannot be prohibited, pre-dispute, from pursuing claims or remedies under California's consumer statutes for the public's protection. If the law were otherwise, corporations would be empowered to institute a sweeping ban on consumer or employment claims through waivers contained in an arbitration agreement. This would eviscerate the entire body of law designed to protect workers and consumers.

Background

Paula Blair had entered into "rent-to-own" agreements with Rent-A-Center for an air conditioner in 2015 and then for a used Xbox a year later. Along with two other named plaintiffs, Blair filed a complaint, on behalf of a putative class, alleging that Rent-A-Center structured its rent-to-own pricing in violation of the Karnette Rental-Purchase Act, the Unfair Competition Law and the Consumer Legal Remedies Act. They sought a public injunctive to prohibit future violations, an accounting, and individualized notice to affected consumers.

Rent-A-Center moved to compel arbitration of Blair's claims based on an arbitration agreement for the air conditioner rental. The arbitration agreement contained a clause prohibiting "class collective, mass private attorney general or representative action" in arbitration. The district court examined the agreement and found that it violated the McGill Rule because it operated to waive Blair's right to pursue public injunctive relief in any forum. The agreement also contains a severance clause, which, by its own language, keeps in court any claims stricken from the arbitration agreement. Construing that clause, the district court compelled Blair's usury claim to arbitration, but kept the other claims in court. Rent-A-Center appealed.

Blair's Affirmance of the McGill Rule

The appeal in Blair turns on whether the McGill rule is preempted by the FAA. Because the 9th Circuit is not bound by the California Supreme Court's holding on federal law, the panel had to independently construe the interplay between the FAA and California law.

McGill involved a claim that Citibank's now-defunct credit protector add-on to its credit card policy violated California consumer laws. Citibank had sought to compel the claims to arbitration and prohibit the plaintiff from pursuing injunctive relief to prohibit the alleged unlawful business practice. The matter reached the California Supreme Court, where conservative California Justice Ming Chin, writing for a unanimous court, struck down Citibank's waiver to the extent that it prohibits public injunctive relief.

McGill reached several important holdings. First, the court found that a contractual waiver, whether tied to an arbitration clause or not, cannot be enforced to prohibit public injunctive relief. The court found that, because public injunctive relief is an unwaivable right for the public's benefit, a California consumer cannot be subject to a waiver that prohibits relief in any forum. McGill, 2 Cal. 5th at 956. In this way, the McGill holding can be distinguished from another California doctrine, the "Broughton-Cruz rule," that hold that public injunctive relief is "inarbitrable" due to the distinct differences between the court and arbitration (and which the 9th Circuit has held has been preempted by the FAA in Ferguson v. Corinthian Colleges, Inc., 733 F.3d 928 (9th Cir. 2013)). Id.

Second, the McGill Court concluded that the generally applicable defense to contract enforcement announced in its decision is not preempted by the FAA. This is because it falls within the FAA's saving clause that permits generally applicable contract defenses. McGill also cited numerous U.S. Supreme Court precedent, including a recent decision authored by Justice Antonin Scalia, that prohibits the enforcement of "any waiver of a party's right to pursue statutory remedies." Id. at 965 (quoting American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304, 2307 (2013)).

Third, McGill held that plaintiffs need not satisfy class procedures to pursue a public injunction. Instead, the court found nothing in the statute requires class procedure for injunctive relief, and thus, a single private plaintiff has the right to enjoin a future wrongful business practice that will injure the public. This is important because arbitration is a matter of consent, so that if a consumer wishes to pursue public injunctive relief in arbitration, he or she may still do without requiring the participation of third parties that have not contracted with the defendant or adhering to class procedures that the U.S. Supreme Court found to be incompatible with the fundamental attributes of arbitration.

In evaluating the merits of the appeal, the Blair panel affirmed the reasoning of McGill. It distinguished the McGill rule that authorizes a generally applicable contract defense under California law from other state rules recently struck down by the U.S. Supreme Court cases for specifically targeting arbitration. See Blair, 2019 DJDAR at 6015. The Blair panel also went deeper into FAA preemption, analyzing whether McGill "stands as an obstacle" to the objectives of the FAA, and concluding that it did not. Its reasoning relies on prior precedent finding waivers of representative claims under the Labor Code Private Attorneys General Act to be unenforceable. As with an arbitration of a PAGA representative claim, arbitration of a public injunctive relief claim is bilateral and does not interfere with arbitration's fundamental attributes of speed and efficiency. Id. at 6016. Finally, the Blair panel found that public injunction actions is not incompatible with arbitration due to the action's complexity or the potentially high-stakes. The panel observed that there is no need for "class-wide discovery" to obtain a public injunction and that arbitrators are able to grant relief in consumer actions just as they can in high-stakes, complex antitrust actions that are frequently arbitrated. Id. at 6017. A rule that prohibits waivers of public injunctive relief nonetheless avails the parties of the right to arbitrate those claims.

In the case before it, however, due to the specific language of Rent-A-Center's severance clause, the claims for public injunctive relief cannot be arbitrated and must remain in court. The Blair panel thus affirmed the district court's decision denying the motion to compel arbitration as to those consumer claims.

Looking Ahead

With Blair affirming McGill, there is no doubt that California consumers may pursue a bilateral action for public injunctive relief in some forum -- federal court, state court, or arbitration -- to prohibit an unlawful business practice affecting the general public, even if the plaintiff had signed an arbitration agreement prohibiting the right to pursue such relief.

So what's next? Rent-A-Center, which has found prior success in the U.S. Supreme Court on arbitration issues (see Rent-A-Center West v. Jackson, 561 U.S. 63 (2010)), can be expected to file a petition for writ of certiorari. But it's unclear whether the U.S. Supreme Court will want to take this issue up. Blair is a well-reasoned opinion that comports with longstanding U.S. Supreme Court case law, including the recent decision in Italian Colors that leaves little room for courts to enforce broad waivers of statutory rights and remedies. And the McGill Rule is exactly the kind of generally applicable contract defense that would fall squarely within the FAA's saving clause. Indeed, a decision striking down the McGill Rule would open the door to corporations including broad waivers of statutory rights in their arbitration agreement and thereby insulating themselves from liability altogether. States would be stripped of their police powers to enact workplace and consumer protection laws for their residents.

But it is a fool's errand to predict where this Supreme Court might go. Neither longstanding precedent nor the potential far-reaching consequences of changing the law have dissuaded the conservative majority from remaking the law in other areas. However, the limits set out in McGill and Blair are entirely compatible with the court's pro-arbitration jurisprudence, and the Supreme Court would be wise to leave these decisions in place. 