California Arbitration Decision Highlights McGill Risk

Financial Services Law

A recent arbitration decision by a federal district court in San Diego highlights the risk posed by the California Supreme Court’s 2017 decision in McGill v. Citibank. McGill held that California public policy precludes the enforcement of arbitration provisions that prevent consumers from pursuing claims for “public” injunctive relief in any forum, i.e., in court or in arbitration. The case also held that the Federal Arbitration Act (FAA) does not preempt such a decision.

On June 10, 2019, the U.S. District Court, Southern District of California denied a motion to compel arbitration in Delisle v. Speedy Cash, Case No. 3:18-CV-2042-GPC-RBB (Curiel, J.), holding that the arbitration provision at issue was unconscionable because it prevented the plaintiffs from seeking public injunctive relief. Specifically, the arbitration agreement prohibited the plaintiffs from “act[ing] as a private attorney general in court or in arbitration,” and from “join[ing] or consolidate[ing] claim(s) involving you with claims involving any other person.” It further held that the severability clause in the arbitration provision rendered the entire arbitration provision null and void if the private attorney general language is invalidated. Notably, the court refused to enforce a Kansas choice-of-law provision in the loan agreement, finding that California has a fundamental public policy in favor of allowing public injunctive relief claims, and a materially greater interest than Kansas in applying its own law to protect California consumers.

McGill was not appealed to the United States Supreme Court, which may well reject the McGill rule for the same reasons it repeatedly has found that the FAA preempts judicial attempts to invalidate class action waivers. In February, the U.S. Court of Appeals, Ninth Circuit heard oral argument in three appeals raising this very issue; a decision in those cases is expected soon. In the meantime, however, companies doing business with California consumers would be well advised to ensure that their arbitration provisions are not vulnerable to the result in Delisle. Specifically, arbitration provisions should provide that, if a court decides that a claim for public injunctive relief cannot be waived and all appeals from that decision are exhausted, then the claim for public injunctive relief should be stayed pending arbitration of the remaining claims, and then decided in court. By employing such language, companies can ensure enforcement of the balance of their arbitration provision, including the class action waiver, while retaining the ability to appeal any adverse decision on the public injunctive relief claim.

To read the opinion in Delisle v. Speedy Cash, click here.