Could California’s McGill Problem Be Solved on Appeal?

Financial Services Law

The battle over arbitration in California continues, with two defendants in a recent U.S. Court of Appeals, Ninth Circuit decision appealing the court’s reaffirmation of McGill v. Citibank.

In its 2017 decision in McGill, the California Supreme Court held that an agreement preventing a party from seeking public injunctive relief in any forum is unenforceable under state law, notwithstanding the Federal Arbitration Act (FAA) and ample Supreme Court case law holding that parties properly may restrict the scope of an arbitration to the parties’ individual claims. Now, defendants in the recent Blair v. Rent-A-Center case—which reaffirmed the McGill decision—are asking the court to reconsider.

What happened

In June, a three-judge panel of the Ninth Circuit affirmed a denial of a motion to compel arbitration, relying on McGill. The case involved Paula Blair and two other California residents, who filed suit against Rent-A-Center, alleging that the company structured its rent-to-own agreements in violation of state law.

Specifically, the plaintiffs brought claims under the state’s Karnette Rental-Purchase Act, Unfair Competition Law (UCL), Consumers Legal Remedies Act (CLRA) and anti-usury law.

As a remedy, the plaintiffs requested a “public injunction” on behalf of state residents to enjoin future violations and to require that Rent-A-Center provide an accounting of monies obtained from California consumers, as well as individualized notice to those consumers of their statutory rights.

Rent-A-Center responded with a motion to compel arbitration based on a clause found in Blair’s 2015 rent-to-own agreement for an air conditioner. The provision mandated that arbitration be conducted on an individual basis and that neither party could seek “relief that would affect [Rent-A-Center] account holders other than you.”

Relying on McGill, the district court denied the motion to compel. The arbitration agreement violated the McGill rule because it waived Blair’s right to seek public injunctive relief in any forum, the court held. The court also ruled that the McGill rule was not pre-empted by the FAA.

Rent-A-Center appealed, but the Ninth Circuit affirmed. In McGill, the California Supreme Court explicitly found that public injunctive relief available under the UCL and CLRA was “[b]y definition … primarily ‘for the benefit of the general public,’” and therefore, the waiver in Blair’s contract was invalid and unenforceable under state law, the court said.

The panel received briefing and heard argument in two additional cases raising the same question as Blair: McArdle v. AT&T Mobility LLC and Tillage v. Comcast Corp. Defendants in both cases filed motions for panel rehearing and rehearing by the en banc Ninth Circuit.

In its motion, Comcast urged the court to “correct the panel’s decision now,” as it conflicts with “many Supreme Court decisions,” the defendant contended, and cannot be reconciled with the justices’ recent ruling in Epic Systems Corp. v. Lewis.

Multiple amicus briefs have already been filed in support of the defendants, from organizations including the Chamber of Commerce of the United States, National Association of Manufacturers, CTIA – The Wireless Association and Washington Legal Foundation.

For example, the Chamber of Commerce argued that the panel decision was “plainly inconsistent” with Supreme Court precedent including AT&T Mobility, LLC v. Concepcion and Epic Systems Corp., because “the McGill rule effectively bars traditional, bilateral agreements and thus interferes with the ‘fundamental attributes of individualized arbitration,’” according to the amicus brief.

“If left uncorrected, the panel decision would nullify millions of consumer arbitration agreements in California, and more broadly,” the Chamber of Commerce wrote. “This is because nearly every consumer claim under California law can include a request for a public injunction. If this Court allows the panel decision to stand, it will undermine the [FAA’s] ‘liberal federal policy favoring arbitration.’”

To read Comcast’s motion for rehearing, click here.

To read the Chamber of Commerce amicus brief, click here.

Why it matters

The battle over arbitration generally—and McGill specifically—rages on. While the parties in Blair indicated that they are close to reaching a settlement agreement, the defendants in the other two cases are moving forward with their appellate efforts, asking for either a panel rehearing or rehearing by the en banc Ninth Circuit. Should those motions be denied, the defendants could take the next step and file a writ of certiorari to the Supreme Court, setting up the possibility of a solution to the problem of McGill.