Thursday, September 16, 2021

FYI: 9th Cir Holds McGill Rule Did Not Bar Arbitration, Rejects Recent Contrary State Appellate Court Rulings

The U.S. Circuit Court of Appeals for the Ninth Circuit recently reversed a trial court's denial of a motion to compel arbitration under the Federal Arbitration Act (FAA) in a putative class action involving privacy and data-collection practices laws.


In so ruling, the Ninth Circuit held that, even though the named plaintiff sought "public injunctive relief" as one of its requested remedies, the California Supreme Court's ruling in McGill v. Citibank, N.A., 393 P.3d 85, 87 (Cal. 2007), "under which a contractual provision that waives the right to seek 'public injunctive relief' in all forums is unenforceable", did not apply.


A copy of the opinion is available at:  Link to Opinion


The named plaintiff brought a putative class action of California residents alleging supposed violations of various federal and state privacy and data-collection practices laws, and sought "liquated, statutory, and punitive damages; seven specified forms of 'statewide public injunctive relief'; and attorney's fees."  The defendant moved to compel arbitration under its agreement with the named plaintiff.


The trial court denied the defendant's motion, ruling that because the "complaint sought 'public injunctive relief' as one of its requested remedies, the complaint implicated California's McGill rule, under which an arbitration provision that waives the right to seek 'public injunctive relief' in all forums is unenforceable."


This appeal followed.


On appeal, the Ninth Circuit first rejected the defendant's arguments that the McGill rule was preempted by the FAA, noting its recent ruling in Blair v. Rent-A-Center, Inc., 928 F.3d 819 (9th Cir. 2019), in which the Court rejected this argument. 


Therefore, the remaining question on appeal was whether the defendant's enforcement of its arbitration provision violated the McGill rule.


The plaintiff argued that, "in addressing whether the McGill rule is implicated in this case, it is irrelevant whether his complaint 'actually includes a claim' for public injunctive relief."  The Ninth Circuit soundly rejected this argument, citing both the McGill ruling itself and its more recent progeny in the state and federal appellate courts.


Turning to the other arguments regarding the application of McGill, the Ninth Circuit noted that McGill arose from California Civil Code § 3513, which provides: "Any one may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement."  Because the consumer protection statutes at issue in McGill all "authorize injunctive relief that is primarily for the benefit of the general public," the McGill Court held that "any waiver of the right to request in any forum such public injunctive relief is invalid and unenforceable under California law."


However, the Ninth Circuit noted that the California Supreme Court in McGill emphasized three points:


-  "[P]ublic injunctive relief has the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public";


-   A "request for public injunctive relief does not constitute the pursuit of representative claims or relief on behalf of others, nor does it involve prosecuting actions on behalf of the general public" and


-  "[I]n contrast to private injunctive relief, which provides benefits to an individual plaintiff — or to a group of individuals similarly situated to the plaintiff, public injunctive relief involves diffuse benefits to the general public as a whole, and the general public fails to meet the class-action requirement of an ascertainable class."


Accordingly, the Ninth Circuit held, "public injunctive relief within the meaning of McGill is limited to forward-looking injunctions that seek to prevent future violations of law for the benefit of the general public as a whole, as opposed to a particular class of persons, and that do so without the need to consider the individual claims of any non-party."


As an example, the Court noted that "sort of injunctive relief sought in McGill itself, where the plaintiff sought an injunction against the use of false advertising to promote a credit protection plan," would plainly qualify as "public injunctive relief".


"By contrast," the Ninth Circuit explained, "when the injunctive relief being sought is for the benefit of a discrete class of persons, or would require consideration of the private rights and obligations of individual non-parties, it has been held to be private injunctive relief." 


In fact, the Court held that, under the plaintiff's argument, the FAA would preempt the McGill rule. 


"If California's McGill rule had sought to preserve, as non-waivable, the right to formally represent the claims of others, to seek retrospective relief for a particular class of persons, or to request relief that requires consideration of the individualized claims of non-parties, then such a rule would plainly 'interfere with the informal, bilateral nature of traditional consumer arbitration," which is impermissible under the FAA.


The Ninth Circuit declined to rely upon two recent opinions by California's Fourth District Court of Appeal in Maldonado v. Fast Auto Loans, Inc., 275 Cal. Rptr. 3d 82 (Cal. Ct. App. 2021, and Mejia v. DACM Inc., 54 Cal. App. 5th 691 (2020).  The Ninth Circuit concluded "that these decisions rested on such a patent misreading of California law that they would not be followed by the California Supreme Court."


Moreover, the Ninth Circuit held, "[b]y insisting that contracting parties may not waive a form of relief that is fundamentally incompatible with the sort of simplified procedures the FAA protects, the Mejia-Maldonado rule effectively bans parties from agreeing to arbitrate all of their disputes arising from such contracts. To say that such a rule is not preempted would flout Supreme Court authority" under its many rulings in favor of FAA preemption.


The Ninth Circuit concluded that the complaint at issue did not seek public injunctive relief.  Accordingly, the Court held that the McGill rule was not implicated, and the arbitration agreement should have been enforced.  The Appellate Court reversed the trial court's ruling, and remanded with instructions to grant the motion to compel arbitration.




Ralph T. Wutscher
Maurice Wutscher LLP
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