Monday, April 5, 2021

FYI: Cal App Ct (4th Dist) Upholds Denial of Motion to Compel Arbitration

The Court of Appeal of the State of California, Fourth Appellate District, recently affirmed a trial court's order denying the defendant's motion to compel arbitration.


In so ruling, the Court held that the plaintiffs' complaint and prayer for relief did not limit the requested remedies to only class members, but rather encompassed all consumers and members of the public, and that requiring consumers to waive their right to pursue public injunctive relief violates the rule described in McGill v. Citibank, N.A., 2 Cal.5th 945 (2017).


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


In a putative class action, the plaintiffs claimed that the defendant charged unconscionable interest rates on loans in violation of California Financial Code sections 22302 and 22303. The first amended complaint alleged (1) violations of California's Unfair Competition Law (UCL; Bus. & Prof. Code, § 17200 et seq.), and (2) violations of the Consumers Legal Remedies Act (CLRA; Civ. Code, § 1750 et seq.).


In their prayer for relief, the plaintiffs requested that the trial court certify the lawsuit as a class action, determine that the defendant violated consumer protection statutory claims, and issue "a temporary, preliminary and/or permanent order for injunctive relief requiring [the defendant] to: (i) cease charging an unlawful interest rate on its loans exceeding $2,500; (ii) and institute corrective advertising and provide written notice to the public of the unlawfully charged interest rate on prior loans[.]" The complaint also sought a disgorgement of the defendant's revenue to pay restitution to the class members.


The defendant filed a motion to compel arbitration and stay the action pursuant to an arbitration clause contained in the plaintiffs' loan agreements. One paragraph of the clause stated a party could reject the arbitration provision if he or she mailed a written rejection notice following specific instructions. Another one noted that the arbitration provision was governed by the Federal Arbitration Act (FAA) because the agreement involved interstate commerce.


Relevant to this appeal, paragraph 14(d) stated that the parties must arbitrate any claim (with a few exceptions) "that in any way arises from or relates to this Agreement or the Motor Vehicle securing this Agreement." Paragraph 14(h), titled "Class Action Waiver" provided that the consumer had no right to participate in or join "a class action, private attorney general action, or other representative action[.]"


Paragraph 14(h) also contained a "poison pill" provision stating: "[t]he parties acknowledge that the Class Action Waiver is material and essential to the arbitration of any disputes between them and is non-severable from this Arbitration Provision. If the Class Action Waiver is limited, voided or found unenforceable, then this Arbitration Provision (except for this sentence) shall be null and void with respect to such proceedings, subject to the right to appeal the limitation or invalidation of the Class Action Waiver. The parties acknowledge and agree that under no circumstances will a class action be arbitrated."


Additionally, paragraph 14(n), titled "Severability and Survival" provided: "[i]f any part of this Arbitration Provision, other than the Class Action Waiver, is deemed or found to be unenforceable for any reason, the remainder shall be enforceable."


In short, the arbitration clause required the plaintiffs to agree to individual, non-class arbitration.


The defendant asserted that the arbitration clause was broadly written to cover all of the plaintiffs' claims. In addition, the defendant urged the trial court to enforce the agreement's Class Waiver provision, which requires arbitration to only take place on an individual basis.


The trial court denied the motion on the grounds that the Class Waiver provision was invalid and unenforceable because it required consumers to waive their right to pursue public injunctive relief, a rule described in McGill v. Citibank, N.A., (2017) 2 Cal.5th 945. Therefore, the entire arbitration clause was deemed invalid and unenforceable because the "poison pill" provision did not allow the Class Waiver provision to be severed. On appeal, the defendant argued that the "McGill rule" did not apply, but even if it did, other claims were subject to arbitration. Alternatively, the defendant contended that the McGill rule was preempted by the Federal Arbitration Act ("FAA").


The Court of Appeal of the State of California, Fourth Appellate District (Fourth District), noted that, in McGill, the California Supreme Court held that the arbitration provision in that case was "invalid and unenforceable under California law" because "it purport[ed] to waive the plaintiff's statutory right to seek public injunctive relief." McGill, 2 Cal. 5th at p. 961. In explaining its conclusion, the California Supreme Court cited Civil Code section 3513, which provides, in pertinent part, that "a law established for a public reason cannot be contravened by a private agreement." Id. at p. 962. In other words, a statutory right created to serve a public purpose is unwaivable.


In Mejia v. DACM Inc., 54 Cal.App.5th 691 (2020), the Fourth District applied the McGill rule. Mejia, supra, 54 Cal.App.5th at pp. 702-703. The arbitration terms discussed in Mejia were similarly broad to those found in the arbitration clause here, with the plaintiff agreeing to arbitrate any claims arising out of the credit agreement. Id.


The arbitration clause in Mejia also contained a class action waiver that "specifically barred arbitration of all class, representative, or private attorney general claims[.]" Id. As in this case, the class waiver paragraph contained a "'poison pill' provision" stating: "[i]f any portion of this Arbitration Provision other than [the Class Waiver provision] is deemed invalid or unenforceable, the remaining portions of this Arbitration Provision shall nevertheless remain valid and in force. If an arbitration is brought on a class, representative, or collective basis, and the limitations on such proceedings in [the Class Waiver provision] are finally adjudicated . . . to be unenforceable, then no arbitration shall be had." (Italics added.) Id. at p. 695.


The defendant in Mejia moved to compel arbitration, arguing that the plaintiff was seeking private injunctive relief. Id. at pp. 694-695. The defendant maintained that the plaintiff was not seeking to prevent future harm to the general public, but only to benefit members of his class of similarly situated individuals. Id. at p. 702. The Mejia court disagreed, pointing out that the plaintiff sought an injunction forcing the defendant "to cease selling motor vehicles in the state of California without first providing the consumer with all disclosures mandated by Civil Code [section] 2982 in a single document." Id. at p. 703.


The Mejia court noted that McGill defined "public injunctive relief" as "relief that by and large benefits the general public and that benefits the plaintiff, if at all, only incidentally and/or as a member of the general public." Id. Accordingly, the court held that the plaintiff's prayer for relief clearly meets this definition because the plaintiff "seeks to enjoin future violations of California's consumer protection statutes, relief oriented to and for the benefit of the general public." Id.


In the present case, the defendant argued that even though the plaintiffs requested a public injunction in the complaint, the relief sought is actually private because it will, at best, only benefit the plaintiffs and a discreet, narrowly-defined group of other customers. The Fourth District disagreed because the plaintiffs specifically stated that the injunctive relief should require the defendant to stop charging unlawful interest rates and adopt "corrective advertising."


Therefore, the Appellate Court held that the plaintiffs' complaint and prayer did not limit the requested remedies for only some class members, but rather encompassed all consumers and members of the public.


Moreover, the Fourth District concluded that an injunction under the CLRA against the defendant's unlawful practices would not directly benefit the plaintiffs because they had already been harmed and were already aware of the misconduct. Any benefit to the plaintiffs would be incidental to the "general public benefit of enjoining such a practice." McGill, supra, 2 Cal.5th at p. 955. Therefore, the Appellate Court agreed with the trial court on this issue, and held that the Class Waiver provision violated the McGill rule.


The defendant also asserted that the trial court erred in declaring the entire arbitration provision unenforceable simply because the Class Waiver provision was invalid. The defendant argued that the "subject to the right to appeal" language in the "poison pill" provision meant that the arbitration agreement would not become void until an appeal was taken from an adverse ruling, and that appeal did not succeed in overturning the trial court's ruling. Alternatively, the defendant maintained that any ambiguity in the contractual language must be construed in favor of arbitration.


The Fourth District concluded that the defendant's interpretation of the "poison pill" provision is incorrect and moot.


First, the Appellate Court pointed out that an appeal has now taken place and the appellate court was affirming the trial court's ruling. Therefore, this argument was no longer relevant even under the defendant's interpretation of the "poison pill" provision.


Second, the Fourth District interpreted the "subject to the right to appeal" language, when read in context, as simply acknowledging the defendant's right to appeal the decision and enforce the Class Waiver limitations if successful on appeal. Thus, the Court held that the "poison pill" provision prevented the Class Waiver provision from being severed from the rest of the arbitration clause.


The defendant lastly argued that the FAA preempts McGill, stating that there are two petitions currently before the US Supreme Court that make this same argument. However, the Fourth District noted that the Supreme Court of the United States has already denied these petitions, and that it is bound to follow the precedent set by the California Supreme Court in McGill.


Accordingly, the Fourth District concluded that the arbitration clause was invalid because the Class Waiver provision violated the McGill rule, and affirmed the trial court's order denying the defendant's motion to compel arbitration.




Ralph T. Wutscher
Maurice Wutscher LLP
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