Ninth Circuit Holds FAA Does Not Preempt California’s McGill Rule

Earlier this year, we reported on the pendency of several Ninth Circuit appeals concerning the enforceability of consumer arbitration agreements with respect to claims for “public” injunctive relief. On June 28, 2019, in Blair v. Rent-A-Center, Inc., the court held that the Federal Arbitration Act (FAA) does not preempt the California Supreme Court’s holding in McGill v. Citibank that an arbitration provision precluding a consumer from pursuing claims for “public injunctive relief” in any forum, i.e., in court or in arbitration, is unenforceable under California law.

The Ninth Circuit also issued two other unreported opinions yesterday in which holdings on the FAA preemption issue were identical to Rent-A-Center. The stage is now set for possible review of this important issue by the Ninth Circuit en banc or the U.S. Supreme Court. 

Relying upon McGill, class action plaintiffs increasingly have been seeking to circumvent class action waivers by filing lawsuits in California, expressly seeking public injunctive relief, and arguing that the entire arbitration agreement is unenforceable under McGill, or that the request for public injunctive relief must proceed in court. With limited exceptions, California district courts have largely followed McGill and either denied motions to compel arbitration or held that the public injunctive relief claim is not subject to arbitration. The decision in Rent-A-Center gives plaintiffs’ lawyers in California the green light to continue trying to side-step arbitration provisions with class action waivers by asserting claims for public injunctive relief.  

In Rent-A-Center, plaintiffs brought a putative class action alleging that defendants charged excessive prices for its rent-to-own plans for household items. Plaintiffs sued under California statutes that regulate rent-to-own agreements and sought a public injunction on behalf of the people of California to enjoin future violations of these laws and to provide an accounting of monies obtained from California consumers. The district court denied Rent-A-Center’s motion to compel individual arbitration on the ground that it waived plaintiffs’ right to seek public injunctive relief in any forum and therefore violated McGill. The Ninth Circuit has now affirmed that decision.

The Ninth Circuit ruled that the FAA does not preempt the McGill rule because the rule applies equally to arbitration and non-arbitration agreements and, therefore, does not single out arbitration for special treatment or prohibit outright the arbitration of a particular type of claim. Moreover, according to the Ninth Circuit, the rule does not interfere with the fundamental attributes of arbitration because the arbitration of a public injunctive relief claim, unlike class-wide arbitration, does not require formalities inconsistent with arbitration.

Nevertheless, if the defendants seek en banc review or review by the U.S. Supreme Court, a compelling case could be made that the FAA does preempt the McGill rule given the conflict between McGill and the long line of U.S. Supreme Court cases favoring arbitration. Those cases include AT&T Mobility, LLC v. Concepcion, in which the Court held that class action waivers in consumer arbitration agreements are valid under the FAA, notwithstanding California law holding such waivers to be invalid and against public policy. 

In Concepcion, the Court emphasized that the “overarching principle” of the FAA is to ensure that arbitration agreements are enforced according to their terms. It further instructed that parties are free to limit both the issues subject to arbitration and with whom a party will arbitrate its disputes. A state court declaration that the right to pursue public injunctive relief is non-waivable directly interferes with an agreement by the parties to resolve injunction claims in arbitration on an individual, non-public basis. It is tantamount to a state purporting to exclude particular disputes from the reach of the FAA, which is clearly preempted by the FAA as the U.S. Supreme Court has held on multiple occasions.

Although the Ninth Circuit rejected these arguments in Rent-A-Center, the U.S. Supreme Court may be more receptive, since it held in Concepcion that “nothing in [the FAA] suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” 

Ballard Spahr’s Consumer Financial Services Group pioneered the use of pre-dispute arbitration provisions in consumer financial services agreements. It is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.  In particular, it has drafted language for arbitration agreements designed to help blunt the impact of McGill.

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