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Narrow Citibank arbitration ruling opens door to Supreme Court

Narrow Citibank arbitration ruling opens door to Supreme Court

A unanimous California Supreme Court ruling that overturns a Citibank N.A. arbitration provision in a consumer case is narrowly focused but presents an issue that may ultimately be considered by the U.S. Supreme Court, experts say.

An arbitration agreement that waives the right to injunctive relief in cases where it is intended to prohibit unlawful acts that threaten injury to the general public is “contrary to California public policy and is thus unenforceable under California law,” said the California Supreme Court in its 7-0 ruling on April 6 in Sharon McGill v. Citibank N.A.

Citibank N.A. is the consumer banking arm of Citigroup Inc.

“We further hold that Federal Arbitration Act does not pre-empt this rule of California law or require enforcement of the waiver provision,” said the court, in reversing a California Court of Appeal ruling in the case.

Ms. McGill had opened a credit card account with defendant Citibank N.A. and purchased a “credit protector plan” under which Citibank agreed to defer or to credit certain amounts to her credit card account when a qualifying event, such as unemployment, occurred. 

Citibank charged a monthly premium for the plan based on the amount of Ms. McGill’s credit card balance, according to the ruling. It sent her a copy of her account agreement that included arbitration provisions.

In 2011, Ms. McGill filed a class action based on Citibank’s marketing of the plan and the handling of a claim she made when she lost her job in 2008. As part of the litigation, she requested an injunction prohibiting Citibank from continuing to engage in its “allegedly illegal and deceptive practices,” which was the focus of the court’s ruling.

The Citibank arbitration provision “purports to preclude her from seeking public injunctive relief in any forum,” said the ruling. The “arbitration provision here at issue is invalid and unenforceable under state law insofar as it purports to waive McGill’s statutory right to seek such relief,” said the ruling. The case was remanded for further proceedings.

The Citibank arbitration provision, which “foreclosed a plaintiff’s right to seek public injunctive relief in any forum,” including arbitration or any court, “was so broad” the court found it to be unenforceable, said Molly Melcher, an associate with Fenwick & West L.L.P. in San Francisco. She added that the ruling is “only going to be applicable in certain situations.”

“The biggest takeaway from the decision is what the high court did was carve out in California a narrow exception” to the U.S. Supreme Court’s 2011 decision in AT&T Mobility L.L.C. v. Vincent and Liza Concepcion and its 2015 ruling in American Express Co. et al. v. Italian Colors Restaurant so that consumers “cannot sign away their right to seek injunctive relief on behalf of the public under California’s consumer protection statutes in at least some forum,” said Josh Thomas Foust, counsel with Crowell & Moring L.L.P. in San Francisco.

The Concepcion ruling said an arbitration agreement can contain a class action waiver, while Italian Colors held that federal arbitration law does not permit courts to invalidate contractual waivers of class arbitration agreements.

California courts historically have “been hostile to arbitration agreements,” said Lewis S. Wiener, a partner with Eversheds Sutherland (US) L.L.P. in Washington.

This ruling impacts only cases involving a “very special kind of injunctive relief,” said Mr. Wiener. “It’s not something that people in New Jersey” will find applicable, he said.

“It’s a very narrow construction of a certain type of relief applied in a certain type of case under this very specific statute in California that can be carved out for the general rule enforcing mandatory arbitration provisions,” he said.

There will probably be, though, some effort to apply this ruling elsewhere, although it will be like “trying to thread the needle using a bow and arrow from hundreds of miles away” and is unlikely to be successful, Mr. Wiener said.

“The ruling is an attempt by the (California) Supreme Court to sidestep an issue that has been percolating in the (9th U.S. Circuit Court of Appeals) and other courts,” said Michael J. Stortz, a partner with Drinker Biddle & Reath L.L.P. in San Francisco.

“The issue is whether states can prohibit arbitration of claims for injunctive relief, and the California Supreme Court avoided that question and issued a ruling on a narrower issue regarding whether consumers can waive claims for public injunctive relief,” he said. 

The U.S. Supreme Court may be asked to consider the case. The California Supreme Court ruling has “keyed up the issue pretty well for the (U.S.) Supreme Court’s review,” said Mr. Foust. It has “set the stage for the Supreme Court to come in with its opinion.”

A Citibank spokesman could not be reached for comment as to whether the company planned to appeal.
Experts also note the ruling is not applicable to employment cases, where arbitration is frequently an issue.

“I do not think the ruling will have a big impact on the enforceability of employment arbitration agreements,” said Michael W. Kelly, a partner with Squire Patton Boggs in San Francisco.

“It would be limited in that respect,” agreed David D. Kadue, a partner with Seyfarth Shaw L.L.P. in Los Angeles.




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