Federal Arbitration Act Preempts State Arbitration Rule, California Court of Appeal Holds

The Federal Arbitration Act (“FAA”) preempts California’s Broughton-Cruz rule, which states arbitration agreements for injunctive relief claims under the state unfair competition and false advertising laws are against public policy and invalid, the California Court of Appeal has held in an insurance consumer class action, allowing arbitration to proceed. McGill v. Citibank, N.A., No. G049838 (Cal. Ct. App. Dec. 18, 2014).

This decision calls into question the continued viability of California’s Broughton-Cruz rule, which was established by the California Supreme Court in Broughton v. Cigna Healthplans, 21 Cal. 4th 1066 (Cal. 1999), and Cruz v. PacifiCare Health Systems, Inc., 30 Cal. 4th 303 (Cal. 2003).

Applying a narrow exclusion for representative claims under the state Labor Code Private Attorneys General Act of 2004 (“PAGA”), the Court of Appeal also ruled the plaintiff’s claims cannot be saved from arbitration by the California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (Cal. 2014), which held waivers of representative actions in arbitration agreements invalid. The Court ruled an arbitration agreement covering the plaintiff’s claims under the state unfair competition and false advertising laws are enforceable.

Sharon McGill sued Citibank, N.A. for violations of the California unfair competition law (“UCL”), false advertising law (“FAL”), and Consumer Legal Remedies Act (“CLRA”) in connection with a credit insurance plan protecting her credit card account. McGill sought monetary damages, restitution, and injunctive relief. The company petitioned the trial court to compel arbitration of her claims based on a broad arbitration provision in her account agreement. The trial court granted the petition with respect to McGill’s claims for damages and restitution, but denied the petition on injunctive relief claims under the Broughton-Cruz rule. The company appealed.

The U.S. Supreme Court has held that arbitration agreements are enforced according to their terms, in the same manner as other contracts. AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). On whether the Federal Arbitration Act prohibited California’s rule conditioning the enforceability of certain consumer arbitration agreements on the availability of class-wide arbitration procedures set forth in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), the U.S. Supreme Court found that, although the FAA’s savings clause preserved generally applicable contract defenses, “nothing in it suggests an intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.” On this basis, it overruled Discover Bank as preempted because the rule interfered with the FAA’s overarching purpose: “to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.”

In another case, Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (Cal. 2014), the California Supreme Court upheld the validity of class action waivers in employment arbitration agreements, overruling its earlier decision (Gentry v. Superior Court, 42 Cal. 4th 443 (2007)) as preempted by the FAA and the U.S. Supreme Court’s decision in Concepcion. However, the California court also ruled that employers could not require waivers of...