What’s In Your Arbitration Agreement?

California High Court Finds Another Exception to Enforcing Arbitration Agreements As Written

April 13, 2017

By Suzanne Steinke and Mazen Khatib

Many employers enter into pre-dispute arbitration agreements with their employees so that any future claims or disputes between the employer and the employee get resolved through binding arbitration, rather than a court of law. The United States Supreme Court has traditionally favored the enforcement of such arbitration agreements as written. This has included approving agreements that contain a waiver of the right to bring a class action in any forum, meaning that an employer and an employee must resolve all disputes in arbitration and on an individual, not class-wide, basis. This class action waiver is significant for employers because an employee is stopped from bringing any claim in court or arbitration to benefit and on behalf of any employees other than herself.

California courts have been reluctant to fully embrace pre-dispute arbitration agreements, even though they are generally required to follow U.S. Supreme Court pronouncements in this area. Although California’s highest court has finally accepted that class action waivers in arbitration agreements are enforceable, with its recent decision in McGill v. Citibank, it once again shows its willingness to find exceptions to avoid fully enforcing these agreements as written.

In McGill, the Court was faced with a consumer pre-dispute arbitration agreement which, as conceded by the parties, waived the right to seek, in any forum, “public injunctive relief.” Public injunctive relief is relief that is meant to stop unlawful acts from continuing in the future and is intended to primarily benefit the general public rather than the plaintiff singularly. The McGill plaintiff, a Citibank customer, had sought both individual relief and public injunctive relief for alleged violations of the Consumers Legal Remedies Act, the false advertising law, and the unfair competition law (“UCL”). The Court ruled that, unlike the pre-dispute waiver of class actions, which are now uniformly approved by the courts, the waiver in McGill was unenforceable as against California public policy because it sought to waive the plaintiff’s statutory right under the UCL and other laws to seek public injunction relief.  In other words, the Court distinguished the permissible waiver of class actions as only waiving the “procedure” of seeking in any forum monetary or other relief on behalf of others as a class action, whereas the McGill waiver sought to deny the plaintiff the “substantive” statutory right to seek in any forum a particular type of relief, i.e., public injunctive relief on behalf of the public at large. The Court framed its decision narrowly as prohibiting waiver of any statutory right to seek a public injunction in any forum and expressly declined to address whether claims for public injunctive relief could be decided in an arbitration forum, leaving that issue for another day.

The California Supreme Court’s ruling in McGill is important to employers even though the case concerns an arbitration agreement in the consumer, rather than employment, setting and even though the Court’s ruling hinges on the parties’ concession that the agreement resulted in a complete waiver of the right to seek public injunctive relief in any forum. Indeed, the language that created the impermissible waiver is likely very similar to language many employers have included in their pre-dispute arbitration agreements to ensure the permissible waiver of class actions in any forum. For example, the McGill plaintiff cited provisions such as “the arbitrator may award relief only on an individual (non-class, nonrepresentative) basis,” “[a]n award in arbitration shall determine the rights and obligations between the named parties only, and only in respect of the Claims in arbitration, and shall not have any bearing on the rights and obligations of any other person, or on the resolution of any other dispute,” and “neither you, we, nor any other person may pursue the Claims in arbitration as a class action, private attorney general action or other representative action,” as creating the waiver of public injunctive relief ultimately struck down by the Court.

This is not to say that the Court’s ruling means that every employment arbitration agreement that includes similar language to the agreement in McGill impermissibly waives the right to seek public injunction relief for alleged violation of statutes such as the UCL. Nonetheless, employers are advised to carefully review their arbitration agreements to ensure that any class action waiver language does not inadvertently support an unlawful waiver of public injunctive relief.

Ask MSK

Is the Court’s decision in McGill limited to consumer arbitration agreements?

No.  McGill held unlawful a waiver of the statutory
right to seek in any forum public injunctive relief pursuant to statutes such as the Unfair Competition Law, which benefits the public as a whole.  Since the UCL is frequently alleged in employment litigation, employers are well advised to assume McGill potentially will be applied to strike down similar waivers in the employment context.

Will employers still be able to enter into enforceable pre-dispute arbitration agreements with employees?

Yes, but employers should refrain from intentionally or inadvertently seeking waiver of employees’ rights to seek public injunctive relief in any forum.

What can employers do to limit the risk of a challenge to their arbitration agreements as impermissibly waiving the right to seek public injunctive relief?

Employers should review their arbitration agreements for the same or similar language as appeared in the McGill agreement and revise, as necessary.  Employers also should consider, if they do not already have one, including a severance clause in their arbitration agreements.  This type of clause authorizes a court or arbitrator to sever a provision deemed unlawful while leaving the remainder of the arbitration agreement intact.  In this way, the arbitration agreement is better protected from being found unenforceable as a whole when a single provision is found contrary to applicable law.

 

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