On The Case

U.S. Supreme Court allows Calif. consumers to evade arbitration due to injunctive claims

(Reuters) - The U.S. Supreme Court has given its blessing, at least for now, to a tactic that the U.S. Chamber of Commerce has described as “a road map marked with an easy-to-follow path” for California consumers to evade mandatory arbitration with corporations.

The justices on Monday declined to grant petitions by AT&T and Comcast for review of a 2019 ruling by the 9th U.S. Circuit Court of Appeals, which said companies cannot enforce mandatory arbitration provisions requiring consumers to waive their right to seek a public injunction. The 9th Circuit decision applied California Supreme Court’s so-called McGill rule, from 2017’s McGill v. Citibank (2 Cal.5th 945), that the Federal Arbitration Act does not preempt California public policy favoring the right to seek injunctive relief.

Under the McGill rule, companies cannot require consumers to waive the right to seek a public injunction, although the rule does not specify whether plaintiffs must sue or arbitrate. AT&T and Comcast purported to require waivers in arbitration provisions that were non-severable.

The companies’ veteran Supreme Court counsel – Andrew Pincus of Mayer Brown for AT&T and Mark Perry of Gibson Dunn & Crutcher for Comcast – argued that the McGill rule is just another improper attempt by California to undermine U.S. Supreme Court precedent establishing the power and reach of the FAA. But we needn’t spend much time today on the companies’ legal reasons for why the Supreme Court should take their cases, since those arguments failed to persuade the justices.

I’m interested instead in their warnings – and those of the Chamber of Commerce, which was among the business lobby amici that submitted briefs backing the companies’ request for review – about how consumers and their lawyers can leverage their right to go to court to seek injunctions. The Chamber, as I mentioned, is of the view that the 9th Circuit has basically provided consumers with a how-to guide for eviscerating mandatory consumer arbitration. And if those instructions weren’t entirely clear before the Chamber filed its brief, they certainly should be now, thanks to the brief’s delineation of just how consumers’ lawyers can capitalize on class actions seeking injunctions.

I should first say that Public Citizen’s Scott Nelson, who was counsel of record for the plaintiffs opposing both the AT&T and Comcast petitions, argued in the consumers’ briefs that the companies are exaggerating the implications of the 9th Circuit’s decision and, indeed, the California Supreme Court’s McGill rule. The rule only gives consumers a right to seek injunctions, Nelson argued in the AT&T opposition brief. Companies can still mandate arbitration of individual disputes – and can even require individual arbitrations to take place before consumers can go to court for an injunction. Or, Nelson said, companies can allow consumers to arbitrate claims for a public injunction.

AT&T (and Comcast, according to Public Citizen's brief opposing its petition for review), required consumers to sign arbitration provisions in which the restriction on injunctive relief could not be severed from the rest of the clause. Other companies, Nelson argued, redrafted their arbitration provisions after California adopted the McGill rule to distinguish between public injunctions, which can’t be forced into arbitration, and individual claims, which must still be arbitrated.

So take the doomsday warnings of AT&T, Comcast and the Chamber with a grain of salt. But they contend that the McGill rule will eviscerate mandatory consumer arbitration. A public injunction claim is akin to a class action claim for injunctive relief, Comcast said. It’s inevitable, the company said, that consumers who would otherwise have to arbitrate their cases individually will now bring claims for public injunctions. “The practical effect of the McGill rule is to provide enterprising plaintiffs and their lawyers with a clear route for circumventing this court’s holdings,” AT&T argued, “thereby disrupting tens of millions of arbitration agreements in California.”

In fact, the Chamber warned, companies may ditch arbitration altogether if they have to litigate these public injunction claims regardless of mandatory arbitration provisions with consumers. “Any cost savings from individual arbitration will be dwarfed by the additional expense of defending against a public injunction and the risks of an erroneous public injunction that cannot be corrected on appeal,” wrote the Chamber’s counsel of record, Joseph Palmore of Morrison & Foerster. Companies will also now face the expense of rewriting arbitration contracts to acknowledge the exception in California for public injunction claims, the Chamber said. That’s another cost that may lead some businesses just to abandon arbitration altogether.

“Plaintiffs and their lawyers will use public-injunction claims to gain undue leverage over defendants, and California will likely acquiesce in those efforts,” the Chamber wrote. “This is not speculation — plaintiffs’ attorneys are already exploiting these decisions by adding claims for public-injunctive relief to evade arbitration agreements their clients agreed to.”

Plaintiffs’ lawyers are ordinarily accustomed to attempting to prove the Chamber wrong. But in this instance, they just might want to prove the business lobby correct.

This article has been corrected. A previous version incorrectly said the rule requires public injunction claims to be litigated in court.