The California Supreme Court ruled unanimously on Thursday that a provision in an arbitration agreement is invalid and unenforceable if it tries to waive a consumer’s right to stop future violations of consumer protection laws.

The court's decision in McGill v. Citibank calls into question the validity under California law of provisions used in many consumer contracts throughout the U.S. It also sets up another potential showdown between California and the U.S. Supreme Court over whether federal law overrides California statute in the field of arbitration.

Supreme court building exterior in Washington DC, USA.
A California state decision sets up another potential showdown between the state and the U.S. Supreme Court over whether federal law overrides California statute in the field of arbitration.

Associate Justice Ming Chin wrote in a 24-page opinion that California has long maintained a public policy that “a law established for a public reason cannot be contravened by a private agreement.”

The court also held that California’s policy is not overridden by the Federal Arbitration Act but instead falls under an exception for state laws that applies to all agreements, not just arbitration agreements.

The case began in 2011, when consumer Sharon McGill filed a class action lawsuit against Citibank for allegedly violating California consumer protection laws in its marketing of a credit protection plan. McGill's original credit card agreement did not contain an arbitration provision but Citibank later amended the agreement. McGill declined twice to opt out of arbitration.

The court held that a provision in McGill's arbitration agreement waiving her right to seek an injunction to prevent future violations of a statute — which would benefit the public generally — violates long-standing public policy and is invalid and unenforceable under California law.

Some of the language at issue in McGill's arbitration agreement is: "Claims must be brought in the name of an individual person or entity and must proceed on an individual (non-class, non-representative) basis. The arbitrator will not reward relief for or against anyone who is not a party."

Fredrick S. Levin, a partner with Buckley Sander, said the practical impact of the ruling is that financial companies will need to look at whether arbitration agreements contain language that is similar to what was found in McGill's case.

"Parties seeking to enforce their arbitration agreements in California will need to consider carefully whether the language of their agreement precludes resolution of public injunctive relief claims in any forum," Levin said.

The ruling also eliminated California class certification requirements for claims seeking so-called public injunctive relief, which creates an opening for the expansion of litigation, Levin said.

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