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Calif. App. Court (4th Dist) Rules Arbitration Clause Invalid Due to Prohibition on Injunctive Relief

The Court of Appeals of the State of California, Fourth Appellate District, recently held that an arbitration provision contained in a credit card agreement was unenforceable because it sought to bar a customer from pursuing “in any forum” his claim for a public injunction.

A copy of the opinion in Mejia v. DACM Inc. is available at:  Link to Opinion.

In May 2017 a consumer purchased a used motorcycle in part by using a credit card obtained through the motorcycle dealership. The credit application contained an arbitration provision providing any party acting alone could “require that the sole and exclusive forum and remedy for resolution of a Claim be final and binding arbitration…”

The arbitration agreement also contained a “poison pill” provision which provided: “If any portion of this Arbitration Provision other than section (f) is deemed invalid or unenforceable, the remaining portions of this Arbitration Provision shall nevertheless remain valid and in force. If an arbitration is brought on a class, representative, or collective basis, and the limitations on such proceedings in section (f) are finally adjudicated pursuant to the last sentence of section (f) to be unenforceable, then no arbitration shall be had.”

Finally, the credit card agreement also contained a choice-of-law provision providing the agreement was “governed by applicable federal law and by Utah law.”

Thereafter, the consumer filed a complaint against the dealership on behalf of himself and other similarly situated consumers alleging the dealership “violated and continues to violate” the California Rees-Levering Automobile Sales Finance Act.

As you may recall, the California Rees-Levering Automobile Sales Finance Act regulates conditional sales contracts for motor vehicles, among other things. The Act also contains a “single document rule” which “requires motor vehicle dealers in transactions involving the financing of motor vehicles to state in a single document all the agreements concerning the total cost and terms of payment, including the terms of financing as required by Civil Code section 2981.9.”

The consumer’s complaint alleged the dealership was deceptively attempting to make transactions appear to be cash purchases, thus exempt from Rees-Levering, through use of the dealership credit card.

Based on the arbitration clause in the credit card agreement, the dealership moved to compel arbitration and to dismiss or stay the case pending completion of the arbitration.

The consumer opposed the motion arguing that the arbitration provision was unenforceable under McGill v. Citibank, N.A. (2017) 2 Cal.5th 945 because it purports to waive the consumer’s right to seek a public injunction “in any forum.”

In McGill, the California Supreme Court concluded, “the waiver in a predispute arbitration agreement of the right to seek public injunctive relief under these statutes would seriously compromise the public purposes the statutes were intended to serve. Thus, insofar as the arbitration provision here purports to waive McGill’s right to request in any forum such public injunctive relief, it is invalid and unenforceable under California law.”  Accordingly, the California Supreme Court ruled that an arbitration provision was “invalid and unenforceable under California law” because “it purports to waive McGill’s statutory right to seek [public injunctive] relief.”

The trial court agreed with the consumer that the arbitration provision was unenforceable under McGill and the dealership appealed.

On appeal, the dealership first argued that McGill did not apply due to the choice-of-law provision in the contract which provided that Utah law, rather than California law, governs the dispute.

The Court of Appeals acknowledged that if a party seeking to enforce choice-of-law meets the burden of proving a substantial relationship, “the parties’ choice generally will be enforced unless the other side can establish both that the chosen law is contrary to a fundamental policy of California and that California has a materially greater interest in the determination of the particular issue.” Washington Mutual Bank v. Superior Court (2001) 24 Cal.4th 906, 917.

The Court of Appeals found that while a substantial relationship was established through the business’s headquarters in Utah, it also noted that Utah law was contrary to a fundamental policy of California as “Utah does not permit courts to invalidate arbitration clauses that waive public injunctive relief in any forum.”

Consequently, applying Utah law would conflict with California’s materially greater interest in protecting the consumer’s right to seek public injunctive relief from the dealership’s allegedly illegal practices.

Accordingly, the Court of Appeals held that the trial court properly applied McGill.

Next, the dealership argued that if California law applies, the arbitration provision “does not run afoul of McGill” because the consumer does not seek a public injunction, but rather an injunction to benefit only a narrow group of the dealership’s customers.

The Court of Appeals rejected this argument finding that the consumer sought an injunction forcing the dealership to cease “selling motor vehicles in the state of California without first providing the consumer with all disclosures mandated by Civil Code [section] 2982 in a single document.” The Court held this fit the definition of “public injunctive relief” in McGill which was defined as “injunctive relief that has the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public.” Accordingly, the Court of Appeals found no merit in the dealership’s argument.

The dealership next argued the arbitration clause is not unenforceable under McGill because the provision does not prevent a plaintiff from seeking public injunctive relief in all forums. The dealership claimed the arbitration clause has an implied exception for a claim for a public injunction which allows the consumer to pursue his claim for public injunction in court after arbitration of all arbitrable claims.

The Court of Appeals found that the purported implied exception for a public injunction directly conflicts with the plain text of the arbitration provision and the clear intent expressed in that text. Specifically, the text of the “poison pill” provision makes clear the parties do not intend to arbitrate “other claims” if the “limitations” on the arbitration of “class, representative [and] collective” claims are unenforceable.

The dealership’s final argument, presented only to preserve it for review, was that the arbitration provision was unenforceable under McGill because the Federal Arbitration Act preempts McGill and requires enforcement of the clause. However, the dealership conceded the California Supreme Court and the Ninth Circuit have held that the FAA does not preempt the McGill rule.

Accordingly, the Court of Appeals of the State of California affirmed the trial court order denying the petition to compel arbitration.

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Ryan Grotz practices in Maurice Wutscher's Commercial Litigation, Consumer Credit Litigation, and Appellate groups. He has substantial experience in all phases of commercial litigation, including motion practice, written discovery, depositions, mediations, and bench and jury trials. Ryan received his Juris Doctor from the Chicago-Kent College of Law, where he was an associate editor on the Access to Justice Student Editorial Board. He was awarded his Bachelor of Business Administration degree from the University of Iowa. Ryan is licensed to practice law in Illinois and the U.S. District Court for the Northern District of Illinois. For more information, see https://mauricewutscher.com/attorneys/ryan-grotz/

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