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California High Court Guts Credit Card Arbitration Clause

In a ruling with major implications for consumer-protection laws, the California Supreme Court reversed an appellate court and ruled that an arbitration agreement waiving a credit card customer’s right to sue is unenforceable under California law.

SAN FRANCISCO (CN) – In a ruling with major implications for consumer-protection laws, the California Supreme Court reversed an appellate court and ruled that an arbitration agreement waiving a credit card customer’s right to sue is unenforceable under California law.

The California Supreme Court unanimously overturned the decision, finding Sharon McGill’s signature on a credit card contract with Citibank that stipulated she may not take any disputes into the court system and must instead proceed through arbitration was unenforceable.

In a 24-page ruling written by Associate Justice Ming Chin, he said any consumer has the right to pursue “injunctive relief that has the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public.”

The dispute stems from claims brought by McGill, who said Citibank engaged in a scheme to offer its customers insurance protecting them from incurring huge late fees on their credit debt if they suffered a health catastrophe or a loss of employment.

When McGill lost her job in 2008, she filed for her insurance benefits which took months to arrive. Meanwhile, Citibank charged her exorbitant late fees, according to the original complaint.

These charges were handed down despite the fact the insurance payments were late, and the insurance companies in charge of disbursing payment were subsidiaries of Citibank itself, according to the complaint.

The case, initially filed in Riverside County Superior Court, was eventually dismissed because of a contract McGill signed when she signed up for the card that essentially forfeited her right to pursue individual or class action claims in court.

However, the high court said that agreement was essentially worthless, because California law clearly states anyone can seek legal remedies under the state’s unfair competition law, the Consumer Legal Remedies Act and false advertising laws.

“Agreements to arbitrate claims for public injunctive relief under the CLRA, the UCL, or the false advertising law are not enforceable in California,” Chin wrote.

Citibank attempted to argue that McGill was not seeking public injunctive relief, but was instead seeking redress on her individual claims and for others similarly situated, something which was expressly prohibited in the contract.

But Chin said this argument failed because McGill claimed the conduct was ongoing.

“Any one may waive the advantage of a law intended solely for his benefit,” Chin wrote. “But a law established for a public reason cannot be contravened by a private agreement.”

The ruling will have significant impacts on corporations that attempt to stave off individual or class action lawsuits by mandating arbitration in pre-dispute contracts.

Some lawyers argue the ruling – which was unanimous – will open a Pandora’s Box and throw the validity of arbitration agreements in into question.

“It also raises the question of whether California’s federal courts will follow the California Supreme Court’s lead or independently determine the preemptive effect of the Federal Arbitration Act on claims like McGill’s,” said Fredrick S. Levin, a partner with Buckley Sandler. “This issue is likely to play out over several years in the California federal courts and may ultimately lead to yet another showdown between the California Supreme Court and the United States Supreme Court regarding the preemptive effect of the Federal Arbitration Act.”

Citibank also argued federal law overrode California law on the issue, when it passed the Federal Arbitration Act in the 1920s.

“Citibank does not argue that the waiver is valid under California law,” Chin wrote. “Instead, it argues that a California rule precluding enforcement of the waiver 15 would be preempted by the FAA.”

Chin said the federal law does not require courts to favor arbitration over court remedies, but only puts them on equal footing and gives the courts wide discretion to apply each as appropriate.

“Here, we likewise conclude that the FAA does not require enforcement of a provision in a pre-dispute arbitration agreement that, in violation of generally applicable California contract law, waives the right to seek in any forum public injunctive relief under the UCL, the CLRA, or the false advertising law,” Chin wrote.

The ruling means McGill can pursue her claims against Citibank in court, as long as she and her class members continue to pursue public injunctive relief.

Phone calls to Julia Strickland, the attorney for Citibank, and Glenn Danas, attorney for McGill, were not returned by press time.

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Categories / Appeals, Consumers

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