Public interest can trump arbitration

Businesses can’t require consumers in California to sign away their right to seek rulings prohibiting unfair or deceptive practices, the state Supreme Court ruled unanimously Thursday.

The court said a provision in a Citibank credit card account, requiring the customer to arbitrate all disputes individually and barring the customer from seeking a ruling that benefits anyone else, violates state consumer-protection laws — even if the customer signed the agreement.

Quoting state law, Justice Ming Chin said, “A law established for a public reason cannot be contravened by a private agreement.”

That means, he said, that the customer can seek a “public injunction” — an order forbidding practices by the bank that harm the public, such as false advertising — despite the agreement. The court did not say whether a consumer could seek such an order in court or would have to go before a private arbitrator, but said businesses can’t prevent them from representing the public interest.

In other words, seeking a public injunction is grounds for an exception to the arbitration clauses, allowing benefits for only the individual customer, that many companies require customers to agree to.

The ruling “ensures that consumers have the ability to pursue remedies for wrongdoing guaranteed by state law,” a group of consumer rights organizations called the Fair Arbitration Now Coalition said in a news release.

A lawyer for Citibank could not be reached for comment. But a lawyer for the business-backed Association of Southern California Defense Counsel predicted that the ruling would be appealed to the U.S. Supreme Court, whose past decisions have limited California courts’ authority to strike down arbitration clauses in consumer contracts.

The Federal Arbitration Act, which makes arbitration agreements enforceable, “trumps state law,” said the attorney, Felix Shafir. He said the nation’s high court has never allowed a state court “to refuse to enforce arbitration agreements because it’s worried its state laws will not be vindicated.”

Many consumer contracts, and some contracts between companies and their employees, require individuals to take disputes to arbitration rather suing in court, and also require them to proceed individually rather than joining with others in class actions. Business groups say arbitration is more efficient and less expensive than litigation, but consumer advocates say arbitrators regularly favor companies that are their repeat customers.

A California Supreme Court ruling, voiding arbitration agreements that state courts judged to be one-sided, was overturned in 2011 by the U.S. Supreme Court, which said the federal arbitration law prevailed. So far, however, the U.S. Supreme Court has not disturbed a 2014 ruling by the California court allowing consumers to sue lawbreaking companies on behalf of the state, and collect a portion of the damages, despite arbitration clauses in their contracts.

Thursday’s case involved a Los Angeles County woman, Sharon McGill, whose Citibank credit card account provided certain protections for her credit standing if she lost her job. McGill, who became unemployed in 2008, said the bank reneged on its promise, and sought to file a classaction suit for false advertising on behalf of all affected customers.

Citibank sought to dismiss the suit based on a contract provision that required all disputes to be arbitrated individually and barred the arbitrator from providing benefits to anyone but the individual customer.

But the court said a California consumer, even one who has signed an arbitration agreement, retains the right to seek an order barring “future wrongful business practices that will injure the public.” Those rights do not conflict with the Federal Arbitration Act, which preserves a consumer’s right to challenge contracts that violate a state’s laws, Chin said.

The case is McGill vs. Citibank, S224086.