Ninth Circuit: California Public Injunctions Cannot Be Blocked By Arbitration Agreements

Ninth Circuit: California Public Injunctions Cannot Be Blocked By Arbitration Agreements

A plaintiff’s right to seek a public injunction under California law is not foreclosed by the Federal Arbitration Act (FAA), the Ninth Circuit confirmed in McBurnie v. RAC Acceptance East, LLC.  This means that employers and merchants cannot force anyone to waive her right to seek a public injunction (injunctive relief that benefits the general public), even if their employees and purchasers are required to sign arbitration agreements. The holding reinforces California law, which recognizes that an employee’s right to seek a public injunction under the Fair Employment and Housing Act cannot be waived, as an appellate court held last year in this firm’s race harassment suit against Tesla.  (Vaughn v. Tesla (2023) 87 Cal.App.5th 208.)  In both McBurnie and Vaughn, corporate proponents of arbitration agreements argued that the U.S. Supreme Court’s decision in Viking River Cruises permitted arbitration agreements to waive public injunction claims. Now, both federal and California appellate courts have rejected the argument. McBurnie is a victory for workers and consumers who want to stop misconduct prohibited by statutes that protect the general public.

In McBurnie, two plaintiffs entered agreements with RAC whereby they would pay for furniture in installments and take ownership after a set number of installments. Each agreed to pay a “processing fee” as well as an “expedited payment fee.”  RAC required the plaintiffs to agree that they would not seek any relief that would affect other RAC “account holders,” and expressly to waive the right to arbitrate any “class, collective, mass, private attorney general, or representative action.”

Plaintiffs filed a class action alleging that the processing and payment fees that they and other RAC renters paid violate California consumer protection statutes. Plaintiffs sought damages, restitution, fines, attorneys’ fees and costs, and public injunctions.

When plaintiffs filed their class action in December 2020, the Ninth Circuit already had found, in a separate case, that RAC’s arbitration agreement is invalid. This was because California law invalidates contract terms that purport to waive the right to seek public injunctions. (McGill v. Citibank, N.A. (2017) 2 Cal.5th 945, 961-962.)  The unenforceable part of the RAC agreement could not be severed from the rest of the arbitration agreement, the Ninth Circuit held, and the California rule that prohibited waiver of public injunctions was not preempted by the Federal Arbitration Act (FAA).

After the parties in McBurnie began discovery, the Supreme Court decided Viking River Cruises. As we have explained here, in that case the Supreme Court held that employers cannot strip California employees of their right to bring labor law enforcement actions as representatives of the state under the Private Attorneys General Act (PAGA).  The FAA requires enforcement of otherwise valid agreements to arbitrate PAGA claims.  This holding partially overruled California law referred to as “the Iskanian rule,” which held that PAGA representative action claims could not be compelled to arbitration. (Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 360.)    Before Viking River Cruises, the Ninth Circuit held that the FAA did not conflict with the Iskanian rule.

Asserting that Viking River Cruises abrogated the Ninth Circuit’s earlier decision invalidating RAC’s arbitration agreement by partially overruling the Iskanian rule, RAC petitioned the trial court to compel the McBurnie plaintiffs to arbitration. The court denied the petition. RAC appealed, and the Ninth Circuit affirmed the petition denial.

The Ninth Circuit held that its decision invalidating the RAC arbitration agreement does not conflict with Viking River Cruises. This is because—as Viking River Cruises affirms—the FAA provides that arbitration agreements are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  (9 U.S.C. § 2.) The California rule that the right to bring a public injunction is not waivable is a generally applicable contract defense that does not impede parties’ agreements to arbitrate disputes. Rather than disfavor arbitration, California law only prohibits the total waiver of a right to seek a public injunction in any forum. RAC’s arbitration agreement purported to do just that and is therefore unenforceable, as the Ninth Circuit already found – similar to the California Court of Appeal’s ruling in Vaughn. In McBurnie, the court confirmed that this rule is undisturbed by Viking River Cruises.

McBurnie is a victory for employees and consumers. Public injunctions are a powerful tool to force bad actors to comply with the law, including by prohibiting the particular junk fees that a seller imposes, as plaintiffs seek to do in McBurnie; or by forcing an employer who allows rampant race harassment to take measures to protect its minority workers, as in Vaughn.  The Ninth Circuit joins California courts in recognizing that nothing in the FAA prohibits California from protecting the public’s rights to enforce statutory mandates.

If you are a worker facing illegal treatment in the workplace, or if you have questions about an arbitration agreement, please contact Bryan Schwartz Law, P.C.