State capitol building in California showing how CCPA will address arbitration and class action waiver clauses in class action lawsuits

California Strikes Again: Do Arbitration and Class Action Waiver Clauses Protect Your Clients Against a Class Action CCPA Claim?

Consumer companies have increasingly been adding arbitration requirements and class action waiver clauses to their consumer terms and conditions.  The Supreme Court has been supportive of those clauses, but California lawmakers and courts have not.  California lawmakers continued their decade-long battle against arbitration and class action waiver clauses in the California Consumer Privacy Act (“CCPA”), California’s newest and most aggressive consumer protection law in the data privacy space.

The CCPA purports to make any class action waiver or arbitration agreement unenforceable through Cal. Civ. Code § 1798.192, which reads:

Any provision of a contract or agreement of any kind that purports to waive or limit in any way a consumer’s rights under this title, including, but not limited to, any right to a remedy or means of enforcement, shall be deemed contrary to public policy and shall be void and unenforceable.

Companies that handle large amounts of personal identifying information (“PII”) and their lawyers have been preparing for CCPA compliance and enforcement since the law initially passed in June 2018, but there has been little discussion of its potential impact on the enforceability of arbitration and class action waiver clauses.  However, now that CCPA is here and numerous class action lawsuits have been filed against companies—including those with arbitration and class action waiver clauses in their consumer agreements—this issue will come front and center.  Below, we outline the current law regarding enforceability of arbitration and class action waiver clauses and discuss how courts will likely address these issues in CCPA litigation.

A brief history of the Supreme Court’s support for arbitration and class action waivers

Over the last decade, the Supreme Court has consistently enforced arbitration agreements and class action waivers over state laws that attempt to limit or prohibit them – particularly California laws.

First, in AT&T Mobility LLC v. Concepcion, 563 US 333 (2011), the Supreme Court held that a California state contract rule that deemed class action waivers in arbitration clauses contained in consumer contracts invalid under certain circumstances was preempted by the Federal Arbitration Act (“FAA”) because it stood as an obstacle to the accomplishment of the full purpose of the FAA.  Central to the Concepcion holding was the principle that arbitration agreements cannot be singled out from other types of contracts for negative treatment, but instead “courts must place arbitration agreements on an equal footing with other contracts…and enforce them according to their terms.” Id. at 339 (internal citations omitted).

Two years later, in American Express Co v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), the Supreme Court rejected the argument that class action waivers and arbitration clauses should not be enforced when prosecuting individual claims in arbitration would be cost prohibitive.

Following Concepcion and Italian Colors, California has continued its attempts to limit class action waivers and arbitration clauses – but the Supreme Court repeatedly has blocked California’s efforts.  Indeed, in 2015, the Supreme Court overturned a decision of the California Court of Appeals refusing to enforce a class action waiver and doubled-down on its rule that the FAA also preempts state laws that single out class action waivers in arbitration agreements. See DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463, 468 (2015) (finding that the FAA “allows parties to an arbitration contract considerable latitude to choose what law governs some or all of its provisions, including the law governing enforceability of a class-action waiver”).

Beyond its ongoing arbitration clause turf war with California, the Supreme Court has continuously expanded the applicability of the principle of “non-discrimination” against arbitration agreements articulated in Concepcion.  For example, in 2017, the Supreme Court held that a Kentucky rule that purported to invalidate arbitration agreements executed by individuals holding powers of attorney for nursing home residents was preempted by the FAA, reiterating that the Kentucky rule improperly “singles out arbitration agreements for disfavored treatment.”  Kindred Nursing Ctrs. Ltd. v. Clark, 137 S. Ct. 1421, 1424-24 (2017).

More recently, in Lamps Plus Inc. v. Varela, the Supreme Court held that courts may not infer the parties’ consent to class arbitration from ambiguous agreements—a key protection for companies seeking to mitigate class action risk through consumer arbitration agreements. 139 S. Ct. 1407, 1419 (2019).  Under Lamps Plus, class arbitration is impermissible unless expressly permitted by the parties’ arbitration agreement.

Thus, a central theme through nearly a decade of Supreme Court decisions is that state law cannot single out arbitration agreements and class action waivers for disfavored treatment.  Any state law that does so runs afoul of the FAA and will be preempted.  However, as discussed in the next section, recent action by the Supreme Court implies that the Court’s support for such agreements is not limitless, and potentially signals a lengthy battle ahead as businesses attempt to enforce arbitration agreements and class action waivers against CCPA claims.

California carve outs

Although the Supreme Court has struck down multiple California rules limiting the enforceability of class action waivers and arbitration clauses, there are at least two remaining ways claimants can bring certain representative actions in California, even in the face of otherwise broad arbitration agreements with class action waivers.

First, California courts continue to allow employees to bring claims acting as private state attorneys general under the California Private Attorney General Act (“PAGA”) to enforce alleged violations of the California Labor Code. Cal. Labor Code (“CLC”) §§ 2698 – 2699.5.  In Iskanian v. CLS Transportation Los Angeles, LLC, 173 Cal. Rptr. 3d 289, 315 (Cal. 2014), the California Supreme Court held that:

[A] PAGA claim lies outside the FAA’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state, which alleges directly or through its agents—either the Labor and Workforce Development Agency or aggrieved employees—that the employer has violated the Labor Code.

In Correia v. NB Baker Elec., Inc., the California Court of Appeals went a step further and held that employment agreements that purportedly require the arbitration of any potential PAGA claims are unenforceable. 32 Cal. App. 5th 602 (Cal. Ct. App. 2019).  Because of the PAGA’s focus on labor code violations, this exception should have little or no impact on CCPA class actions.

Second, the California Supreme Court ruled in McGill v. Citibank, N.A., 2 Cal.5th 945 (2017), that a contract purporting to waive a party’s right to seek public injunctive relief (an injunction requiring the defendant company to change the way it does business with all California residents) in any forum under California’s Consumer Legal Remedies Act or Unfair Competition Law is unenforceable.  The Ninth Circuit recently held that the FAA does not preempt the McGill rule.  See Blair v. Rent-A-Center, Inc., 928 F.3d 819 (9th Cir. 2019); Tillage v. Comcast Corp., 772 Fed.Appx. 569 (9th Cir. 2019); McArdle v. AT&T Mobility LLC, 772 Fed.Appx. 575 (9th Cir. 2019).  Central to the Ninth Circuit’s holding was the fact the McGill rule is a “generally applicable contract defense” that applies “equally to arbitration and non-arbitration agreements” and does not single out arbitration agreements for disfavored treatment.  See Blair, 928 F.3d at 827.

On June 8, 2020, the United States Supreme Court denied certiorari on (i.e., refused to review) the Ninth Circuit’s decisions in the Tillage v. Comcast and McArdle v. AT&T Mobility cases, passing up the opportunity to strike down the McGill rule.  This decision surprised some observers who expected that the Supreme Court would take these cases and, following its recent trend, roll back the McGill rule.  For now, however, the Supreme Court’s refusal to wade into this debate means that the McGill rule remains good law and bars companies from requiring their customers to waive their right to seek public injunctive relief.  Companies must deal with the fact that a federal or California state court has the power to hear a California consumer’s claim for a public injunction that would require the company to change the way it does business with all California residents.

Arbitration and class action waivers in CCPA litigation

As noted above, the CCPA purports to prohibit “any provision of a contract or agreement of any kind that purports to waive or limit in any way a consumer’s rights under this title, including, but not limited to, any right to a remedy or means of enforcement…” Cal. Civ. Code § 1798.192.  This language seems plainly directed at class action waivers and arbitration clauses because they limit a particular “means of enforcement”—indeed, it is difficult to imagine other situations where this provision might apply.  Thus, companies seeking to enforce their arbitration agreements and class action waivers will have strong arguments this purported restriction is preempted by the FAA because it “singles out arbitration agreements for disfavored treatment.”  Kindred Nursing Ctrs. Ltd. v. Clark, 137 S. Ct. 1421, 1424-24 (2017).

Further, the CCPA does not include a state-actor mechanism for bringing a representative claim, like the mechanism found in the PAGA. The CCPA only provides a private right of action for “any consumer whose nonencrypted and nonredacted personal information…is subject to an unauthorized access and exfiltration, theft, or disclosure…” Cal. Civ. Code § 1798.150.  Although the CCPA allows consumers to bring claims on a class action basis, it does not provide a mechanism through which a claimant may stand in the shoes of the state.  Thus, the exceptions to FAA preemption under the Iskanian rule are unavailable because those exceptions rest on the lack of privity between the state and the employer seeking to enforce an employment arbitration agreement.

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Similarly, the CCPA does not provide a mechanism for public injunctive relief or afford claimants the ability to act as private attorneys general, so claimants are unlikely to succeed in asserting the McGill carve out from arbitration.  However, the Supreme Court’s recent decision to pass up the opportunity to invalidate the McGill rule leaves open the possibility that some narrow exception for CCPA claims similar to the McGill rule might survive—or at least survive in lower California courts for long enough to keep companies and consumers litigating whether companies can require individual arbitration of CCPA claims.

Conclusion

Although the CCPA attempts to limit arbitration and class action waiver clauses, we believe litigants will have a difficult time enforcing the CCPA’s anti-arbitration provision in light of contrary Supreme Court precedent.  Companies seeking to enforce arbitration agreements against consumers bringing CCPA class actions should expect vigorous opposition, as well as creative arguments from the plaintiffs’ bar that these clauses are unenforceable under the CCPA.  These issues could potentially take years to resolve as they work their way through the appeals courts.  Meanwhile, companies should be vigilant in enforcing their arbitration agreements and class action waivers, asserting them promptly in any CCPA litigation to avoid waiving any right to mandatory arbitration.