Will California’s Attempt to Invalidate Arbitration Agreements and Class Action Waivers for CCPA Claims Prove Successful?

Data BreachThe day the California Consumer Privacy Act of 2018 (CCPA) will become operative (January 1, 2020) is fast approaching. We have written extensively about the CCPA since it passed, and our past client alerts and a variety of CCPA-related materials can be found in our CCPA Resource Center.

Here, we focus on the CCPA’s private right of action and the California legislature’s effort to invalidate applicable arbitration and class action waiver provisions. The CCPA permits plaintiffs to seek actual damages, statutory damages, or injunctive or declaratory relief when certain

nonencrypted or nonredacted personal information . . . is subject to an unauthorized access and exfiltration, theft, or disclosure as a result of the business’s violation of the duty to implement and maintain reasonable security procedures and practices appropriate to the nature of the information to protect . . . .

Cal. Civ. Code § 1798.150. In furtherance of this private right of action, the CCPA prohibits: “[a]ny provision of a contract or agreement of any kind that purports to waive or limit in any way a consumer’s rights under [the CCPA], including, but not limited to, any right to a remedy or means of enforcement.” Cal. Civ. Code. § 1798.192. Section 1798.192 further says that any such contractual provisions “shall be deemed contrary to public policy and shall be void and unenforceable.” Though written broadly, this provision can be read as another attempt by the state of California to target arbitration and class action waiver clauses, despite clear United States Supreme Court precedent enforcing arbitration agreements and class action waivers. While it remains to be seen how state and federal courts will interpret this provision, businesses that may find themselves the subject of CCPA class action lawsuits will be able to rely on Supreme Court precedent to argue that the CCPA’s attempted prohibition on arbitration agreements and class action waivers is preempted by the Federal Arbitration Act.

The Supreme Court’s Firm Support of Arbitration and Class Action Waivers

Over the past decade, the United States Supreme Court has consistently affirmed the strong federal policy favoring arbitration and the enforceability of class action waivers in arbitration agreements. The Supreme Court has explained that “the FAA was designed to promote arbitration” and preempts state laws that undermine that goal of the FAA.[1] The Supreme Court recently reaffirmed that the FAA supersedes state laws that treat arbitration agreements differently than other contracts.[2]

Beginning in 2011, with the Supreme Court’s landmark decision in AT&T Mobility LLC v. Concepcion, the Supreme Court has on several occasions also confirmed that class action waivers in arbitration agreements are enforceable. In Concepcion, the Supreme Court held that class action waivers in arbitration provisions are enforceable and found that the FAA preempted a California rule that attempted to prohibit class action waivers in consumer arbitration agreements. A few years later in DirecTV Inc. v. Imburgia, the Supreme Court again confirmed that class action waivers are enforceable.[3] And in Lamps Plus, Inc. v. Varela, decided just this past term, the Supreme Court found that parties cannot be compelled to class arbitration unless the arbitration agreement explicitly contemplates and provides for such class-wide arbitration.[4]

This series of Supreme Court decisions has led even the California Supreme Court, which has not viewed arbitration and class action waivers favorably, to enforce class action waivers in certain contexts. In Sanchez v. Valencia Holding Co., the California Supreme Court found that a provision of the California Consumers Legal Remedies Act (CLRA) that as applied would have prohibited class waivers in arbitration agreements was preempted by the FAA.[5] Sanchez addressed the CLRA’s anti-waiver provision in California Civil Code § 1751, which contains language similar to that found in the CCPA’s § 1798.192 prohibition on contract terms. Section 1751 states, “[a]ny waiver by a consumer of the provisions of this title is contrary to public policy and shall be unenforceable and void.” Even though the CLRA’s anti-waiver provision did not facially discriminate against arbitration, the Sanchez court found that the anti-waiver was “preempted insofar as it bars class waivers in arbitration agreements covered by the FAA.”[6]

The FAA Likely Preempts the CCPA’s Prohibition on Class Action Waivers

Despite the series of pro-arbitration decisions issued by the United States Supreme Court in recent years, the state of California seems to have gone back to the well one more time in its effort to invalidate class action waivers in certain contexts. As mentioned above, the CCPA prohibits contracts or agreements that purport to waive or limit in any way a consumer’s right to a remedy or means of enforcement under the CCPA. Cal. Civ. Code. § 1798.192. The California legislature’s decision to include this provision in the CCPA suggests that the legislature remains hostile to class action waivers.

Litigation regarding the enforceability of class action waivers as applied to claims under the CCPA seems inevitable in the short term. The United States Supreme Court cases since Concepcion and California Supreme Court cases like Sanchez provide strong support for businesses to argue that this latest attempt by the California legislature to defeat arbitration agreements and invalidate class action waivers is preempted by the FAA. The FAA should apply to most, if not all, putative class action lawsuits brought under the CCPA because the FAA applies if any part of an underlying transaction between the parties involves interstate commerce, a standard that the Supreme Court has interpreted broadly.[7] Well-written arbitration agreements that expressly state the FAA applies to the parties’ relationship can provide further support for invoking the FAA. Businesses should be aware, however, of other state and federal court decisions that have carved out exceptions to the United States Supreme Court’s arbitration jurisprudence. The California Supreme Court’s decisions in Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348 (2014) and McGill v. Citibank, N.A., 393 P.3d 85 (Cal. 2017), and the Ninth Circuit’s decisions in Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425 (9th Cir. 2015) and Blair v. Rent-A-Center, Inc., 928 F.3d 819 (9th Cir. 2019), raise certain complexities when seeking to enforce arbitration agreements and class action waivers in the employment context and against certain types of claims.[8]

Steps to Take

Despite California’s latest attempt to invalidate class action waivers in arbitration agreements, companies should continue to include arbitration provisions and class action waivers in their agreements. Businesses that have not previously included arbitration provisions and class action waivers in their terms and conditions, employment agreements, or other contracts with consumers or employees should consider doing so before the CCPA’s January 1, 2020 operative date.

Businesses should also be aware that Concepcion and the subsequent line of arbitration-related cases still permit plaintiffs to raise generally applicable state law contract defenses when arguing that arbitration agreements are unenforceable. Businesses should ensure that their arbitration agreements and class action waiver provisions are carefully drafted with the complexities of applicable law in mind,[9] so as to be best positioned to defend against any and all types of claims plaintiffs may seek to assert under the CCPA and other California consumer protection statutes.

[1] AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 345 (2011).

[2] Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421 (2017).

[3] 136 S. Ct. 463 (2015).

[4] 139 S. Ct. 1407 (2019). For further discussion of the Lamps Plus decision, see our client alert here.

[5] 61 Cal. 4th 899, 924 (2015).

[6] Id. at 923-24. In McGill v. Citibank, N.A., 393 P.3d 85 (Cal. 2017), however, the California Supreme Court held that an agreement purporting to waive a party’s right to seek “public injunctive relief” in any forum is unenforceable under California law. Though we believe McGill was wrongly decided and that the rule set forth in that case should be preempted by the FAA, the Ninth Circuit recently held in Blair v. Rent-A-Center, Inc., 928 F.3d 819 (9th Cir. 2019), that the FAA does not preempt California’s McGill rule. For more information, see our blog post discussing Blair in further detail.

[7] See Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995).

[8] For further discussion, see our client alert on Blair here.

[9] For example, see Blair, footnote 8, and the other California Supreme Court and Ninth Circuit cases discussed therein.