Preparing for the COVID-19 class action: Is there an unexpected consequence lurking in your arbitration agreement's poison pill provision?

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COVID-19 Alert

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Although the coronavirus disease 2019 (COVID-19) pandemic may be far from over, dozens of class action lawsuits have already been filed, many by consumers. To date, class action waivers have been a potent weapon for companies seeking to avoid lengthy, complex, and expensive consumer class action lawsuits. They have become so useful that many companies have attempted to expand the scope of their waivers to preclude the individual from pursuing any representative action, be it a class action, a private attorney general action, or an action for public injunctive relief. Because the enforceability of class action waivers will often depend on a number of factors, companies that do not want to litigate class or representative claims in arbitration will frequently opt to include a “poison pill” provision within the arbitration agreement, which states that the arbitration agreement shall be severed and voided if the class action waiver is deemed unenforceable. However, several decisions, including one from the Ninth Circuit Court of Appeals, demonstrate that including a poison pill provision with a class action waiver that waives the right to seek public injunctive relief could render the entire arbitration agreement unenforceable.

In Blair v. Rent-A-Center, Inc., plaintiffs brought claims for violations of California’s Unfair Competition Law (UCL), Consumers Legal Remedies Act (CLRA), and Karnette Rental-Purchase Act, alleging that Rent-A-Center charged excessive prices for its rent-to-own plans for household items.  Blair, 928 F.3d 819 (2019). Rent-A-Center invoked its arbitration agreement, which contained a broad class action waiver precluding the plaintiff from pursuing any class claims, as well as claims for public injunctive relief, against one of the plaintiffs.  Citing the California Supreme Court’s decision in McGill v. Citibank, N.A., 2 Cal. 5th 945, 951-952 (2017), the plaintiff argued that the waiver was unenforceable because the arbitration agreement sought to waive her right to seek public injunctive relief in any forum. Rent-A-Center argued that the Federal Arbitration Act (FAA) preempted the McGill rule.

The Ninth Circuit disagreed with Rent-A-Center, analogizing the McGill rule to the California rule that a party cannot waive his or her right to bring a claim under the California Private Attorneys General Act (PAGA) that the Ninth Circuit addressed in Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425, 432 (9th Cir. 2015). In Sakkab, the Ninth Circuit held that the FAA did not preempt the rule because it did not “diminish parties’ freedom to select informal arbitration procedures.” Id. at 435. As the Ninth Circuit explained, this is because PAGA actions are brought on behalf of the state, rather than absent class members, so there is no need for cumbersome procedural protections to preserve the absentees’ due process rights. Id. at 436.

Applying this logic in Blair and engaging in a thorough preemption analysis, the Ninth Circuit held that the FAA did not preempt the McGill rule either. First, the Ninth Circuit concluded that the McGill rule was a generally applicable contract defense that applied equally to arbitration and non-arbitration agreements. Blair, 928 F.3d at 827. Accordingly, the court concluded that it fell within the FAA’s saving clause as a ground for the revocation of any contract. Id. Second, the court found that the McGill rule did not stand as an obstacle to the accomplishment of the FAA’s objectives, because it did not deprive the parties of the benefits of arbitration. Id. at 830-31.

Having determined that the McGill rule was not preempted and the waiver of the right to seek public injunctive relief in Rent-A-Center’s arbitration agreement was unenforceable, the court next analyzed the impact of the poison pill clause in Rent-A-Center’s arbitration agreement. Unlike many provisions which deem the entire arbitration agreement unenforceable, Rent-A-Center’s clause allowed any unenforceable claims to be severed and tried in court. Id. at 831. Because of this, the Ninth Circuit held that the claims calling for public injunctive relief would be severed and tried in court, and the remaining class claims would be arbitrated. Id. Notably, however, the clause did not contain any language giving priority to the adjudication of the class claims. On this basis, the Ninth Circuit held that the lower court did not err in denying Rent-A-Center’s request that the adjudication of the public injunctive relief claim be stayed pending arbitration of the other claims. Id. Compare with Eiess v. USAA Federal Savings Bank, No. 19-cv-00108-EMC, 2019 WL 3997463, at *12-13 (N.D. Cal. Aug. 8, 2019) (holding that public injunctive relief claims would be tried in court and staying court proceedings pending arbitration).

While Rent-A-Center did not see its entire arbitration agreement rendered unenforceable, not every defendant will be so lucky. Many poison pill clauses are drafted to invalidate the entire arbitration agreement, rather than specific terms, if any aspect of the class action waiver is found to be unenforceable. If a putative class action seeks public injunctive relief, as many do when they assert claims under California’s UCL and CLRA, for example, a company that has included a waiver of public injunctive relief in its arbitration agreement may find itself litigating the class actions it sought to avoid in court.

This was the fate of defendants in at least two California district court cases, in which the arbitration agreement at issue contained a broad poison pill that invalidated the entire agreement if any section waiving the right to a class action was found to be unenforceable. In contrast, in a case where the arbitration agreement and class action waiver were separate provisions within a defendant’s terms of use, followed by an unambiguous severability clause, the court opined that if the waiver was found unenforceable it could be severed, leaving the arbitration agreement intact.

Takeaway

Although companies are encouraged to always periodically review their arbitration agreements, the COVID-19 pandemic presents a compelling reason for companies to review them now.

First, to the extent that an arbitration agreement is drafted to include a waiver of the right to seek public injunctive relief, Blair confirms that the McGill rule is not preempted by the FAA and waiver of the right to seek public injunctive relief may lead to a finding of unenforceability in California. Second, companies utilizing poison pill provisions in their arbitration agreements are encouraged to review them in the context of Blair and its progeny to seek to avoid the unintended consequence of finding themselves in costly court proceedings previously thought to be guarded against by those very agreements.

If you have any questions regarding these new requirements and their implications, please contact the author, any member of DLA Piper’s Litigation group or your DLA Piper relationship attorney.

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This information does not, and is not intended to, constitute legal advice.  All information, content, and materials are for general informational purposes only.  No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.