Federal Arbitration Act Preempts California’s Broughton-Cruz Rule, Allowing Arbitration of all Claims Including Claims for Injunctive Relief

A federal district court denied a motion to compel arbitration for claims for injunctive relief under California’s unfair competition law, Consumer Legal Remedies Act, and false advertising law but granted the motion as to the other legal claims.  In its finding, the district court relied on what is known as California’s Broughton-Cruz rule, which exempts claims for public injunctive relief from arbitration.  On appeal, the United States Court of Appeals for the Ninth Circuit held that the district court erred in applying the Broughton-Cruz rule, as the rule is preempted by the Federal Arbitration Act which requires all claims between two litigants to be arbitrated in a single proceeding.  (Ferguson v. Corinthian Colleges, Inc. (--- F.3d ----, C.A.9 (Cal.), October 28, 2013).

Two students ("Students") sued Corinthian Colleges, Inc. (“Corinthian”), which operates multiple for-profit schools, alleging that “Corinthian systematically misled prospective students in order to entice enrollment.”  They also alleged they were misinformed about financial aid, which caused many students to be unable to repay their student loans.  Finally, they alleged Corinthian targeted veterans and military personnel so it could receive funding through federal programs.

The Students asserted seven causes of action under California law.  Relevant to the appeal at issue, the Students alleged violations of California’s unfair competition law (“UCL”), false advertising law (“FAL”), California Business and Professions Code §§ 17200 et seq. and  §17500 et seq., California Civil Code § 1750 et seq., and Consumer Legal Remedies Act (“CLRA”).  They sought injunctive relief and money damages under these statutes.

The Students’ enrollment agreements and other documents contained arbitration clauses.  Corinthian moved to compel arbitration of their action, which the federal district court granted as to most of the Students’ claims.  However, the district court refused to compel arbitration of the Students’ requests for injunctive relief under the UCL, FAL, and CLRA based on the Broughton-Cruz rule, which exempts claims for public injunctive relief from arbitration.  The Broughton-Cruz rule arose out of a belief that there is an inherent conflict between arbitration of a claim and the purposes of the UCL, FAL, and CLRA, which are designed to protect consumers and allow plaintiffs to seek injunctions on behalf of the public.  The effect of the district court's ruling would be to force two proceedings- an arbitration proceeding to address claims for money damages under these statutes and their other claims, and a court proceeding to address the requests for injunctive relief under the UCL, FAL, and CLRA.

The court of appeals reversed the decision of the district court and found that the Federal Arbitration Act (“FAA”) preempts the Broughton-Cruz rule and that all of the Students’ claims must be submitted to arbitration.  The court cited AT&T Mobility LLC v. Concepcion, –– U.S. ––, 131 S. Ct. 1740 (2011), wherein the United States Supreme Court stated that “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.”  By exempting public injunctive relief claims under the CLRA, UCL, and FAL from arbitration, the Broughton-Cruz rule prohibited “outright arbitration of a particular type of claim.”  The fact that the Broughton-Cruz rule attempts to address matters that benefit the general public is of no consequence because Supreme Court case law “strongly suggests even where a specific remedy has implications for the public at large, it must be arbitrated under the FAA if the parties have agreed to arbitrate it.”  A state “cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”  Even though the California courts crafted the Broughton-Cruz rule for the good of the general public, the rule still prohibits “outright arbitration of a particular type of claim.”  This prohibition violates the FAA and, because federal rules preempt and supersede state laws with respect to substantive issues such as where to bring a claim, the FAA must prevail.  

The court noted that “an arbitrator generally has the authority to enter injunctive relief against a party that has entered into an arbitration agreement.”  However, the arbitrator may only enter injunctive relief if the arbitration agreement allows the arbitrator to do so.  Here, the arbitrator must determine if the Students’ agreements contain such a provision.  If the arbitrator determines that he or she lacks authority to issue an injunction, the Students may return to the district court in search of public injunctive relief.  

Topics:  Arbitration, Arbitration Agreements, Federal Arbitration Act, Injunctions, Preemption

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Remedies Updates, Conflict of Laws Updates, Constitutional Law Updates, Education Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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