Federal Law Preempts State Law Barring Arbitration Of Claims For Public Injunction

[authors: Travis Anderson and Shannon Petersen]

On March 7, 2012, the Ninth Circuit held that the Federal Arbitration Act preempts California's rule prohibiting the arbitration of claims for public injunctions. Kilgore v. KeyBank, Nat'l Ass'n, --- F.3d ----, 2012 WL 718344, *10 (9th Cir. March 7, 2012). Referring to this as the "Broughton-Cruz rule," after the California Supreme Court's decisions in Broughton v. Cigna Healthplans of California, 21 Cal. 4th 1066 (1999), and Cruz v. Pacificare Health Systems, Inc., 30 Cal. 4th 303 (2003), the Ninth Circuit unanimously held that "the Broughton-Cruz rule does not survive" the United States Supreme Court decision in AT&T Mobility, Inc. v. Concepcion, 131 S. Ct. 1740 (2011) (FAA preempts California law refusing to enforce class action waivers in arbitration provisions).

Plaintiffs in Kilgore obtained private loans through KeyBank to pay their tuitions for a helicopter vocational school and each signed a promissory note containing an arbitration clause. Before plaintiffs could complete their training, the school went bankrupt and ceased operations. Plaintiffs then sued for a public injunction under California's Unfair Competition Law to prevent KeyBank from collecting on the student loans. The district court denied KeyBank's motion to compel arbitration under the Broughton-Cruz rule. Kilgore, 2012 WL 718344 at *3-*4.

The Ninth Circuit reversed, holding that the FAA preempted the Broughton-Cruz rule "because the rule 'prohibits outright the arbitration of a particular type of claim'—claims for broad public injunctive relief." Id. at *10, quoting Concepcion, 131 S. Ct. at 1747. The Ninth Circuit found the state rationale behind this rule—that the judiciary is better suited to administer public injunctions—irrelevant. "[F]ederal preemption requires that state law bend to conflicting federal law—no matter the purpose of the state law." Kilgore, 2012 WL 718344 at *12.

Next, Kilgore examined whether the arbitration clause was unconscionable. It noted that "generally applicable" contract defense doctrines like unconscionability still apply to arbitration clauses, but only "so long as those doctrines are not 'applied in a fashion that disfavors arbitration.'" Id. at *13, quoting Concepcion, 131 S. Ct. at 1747. As to procedural unconscionability, the arbitration provision gave plaintiffs 60 days to opt-out. Primarily for this reason, the Ninth Circuit rejected the plaintiffs' claim that the arbitration provision was buried in the fine print and that they did not have a meaningful opportunity to review it. Accordingly, the Kilgore court enforced the arbitration provision.



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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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