On March 7, 2012, the Ninth Circuit Court of Appeals issued an opinion that significantly limits the power of California, and other states, to restrict the enforcement of arbitration agreements and class action waiver clauses.
In Kilgore, et al. v. KeyBank, et al., the plaintiffs were students of a private helicopter vocational school that had taken out private student loans from KeyBank. The helicopter school filed for bankruptcy before the students completed their training.
The students brought an action under California's Unfair Competition Law ("UCL"), Business and Prof. Code section 17200, alleging that KeyBank had knowledge that "the private student loan industry - and particularly aviation schools - was a slowly unfolding disaster," yet continued to make loans to students. The students sought an injunction preventing KeyBank from attempting to collect on the student loans or from reporting students who failed to pay their loans to credit rating agencies. KeyBank moved to compel arbitration under a contractual arbitration provision in the promissory notes the students had signed. The arbitration provision provided:
"IF ARBITRATION IS CHOSEN BY ANY PARTY WITH RESPECT TO A CLAIM, NEITHER YOU NOR I WILL HAVE THE RIGHT TO LITIGATE THAT CLAIM IN COURT OR HAVE A JURY TRIAL ON THAT CLAIM . . . FURTHER, I WILL NOT HAVE THE RIGHT TO PARTICIPATE AS A REPRESENTATIVE OR MEMBER OF ANY CLASS OF CLAIMANTS . . . I UNDERSTAND THAT OTHER RIGHTS THAT I WOULD HAVE IF I WENT TO COURT MAY ALSO NOT BE AVAILABLE IN ARBITRATION. THE FEES CHARGED BY THE ARBITRATION ADMINISTRATOR MAY BE GREATER THAN THE FEES CHARGED BY A COURT.
There shall be no authority for any Claims to be arbitrated on a class action basis. Furthermore, an arbitration can only decide your or my Claim(s) and may not consolidate or join the claims of other persons that may have similar claims.”
The arbitration clause also permitted the students to opt-out of the arbitration provision if they gave written notification within sixty days of signing the note.
The United States District Court refused to order arbitration under California's Broughton-Cruz rule which prohibited the arbitration of claims for broad, public injunctive relief such as those made under the UCL and the California Legal Remedies Act. The Ninth Circuit reversed.
The Ninth Circuit noted that the Federal Arbitration Act ("FAA") has a savings clause that allows arbitration agreements to be invalidated "upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. section 2. The FAA, therefore,
"preserves generally-applicable contract defenses and thus allows for invalidation of arbitration agreements in limited circumstances - that is, if the clause would be unenforceable 'upon such grounds as exist at law or in equity for the revocation of any contract.' 9 U.S.C. section 2.
However, any other state law rule that purports to invalidate arbitration agreements is preempted because the Act 'withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration."
In applying these principles, the Ninth Circuit recognized that the United States Supreme Court has identified two situations where the state law rule will be preempted. The first is when the state law rule provides an outright prohibition to the arbitration of a particular type of claim. The other, more complicated, situation is when a doctrine thought to be generally applicable, such as duress or unconscionability, is applied in a fashion that disfavors arbitration.
The Ninth Circuit held that the Broughton-Cruz rule was an outright prohibition on the arbitration of a particular type of claim, specifically claims for broad public injunctive relief, and was, therefore, preempted by the FAA. In so holding, the Ninth Circuit recognized that its ruling would undercut the public policy behind state statutes:
"We are not blind to the concerns engendered by our holding today. It may be that enforcing arbitration agreements even when the plaintiff is requesting public injunctive relief will reduce the effectiveness of state laws like the UCL It may be that FAA preemption in this case will run contrary to a state's decision that arbitration is not as conducive to broad injunctive relief claims as the judicial forum. And it may be that state legislatures will find their purposes frustrated. These concerns, however, cannot justify departing from the appropriate preemption analysis as set forth by the Supreme Court in Concepcion."
In addition, the Ninth Circuit found that the arbitration clause at issue was not unconscionable, reasoning that it was conspicuous, plainly set forth, and provided a means of opting-out.