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Ninth Circuit Revives California Law That Allows Plaintiffs Seeking Injunctive Relief To Avoid Arbitration

More than one year ago, a three-judge panel of the Ninth Circuit determined that California case law, which precluded arbitration of claims asking for public injunctive relief, was preempted by the Federal Arbitration Act.  Upon rehearing the case en banc, the Court backpedaled.  Kilgore v. KeyBank Nat’l Assoc., __ F.3d __, 2013 WL 1458876 (9th Cir. April 11, 2013).  Ten judges of that Circuit concluded that the California case law simply did not apply to the plaintiffs’ claims, so there was no reason to reach the preemption question.  One judge dissented.

This case involves a class of 120 sympathetic students of a failed flight school, who claim the bank affiliated with the school, which loaned money to the students, violated the California Unfair Competition Law.  All the promissory notes signed by the students contained an arbitration clause that covered their claims and barred anything other than individual arbitrations.  The students asked the court to enjoin the bank from reporting non-payment to credit agencies, from enforcing the notes, and from disbursing any loan proceeds in the future if the consumer credit contract did not comply with FTC regulations.

The bank moved to compel arbitration and the district court denied the motion.  On appeal, a three judge panel of the Ninth Circuit reversed, finding that the FAA preempted California’s Broughton-Cruz rule.  The Broughton-Cruz rule had been developed by the California Supreme Court based on its recognition that the FAA was in conflict with California statutes authorizing public injunctive relief.  Under that rule, claims for monetary relief are subject to arbitration, but claims brought under California statutes that seek injunctive relief for the general public are not subject to arbitration.

When eleven members of the Ninth Circuit reheard the case, however, they left the Broughton-Cruz rule intact.  They were able to dodge the entire preemption analysis by concluding that the injunctions sought by these plaintiffs did not affect enough people to be considered public injunctive relief to trigger the Broughton-Cruz rule.  The majority found the injunction primarily benefited the 120 putative class members.  The majority also concluded that the arbitration agreement was not unconscionable under California law.  As a result, it reversed the district court and remanded with instructions to compel arbitration.

One judge, however, felt strongly that the district court should be affirmed.  The lone dissenter did not analyze the Broughton-Cruz rule, but instead concluded the arbitration agreement was unconscionable under general California law.

Kilgore is significant because it revives the Broughton-Cruz rule.  For everyone else, Kilgore is significant because it shows how skittish courts are about applying Concepcion’s preemption analysis.

 

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