9th Circuit Holds that FAA Preempts Broughton-Cruz Rule

In its first post-Concepcion case involving the enforceability of arbitration clauses, the U.S. Court of Appeals for the Ninth Circuit reversed the district court's denial of the plaintiffs' motion to compel arbitration, holding that the Federal Arbitration Act (FAA) preempts California's exemption of public injunctive relief for arbitration.

In Kilgore v. KeyBank, the plaintiffs brought a putative class action against KeyBank and other defendants for violations of California's Unfair Competition Law (UCL) in connection with private student loans extended to plaintiffs for flight instruction at Silver State Helicopters, LLC (SSH), a private helicopter vocational school.  The Plaintiffs filed suit against KeyBank after SSH closed its doors and filed for bankruptcy, leaving plaintiffs without a diploma, certificate, or other accreditation for their training.

Plaintiffs and each putative class member borrowed between $50,000 and $60,000 from KeyBank and signed loan contracts which contained an arbitration clause informing plaintiffs that they could opt out of the clause and if they did not, that they would waive their rights to litigate any claim in court and proceed with any claim on a class basis.  The Notes also contained several conspicuous statements warning plaintiffs of the consequences of signing the agreement and cautioning them to read it thoroughly.

Plaintiffs complaint, which was initially filed in California state court, sought injunctive relief in the form of an order enjoying KeyBank from: 1) reporting any default by the plaintiffs/class to any credit reporting agencies, 2) enforcing the Notes against plaintiffs/class, or 3) engaging in false and deceptive acts and practices with respect to consumer credit contracts involving purchase money loans.  Plaintiffs also claimed that the arbitration clause was unconscionable.

KeyBank removed the case to federal court and moved to compel arbitration. The district court denied the motion, holding that the Broughton-Cruz rule, as established by Broughton v. Cigna and Cruz v. Pacificare, prohibited the arbitration of plaintiffs' claims for public injunctive relief and that therefore, the arbitration clause was unenforceable.  KeyBank appealed.

On appeal, the Ninth Circuit held that the FAA preempted California's Broughton-Cruz Rule and that the plaintiffs could not opt out of the arbitration agreement.  The Court  that the Broughton-Cruz rule does not survive the Supreme Court's landmark decision in AT&T Mobility LLC v. Concepcion because the Rule "prohibits outright the arbitration of a particular type of claim", specifically, claims for broad public injunctive relief, in violation of Concepcion's mandate that state law cannot prohibit arbitration of certain types of claims.  The Court noted that although the plaintiffs were correct in their argument that the Concepcion opinion did not address the question of arbitrability of a public injunction remedy, the policy arguments justifying the Broughton-Cruz rule, however worthy, could not invalidate an otherwise enforceable arbitration agreement.  The Court reasoned that in enacting the FAA, "Congress declared a national policy favoring arbitration and 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."

Regarding plaintiffs' claim that the arbitration clause was unconscionable, the Court held that the arbitration clause in the Note withstood scrutiny.  The Court reasoned that the clause was not buried within the document, contained more than one statement setting forth in plain language the rights that plaintiffs would waive if they did not opt-out of the arbitration clause, and was conspicuous and appeared in its own section of the Note.  The Court held that the plaintiffs must be held to their decision to sign the Note-and accept at least a portion of the benefit of their contract with KeyBank-without opting out of the arbitration agreement.

The Court reversed the district court's denial of KeyBank's motion to compel arbitration and remanded the case with instructions to stay the case and compel arbitration. 

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