Kilgore v. KeyBank: Ninth Circuit Holds That FAA Preempts California Cases Holding That Actions for Public Injunctive Relief Are Not Subject to Arbitration

In Kilgore v. KeyBank, N.A., 673 F.3d 947 (3/7/12), the Ninth Circuit Court of Appeals weighed in on the question of the day: the impact of the Supreme Court's decision in AT&T Mobility v. Concepcion. The Court described its holding as follows:

These consolidated appeals involve the sometimes delicate and precarious dance between state law and federal law. [Plaintiffs] brought this putative class action against [KeyBank], alleging violations of California's Unfair Competition Law ("UCL"), Cal. Bus. & Prof.Code § 17200, in connection with private student loans that KeyBank extended to Plaintiffs. Each of Plaintiffs' loan contracts contained an arbitration clause, which the district court declined to enforce. [We] consider whether, in light of the Supreme Court's recent decision in AT&T Mobility LLC v. Concepcion, ___ U.S. ___, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011), the Federal Arbitration Act ("FAA" or "Act") preempts California's state law rule prohibiting the arbitration of claims for broad, public injunctive relief—a rule established in Broughton v. Cigna Healthplans of California, 21 Cal.4th 1066 (1999), and Cruz v. PacifiCare Health Systems, Inc., 30 Cal.4th 303 (2003). We consider also whether the arbitration clause is unconscionable. We have jurisdiction pursuant to 9 U.S.C. § 16(a)(1)(C).  

We conclude that (1) the FAA preempts the Broughton-Cruz rule and (2) the arbitration clause in the parties' contracts must be enforced because it is not unconscionable.... [We] reverse the district court's denial of KeyBank's motion to compel arbitration, vacate the judgment, and remand to the district court with instructions to enter an order staying the case and compelling arbitration. 

673 F.3d at 951.

In Broughton, the California Supreme Court held that plaintiffs could not be compelled to arbitrate claims under the Consumers Legal Remedies Act ("CLRA") when the plaintiff is functioning as a private attorney general, enjoining future deceptive practices on behalf of the general public. 673 F.3d at 958. In Cruz, the California Supreme Court extended this holding to cases for public injunctive relief under the Unfair Competition Law ("UCL"). Ibid. After reviewing a number of post-Concepcion district court decisions on this issue, the Ninth Circuit held:

We hold that the Broughton-Cruz rule does not survive Concepcion because the rule "prohibits outright the arbitration of a particular type of claim" — claims for broad public injunctive relief. Concepcion, 131 S.Ct. at 1747. Therefore, our statement in Davis — that Broughton and Cruz prohibit the arbitration of public injunctive relief claims in California—is no longer good law.   

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.

673 F.3d at 960-961.

The Court also cited the recent decision in Marmet Health Care Center, Inc. v. Brown, 565 U.S. ___, 132 S.Ct. 1201, 182 L.Ed.2d 42 (2012) (per curiam) (discussed here), in which the Supreme Court held that under the FAA, an arbitration agreement between a nursing home and a patient's family member was enforceable in a suit against the nursing home for personal injury or wrongful death—despite the West Virginia Supreme Court of Appeals' conclusion that arbitration of such claims was against that state's public policy.

The Court then considered the plaintiff's argument that the arbitration agreement at issue was unconsconable -- an analysis that the Court held was still viable after Concepcion. The Court then held that the clause at issue was not procedurally unconscionable.

Here, the arbitration clause in the Note, like that at issue in [Circuit City Stores, Inc. v. Ahmed, 283 F.3d 1198, 1199-1200 (9th Cir.2002)], withstands scrutiny. The arbitration agreement is not buried within the document; it is conspicuous and appears in its own section of the Note. The Note contains 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: the right to litigate in court, the right to a jury trial, and the right to proceed on a class basis. The arbitration clause even points out that the costs of arbitration could be higher than those of a trial.

673 F.3d at 964. Having held that the clause at issue was not procedurally unconscionable, the Court did not address whether it was substantively unconscionable.

The opinion is available here.