chevron-down Created with Sketch Beta.
June 24, 2013 Articles

Ninth Circuit Retreats from Complete Destruction of Broughton-Cruz Rule

By Sheila J. Carpenter

In AT&T Mobility LLC v. Concepcion, 563 U.S. ___, 131 S.Ct. 1740, 1745 (2011) (Concepcion), the Supreme Court struck down the "Discover Bank rule," California's judicially crafted prohibition of class action waivers in arbitration agreements. See Discover Bank v. Superior Court, 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (2005). Concepcion also brought into question the validity of California's "Broughton-Cruz rule," another judicially crafted doctrine allowing plaintiffs to avoid arbitration in cases involving claims for relief in the form of a "public injunction." See Broughton v. Cigna Healthplans of California., 21 Cal. 4th 1066, 90 Cal.Rptr.2d 334, 988 P.2d 67 (Cal. 1998 and Cruz v. PacifiCare Health Systems, Inc., 30 Cal.4th 303, 133 Cal.Rptr.2d 58, 66 P.3d 1157 (Cal. 2003).

In a decision issued April 11, 2013, the Ninth Circuit, sitting en banc, declined the opportunity to settle the question of whether seeking a "public injunction" can allow a party to avoid an arbitration agreement, opining that it need not reach the validity of Broughton-Cruz because it was able to compel arbitration on other grounds. Kilgore v. KeyBank, ___ F.3d ___, 2013 WL 1458876 (9th Cir. 2013) (Kilgore II). Kilgore II grew out of the panel decision in Kilgore v KeyBank, N.A., 673 F.3d947 (9th Cir. 2012) (Kilgore I), which had declared the Broughton-Cruz rule voided by the Supreme Court's decision in Concepcion. (None of the panel judges sat en banc.) (I addressed Kilgore I at length in "The FAA Dictates the Supremacy of Arbitration Agreements . . . Right?"

Is Concepcion's Reach Broader than Invalidating the Discover Bank Rule?
It is well settled that the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., embodies a liberal federal policy favoring arbitration, specifying in Section 2 that arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." It is equally well settled that the language of the "savings clause" that is part of Section 2 preserves contract defenses, such as fraud, duress, or unconscionability that could be used to avoid any contract, allowing courts to determine that an arbitration agreement may be avoided on these grounds. Concepcion, 131 S.Ct. at 1746. The judicial hostility to arbitration that prompted the adoption of the FAA in 1925 (e.g., Id.) has persisted in certain courts and federal courts have repeatedly had to review and overturn state court decisions that allowed a litigant to avoid arbitration in violation of the FAA. Alternative Dispute Resolution practitioners are familiar with the volume of Supreme Court and other appellate cases generated by the conflict between legislative policies favoring arbitration and the willingness of some courts to use the "savings clause" to defeat arbitration agreements. Numerous such opinions have their origins in California, particularly in the consumer context, where the reason proffered for avoiding arbitration is that the arbitration agreement is "unconscionable."

Concepcion disapproved the use of "unconscionability" as a mechanism to overcome a prohibition on class actions in an arbitration clause. The Broughton-Cruz rule allows another use of "unconscionability," using that elastic term to exempt from arbitration cases in which an injunction to benefit the public interest is sought. The rationale is that with a broader interest at stake, arbitration of claims one-by-one is inappropriate. The plaintiffs in Kilgore presented some interesting arguments and some sympathetic facts; but, in the end, they were not enough to overcome the fact that they had signed an obvious and clear arbitration agreement and did not exercise their option to reject it.

Kilgore II

Claimants offer some sympathetic facts. Plaintiffs Kilgore and Fuller (collectively Students) were students at a helicopter flight school, which not only provided disappointing instruction but also filed for bankruptcy before the students graduated. KeyBank had assisted the flight school in recruiting students by offering loans to each student of more than $50,000 to cover the cost of the school. KeyBank transmitted the entire proceeds of the loan to the school upon enrollment, so when the school failed the Students had no opportunity to recover any of the loan proceeds. They had not received what they paid for, but they still owed KeyBank more than $50,000 each. The Students sued KeyBank, which held their notes, a related entity, and Great Lakes Education Loan Services, Inc., the loan servicer (collectively Lender), bringing a purported class action in California state court seeking to have KeyBank enjoined from reporting their defaulted student loans to credit bureaus and from attempting to collect on the loans.

Some facts are not so sympathetic. The notes the Students signed contained an arbitration clause that prohibited both class arbitration and consolidated proceedings. The arbitration clause was clear and prominent. Kilgore II cited the following excerpts as relevant:

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 PERTAINING TO ANY CLAIM SUBJECT TO ARBITRATION. . . . I UNDERSTAND THAT OTHER RIGHTS I WOULD HAVE IF I WENT TO COURT MAY ALSO NOT BE AVAILABLE IN ARBITRATION. . . .

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.

Kilgore II, 2013 WL 1458876 at *1.

 Significantly, the Students had an opportunity to reject arbitration: "The Note further provided that '[t]his Arbitration Provision will apply to my Note . . . unless I notify you in writing that I reject the arbitration provisions within 60 days of signing my Note.'" Id.

Procedural History
This case has a somewhat unusual procedural history. The Students sued in California state court, requesting only an injunction. This put them in a position potentially to take advantage of the Broughton-Cruz rule, exempting their cases from mandatory arbitration. The substantive focus of their complaint was that the KeyBank note violated California's unfair competition laws because it did not include the notice required by Federal Trade Commission's "Holder Rule." Id. at 1. The Holder Rule requires that a notice be included in consumer credit contracts disclosing that the lender is subject to the same claims and defenses as the seller. Id. at 1, fn. 3.

The Lender removed the case and filed a motion to compel arbitration, which the district court denied. (This portion of the case took place prior to the decision in Concepcion.) Defendants then filed an appeal to the Ninth Circuit. Despite the pendency of the appeal, the district court allowed the Students to file a third amended complaint and then granted the Lender's motion to dismiss, engendering a second appeal by the Students. The Ninth Circuit panel held that Concepcion had vitiated the Broughton-Cruz rule and that the arbitration agreement was not unconscionable. It therefore remanded the case to the district court for entry of an order compelling arbitration and staying the litigation. This mooted the Students' appeal. Kilgore I, 673 F.3d at 951. The Ninth Circuit took up the case en banc, reaching the same result on somewhat different grounds.

Key rulings from the en banc Ninth Circuit. Judge Hurwitz, writing for the 10–1 majority, made short work of the Students' invocation of the FAA's savings clause to support their arguments that the arbitration clause in question was both procedurally and substantively unconscionable. (Both findings are required under California law to find an arbitration clause unconscionable; a weak showing on one may be balanced by a strong showing of the other type of unconscionability.) Kilgore II, 2013 WL 1458876 at *3. The Students' argument that the arbitration clause's ban on class arbitration made it substantively unconscionable was foreclosed by Concepcion and their argument that the expense of an arbitration was too high was dismissed as speculative in light of Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 90–91 (2000). Their arguments of procedural unconscionability were rejected because the clause was prominent—clearly labeled under its own heading and in boldface—and because the Students had the option to reject the arbitration provision within 60 days after execution of the note.

The court rejected, however, the Lender's appeal that it pronounce the Broughton-Cruz rule dead. Instead, the court held that the injunction sought by the Students was not one primarily to benefit the public, as California law required, but to benefit themselves. The injunction the Students sought included a bar to reporting and attempting to collect the student loan debt, but it also included a bar to disbursing loan proceeds to any seller whose consumer credit contract omitted the language required by the Holder Rule. The court held that because there were only 120 students in the proposed class, the relief for the students was for their personal benefit and not the public's. Because KeyBank had withdrawn from the student loan market, the wider injunction had no practical purpose. Broughton-Cruz reserves the resolution of public injunction cases to the courts because courts have advantages over arbitral forums in administering relief. However:

That concern is absent here, where Defendants' alleged statutory violations have, by Plaintiffs' own admission, already ceased, where the class affected by the alleged practices is small . . . , and where there is no real prospective benefit to the public at large from the relief sought.

Kilgore II, 2013 WL 1458876 at *5.

Is the Broughton-Cruz Rule Dead?
Likely. Kilgore II can be read as an effort to avoid invalidating a rule crafted by the California Supreme Court to give that court time to do the work itself. At least one California intermediate appellate court has concluded that Broughton-Cruz cannot survive Concepcion. The case was decided before Kilgore II and cited Kilgore I as support. Nelsen v. Legacy Partners Residential, Inc, 207 Cal.App.4th 1115, 1135–36, 144 Cal.Rptr.3d 198 (2012).

While Kilgore I is no longer the opinion of the Ninth Circuit, the Circuit's retreat from Kilgore I's invalidation of the Broughton-Cruz rule does not detract from Kilgore I's reasoning that Concepcion invalidates not only California's class action exemption from arbitration but also the public injunction exception. Indeed, Kilgore II illustrates how easily a purported "public injunction"can be crafted as part of the relief sought. It did not work in Kilgore II because the Students' own pleading recited that KeyBank was out of the student loan business. However, artful wording might save other efforts to avoid arbitration. When such a case comes before the Ninth Circuit, it will not be in a position to take a pass again.

Keywords: ADR, litigation, Kilgore, Broughton-Cruz, arbitration, public injunction, Concepcion