• FAA Preempts California Rule Barring Arbitration of Certain Claims for Injunctive Relief, Federal Court Rules
  • November 7, 2013
  • Law Firm: Jackson Lewis P.C. - White Plains Office
  • The Federal Arbitration Act (“FAA”) preempted the California Supreme Court’s rule exempting claims for “public injunctive relief” from arbitration (known as the “Broughton-Cruz” rule), the U.S. Court of Appeals for the Ninth Circuit has ruled, reversing an order denying arbitration. Ferguson v. Corinthian Colleges, Inc. et al., No. 11-56965 (9th Cir. Oct. 28, 2013). The Court found the Broughton-Cruz rule was “clearly irreconcilable” with the U.S. Supreme Court’s recent decisions on the FAA. The Ninth Circuit returned the case to the district court, directing it to order arbitration.

    Background
    Former students of various for-profit schools owned by Corinthian Colleges, Inc., filed a class action suit alleging that Corinthian engaged in a deceptive scheme to entice the enrollment of prospective students in violation of California law (i.e., unfair competition law (“UCL”), Cal. Bus. & Prof. Code § 17200 et seq.; false advertising law (“FAL”), Cal. Bus. & Prof. Code §17500 et seq.; and Consumer Legal Remedies Act (“CLRA”), Cal. Civ. Code § 1750 et seq.) The students sought monetary damages and injunctive relief. Corinthian asked the district court to compel arbitration based on arbitration provisions contained in the students’ enrollment agreements. The district court denied the motion as to the students’ claims for injunctive relief, finding that California’s Broughton-Cruz rule barred arbitration of these claims. Corinthian appealed.

    Applicable Law
    Broughton-Cruz Rule

    The California Supreme Court held that arbitration could not be compelled for certain “public injunction” claims. Broughton v. Cigna Healthplans of California, 988 P.2d 67 (Cal. 1999). In Broughton, a mother and minor child sued Cigna for deceptive advertising in violation of the CLRA and sought an order to enjoin the company’s deceptive practices. Affirming the denial of a motion to compel arbitration of the CLRA claims, the California Supreme Court noted that, when a party seeks an injunction under the CLRA, the party functions as a private attorney general, enjoining future deceptive practices on behalf of the general public. In these circumstances, the California Supreme Court held that arbitration could not be compelled for such “public injunction” claims. Thereafter, in Cruz v. PacifiCare Health Systems, Inc., 66 P.3d 1157 (Cal. 2003), the California Supreme Court extended Broughton to claims for public injunctive relief under California’s UCL and FAL.

    Federal Arbitration Act

    The Federal Arbitration Act provides that agreements to arbitrate are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” It reflects, the U.S. Supreme Court stated, an “emphatic federal policy” in favor of arbitration. Marmet Health Care Ctr., Inc. v. Brown, 132 S.Ct. 1201 (2012). The FAA preempts contrary state law.

    In AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), the U.S. Supreme Court struck down California law prohibiting class action waivers in consumer arbitration agreements as preempted by the FAA. The Court stated, “When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.” Likewise, in Marmet Health Care Ctr., the Supreme Court struck down the West Virginia Supreme Court’s rule invalidating any predispute agreement to arbitrate a personal injury or wrongful death claim against a nursing home, finding that the state high court’s interpretation of the FAA was “both incorrect and inconsistent with [the Supreme Court’s] clear instruction.”

    State Rule Preempted by FAA
    Applying Concepcion and Marmet, the Ninth Circuit concluded California’s Broughton-Cruz rule was preempted by the FAA because it prohibited the arbitration of specific claims for injunctive relief. The Court declined to address in advance the question of the remedy to which the students might be entitled if the arbitrator determined that he or she lacked the authority to issue an injunction. In such a case, the Court noted, the students could return to court to request injunctive relief.

    ***

    This case reiterates that blanket exclusions of particular types of claims or remedies from arbitration will not pass muster under the FAA. However, employers should keep in mind that arbitration agreements remain subject to challenge using traditional contract defenses such as unconscionability and duress, as the California Supreme Court recently emphasized in Sonic-Calabasas A, Inc. v. Moreno, No. S174475 (Cal. Oct. 17, 2013).