Court Also Lays Bare The Policy Consequences For The Privatization Of Consumer Justice
In Kilgore v. KeyBank, No. 09-16703 & No. 10-15934 (9th Cir. March 7, 2012) (authored by Judge Trott) (for publication), the Ninth Circuit resolves an FAA preemption issue dividing the district courts, lays bare the policy consequences for consumer justice, and provides a roadmap for drafting an arbitration clause that will survive claims of procedural unconscionability.
The named plaintiffs, who had been students of a private helicopter vocational school, sued the school on behalf of themselves and others similarly situated. Plaintiffs claimed that the school was a “sham aviation school” targeting limited-income individuals unable to pay for their training without student loans; that the school’s “preferred lender” provided the loans; that the school obtained the loan proceeds; that the school failed before the students could complete their training; and that the lender purportedly knew that aviation schools were “a slowly unfolding disaster”, yet continued to loan money to students. Because of a bankruptcy stay, the students could not prosecute their claims against the school, and so turned their attention to the lender.
Each of the lender’s Notes, however, contained an arbitration clause that the district court declined to enforce. In one interlocutory appeal (the second appeal was dismissed as moot), the Kilgore court considered whether, in light of AT&T Mobility, Inc. v. Concepcion, __ U.S. __ 131 S.Ct. 1740 (2011), the FAA “preempts California’s state law rule prohibiting the arbitration of claims for broad, public injunctive relief – a rule established in Broughton v. Cigna Health-Plans of California, 988 P.2d 67 (Cal. 1999), and Cruz v. Pacificare Health Systems, Inc., 66 P.3d 1157 (Cal. 2003).” Kilgore holds that the FAA does preempt the Broughton-Cruz rule.
What are the policy consequences of federal preemption of the Broughton-Cruz rule? Well, what did the rule protect? In Broughton, the California Supreme Court concluded that an agreement to arbitrate could not be enforced in a case where the plaintiff is “functioning as a private attorney general, enjoining future deceptive practices on behalf of the general public” to enforce the Consumers Legal Remedies Act (CLRA). The California court “noted that enforcement of an arbitrator’s injunction would require a new arbitration proceeding, but that a court retains jurisdiction and could more easily handled the ‘considerable complexity’ involved in supervising injunctions. . . . Further, judges ‘are accountable to the public in ways arbitrators are not.’”
In other words, Broughton found that there is a public benefit to not privatizing consumer justice in cases where a public injunction is sought under the CLRA. In Cruz, the California Supreme Court extended the Broughton rule to claims for public injunctive relief under the UCL. The court found that the “request for injunctive relief is clearly for the benefit of health care consumers and the general public . . . .” Hence, the “Broughton-Cruz rule.” That rule is what is lost through federal preemption.
We note the Kilgore court seems to be very aware of the cognitive dissonance that results when consumer claims affecting the public are dispatched to arbitration, for it cites Judge Carter’s statement in Ferguson v. Corinthian Colleges, ___ F.Supp.2d ___, No. 08:11-cv-00127-DOC-AJW, Dkt. 56, 2011 WL 4852339 (C.D. Cal. Oct. 6, 2011): “[b]ecause Plaintiffs’ injunctive relief claims seek to enforce a public right, there is an inherent conflict with sending these claims to an arbitrator.” But Kilgore holds 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.”
Now all the lender needed in Kilgore was a well-drafted arbitration clause that would withstand allegations that it was “unconscionable.” And the lender had such an arbitration clause: the clause was not buried in the document; it was conspicuous in bold, large font; it appeared in its own section of the Note; plain language in more than one place explained the consequences of not opting out of arbitration; the potentially higher costs of arbitration were pointed out; the borrower was given 60 days to opt out; the contract was clear and signed; and above the Plaintiff’s signature was a warning to read the contract before signing, “as well as a promise from the student that he would do so ‘even if otherwise advised’”. Thus, Kilgore provides a roadmap for drafting an arbitration clause.
Absent an unforeseeable interpretive tour de force, or unforeseeable legislative changes, a well-honed arbitration clause will increasingly be found in the legal arsenals of corporations that battle consumer, CLRA, and UCL claims in California. That’s bad news, or good news, depending on where you stand.
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