Federal Law Preempts State Law Barring Arbitration Of Claims For Public Injunction

On March 7, 2012, the Ninth Circuit held that the Federal Arbitration Act preempts California's rule prohibiting the arbitration of claims for public injunctions. Kilgore v. KeyBank, Nat'l Ass'n, --- F.3d ----, 2012 WL 718344, *10 (9th Cir. March 7, 2012). Referring to this as the "Broughton-Cruz rule," after the California Supreme Court's decisions in Broughton v. Cigna Healthplans of California, 21 Cal. 4th 1066 (1999), and Cruz v. Pacificare Health Systems, Inc., 30 Cal. 4th 303 (2003), the Ninth Circuit unanimously held that "the Broughton-Cruz rule does not survive" the United States Supreme Court decision in AT&T Mobility, Inc. v. Concepcion, 131 S. Ct. 1740 (2011) (FAA preempts California law refusing to enforce class action waivers in arbitration provisions).

Plaintiffs in Kilgore obtained private loans through KeyBank to pay their tuitions for a helicopter vocational school and each signed a promissory note containing an arbitration clause. Before plaintiffs could complete their training, the school went bankrupt and ceased operations. Plaintiffs then sued for a public injunction under California's Unfair Competition Law to prevent KeyBank from collecting on the student loans. The district court denied KeyBank's motion to compel arbitration under the Broughton-Cruz rule. Kilgore, 2012 WL 718344 at *3-*4.

The Ninth Circuit reversed, holding that the FAA preempted the Broughton-Cruz rule "because the rule 'prohibits outright the arbitration of a particular type of claim'—claims for broad public injunctive relief." Id. at *10, quoting Concepcion, 131 S...