The US Court of Appeals for the Ninth Circuit released two opinions yesterday of some interest.  In Chavarria v. Ralphs Grocery Company (No. 11-56673, October 28, 2013), the Court of Appeals held that the arbitration provision in an employment agreement was unenforceable because it was “procedurally unconscionable because it was a condition of applying for employment and was presented on a “take it or leave it” basis.  In addition, its terms were not provided to the plaintiff until three weeks after she had agreed to be bound by it.  The panel held that the arbitration policy was substantively unconscionable because it was unjustifiably one-sided to such an extent that it “shocked the conscience.”  Specifically, the policy’s arbitrator selection process would always produce an arbitrator proposed by the defendant in employee-initiated arbitration proceedings; the policy precluded institutional arbitration administrators, which have established rules and procedures to select a neutral arbitrator; and the policy’s arbitrator-fee-apportionment provision would have the effect of pricing employees out of the dispute resolution process.”  Moreover, “Ralphs’ terms required that the arbitrator impose significant costs on the employee up front, regardless of the merits of the employee’s claims, and severely limited the authority of the arbitrator to allocate arbitration costs in the award.”  The text of the unanimous opinion is available here – docs.justia.com/cases/federal/appellate-courts/ca9/11-56673/11-56673-2013-10-28.pdf.

The question of claims for breach of State statutory obligations and injunctive remedies was at issue in the second decision, Ferguson, et al. v. Corinthian Colleges, Inc., et al. (No. 11-56965, October 28, 2013) (opinion available here – docs.justia.com/cases/federal/appellate-courts/ca9/11-56965/11-56965-2013-10-28.pdf).  Plaintiffs alleged in a class action proceeding in the US Federal courts that Corinthian and related entities (which own and operate for-profit academic institutions) had engaged in a deceptive scheme to entice the enrollment of prospective students in violation of California State law.  The class plaintiffs asserted inter alia “claims under California’s unfair competition law (“UCL”), California Business and Professions Code § 17200 et seq.; false advertising law (“FAL”), California Business and Professions Code §17500 et seq.; and Consumer Legal Remedies Act (“CLRA”), California Civil Code § 1750 et seq.  Plaintiffs sought both money damages and injunctive relief under those statutes.” 

The various student enrollment documents contained arbitration clauses.  Corinthian therefore sought to compel arbitration rather than proceed with the class action in the district court.  The district court granted the motion to compel arbitration as it related to the damages claims, but denied the motion regarding plaintiffs’ claims for injunctive relief under California’s unfair competition law, false advertising law and Consumer Legal Remedies Act.

The district court relied on a line of decisions by the California Supreme Court starting in 1999 (the so-called Broughton-Cruz rule), which exempted claims for “public injunctive relief” from arbitration.  The California Supreme Court had developed the Broughton-Cruz rule “[b]ecause of an “inherent conflict” between arbitration and the purposes of the [California Consumer Legal Remedies Act] …. The California court identified two factors that create the conflict.  First, public injunctions under the CLRA are “for the benefit of the general public rather than the party bringing the action,” and, second, the “judicial forum has significant institutional advantages over arbitration in administering a public injunctive remedy, which as a consequence will likely lead to the diminution or frustration of the public benefit if the remedy is entrusted to arbitrators.””

On appeal, the Ninth Circuit Court of Appeals, again unanimously, held that the that the California Broughton-Cruz rule was preempted by the US Federal Arbitration Act, relying on more recent US Supreme Court decisions.  The summary explains:

The  panel held that under AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), and Marmet Health Care Center, Inc. v. Brown, 132 S. Ct. 1201 (2012) (per curiam), the Broughton-Cruz rule was preempted because it prohibits outright arbitration of a particular type of claim.

The appellate judges noted (citations omitted) that “[p]ursuant to the Supremacy Clause of the United States Constitution, “the FAA preempts contrary state law.” … In enacting the FAA, Congress “withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.” …. We are thus prohibited from applying any state statute that invalidates an arbitration agreement. …  Nor may we apply any other state law that “prohibits outright the arbitration of a particular type of claim.””

Applying these principles, the appellate court also held that there was no meaningful distinction between injunctive and damages remedies under the applicable US Supreme Court precedents (citations omitted).

We reject the argument that because an injunction is technically a remedy rather than a cause of action, the Broughton-Cruz rule is insulated from the FAA. We do not think the Supreme Court intended such a technical reading of the word “claim.” As we have recognized en banc, recent Supreme Court decisions “have given broad effect to arbitration agreements.” …. Just a few months ago, the Supreme Court reiterated that “courts must ‘rigorously enforce’ arbitration agreements according to their terms.””

In addition to the policy of deference to arbitration agreements, the Ninth Circuit also commented that the Broughton-Cruz rule developed by the California Supreme Court had been based as well on an incorrect understanding of the Constitutional framework for assessing possible conflicts between a Federal statute (the FAA), on the one hand, and a State statute (the CLRA), on the other.  According to the Federal appellate court, the California Broughton-Cruz rule improperly treated California State law as standing on the same level as US Federal law.  In this regard, the Court of Appeals quoted US Supreme Court Justice Kagan’s pungent comment on the federalism issue in dissent in Italian Colors (“We have no earthly interest (quite the contrary) in vindicating” a state law.)

Subsequent decisions of the United States Supreme Court have made clear that the Broughton-Cruz rule is flawed in other ways as well.  To begin with, the California Supreme Court relied on the inherent conflict analysis drawn from Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 627–28 (1985), but, as observed in the Italian Colors dissent, that analysis does not apply to state statutes such as those that form the basis of Plaintiffs’ request for a public injunction in this case.  The “effective vindication” exception, which permits the invalidation of an arbitration agreement when arbitration would prevent the “effective vindication” of a federal statute, does not extend to state statutes. See Italian Colors, 133 S. Ct. at 2320 (Kagan, J., dissenting).

The effective vindication and inherent conflict exceptions are two sides of the same coin—the former turning on the ability to vindicate a statute, and the latter turning on the underlying purposes of a statute.  Both exceptions are reserved for claims brought under federal statutes.  They rest on the principle that other federal statutes stand on equal footing with the FAA.  In both Mitsubishi Motors and Italian Colors the claims at issue were under the federal antitrust laws, and the argument was that the federal antitrust statutes modified the FAA.  “In [the] all-federal context, one law does not automatically bow to the other.” Id.  In contrast, as bluntly stated by Justice Kagan in her dissent in Italian Colors, “We have no earthly interest (quite the contrary) in vindicating” a state law. Id.  Plaintiffs in this case, like the plaintiffs in the Broughtonand Cruz cases, are pursuing state statutory claims.

Additionally, the appellate panel rejected the alternative argument that the class plaintiffs should not be required to arbitrate their “public injunction claims” because those claims did not fall within the scope of the arbitration clauses in the Corinthian student enrollment documents.  The Court of Appeals reminded the parties of the principle in FAA jurisprudence that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.”  The arbitration clauses provided that prospective Corinthian students agreed to “submit any and all claims to the decision of an arbitrator instead of a court” and that “any dispute arising from my enrollment, no matter how described, pleaded or styled, shall be resolved by binding arbitration under the Federal Arbitration Act.”  Applying the “any doubts shall be resolved in favor of arbitration” principle to these arbitration clauses, the court concluded that the statutory claims and request for injunctive relief did indeed fall within the scope of the arbitration agreements.

The parties also disputed what might happen if the arbitral panel concluded that Corinthian was in fact liable for breach of the applicable California State statutes, but that the arbitrators did not have authority to issue the requested injunctive relief.  The Ninth Circuit considered that the plaintiffs could then return to Federal court to seek the injunction, but offered no view on the merits of such a request in that situation.

In the event that the arbitrator concludes that Corinthian has violated the UCL, FAL, or CLRA, and that entry of an injunction might be appropriate, but further determines that it lacks the authority under the agreements at issue to grant the requested injunction, Plaintiffs may seek the requested injunction in court.  We express no opinion about the merits of such action.

Thanks to Mark Kantor for regularly providing these great summaries.

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