Friday, April 25, 2014

FYI: 9th Cir Limits "Public Injunction" Exception to Federal Arbitration Act

Saturday, April 13, 2013

Reversing the lower court, the U.S. Court of Appeals for the Ninth Circuit recently ruled that putative class-action claims under California's Unfair Competition Law were subject to arbitration, where an arbitration provision in student loan agreements was neither substantively nor procedurally unconscionable, and plaintiffs' claims for injunctive relief did not fall within the "public injunction" exception to the Federal Arbitration Act's broad mandate to recognize arbitration agreements.  In so ruling, the Court reasoned that the requested relief related only to past harms and would not benefit the public at large, and thus did not fall within the exception. 


Plaintiffs, former flight-training students ("Students"), obtained loans from defendant bank ("Bank") to finance their tuition at a flight school that failed before they could graduate.   The promissory notes on the loans contained a prominent arbitration clause which expressly waived the right to litigate claims and contained a waiver of class-action arbitration.  The note also provided that Students had 60 days from the date of signing to opt-out of the arbitration provisions by so notifying Bank in writing. 

Alleging violations of California's Unfair Competition Law ("UCL"), Cal. Bus & Prof. Code §§ 17200-17210, based on Bank's supposed failure to include certain language in the note mandated by the Federal Trade Commission, Students filed putative class-action lawsuits in state court against Bank and another defendant (collectively, "Defendants"), seeking to enjoin them from reporting loan defaults to credit reporting agencies and from enforcing the notes against Students.   Defendants removed the case to federal court and filed a motion to compel arbitration.  The lower court denied the motion.  Defendants appealed.   

After Defendants filed their appeal, the lower court allowed Students to file a third amended complaint, but granted Defendants' motion to dismiss for failure to state a claim.  Plaintiffs appealed.

In this consolidated appeal, the Ninth Circuit vacated the dismissal of Students' claims and reversed the denial of Defendants' motion to compel.

As you may recall, the Federal Arbitration Act ("FAA") broadly recognizes arbitration clauses as "valid, irrevocable, and enforceable."  9 U.S.C. § 2.  The FAA also "preserves generally applicable contract defenses" by providing that arbitration agreements are "enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."  Id.; see also AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1753 (2011)("Concepcion")(holding that the FAA preempted California rule against class-action waivers).

Recognizing that state-law defenses to the enforceability of contracts, such as fraud, duress, or unconscionablity, also applied to arbitration agreements, the Ninth Circuit noted that under California law, contractual provisions that are both procedurally and substantively unconscionable are unenforceable.  Thus, applying this two-prong standard in light of Concepcion, the Court rejected Students' assertion that the arbitration clause's ban on class actions was unconscionable under California law, explaining that the argument that the ban on class arbitration was unconscionable under state law "is now expressly foreclosed by Concepcion." 

The Ninth Circuit also noted that nothing in the arbitration provision was substantively or procedurally unconscionable.  In so doing, the Court pointed out the relatively generous 60-day opt-out period as well as the prominent nature of the provision itself.  See Circuit City Stores, Inc. v. Ahmed, 283 F.3d 1198, 1199-1200 (9th Cir. 2002)(finding 30 day opt-out period sufficient amount of time).

Turning next to Students' request for injunctive relief, the Ninth Circuit noted that claims for "public" injunctive relief may be exempt from the FAA.  See Broughton v. Cigna Healthplans of California, 988 P.2d 67, 73, 78 (Cal. 1999)(holding that claim for damages was subject to arbitration clause, but that claims seeking relief enjoining future deceptive practices on behalf of general public were not arbitrable); Cruz v. PacifiCare Health Systems, Inc. 66 P.3d 1157 (Cal. 2003) (ruling that claims for monetary relief were subject to arbitration, because public benefit was merely "incidental to private benefits obtained" from the action, but that UCL claims seeking injunctive relief were for the benefit of general public and therefore not subject to arbitration).

Nevertheless, the Ninth Circuit held that Students' claim for injunctive relief in this case did not fall within the narrow "public injunction" exception to the FAA's rule that courts honor arbitration agreements.  Pointing out in part that Students specified in their complaint that Bank had withdrawn from the student loan business, the Court reasoned that, because the requested relief would thus only benefit the roughly 120 putative class members, and that "the injunctive relief sought . . . for all practical purposes, relates to past harms suffered by" them, their claims did not fall within the so-called "Broughton-Cruz" exemption to the FAA.

The Ninth Circuit thus concluded that absent from this case was the concern present in both Broughton and Cruz that a public benefit could be frustrated if arbitrators were entrusted to administer a public injunctive remedy.  Noting Students' concession that the alleged UCL violations already ceased, the small size of the affected class, and the lack of any prospective benefit to the public, the Court determined that the arbitration clause was enforceable.

Accordingly, the Ninth Circuit remanded, instructing the lower court to compel arbitration of Students' claims.



Eric Tsai
McGinnis Wutscher Beiramee LLP
 
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