ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Monday, March 26, 2012

California Public Policy on Arbitration Bows before Concepcion and the FAA

In Kilgore v. KeyBank, Nat’l Ass’n, plaintiffs brought a class action against KeyBank alleging violations of California’s Unfair Competition Law.  The parties received private student loans from KeyBank of between $50,000 and $60,000 to cover their costs while attending a private helicopter vocational school.   In connection with their loans, they signed promissory notes (the Notes) which clearly and conspicuously provided for arbitration, choice of law (Ohio), choice of forum (Ohio) and a class-action bar.  The Notes permitted parties to opt out of arbitration.   

HelicopterPlaintiffs allege that it would have been impossible for them to complete all requirements for graduation before the vocational school closed after filing for bankruptcy.  Plaintiffs they also allege that KeyBank knew the school was an “unfolding disaster” but still provided loan disbursement to the school.  Unable to sue their bankrupt helicopter school, the plaintiffs sued Keybank, seeking to enjoin the bank from collecting on the loans or reporting any default on the Notes. 

KeyBank moved to compel arbitration.  The District Court refused to apply Ohio law, finding that California had a fundamental policy interest in the case, based on its law prohibiting arbitration of claims seeking public injunctive relief.  Based on this policy, the District Court refused to compel arbitration in 2009 – that is before the U.S. Supreme Court decided Concepcion.  Under Concepcion, agreements to arbitrate may be invalidated by “generally applicable contract defenses such as fraud, duress, or unconscionability,” but not by defenses that relate only to arbitration or “derive their meaning from the fact that an agreement to arbitrate is at issue.”  Specifically, the Concepcion Court found that California’s public policy in favor of permitting class actions of small claims is pre-empted where it creates an obstacle to the public policy underlying the FAA, which favors the enforcement of arbitration agreements according to their terms.

The issue in Kilgore was whether California’s public policy favoring the litigation (rather than arbitration)  of claims seeking public injunctions could trump the FAA post-Concepcion as it did pre-Concepcion in two California Supreme Court cases, Broughton and Cruz.  The Ninth Circuit reluctantly concluded that the Broughton-Cruz line of cases is no longer viable post-Concepcion.  As the Supreme Court made clear in Marmet, about which we blogged last month, Concepcion’s reach is broad enough to preempt state public policies other than the specific one addressed in Concepcion.  The fact that a state legislature specifically intended to avoid federal preemption under the FAA is irrelevant.

The Court then addressed the unconscionability of the arbitration clause. The Court noted that the arbitration clause was at issue here was not buried in the contract and specified the rights that plaintiffs waived under arbitration.  In addition, the contract contained clear instructions on how to opt-out.  Finding no procedural unconscionability, the Court saw no need to address potential substantive unconscionability in the arbitration clause.  The case was remanded to the District Court with instructions to compel arbitration.

[JT & Janelle Thompson]

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