Ninth Circuit Snuffs Out 'Broughton-Cruz' Doctrine
SAN FRANCISCO — Over the last year, the U.S. Court of Appeals for the Ninth Circuit first killed and then revived a California state law that provides an escape hatch from compulsory arbitration.
On Monday the Ninth Circuit declared the law dead—again.
A three-judge panel ruled that California's Broughton-Cruz doctrine, which forbids the compulsory arbitration of claims for public injunctive relief, can't be reconciled with the U.S. Supreme Court's landmark 2011 decision AT&T Mobility v. Concepcion.
Though a different panel of the court reached the same conclusion 18 months ago, an en banc panel withdrew that decision earlier this year, saying the case could be decided without reaching the issue. All that did was delay the inevitable, as a new three-judge panel, this time led by Judge Richard Clifton, again plunged the dagger on Monday.
"A rule that precludes an arbitrator from fashioning injunctive relief is similar to the Supreme Court's illustrative list of preempted state rules in Concepcion," Clifton wrote in Ferguson v. Corinthian Colleges. Language in Concepcion "strongly suggests even where a specific remedy has implications for the public at large, it must be arbitrated under the [Federal Arbitration Act] if the parties have agreed to arbitrate it."
But the news wasn't all bad for plaintiffs Monday. The same panel that decided Ferguson also ruled that a compulsory arbitration agreement between Ralphs Grocery Co. and its employees "shocked the conscience" and was therefore unenforceable. That decision bolstered a ruling from the California Supreme Court last week which said that the doctrine of unconscionability remains viable in the wake of Concepcion.
"Federal law favoring arbitration is not a license to tilt the arbitration process in favor of the party with more bargaining power," Clifton wrote in Chavarria v. Ralphs Grocery Co.
The California Supreme Court established in Broughton v. Cigna Health Plans and Cruz v. Pacificare Health Systems that claims for injunctive relief on behalf of the general public cannot be forced into arbitration. The Ninth Circuit recognized the Broughton/Cruz rule for California cases in 2007, in Davis v. O'Melveny & Myers.
Last year a Ninth Circuit panel led by Judge Stephen Trott ruled the Broughton-Cruz doctrine had been overruled by Concepcion. But in rehearing the case en banc, Judge Andrew Hurwitz wrote that it wasn't necessary to reach the issue because the plaintiffs in that case, students at a failed school for helicopter pilots, were seeking only to enjoin a bank from collecting on their debts.
The Ferguson case decided Monday has similar facts. Students at vocational schools owned by Corinthian Colleges brought class actions alleging that the school misled them about future employment opportunities. Corinthian allegedly targeted veterans and military personnel so that they could obtain tuition through federal financial aid programs.
The students sought to enjoin the school from continuing to recruit other students through alleged misrepresentations, putting the Broughton-Cruz issue squarely in play. The result was the same as Trott's initial decision in the helicopter case. "We conclude that the portion of Davis applying the Broughton-Cruz rule is clearly irreconcilable with subsequent United States Supreme Court decisions concerning the FAA," Clifton wrote. That meant not only Concepcion, but the American Express v. Italian Colors decision from the U.S. Supreme Court last June.
"The Broughton-Cruz doctrine was an example of a state-created impediment to the enforceability of certain types of arbitration agreements," said Tyler Green, associate chief counsel for litigation at amicus curiae U.S. Chamber of Commerce. "We're pleased that today the Ninth Circuit followed the U.S. Supreme Court's many recent cases teaching that the Federal Arbitration Act preempts such state-law impediments."
James Sturdevant, one of the attorneys for the helicopter students, said the American Express decision left the Ninth Circuit little choice. "That was like the final shoe with a ton of bricks on top," said Sturdevant, a former president of Consumer Attorneys of California who was not involved in the Corinthian Colleges case.
Clifton further held that an arbitrator can award injunctive relief—if the arbitration agreement so provides. If the arbitrator concludes he lacks that authority, plaintiffs can return to district court, Clifton wrote, though he reserved judgment on what should happen then.
Judges Richard Tallman and Consuelo Callahan concurred.
Albert Chang of San Diego's Chapin Fitzgerald Sullivan & Bottini argued the case for the students. Peter Homer of Miami's HomerBonner argued for Corinthian Colleges, which also was represented by Reed Smith and Herron, Jacobs & Ortiz.
The same panel did not look kindly on a Ralphs Grocery employment contract that required employees to pay half of the arbitrator's costs up front. The contract also set up a process for picking an arbitrator that, according to the Ninth Circuit, meant that Ralphs would get the choice most of the time.
Ralphs, which also was represented by Reed Smith, argued that the contract wasn't procedurally unconscionable. Noting that it asked applicants to "please" sign and date it, Ralphs argued Zenia Chavarria wasn't actually required to sign the contract to get her job as a deli clerk.
Clifton sarcastically dismissed that argument. "That Ralphs asked nicely for a signature is irrelevant," he wrote.
Substantively, the troubling aspect of the agreement was the arbitrator fee provision. "Ralphs' term requires that the arbitrator impose significant costs on the employee up front, regardless of the merits of the employee's claims, and severely limits the authority of the arbitrator to allocate arbitration costs in the award," Clifton wrote. "Ralphs has constructed an arbitration system that imposes non-recoverable costs on employees just to get in the door."
Glenn Danas of Capstone Law Group argued the case for Chavarria. Reed Smith's Steven Katz argued for Ralphs.