The Ninth Circuit reversed the district court's partial denial of Corinthian Colleges, Inc.'s motion to compel arbitration in a class action lawsuit brought by current and former students. The plaintiffs alleged that Corinthian engaged in deceptive practices to recruit students, violating California law. The district court had partially granted the motion but denied it concerning claims for injunctive relief under California's unfair competition law, false advertising law, and the Consumer Legal Remedies Act, citing the Broughton-Cruz rule, which exempts claims for public injunctive relief from arbitration.
The appellate panel found that the Broughton-Cruz rule was preempted by the Federal Arbitration Act (FAA), determining that prior circuit authority, specifically Davis v. O'Melveny & Myers, was not applicable due to its inconsistency with later U.S. Supreme Court rulings on the FAA. The panel referenced AT&T Mobility LLC v. Concepcion and Marmet Health Care Center, Inc. v. Brown, asserting that the Broughton-Cruz rule's prohibition on arbitration for specific claims was preempted. Furthermore, the panel dismissed the plaintiffs' argument that their public injunction claims were outside the scope of their arbitration agreements. The panel instructed the district court to send all plaintiffs' claims to arbitration and stay the action pending arbitration.
Defendants Corinthian Colleges, Inc. and affiliated entities appeal a district court's partial denial of their motion to compel arbitration in a class action lawsuit brought by former students. The plaintiffs allege that Corinthian engaged in deceptive practices to recruit students, violating California law. Although the district court partially granted the motion to compel arbitration based on the arbitration clauses in the enrollment agreements, it denied arbitration for claims seeking injunctive relief under California's unfair competition law, false advertising law, and Consumer Legal Remedies Act, citing the Broughton-Cruz rule, which exempts such claims from arbitration. However, the appellate court finds that the Broughton-Cruz rule is preempted by the Federal Arbitration Act, reversing the district court's ruling and instructing that all plaintiffs' claims be directed to arbitration, with the action stayed pending arbitration.
The background includes plaintiffs Kevin Ferguson and Sandra Muniz, who attended Everest Institute and Heald College, respectively, financing their education through federal loans but failing to secure employment in their fields post-graduation. Their complaints assert that Corinthian misrepresented the quality of education, career prospects, and costs, and improperly targeted veterans to capitalize on federal funding. The proposed class action encompasses students who enrolled in the Everest and Heald schools during specified periods, and the district court consolidated their cases.
Plaintiffs filed seven claims under California law, specifically targeting unfair competition (UCL), false advertising (FAL), and the Consumer Legal Remedies Act (CLRA). They sought monetary damages and injunctive relief. Enrollment agreements included arbitration clauses, with Ferguson and Muniz signing additional arbitration agreements. Corinthian moved to compel arbitration for the entire case, which the district court granted for most claims but denied for injunctive relief requests under the UCL, FAL, and CLRA based on California's Broughton-Cruz rule, although damage claims were sent to arbitration. Corinthian appealed this ruling.
The Federal Arbitration Act (FAA) supports the validity of arbitration agreements and preempts conflicting state laws. It prohibits states from requiring judicial resolution for claims designated for arbitration. Corinthian contended that the FAA preempts the Broughton-Cruz rule, which originated from a California Supreme Court case involving deceptive medical advertising claims. The CLRA empowers consumers to seek injunctions against unfair business practices. The Broughton-Cruz rule restricts arbitration for injunctive relief claims, which Corinthian argues is superseded by the FAA.
A plaintiff acting under the California Consumer Legal Remedies Act (CLRA) serves as a 'private attorney general,' seeking to prevent future deceptive practices for the public's benefit. The California Supreme Court determined that arbitration cannot be compelled for claims seeking a 'public injunction' due to an 'inherent conflict' between arbitration and the CLRA's objectives. This conflict arises because public injunctions benefit the public rather than the individual plaintiff, and judicial forums are better suited than arbitrators to administer such remedies. The Court's analysis aligns with the U.S. Supreme Court's view that certain statutory claims may not be suitable for arbitration based on congressional intent.
The California Supreme Court extended this rationale to the Unfair Competition Law (UCL) and False Advertising Law (FAL), allowing public actions to enforce these statutes. The Ninth Circuit applied the Broughton-Cruz rule in Davis v. O’Melveny, Myers, ruling that an arbitration agreement could not mandate arbitration for public injunctive relief claims, rendering such provisions unenforceable. The Ninth Circuit clarified that its decision in Davis is controlling unless superseded by higher authority, rejecting arguments that it was merely dicta. The Broughton-Cruz rule is recognized as binding precedent, as reaffirmed in Kilgore v. KeyBank.
The application of the Broughton-Cruz rule in Davis conflicts with U.S. Supreme Court precedents regarding the Federal Arbitration Act (FAA). Specifically, in AT&T Mobility LLC v. Concepcion, the Supreme Court determined that the FAA preempted California's Discover Bank rule, which rendered most class action waivers in adhesion contracts invalid as unconscionable. The Court asserted that when state law outright prohibits arbitration of a specific claim type, the FAA displaces that conflicting rule. This principle was reaffirmed in Marmet Health Care Center, where the Court found a West Virginia rule invalidating predispute arbitration agreements for personal injury claims against nursing homes to be incorrect and inconsistent with FAA directives. The Supreme Court maintained that prohibiting such arbitration directly conflicts with the FAA, thus invalidating the Broughton-Cruz rule, which similarly exempts public injunctive relief claims from arbitration under California statutes. The argument that the Broughton-Cruz rule is insulated from FAA preemption due to its classification of injunctions as remedies rather than causes of action was rejected. Recent Supreme Court decisions emphasize the broad enforcement of arbitration agreements, indicating that all claims, including those for injunctions, fall under the FAA's preemption. The ruling in Mastrobuono further supports this, demonstrating that state rules cannot inhibit arbitration agreements unless explicitly incorporated.
The Supreme Court's decision in Mastrobuono established that contracting parties can include punitive damages in arbitration agreements, and such agreements will be enforced under the Federal Arbitration Act (FAA), even if state law would exclude these claims from arbitration. The Court reaffirmed this principle in Marmet, indicating that the FAA preempts state laws that require judicial resolution of punitive damage claims. Furthermore, rules that inhibit an arbitrator from granting injunctive relief are similarly preempted, as outlined in Concepcion, which identified various state rules that undermine arbitration agreements.
The application of the Broughton-Cruz rule by the district court sought to determine Corinthian's liability under California's Unfair Competition Law (UCL), False Advertising Law (FAL), and Consumers Legal Remedies Act (CLRA), thereby prohibiting arbitration of public injunction claims. This approach violates the FAA, as it restricts arbitration based on the nature of the claims. The California Supreme Court's reliance on inherent conflict analysis from Mitsubishi Motors does not apply to state statutes, and the effective vindication exception for federal statutes does not extend to state laws. Justice Kagan's dissent in Italian Colors emphasized that there is no federal interest in enforcing state law, aligning with the principle that federal law, under the Supremacy Clause, takes precedence over state law. Hence, state laws obstructing the FAA's objectives are preempted.
State rules that conflict with the Federal Arbitration Act (FAA) are subject to standard preemption principles, which assess whether the state law undermines the FAA's purposes. If a conflict exists, the Supremacy Clause mandates the invalidation of the state law. The inherent conflict of a state law with the FAA does not negate preemption, as demonstrated in Nitro-Lift Technologies, where specificity of a state statute was deemed irrelevant if it conflicted with a general federal law. The California Supreme Court's reliance on the judicial advantages in Broughton is inconsistent with the U.S. Supreme Court's ruling in AT&T Mobility LLC v. Concepcion, which established that state rules cannot impose procedural requirements that undermine arbitration under the FAA.
Additionally, the California court's belief that an arbitrator cannot grant public injunctions is not universally valid; it is contingent on the arbitration agreement's terms. The arbitrator's authority to issue such relief must be determined based on the specific agreement. The court refrains from preemptively deciding what remedies the plaintiffs may pursue if the arbitrator lacks the authority to grant the injunction. If such a determination is made, the plaintiffs could seek relief in district court. The court emphasizes that questions surrounding the confirmation of an arbitration award with injunctive relief should be addressed in the context of actual cases, rather than in advance. Ultimately, the court holds that the FAA preempts the Broughton-Cruz rule and overrules any conflicting precedent, affirming that the plaintiffs' claims fall within the scope of their arbitration agreements.
Corinthian's claim that Plaintiffs' argument constitutes an improper cross-appeal is rejected. The district court previously dismissed Plaintiffs' scope argument when compelling arbitration, leading Corinthian to assert that this should be treated as a separate, untimely appeal under the FAA, which prohibits appeals from orders compelling arbitration. However, Plaintiffs are not seeking to overturn the arbitration ruling but rather present their scope argument as an alternative basis to affirm the district court's decision, which is permissible.
The determination of whether Plaintiffs' public injunction claims fall within the arbitration agreement's scope requires examining the agreements' explicit terms. The court emphasizes that any uncertainties regarding arbitrable issues should favor arbitration. Plaintiffs’ enrollment agreements explicitly state that both parties waive the right to a jury trial and agree to binding arbitration for any disputes arising from enrollment. These broad terms encompass Plaintiffs' public injunction claims.
Plaintiffs’ reliance on the case Tracer Research Corp. is found to be incorrect, as the language in their agreements is more expansive, addressing "any disputes" and "all claims." Their argument that public injunction claims are collateral to their enrollment is unconvincing, as the core of their complaint pertains to misrepresentations linked to their enrollment.
The Federal Arbitration Act (FAA) preempts California’s Broughton-Cruz rule regarding the non-arbitrability of public injunctive relief claims. Consequently, the district court's order denying Corinthian's motion to compel arbitration is reversed and remanded with instructions to grant the motion for all claims, including the injunctive relief claims, and to stay the lawsuit until arbitration is completed. If the arbitrator finds that Corinthian violated relevant laws but lacks the authority to grant the injunction, Plaintiffs may pursue the injunction in court without any commentary on the merits of such a claim. The decision is reversed and remanded.
