With 'Kilgore', Ninth Circuit Won't Make It Easy to Escape Arbitration

Scott Graham

2012-12-11 05:58:53 PM

The U.S. Court of Appeals for the Ninth Circuit didn't sound ready Tuesday to throw out California's Broughton/Cruz doctrine on compulsory arbitration.

But that will probably come as cold comfort to about 120 vocational students trying to bring a class action against a bank they accuse of cheating them out of tuition.

During an hour of much-anticipated en banc arguments in Kilgore v. KeyBank, most of the court sounded inclined to leave in place the California rule that exempts claims for public injunctive relief from compelled arbitration under the Federal Arbitration Act.

But the court also suggested it would construe the rule narrowly, with several judges questioning whether the students were genuinely acting on behalf of the public, notwithstanding their allegations of unfair competition. "As I understand it, what the plaintiffs really want is a court order that says they don't have to repay KeyBank," Judge Richard Tallman said to Andrew Pincus, representing amicus curiae U.S. Chamber of Commerce. "The school's out of business, so what are we protecting the public from?"

Judge Andrew Hurwitz, the court's newest member, contrasted the students' claims to one involving public health or safety. "Assume I had a contract with a water company that said I'd arbitrate any claims with them, and I found out there was poison in the water," Hurwitz said to Pincus, a Mayer Brown partner. "Would I be limited to arbitration?"

"Yes," said Pincus, because under the U.S. Supreme Court's 2011 decision in AT&T Mobility v. Concepcion "even if there's a good policy reason for the state law rule that tries to displace the rules of the FAA, that state rule has to give way."

"That's a broader position than I think you need to take," Hurwitz told him, and several other judges appeared to agree.

Kilgore was brought by students who had enrolled in a school for aspiring helicopter pilots. The suit alleges that the school was a sham — that it duped limited-income students to take out big loans from KeyBank and then shut its doors in 2008 before many students could complete their training. The suit seeks to enjoin KeyBank from enforcing the loans and continuing to violate California's Unfair Competition Law.

KeyBank had sought to compel arbitration based on the loan contracts, but the plaintiffs argued that under California's Broughton and Cruz precedents, class actions seeking injunctive relief on behalf of the public can't be forced into arbitration. A Ninth Circuit panel disagreed last March, declaring Broughton/Cruz overruled by Concepcion, but at the urging of the plaintiff bar the full Ninth Circuit granted rehearing en banc.

James Sturdevant, an attorney representing the students, argued Tuesday that arbitrators are limited to specific and discreet awards limited to the parties before them.

But Sturdevant, of the Sturdevant Law Firm, was forced to play defense throughout his argument. Public injunctive relief may be "a nice term," Judge Milan Smith told him. "But the reality is here it doesn't really mean anything, does it?"

Chief Judge Alex Kozinski asked Sturdevant if California could eliminate the right of arbitrators to issue injunctions. When Sturdevant struggled to formulate his answer, Kozinski pressed repeatedly on whether it was yes or no.

"I don't know. It's not like being in front of an optometrist," Sturdevant retorted, drawing laughter around the courtroom.

"When you read the opinion in this case, it's going to be like being in front of an optometrist," Kozinski fired back, drawing more snickers. "It's going to say yes or no to you."

Hurwitz, Tallman and others suggested the claims could be fashioned as declaratory relief and submitted to arbitration first, then depending on the rulings they could decide later how to proceed on a public injunction.

"That's putting the cart before the horse," Sturdevant said.

"What's wrong with putting the cart before the horse?" Kozinski asked. "Why not do it differently in this case and avoid the whole question of public injunction?"

Judge Morgan Christen asked why an arbitrator couldn't issue an injunction. "Setting aside that they've never done it before," she asked, "why couldn't they?"

"Well, if they did it, they'd probably be out of business," Judge Harry Pregerson responded.

"At least for claims under the unfair competition law," Sturdevant added.

Scott O'Connell, the Nixon Peabody partner representing KeyBank, had an easier time than Sturdevant. When Judge William Fletcher asked how anybody could stop KeyBank's allegedly deceptive practices, O'Connell argued that the bank stopped writing loans to the helicopter school in 2005, three years before it shut down. The demand for injunction is just "artful pleading," he insisted.

Fletcher said he's "tempted to agree with you that it's simply not a public injunction."