Opinion ID: 1087292
Heading Depth: 3
Heading Rank: 3

Heading: Preemption by the Federal Arbitration Act

Text: We turn first to AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). In Concepcion, the Supreme Court held that the FAA preempted a California rule—known as the Discover Bank rule—which invalidated most class action waivers in adhesion contracts, including arbitration agreements, as unconscionable. Id. at 1746, 1753. Of particular significance to this case is the Court’s statement that “[w]hen state law prohibits outright the arbitration of a 2 Only this portion of our decision in Davis has been superseded. The portions not affected by the later United States Supreme Court decisions remain valid precedent. 3 Corinthian’s argument that the FAA preempts the Broughton-Cruz rule was raised by the appellants in Kilgore. On rehearing en banc, we did not reach the appellants’ argument, however, because we concluded that the injunction sought was not a public injunction. Kilgore, 718 F.3d at 1060–61. It would have benefitted only the class members, as it “relate[d] only to past harms suffered by the members of the limited putative class,” not the general public. Id. at 1061. By contrast, Plaintiffs in this case seek to enjoin Corinthian from continuing to engage in a purported scheme to entice prospective students through misrepresentations. Such an injunction would have no benefit for Plaintiffs, as they have already enrolled in Corinthian’s schools, but may prevent others from enrolling in a Corinthian school based on any misrepresentations. 12 FERGUSON V. CORINTHIAN COLLEGES particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.” Id. at 1747. This principle was reiterated in Marmet Health Care Center, Inc. v. Brown, 132 S. Ct. 1201 (2012) (per curiam), one of the decisions handed down after the district court’s order in this case. Marmet involved a West Virginia rule that invalidated any predispute agreement to arbitrate a personal injury or wrongful death claim against a nursing home. Id. at 1202. That rule arose from three state-court negligence lawsuits each alleging the wrongful death of a nursing home patient. Id. In a decision concerning all three cases, the West Virginia Supreme Court of Appeals had held that “Congress did not intend for the FAA to be, in any way, applicable” to those particular types of lawsuits, as they only “collaterally derive” from a contract and “involve[] a service that is a practical necessity for members of the public.” Brown ex rel. Brown v. Genesis Healthcare Corp., 724 S.E.2d 250, 291 (W. Va. 2011), vacated sub nom. Marmet, 132 S. Ct. 1201. The United States Supreme Court held the West Virginia court’s interpretation of the FAA to be “both incorrect and inconsistent with clear instruction” in its precedent. Marmet, 132 S. Ct. at 1203. It stated: “As this Court reaffirmed last Term, ‘[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.’ That rule resolves these cases.” Id. (alteration in Marmet) (quoting Concepcion, 131 S. Ct. at 1747). That rule also resolves this case. By exempting from arbitration claims for public injunctive relief under the CLRA, UCL, and FAL, the Broughton-Cruz rule similarly prohibits outright arbitration of a particular type of claim. FERGUSON V. CORINTHIAN COLLEGES 13 We reject the argument that because an injunction is technically a remedy rather than a cause of action, the Broughton-Cruz rule is insulated from the FAA. We do not think the Supreme Court intended such a technical reading of the word “claim.” As we have recognized en banc, recent Supreme Court decisions “have given broad effect to arbitration agreements.” Kilgore, 718 F.3d at 1057. Just a few months ago, the Supreme Court reiterated that “courts must ‘rigorously enforce’ arbitration agreements according to their terms.” Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304, 2309 (2013) (quoting Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 221 (1985)). Indeed, this argument appears to be foreclosed by Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995). In Mastrobuono, 514 U.S. at 63–64, 66, the Supreme Court found that a contract including an arbitration agreement and indicating that it was “governed by the laws of the State of New York” did not incorporate New York’s rule prohibiting punitive damages awards in arbitration. The New York rule was premised upon the New York Court of Appeals’ conclusion that punitive damages is a “social exemplary ‘remedy’” to address “public penal wrongs” that evoked “strong public policy” concerns precluding its application in a purely private setting. Garrity v. Lyle Stuart, Inc., 353 N.E.2d 793, 795–96 (N.Y. 1976). In rejecting the argument that the arbitration agreement incorporated the rule, the Supreme Court accepted the premise that the rule would be preempted in the absence of an agreement that incorporated it. See Mastrobuono, 514 U.S. at 58 (indicating that the Court’s prior decisions “make clear that if contracting parties agree to include claims for punitive damages within the issues to be arbitrated, the FAA ensures that their agreement will be enforced according to its terms even if a 14 FERGUSON V. CORINTHIAN COLLEGES rule of state law would otherwise exclude such claims from arbitration”). The Supreme Court has since stated that Mastrobuono stands for the proposition that the “FAA pre-empts state law[s] requiring judicial resolution of claims involving punitive damages.” Marmet, 132 S. Ct. at 1204 (citing Mastrobuono, 514 U.S. at 56). Moreover, 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, 131 S. Ct. at 1747. These include rules that would prohibit enforcement of arbitration agreements that failed to provide for “judicially monitored discovery,” “fail[ed] to abide by the Federal Rules of Evidence,” or “disallow[ed] an ultimate disposition by a jury.” Id. This all strongly suggests even where a specific remedy has implications for the public at large, it must be arbitrated under the FAA if the parties have agreed to arbitrate it. Moreover, in applying the Broughton-Cruz rule, the district court in this case apparently intended to determine for itself in the first instance whether Corinthian was liable under the UCL, FAL, and CLRA, and then, if it found liability, to consider whether an injunction was warranted. Under those circumstances, the effect of the Broughton-Cruz rule is to prohibit outright arbitration of three particular types of claims, so long as the plaintiff seeks a public injunction under those causes of action. This violates the FAA. Subsequent decisions of the United States Supreme Court have made clear that the Broughton-Cruz rule is flawed in other ways as well. To begin with, the California Supreme Court relied on the inherent conflict analysis drawn from Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 627–28 (1985), but, as observed in the Italian FERGUSON V. CORINTHIAN COLLEGES 15 Colors dissent, that analysis does not apply to state statutes such as those that form the basis of Plaintiffs’ request for a public injunction in this case. The “effective vindication” exception, which permits the invalidation of an arbitration agreement when arbitration would prevent the “effective vindication” of a federal statute, does not extend to state statutes. See Italian Colors, 133 S. Ct. at 2320 (Kagan, J., dissenting). The effective vindication and inherent conflict exceptions are two sides of the same coin—the former turning on the ability to vindicate a statute, and the latter turning on the underlying purposes of a statute. Both exceptions are reserved for claims brought under federal statutes. They rest on the principle that other federal statutes stand on equal footing with the FAA. In both Mitsubishi Motors and Italian Colors the claims at issue were under the federal antitrust laws, and the argument was that the federal antitrust statutes modified the FAA. “In [the] all-federal context, one law does not automatically bow to the other.” Id. In contrast, as bluntly stated by Justice Kagan in her dissent in Italian Colors, “We have no earthly interest (quite the contrary) in vindicating” a state law. Id. Plaintiffs in this case, like the plaintiffs in the Broughton and Cruz cases, are pursuing state statutory claims. The Italian Colors majority would agree with Justice Kagan’s dissent on this point. The central premise of the Supremacy Clause is that federal law is superior to state law. U.S. Const. art. VI, cl. 2. (“[T]he Laws of the United States . . . shall be the supreme Law of the Land.”). The Supreme Court has therefore long recognized that any state law that “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” is preempted. 16 FERGUSON V. CORINTHIAN COLLEGES Hines v. Davidowitz, 312 U.S. 52, 67 (1941); see also Mortensen v. Bresnan Commc’ns, LLC, 722 F.3d 1151, 1157 (9th Cir. 2013). There is no reason to think that this principle does not apply to state rules that conflict with the FAA. “When a state rule allegedly conflicts with the FAA, we apply standard preemption principles, asking whether the state law frustrates the FAA’s purposes and objectives. If the state rule does so . . . the Supremacy Clause requires its invalidation.” Italian Colors, 133 S. Ct. at 2320 (Kagan, J., dissenting). That there may be an inherent conflict is irrelevant. Cf. Nitro-Lift Technologies, LLC v. Howard, 133 S. Ct. 500, 504 (2012) (per curiam) (rejecting the argument that the FAA did not preempt an Oklahoma statute because that statute was more specific than the FAA, and explaining that the “interpretive principle that the specific governs the general . . . applies only to conflict between laws of equivalent dignity,” but when a specific state statute conflicts with a general federal law, “the latter governs”). The California Supreme Court’s reliance in Broughton, 988 P.2d at 77, on the institutional advantages of the judicial forum is also inconsistent with AT&T Mobility LLC v. Concepcion. In Concepcion, 131 S. Ct. at 1747, the United States Supreme Court explained that state rules prohibiting enforcement of arbitration agreements that fail to provide for the judicial advantages of monitored discovery, evidence rules, or disposition by a jury would be impermissible under the FAA, as such rules disfavor arbitration. Simply put, “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” Id. at 1753. FERGUSON V. CORINTHIAN COLLEGES 17 Moreover, in creating the Broughton-Cruz rule, the California court was motivated by its conclusion that the public injunction sought by the plaintiffs was “beyond the arbitrator’s power to grant.” Broughton, 988 P.2d at 76. But that premise is not necessarily true. Corinthian concedes, and we agree, that an arbitrator generally has the authority to enter injunctive relief against a party that has entered into an arbitration agreement. Corinthian’s caveat, however, is that an arbitrator may do so only if the arbitration agreement at issue permits it. Whether, in this case, Plaintiffs’ arbitration agreements do so will need to be determined by the arbitrator. See Coast Trading Co. v. Pac. Molasses Co., 681 F.2d 1195, 1197–98 (9th Cir. 1982) (describing an arbitrator’s role as the “interpretation and application of the parties’ agreement,” and stating that its award is “legitimate only so long as it draws its essence from the . . . agreement” (alteration in Coast Trading) (quoting United Steelworkers of Am. v. Enter. Wheel & Car Corp., 363 U.S. 593, 597 (1960))). We decline to resolve in advance the question of what, if any, court remedy Plaintiffs might be entitled to should the arbitrator determine that it lacks the authority to issue the requested injunction. That is beyond the scope of this appeal. If the arbitrator comes to that conclusion, Plaintiffs may return to the district court to seek their public injunctive relief. We express no opinion on any question that might arise at that time. Similarly, we decline to resolve now questions that could arise if a motion is brought in court to confirm an arbitration award that includes injunctive relief, or whether it might be necessary for a court to enforce a public injunction awarded by an arbitrator. Those questions can be better addressed in the context of an actual case, with arguments directed more specifically to the questions raised in that case. 18 FERGUSON V. CORINTHIAN COLLEGES We therefore hold that the FAA preempts the Broughton-Cruz rule. To the extent Davis v. O’Melveny & Myers, 485 F.3d 1066 (9th Cir. 2007), held otherwise, it is clearly irreconcilable with intervening Supreme Court authority and has been overruled. D. Plaintiffs’ Claims Are Within the Scope of Their Arbitration Agreements Plaintiffs argue in the alternative that they should not be required to arbitrate their public injunction claims because those claims do not fall within the scope of their arbitration agreements. We disagree. We first reject Corinthian’s attempt to characterize Plaintiffs’ argument as an improper cross-appeal. Because the district court rejected Plaintiffs’ scope argument in the section of its order compelling arbitration, Corinthian takes the position that Plaintiffs’ argument should be treated as a separate appeal that is both untimely and in violation of the FAA, which precludes the appeal of an order compelling arbitration. See 9 U.S.C. § 16(b)(2) (“[A]n appeal may not be taken from an interlocutory order . . . directing arbitration to proceed under section 4 of this title.”). But Plaintiffs are not asking us to reverse the ruling compelling arbitration. Rather, they have raised their scope argument as an alternative ground on which the panel may affirm the district court. They are entitled to do so. See, e.g., Atel Fin. Corp. v. Quaker Coal Co., 321 F.3d 924, 926 (9th Cir. 2003) (per curiam). Turning to the merits of Plaintiffs’ argument, because the scope of an arbitration agreement is a matter of contract, we must look to the express terms of the agreements at issue to FERGUSON V. CORINTHIAN COLLEGES 19 determine whether Plaintiffs and Corinthian intended that public injunction claims be arbitrated. See Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). Keeping in mind that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration,” we conclude that Plaintiffs’ claims do fall within the scope of their arbitration agreements. Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25 (1983). Plaintiff Ferguson’s enrollment agreement states: “I understand that both I and The School are irrevocably waiving rights to a trial by jury, and are selecting instead to submit any and all claims to the decision of an arbitrator instead of a court.” His “Enrollment Agreement Addendum” further states: “I agree that any dispute arising from my enrollment, no matter how described, pleaded or styled, shall be resolved by binding arbitration under the Federal Arbitration Act.” Each of Plaintiff Muniz’s enrollment agreements provides: “Any dispute arising from enrollment at Heald College, no matter how described, pleaded or styled, shall be resolved by binding arbitration.” And her separate “Agreement to Binding Arbitration and Waiver of Jury Trial” states: “I, Sandra L. Muniz agree that any dispute arising from my enrollment at Heald College . . . no matter how described, pleaded or styled, shall be resolved by binding arbitration.” Those terms are sufficiently broad to cover Plaintiffs’ public injunction claims. Plaintiffs’ reliance on Tracer Research Corp. v. National Environmental Services Co., 42 F.3d 1292 (9th Cir. 1994), is misplaced. Although Plaintiffs correctly point out that in Tracer Research we narrowly interpreted the phrase “arising under the Agreement” as covering only contract disputes 20 FERGUSON V. CORINTHIAN COLLEGES related to the agreement itself, id. at 1295, the terms in Plaintiffs’ agreements are broader than that, as they refer to “any disputes,” “all claims,” and disputes “arising from my enrollment.” Plaintiffs’ argument that their public injunction claims are collateral to, rather than arising from, their enrollment because they pertain to recruiting is no more persuasive. Plaintiffs’ central complaint in this lawsuit is that Corinthian misrepresented the value and cost of an education at Heald and Everest schools. That complaint is directly related to enrollment.