Ninth Circuit.jpgCo-authored by David Kadue and Julie G. Yap

On Tuesday, an en banc panel of the Ninth Circuit heard oral argument regarding whether California’s rule against compulsory arbitration for claims of public injunctive relief was preempted by the Federal Arbitration Act (“FAA”) in Kilgore v. KeyBank NA.  As we reported in March of this year, a three judge panel of the Ninth Circuit held that the California rule did not survive the U.S. Supreme Court’s vehement reaffirmation of the preemptive effect of the FAA in AT&T Mobility v. Concepcion.  But then came the Ninth Circuit’s decision to grant en banc review.  This development appeared to breath new life into the plaintiffs’ argument that certain claims are immune to mandatory arbitration agreements when judicial resolution is needed to “vindicate statutory rights.” 

Yet at oral argument, the en banc panel of Ninth Circuit seemed unwilling to land the knock-out punch, either in favor of or against FAA preemption.  Instead, the questioning focused on whether the court could resolve the case on a more narrow ground.

In Kilgore, former students of a vocational school sued KeyBank, the school’s preferred tuition lender, alleging that KeyBank violated California’s Unfair Competition Law (“UCL”) by continuing to lend the students tuition money even while knowing that the school was moving toward bankruptcy.  The students sought to have KeyBank enjoined from enforcing the loan agreements.  These agreements contained an arbitration clause, which KeyBank moved to enforce.  The district court, ruling prior to Concepcion, denied the motion to compel arbitration, reasoning that California precedent prohibited mandatory arbitration of claims for injunctive relief under the UCL. .

The original Ninth Circuit panel reversed this result, because Concepcion expressly rejects state laws that place a blanket prohibition on the arbitration of certain types of claims.   California’s pre-Concepcion law, the panel explained, was no longer valid.  The panel rejected the plaintiffs’ arguments that the FAA’s preemptive scope does not reach injunctive relief primarily designed to protect the public.  Rather, the panel cited Concepcion’s dismissal of state public policy arguments, concluding that “states cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”

The grant of an en banc rehearing signaled potential openness to a theory that Concepcion does not apply where arbitration would impede the vindication of statutory rights.  The Second Circuit has adopted this argument as applied to federal claims, and the U.S. Supreme Court recently granted review to address this issue in American Express Co. v. Italian Colors Restaurant.  Because American Express involves the vindication of federal statutory rights, however, the Supreme Court’s decision would not necessarily determine how Concepcion applies to state law claims such as the one that the Ninth Circuit faces in Kilgore.

At oral argument, the en banc court seemed hesitant to address the broad preemption issues.  Instead, judges asked if this case really presents a claim for public injunctive relief, since what the students really want is an order that they need not repay their loans to KeyBank.  Meanwhile, the students’ school has gone out of business, so what is the public harm that the requested “public injunctive relief” would avert?  In a further expression of judicial restraint, the en banc judges asked both whether the Ninth Circuit should stay its hand until the U.S. Supreme Court has decided American Express or the California Supreme Court has decided Iskanian.

The en banc Ninth Circuit’s decision in Kilgore could be groundbreaking precedent on the issue of the scope of Concepcion and the enforceability of arbitration agreements generally.  A ruling for the plaintiffs could open the floodgates to arguments that any arbitration agreement should be set aside to accommodate various important public policies.  A ruling for the defendant could powerfully reinforce Concepcion’s message that states cannot interpose state public policies to frustrate the enforcement of arbitration agreements.  Yet it appears that, after all the excitement aroused by the Ninth Circuit’s decision to go en banc, the case now may go out with a whimper instead of a bang.