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Federal Arbitration Act Overrules Broughton-Cruz Rule

Tuesday, March, 27, 2012

In the recent case of Kilgore vs. KeyBank, the Ninth Circuit Court in California determined that the Federal Arbitration Act preempts the Broughton-Cruz rule regarding the prohibition of arbitration for public injunction cases. This overturned a California district court decision to deny KeyBank's motion to compel arbitration. This unanimous decision reinforces the United States Supreme Court's mantra that in all cases where the FAA and state law are in conflict, the FAA overrules the state law.

Kilgore vs. KeyBank and Contract Arbitration


The back story of Kilgore vs. KeyBank is that the plaintiffs had received private loans from Keybank to pay tuition for helicopter training. The school in question went bankrupt and closed before the training was complete. The loans that the plaintiffs received contained clauses compelling arbitration.


After the school closed, the plaintiffs litigated for public injunction to keep KeyBank from collecting on these student loans. This was done under the Unfair Competition Law in California. KeyBank's motion for arbitration was turned down by the Broughton-Cruz rule, the collective name of decisions by the California Supreme Court in Broughton vs. Cigna and Cruz vs. Pacificare, where litigation was considered to be more appropriate than arbitration in the case of public injunctions.

Legal Arbitration Deemed “Not Unconscionable”


The next issue that was examined was the question of whether or not contract arbitration was “unconscionable” in this case. The plaintiffs made the argument that the arbitration clauses were buried in a mountain of fine print. However, it was decided that as the plaintiffs had 60 days to opt out of the contracts, this argument was denied.


In the end, it was unanimously decided that the Federal Arbitration Act as interpreted through AT&T vs. Concepcion had precedence over California law in the case of public injunctions.