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Ninth Circuit Rules that Federal Arbitration Act Preempts State Law in California Case

Thursday, November, 7, 2013


The Ninth Circuit Court’s recent decision gave precedence to the Federal Arbitration Act over California's Broughton-Cruz rule—a law instituted by the state to provide "public injunctive relief" from arbitration.  In the case of Ferguson v. Corinthian Colleges, the plaintiffs, who were former students of the for-profit schools, sought injunctive relief to pursue a class action suit against the colleges.  However, based on an arbitration clause that was embedded in the enrollment agreements signed by the students, Corinthian sought to compel arbitration. 


The plaintiffs alleged that Corinthian Colleges used deceptive practices to entice prospective students to enroll, which is a violation of the state’s law.  However, the district court denied the defendant their motion to compel arbitration due to California’s unfair competition law, false advertising law, and Consumer Legal Remedies Act.  According to the district court, it was bound to this decision based on the establishment of the Broughton-Cruz rule by the California Supreme Court—a rule which exempts claims for "public injunctive relief" from arbitration.


However, when the defendant appealed the ruling in the Ninth Circuit, that court found that the Federal Arbitration Act preempts the Broughton-Cruz rule, and that arbitration agreements are "valid, irrevocable, and enforceable" unless the clause and arbitration agreement is found to be unconscionable.  


In such, this case has become an example of the importance of carefully drafting an arbitration clause in a contract; and of relying on its enforceability based on the Federal Arbitration Act, despite state law