Matthew Kilgore, et al v. Keybank, National Association, et al
Filing
FILED OPINION (STEPHEN S. TROTT, CARLOS T. BEA and REBECCA R. PALLMEYER) For the foregoing reasons, in Interlocutory Appeal No. 09- 16703, we REVERSE the district court s denial of KeyBank s motion to compel arbitration, VACATE the judgment, and REMAND to the district court with instructions to enter an order staying the case and compelling arbitration. We DISMISS Appeal No. 10-15934 as MOOT. Judge: SST Authoring, FILED AND ENTERED JUDGMENT. [8093387] [09-16703, 10-15934]
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FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
MATTHEW C. KILGORE, individually
and on behalf of all others
similarly situated; WILLIAM BRUCE
FULLER, individually and on behalf
of all others similarly situated,
Plaintiffs-Appellees,
v.
KEYBANK, NATIONAL ASSOCIATION,
successor in interest to KeyBank
USA, N.A.; KEY EDUCATION
RESOURCES, a division of KeyBank
National Association; GREAT
LAKES EDUCATION LOAN SERVICES,
INC., a Wisconsin corporation,
Defendants-Appellants,
2627
No. 09-16703
D.C. No.
3:08-cv-02958-THE
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KILGORE v. KEYBANK, NAT’L ASS’N.
MATTHEW C. KILGORE, individually
and on behalf of all others
similarly situated; WILLIAM BRUCE
FULLER, individually and on behalf
of all others similarly situated,
Plaintiffs-Appellants,
v.
KEYBANK, NATIONAL ASSOCIATION,
successor in interest to KeyBank
USA, N.A.; KEY EDUCATION
RESOURCES, a division of KeyBank
National Association; GREAT
LAKES EDUCATION LOAN SERVICES,
INC., a Wisconsin corporation,
Defendants-Appellees.
No. 10-15934
D.C. No.
3:08-cv-02958-THE
OPINION
Appeal from the United States District Court
for the Northern District of California
Thelton E. Henderson, Senior District Judge, Presiding
Argued and Submitted
December 5, 2011—San Francisco, California
Filed March 7, 2012
Before: Stephen S. Trott and Carlos T. Bea, Circuit Judges,
and Rebecca R. Pallmeyer, District Judge.*
Opinion by Judge Trott
*The Honorable Rebecca R. Pallmeyer, District Judge for the U.S. District Court for Northern Illinois, sitting by designation.
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COUNSEL
Andrew A. August, Pinnacle Law Group, LLP, San Francisco, California, for the plaintiffs-appellees/appellants.
W. Scott O’Connell, Nixon Peabody LLP, Manchester, New
Hampshire, for the defendants-appellants/appellees.
Mark A. Chavez, Chavez & Gertler LLP, Mill Valley, California, for amici National Consumer Law Center, National
Association of Consumer Advocates, and National Consumers League.
Gregory F. Taylor, American Bankers Association, Washington, D.C., for the amici American Bankers Association, Consumer Bankers Association, and the Clearing House
Association, L.L.C.
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OPINION
TROTT, Circuit Judge:
These consolidated appeals involve the sometimes delicate
and precarious dance between state law and federal law. Matthew Kilgore and William Fuller (“Plaintiffs”) brought this
putative class action against KeyBank, N.A., Key Education
Resources, and loan servicer Great Lakes Education Loan
Services, Inc. (collectively, “KeyBank”), alleging violations
of California’s Unfair Competition Law (“UCL”), Cal. Bus.
& Prof. Code § 17200, in connection with private student
loans that KeyBank extended to Plaintiffs. Each of Plaintiffs’
loan contracts contained an arbitration clause, which the district court declined to enforce. In Interlocutory Appeal No.
09-17603, we consider whether, in light of the Supreme
Court’s recent decision in AT&T Mobility, Inc. v. Concepcion,
___ U.S. ___, 131 S. Ct. 1740 (2011), the Federal Arbitration
Act (“FAA” or “Act”) preempts California’s state law rule
prohibiting the arbitration of claims for broad, public injunctive relief — a rule established in Broughton v. Cigna Healthplans of California, 988 P.2d 67 (Cal. 1999), and Cruz v.
Pacificare Health Systems, Inc., 66 P.3d 1157 (Cal. 2003).
We consider also whether the arbitration clause is unconscionable. We have jurisdiction pursuant to 9 U.S.C.
§ 16(a)(1)(C).
We conclude that (1) the FAA preempts the BroughtonCruz rule and (2) the arbitration clause in the parties’ contracts must be enforced because it is not unconscionable.
Therefore, we do not reach the question, presented in Appeal
No. 10-15934, whether the National Bank Act (“NBA”) and
the regulations of the Office of the Comptroller of the Currency (“OCC”) preempt Plaintiff’s UCL claims. Accordingly,
in Interlocutory Appeal No. 09-16703, we reverse the district
court’s denial of KeyBank’s motion to compel arbitration,
vacate the judgment, and remand to the district court with
instructions to enter an order staying the case and compelling
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arbitration. Because the disposition of that appeal renders the
district court’s subsequent dismissal order a nullity, we dismiss Appeal No. 10-15934 as moot.
I
BACKGROUND
Plaintiffs are former students of a private helicopter vocational school located in Oakland, California, and operated by
Silver State Helicopters, LLC (“SSH”). According to Plaintiffs, SSH engaged in an elaborate, aggressive, and misleading
marketing effort to attract students. Plaintiffs claim SSH was
a “sham aviation school” that targeted limited-income individuals who could not afford to pay for their pilot training
without taking out student loans. SSH’s “preferred lender”
was KeyBank, and SSH gave prospective students loan application forms and other information about borrowing tuition
money from KeyBank.
To fund their helicopter training, Plaintiffs and each member of the putative class borrowed between $50,000 and
$60,000 from KeyBank. Each Plaintiff signed a promissory
note (“Note”), promising to repay KeyBank for the student
loan. The transaction was structured so that KeyBank disbursed the entire loan proceeds to SSH before the student
completed his training.
Each Note contained an arbitration clause, included in a
separate section entitled “ARBITRATION.” The arbitration
clause informed Plaintiffs that they could opt out of the clause
and that if they did not, Plaintiffs would be giving up their
rights (1) to litigate any claim in court and (2) to proceed with
any claim on a class basis:
IF ARBITRATION IS CHOSEN BY ANY
PARTY WITH RESPECT TO A CLAIM, NEITHER YOU NOR I WILL HAVE THE RIGHT
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TO LITIGATE THAT CLAIM IN COURT OR
HAVE A JURY TRIAL ON THAT CLAIM . . . .
FURTHER, I WILL NOT HAVE THE RIGHT
TO PARTICIPATE AS A REPRESENTATIVE
OR MEMBER OF ANY CLASS OF CLAIMANTS
. . . . I UNDERSTAND THAT OTHER RIGHTS
THAT I WOULD HAVE IF I WENT TO
COURT MAY ALSO NOT BE AVAILABLE IN
ARBITRATION. THE FEES CHARGED BY
THE ARBITRATION ADMINISTRATOR MAY
BE GREATER THAN THE FEES CHARGED
BY A COURT.
There shall be no authority for any Claims to be
arbitrated on a class action basis. Furthermore, an
arbitration can only decide your or my Claim(s) and
may not consolidate or join the claims of other persons that may have similar claims.
(boldface in original) (additional emphasis added). The arbitration clause included an opt-out provision: “This Arbitration Provision will apply to my Note . . . unless I notify you
in writing that I reject the Arbitration Provisions within 60
days of signing my Note.” (emphasis added) (boldface in
original).
In addition, each Note included a choice of law clause:
THE PROVISIONS OF THIS NOTE WILL BE
GOVERNED BY FEDERAL LAWS AND THE
LAWS OF THE STATE OF OHIO, WITHOUT
REGARD TO CONFLICT OF LAW RULES.
The Note also contained a forum-selection clause designating,
as the appropriate forum for the resolution of all disputes arising from the Notes, the county in which KeyBank has its principal place of business: Cuyahoga County, Ohio. KeyBank,
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however, does not argue on appeal that the forum-selection
clause should have been enforced.
Plaintiffs signed the Notes immediately below several conspicuous statements contained in a box set off from the rest
of the document. One of these statements provided,
I UNDERSTAND THAT THE MASTER STUDENT LOAN PROMISSORY NOTE GOVERNING
MY
LOAN
CONTAINS
AN
ARBITRATION PROVISION UNDER WHICH
CERTAIN DISPUTES (AS DESCRIBED IN
THE ARBITRATION PROVISION) BETWEEN
ME AND YOU AND/OR CERTAIN OTHER
PARTIES WILL BE RESOLVED BY BINDING
ARBITRATION, IF ELECTED BY ME OR
YOU OR CERTAIN OTHER PARTIES. IF A
DISPUTE IS ARBITRATED, THE PARTIES
WILL NOT HAVE THE OPPORTUNITY TO
HAVE A JUDGE OR JURY RESOLVE IT AND
OTHER RIGHTS MAY BE SUBSTANTIALLY
LIMITED.
(boldface in original) (additional emphasis added). Another
statement was a warning: “CAUTION: IT IS IMPORTANT
THAT I THOROUGHLY READ THE CONTRACT
BEFORE I SIGN IT.” A third statement in the box was a
promise by the student: “I WILL NOT SIGN THIS
AGREEMENT/NOTE BEFORE I READ IT (EVEN IF
OTHERWISE ADVISED).”
Each Plaintiff also signed a Service Contract Agreement
with SSH. In this Agreement, SSH described its vocational
training services as including 175 flight hours, unlimited
access to a flight simulator, ground school classes, and individual instruction “as needed.” Included in the cost of training
were textbooks, supplies, and other required materials. Plaintiffs claim that although the Agreement required all training
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to be completed within 18 months, SSH’s lack of resources
made it impossible to finish within that time.
SSH executives allegedly misappropriated the student loan
funds it received from KeyBank “for their own personal benefit” and “knew [SSH] did not have and never would have sufficient equipment, trainers or maintenance personnel to meet
its obligations under the Service Contract Agreements” within
the required time period. Although Plaintiffs Kilgore and Fuller logged 185.8 and 310 hours of flight training respectively
— more than the promised 175 hours — they did not complete all requirements for graduation before SSH closed its
doors and filed for bankruptcy in February of 2008. They
therefore did not receive a diploma, certificate or other
accreditation for their training.
According to Plaintiffs, KeyBank had knowledge that “the
private student loan industry — and particularly aviation
schools — was a slowly unfolding disaster,” yet continued to
loan tuition money to students and disburse the loan proceeds
to SSH. This knowledge was allegedly based on KeyBank’s
previous dealings with similar schools. In Plaintiffs’ words,
“KeyBank single-handedly fueled the meteoric rise of SSH
which subsequent lenders gleefully continued.”
Unable to take action against SSH because of the automatic
stay, 11 U.S.C. § 362, Plaintiffs turned their focus to KeyBank.
II
DISTRICT COURT PROCEEDINGS
On June 17, 2008, Plaintiffs filed suit against KeyBank in
California state court.1 After Plaintiffs filed their Second
1
The suit initially included a third plaintiff, Kevin Wilhelmy, and two
additional defendants, Student Loan Xpress and American Education Services. Wilhelmy was not listed as a plaintiff in the Third Amended Complaint, and Plaintiffs voluntarily dismissed the two additional defendants.
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Amended Complaint, KeyBank removed the case to the U.S.
District Court for the Northern District of California under 28
U.S.C. §§ 1441, 1446, and 1453. Plaintiffs asserted claims of
unfair competition under California’s UCL, which prohibits
“any unlawful, unfair or fraudulent business act or practice.”
Cal. Bus. & Prof. Code § 17200. Although Plaintiffs’ Second
Amended Complaint also included claims of aiding and abetting fraud and claims under the Racketeer Influenced and
Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et
seq., these claims were omitted from Plaintiffs’ Third
Amended Complaint — the last complaint filed in this case.
Plaintiffs did not seek damages. Rather, they requested an
order enjoining KeyBank from (1) “reporting to any credit
agency any default by Plaintiffs or the Class under the Notes,”
(2) “enforcing the Notes against Plaintiffs and the Class or
taking any action in furtherance of enforcement efforts,” and
(3) “engaging in false and deceptive acts and practices” with
respect to consumer credit contracts involving purchase
money loans. Plaintiffs sought to prohibit KeyBank from collecting any amount of the debt, even though Plaintiffs had
received at least some benefit from the loan in the helicopter
pilot training they received before SSH shut down.
KeyBank moved to compel arbitration. The district court,
Judge Thelton E. Henderson, denied the motion.2 The initial
question the district court had to consider was whether California or Ohio law applied to determine the enforceability of
the arbitration clause. Plaintiffs argued that the parties’ choice
of Ohio law should not control. The district court agreed,
holding that Ohio law was “contrary to a fundamental policy
of California” and that California had a “materially greater
2
At the time of the district court’s decision on the motion to compel
arbitration, the operative complaint was the Second Amended Complaint.
Later, when the court dismissed Plaintiffs’ case, the operative complaint
was the Third Amended Complaint. Any differences between the two
complaints are not material to our resolution of this appeal.
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interest” than Ohio in the resolution of the dispute. See Hoffman v. Citibank (S.D.), N.A., 546 F.3d 1078, 1082 (9th Cir.
2008) (per curiam). This fundamental policy was California’s
rule prohibiting the arbitration of claims for public injunctive
relief, notwithstanding the parties’ agreement to arbitrate.3 See
Cruz, 66 P.3d at 1164-65. In contrast to California, Ohio law
appeared to allow arbitration of such claims. Hawkins v.
O’Brien, No. 22490, 2009 WL 50616, at *6 (Ohio Ct. App.
Jan. 9, 2009). With these considerations in mind, the court
declined to apply the parties’ choice of Ohio law.
Judge Henderson next considered whether, under California law and the FAA, Plaintiffs could maintain their lawsuit
or whether they were bound to arbitrate as required in the
Notes. Judge Henderson held that Broughton and Cruz prohibited the arbitration of Plaintiffs’ injunctive relief claims
and that therefore, the arbitration clause was unenforceable.
Judge Henderson denied the motion to compel arbitration in
July of 2009, nearly two years before the Supreme Court
issued the Concepcion decision and thus did not have the benefit of that opinion.
Pursuant to 9 U.S.C. § 16(a)(1)(C), KeyBank appealed the
district court’s denial of its motion to compel arbitration.
While that interlocutory appeal was pending, KeyBank moved
to dismiss the Third Amended Complaint. The district court
granted the motion and entered judgment, from which Plaintiffs appeal.
3
Presumably because the district court was considering Plaintiffs’ Second Amended Complaint, which requested only private injunctive relief,
the district court extended the Broughton-Cruz rule to all claims for
injunctive relief, not merely those for public injunctive relief. Given the
Third Amended Complaint’s later request for a broad public injunction,
we do not address whether such an extension was warranted.
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III
STANDARD OF REVIEW
We review de novo the district court’s decision to deny
KeyBank’s motion to compel arbitration. Bushley v. Credit
Suisse First Boston, 360 F.3d 1149, 1152 (9th Cir. 2004).
Plaintiffs, as the parties challenging the enforceability of the
arbitration clause, “bear[ ] the burden of proving that the
claims at issue are unsuitable for arbitration.” Green Tree Fin.
Corp.-Ala. v. Randolph, 531 U.S. 79, 91 (2000).
IV
DISCUSSION
KeyBank asks us to find error in the district court’s refusal
to enforce the Note’s choice of Ohio law and its application
of California law, but we need not address this issue. We
assume, without deciding, that California law governs Plaintiffs’ claims, because even under California law, the arbitration agreement must be enforced.
A
The Federal Arbitration Act
[1] The FAA provides for the enforcement of private
agreements to arbitrate disputes. It also includes a savings
clause that allows such agreements to be invalidated only
“upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Unless the savings clause
applies, arbitration agreements are “valid, irrevocable, and
enforceable.” Id. The United States Supreme Court has
repeatedly explained that the FAA was intended to reverse the
long history of judicial refusal to enforce arbitration agreements. See, e.g., Mastrobuono v. Shearson Lehman Hutton,
Inc., 514 U.S. 52, 55 (1995); Volt Info. Sci., Inc. v. Bd. of Trs.,
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489 U.S. 468, 474 (1989). As the Court stated in Mitsubishi
Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614,
625 n.14 (1985), “the Act was designed to overcome an
anachronistic judicial hostility to agreements to arbitrate,
which American courts had borrowed from English common
law.”
Causes of action premised on statutory rights are subject to
contractual arbitration agreements just as are claims under the
common law. Lozano v. AT&T Wireless Servs., Inc., 504 F.3d
718, 725 (9th Cir. 2007) (citing Mitsubishi Motors Corp., 473
U.S. at 627). Congress may, of course, determine that certain
claims should not be subject to arbitration and can pass federal legislation that removes such claims from the reach of the
FAA. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20,
26 (1991). But “[a]lthough all statutory claims may not be
appropriate for arbitration, ‘[h]aving made the bargain to arbitrate, the party [opposing arbitration] should be held to it
unless Congress itself has evinced an intention to preclude a
waiver of judicial remedies for the statutory rights at issue.’ ”
Id. (emphasis added) (second alteration in original) (quoting
Mitsubishi Motors Corp., 473 U.S. at 628). Such congressional intent can be found from the text of the statute or from “an
inherent conflict between arbitration and the statute’s underlying purposes.” Shearson/American Express, Inc. v. McMahon,
482 U.S. 220, 227 (1987).
[2] The FAA “leaves no place for the exercise of discretion
by a district court, but instead mandates that district courts
shall direct the parties to proceed to arbitration on issues as
to which an arbitration agreement has been signed.” Dean
Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985). The
federal case must be stayed while the parties proceed to arbitration. 9 U.S.C. § 3. “The court’s role under the Act is therefore limited to determining (1) whether a valid agreement to
arbitrate exists and, if it does, (2) whether the agreement
encompasses the dispute at issue. If the response is affirmative on both counts, then the Act requires the court to enforce
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the arbitration agreement in accordance with its terms.” Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130
(9th Cir. 2000) (internal citation omitted). Because the parties
here agree that the particular claims at issue fall within the
scope of the arbitration clause, we must decide only whether
the agreement to arbitrate is valid.
[3] The FAA preserves generally-applicable contract
defenses and thus allows for invalidation of arbitration agreements in limited circumstances — that is, if the clause would
be unenforceable “upon such grounds as exist at law or in
equity for the revocation of any contract.” 9 U.S.C. § 2
(emphasis added). However, any other state law rule that purports to invalidate arbitration agreements is preempted
because the Act “withdrew the power of the states to require
a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.” Southland
Corp. v. Keating, 465 U.S. 1, 10 (1984). In short, a state statute or judicial rule that applies only to arbitration agreements,
and not to contracts generally, is preempted by the FAA:
A court may not, then, in assessing the rights of litigants to enforce an arbitration agreement, construe
that agreement in a manner different from that in
which it otherwise construes nonarbitration agreements under state law. Nor may a court rely on the
uniqueness of an agreement to arbitrate as a basis for
a state-law holding that enforcement would be
unconscionable . . . .
Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987) (emphasis
added). The federal government’s authority to preempt state
laws invalidating arbitration agreements derives from the
Supremacy Clause of the Constitution. U.S. Const. art. VI
(“This Constitution, and the laws of the United States . . .
shall be the supreme law of the land; and the judges in every
State shall be bound thereby, any thing in the constitution or
laws of any State to the contrary notwithstanding.”).
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B
The Concepcion Decision
It is against this backdrop that we must read the savings
clause found in § 2 of the FAA. Although that section “explicitly retains an external body of law governing revocation
(such grounds ‘as exist at law or in equity’),” Arthur Anderson LLP v. Carlisle, 556 U.S. 624, ___, 129 S. Ct. 1896, 1902
(2009) (quoting 9 U.S.C. § 2), it also “ensures that [the parties’] agreement will be enforced according to its terms even
if a rule of state law would otherwise exclude such claims
from arbitration,” Mastrobuono, 514 U.S. at 58 (emphasis
added). This inherent tension between the two clauses of § 2
has caused many courts to struggle to define the precise scope
of the savings clause.
The Supreme Court recently clarified that scope in AT&T
Mobility LLC v. Concepcion, ___ U.S. ___, 131 S. Ct. 1740
(2011). Concepcion reemphasized that the “saving clause permits agreements to arbitrate to be invalidated by ‘generally
applicable contract defenses, such as fraud, duress, or unconscionability,’ but not by defenses that apply only to arbitration
or that derive their meaning from the fact that an agreement
to arbitrate is at issue.” Id. at 1746 (quoting Doctor’s Assocs.,
Inc. v. Casarotto, 517 U.S. 681, 687 (1996)).
The plaintiffs in Concepcion were telephone service customers to whom AT&T had promised free phones. Although
AT&T did not charge its customers for the actual phones, it
did charge sales tax based on the retail value of the phones.
Id. at 1744. When the customers filed suit in federal court,
AT&T moved to compel arbitration pursuant to the arbitration
agreement in the customers’ service contracts. The arbitration
clause required all customers to arbitrate disputes in an “individual capacity, and not as a plaintiff or class member in any
purported class or representative proceeding.” Id.
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The district court concluded in Concepcion that the arbitration clause was unconscionable, relying on the California
Supreme Court’s opinion in Discover Bank v. Superior Court,
113 P.3d 1100 (Cal. 2005). The Discover Bank rule prohibited
as unconscionable the enforcement of class action waivers in
arbitration agreements,
when the waiver is found in a consumer contract of
adhesion in a setting in which disputes between the
contracting parties predictably involve small
amounts of damages, and when it is alleged that the
party with the superior bargaining power has carried
out a scheme to deliberately cheat large numbers of
consumers out of individually small sums of money.
Id. at 1110. On appeal, we affirmed the district court’s application of the Discover Bank rule to find the arbitration clause
unenforceable. We held that the Discover Bank rule was not
preempted by the FAA because it was “simply a refinement
of the unconscionability analysis applicable to contracts generally in California,” rather than a rule that applied only to
arbitration agreements. Laster v. AT&T Mobility LLC, 584
F.3d 849, 857 (9th Cir. 2009) (internal quotation marks omitted), rev’d sub nom., Concepcion, 131 S. Ct. 1740.
[4] The Supreme Court disagreed. The Court identified the
two situations in which a state law rule will be preempted by
the FAA. First, “[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.”
Concepcion, 131 S. Ct. at 1747. A second, and more complex,
situation occurs “when a doctrine normally thought to be generally applicable, such as duress or, as relevant here, unconscionability, is alleged to have been applied in a fashion that
disfavors arbitration.” Id. In that case, a court must determine
whether the state law rule “stand[s] as an obstacle to the
accomplishment of the FAA’s objectives,” which are principally to “ensure that private arbitration agreements are
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enforced according to their terms.” Id. at 1748. If the state law
rule is such an obstacle, it is preempted.
The Court held that the Discover Bank rule — prohibiting
class action waivers in arbitration agreements — was just
such a rule because “[r]equiring the availability of classwide
arbitration interferes with fundamental attributes of arbitration
and thus creates a scheme inconsistent with the FAA.” Id. at
1748. Just as the FAA guarantees that contracting parties
“may agree to limit the issues subject to arbitration, to arbitrate according to specific rules, and to limit with whom a
party will arbitrate,” id. at 1748-49 (internal citations omitted), so too does it allow them to agree to limit in what capacity they arbitrate, id. at 1750-51. In so holding, the Court
rejected the plaintiffs’ argument that the savings clause
applied to the Discover Bank rule because of the rule’s “origins in California’s unconscionability doctrine and California’s policy against exculpation.” Id. at 1746. Neither was the
Court persuaded by the dissent’s policy argument that requiring the availability of class proceedings allows for vindication
of small-dollar claims that otherwise might not be prosecuted,
concluding that “States cannot require a procedure that is
inconsistent with the FAA, even if it is desirable for unrelated
reasons.” Id. at 1753. Even though California might have had
a legitimate basis for its public policy against class action
waivers, that policy could not save the Discover Bank rule
from FAA preemption.
C
California’s Broughton-Cruz Rule
As the Supreme Court did with the Discover Bank rule in
Concepcion, we examine the state law rule at issue here to
determine whether it is preempted by the FAA. In Broughton,
the California Supreme Court considered whether plaintiffs
asserting claims under that state’s Consumers Legal Remedies
Act (“CLRA”) could be compelled to arbitrate those claims.
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Plaintiffs requested remedies including an order enjoining the
defendant from engaging in deceptive advertising. Broughton,
988 P.2d at 71. The court concluded that an agreement to
arbitrate could not be enforced in a case where the plaintiff is
“functioning as a private attorney general, enjoining future
deceptive practices on behalf of the general public.” Id. at 76.
This decision was based on the court’s determination that the
California legislature “did not intend this type of injunctive
relief to be arbitrated.” Id.
According to the California Supreme Court, “the evident
institutional shortcomings of private arbitration in the field of
such public injunctions” would be unacceptable in a case
where there was more “at stake” than a “private dispute by
parties who voluntarily embarked on arbitration aware of the
trade-offs to be made.” Id. at 77. The court noted that enforcement of an arbitrator’s injunction would require a new arbitration proceeding, but that a court retains jurisdiction and could
more easily handle the “considerable complexity” involved in
supervising injunctions. Id. Further, judges “are accountable
to the public in ways arbitrators are not.” Id. The court thus
found that the judicial forum “has significant institutional
advantages over arbitration in administering a public injunctive remedy, which as a consequence will likely lead to the
diminution or frustration of the public benefit if the remedy
is entrusted to arbitrators.” Id. at 78.
The Broughton court held also that prohibiting the arbitration of CLRA claims for injunctive relief did not contravene
the FAA: “although the [U.S. Supreme Court] has stated generally that the capacity to withdraw statutory rights from the
scope of arbitration agreements is the prerogative solely of
Congress, not state courts or legislatures, it has never directly
decided whether a [state] legislature may restrict a private
arbitration agreement when it inherently conflicts with a public statutory purpose that transcends private interests.” Id.
(internal citation omitted).
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In Cruz, the California Supreme Court extended the
Broughton rule to claims for public injunctive relief under the
UCL. 66 P.3d at 1159. The court found that “the request for
injunctive relief is clearly for the benefit of health care consumers and the general public by seeking to enjoin PacifiCare’s alleged deceptive advertising practices.” Id. at 1164.
Because public injunctive relief claims under the UCL are
“designed to prevent further harm to the public at large rather
than to redress or prevent injury to a plaintiff,” the court held
that such claims could not be subject to arbitration, notwithstanding the parties’ agreement to the contrary. Id. at 1165.
We have previously agreed with the California Supreme
Court that the Broughton-Cruz rule prohibits arbitration for
claims for public injunctive relief. Davis v. O’Melveny &
Myers, 485 F.3d 1066, 1082 (9th Cir. 2007) (“California law
provides that certain ‘public injunctions’ are incompatible
with arbitration . . . . Actions seeking such injunctions cannot
be subject to arbitration even under a valid arbitration
clause.”). We must, however, reexamine whether Davis
remains good law after Concepcion. United States v.
Rodriguez-Lara, 421 F.3d 932, 943 (9th Cir. 2005) (a prior
panel decision is binding unless “intervening Supreme Court
or en banc authority” compels a contrary conclusion).
D
Concepcion’s Effect on the Broughton-Cruz Rule
We now turn to whether California’s rule against arbitration of public injunctive claims is preempted by federal law.
The district courts in California have been working diligently
to discern precisely whether the Broughton-Cruz rule has survived Concepcion. They have come to different conclusions.
Shortly after Concepcion was decided, Judge Alsup of the
Northern District of California determined that the California
state law rule against arbitration of public injunctive relief
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claims did not survive the Supreme Court’s decision and was
preempted by the FAA. Arellano v. T-Mobile USA, Inc., No.
3:10-cv-05663-WHA, Dkt. 82, 2011 WL 1842712, at *2
(N.D. Cal. May 16, 2011). The district court noted the
Supreme Court’s decades-old statement that “ ‘Congress
intended to foreclose state legislative attempts to undercut the
enforceability of arbitration agreements.’ ” Id. at *1 (quoting
Southland Corp., 465 U.S. at 16). Arrellano concluded that
because “California’s preclusion of public injunctive relief
claims from arbitration . . . ‘prohibits outright the arbitration
of a particular type of claim,’ ” the rule is preempted by the
FAA. Id. at *1-2 (quoting Concepcion, 131 S. Ct. at 1747).
Judge Alsup acknowledged the policy argument that enforcement of an arbitration clause in a public injunctive relief case
“would preclude an individual from ever bringing these types
of claims by foisting prohibitive costs on the individual plaintiff,” but determined that, “[p]erhaps regrettably, this argument was rejected by Concepcion.” Id. at *2.
Other cases from the Northern District have similarly held
that Concepcion compels the conclusion that the FAA preempts the Broughton-Cruz rule. Judge Whyte agreed with
Arellano’s reliance on Concepcion’s “particular type of
claim” analysis and concluded that “Concepcion would seem
to preempt California’s arbitration exemption for claims
requesting public injunctive relief.” In re Apple and AT&T
iPad Unlimited Data Plan Litig., No. 5:10-cv-02553-RMW,
Dkt. 107, 2011 WL 2886407, at *4 (N.D. Cal. July 19, 2011).
After Concepcion, Judge Henderson — the district judge in
this case — also interpreted that case as foreclosing the application of the Broughton-Cruz rule. Nelson v. AT&T Mobility
LLC, No. 3:10-cv-04802-THE, Dkt. 30, 2011 WL 3651153,
at *2 (N.D. Cal. Aug. 18, 2011). Describing the rule against
arbitration of public injunctive relief claims as a “blanket
ban[ ]” of arbitration under state law, Judge Henderson held
that Concepcion compels preemption of that rule, notwith-
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standing “public policy arguments thought to be persuasive in
California.” Id. (internal quotation marks omitted).
Other district courts have disagreed and determined that the
Broughton-Cruz rule is still viable after Concepcion. Judge
Guilford of the Central District stated that “[t]he holdings of
Cruz and Broughton are not inconsistent with Concepcion,
and they protect important public rights and remedies.” In re
DirecTV Early Cancellation Fee Marketing and Sales Practices Litig., ___ F. Supp. 2d ___, No. 8:09-ml-02093-AG-AN,
Dkt. 255, 2011 WL 4090774, at *10 (C.D. Cal. Sept. 6, 2011)
(In re DirecTV Litigation). He reasoned that the public injunction rule was not an “outright” prohibition of arbitration of a
particular type of claim because it did not prohibit arbitration
of all injunctive relief claims, but only those “brought on
behalf of the general public.” Id. The court, relying on
Broughton’s claimed institutional advantages of the judicial
over the arbitral forum, found “compelling reasons why arbitration is not the proper forum for vindicating a broad public
right.” Id. (citing Broughton, 988 P.2d at 77-78)
Judge Carter of the Central District recently considered
Concepcion and the Broughton-Cruz rule in a case with allegations quite similar to those before us, albeit against the
school, not the lender. Ferguson v. Corinthian Colleges, ___
F. Supp. 2d ___, No. 08:11-cv-00127-DOC-AJW, Dkt. 56,
2011 WL 4852339 (C.D. Cal. Oct. 6, 2011). There, a former
student of one of the defendant colleges alleged that the
school induced students to enroll by making them “believ[e]
they are receiving a quality education at an affordable price,
when, in fact, they pay some of the highest tuition rates in the
country, incur crippling student loans, and graduate with a
degree that never qualifies nor prepares them for any job
placement other than low-wage, low-skill employment.” Id. at
*1. The student claimed, inter alia, that these actions violated
the UCL.
Ferguson held that “the California Legislature’s decision to
allow citizens to bring injunctive relief claims . . . on behalf
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of the public” was not preempted by the FAA. Id. at *7. The
court noted that “[n]otwithstanding Concepcion’s mandate
that state law cannot prohibit arbitration of certain types of
claims, the Supreme Court previously acknowledged that ‘not
. . . all controversies implicating statutory rights are suitable
for arbitration.’ ” Id. (quoting Mitsubishi Motors, 473 U.S. at
627) (omission in original). The court agreed with the principle announced in Broughton that a state legislature can enact
laws the purposes of which are incompatible with the enforcement of an arbitration agreement. Claims under such laws
avoid FAA preemption, Judge Carter reasoned, as long as
“the primary purpose of an injunctive relief action under the
[statute] is to protect the public.” Id. at *9. Judge Carter held
that “[b]ecause Plaintiffs’ injunctive relief claims seek to
enforce a public right, there is an inherent conflict with sending these claims to an arbitrator.” Id.
[5] We hold that the Broughton-Cruz rule does not survive
Concepcion because the rule “prohibits outright the arbitration of a particular type of claim” — claims for broad public
injunctive relief. Concepcion, 131 S. Ct. at 1747. Therefore,
our statement in Davis — that Broughton and Cruz prohibit
the arbitration of public injunctive relief claims in California
— is no longer good law. See 485 F.3d at 1082.
We are not blind to the concerns engendered by our holding
today. It may be that enforcing arbitration agreements even
when the plaintiff is requesting public injunctive relief will
reduce the effectiveness of state laws like the UCL. It may be
that FAA preemption in this case will run contrary to a state’s
decision that arbitration is not as conducive to broad injunctive relief claims as the judicial forum. And it may be that
state legislatures will find their purposes frustrated. These
concerns, however, cannot justify departing from the appropriate preemption analysis as set forth by the Supreme Court
in Concepcion.
The difficulty with the preemption analysis urged by Plaintiffs and applied in Ferguson and In re DirecTV Litigation is
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twofold. First, it improperly gives weight to state public policy rationales to contravene the parties’ choice to arbitrate.
Concepcion rejected this proposition, holding that state law
“cannot require a procedure that is inconsistent with the FAA,
even if it is desirable for unrelated reasons.” 131 S. Ct. at
1753 (emphasis added); see also id. at 1753 (Thomas, J., concurring) (“If § 2 means anything, it is that courts cannot refuse
to enforce arbitration agreements because of a state public
policy against arbitration.”). Although Plaintiffs are correct
that “Concepcion did not address the question of arbitrability
of a public injunction remedy,” the policy arguments justifying the Broughton-Cruz rule, however worthy they may be,
can no longer invalidate an otherwise enforceable arbitration
agreement.
Indeed, the Supreme Court recently relied on Concepcion
to reaffirm the FAA’s preemption of state public policy justifications. In Marmet Health Care Center, Inc. v. Brown, Nos.
11-391 and 11-394, 565 U.S. ___ (Feb. 21, 2012) (per
curiam), the Court held that under the FAA, an arbitration
agreement between a nursing home and a patient’s family
member was enforceable in a suit against the nursing home
for personal injury or wrongful death — despite the West Virginia Supreme Court of Appeals’ conclusion that arbitration
of such claims was against that state’s public policy. Slip Op.
at 3-4. Because the public policy of West Virginia prohibited
“ ‘outright the arbitration of a particular type of claim” —
personal injury and wrongful death claims — that policy was
“displaced by the FAA.’ ” Id. at 3 (quoting Concepcion, 131
S. Ct. at 1747).
The second problem with Plaintiffs’ argument is that it mistakenly regards the motivation of state legislators as relevant
to determining whether federal law preempts their legislation.
“In enacting § 2 of the federal Act, Congress declared a
national policy favoring arbitration and withdrew the power of
the states to require a judicial forum for the resolution of
claims which the contracting parties agreed to resolve by arbi-
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tration.” Southland Corp., 465 U.S. at 10 (emphasis added).
In Southland Corp., the Court identified “only two limitations” on the FAA’s enforcement provision: arbitration provisions (1) “must be a part of a written maritime contract or a
contract ‘evidencing a transaction involving commerce’ ” and
(2) can be invalidated under the savings clause. Id. at 10-11
(quoting 9 U.S.C. § 2). No other “additional limitations under
State law” can render arbitration clauses unenforceable. Id. at
11.
The Ferguson court was correct that there is a third exception to the FAA’s applicability, but it applies only to federal
statutory claims. In Mitsubishi Motors Corp., the Court
approved a two-step inquiry in determining whether a statutory claim was subject to arbitration. This approach “first
determin[es] whether the parties’ agreement to arbitrate
reached the statutory issues, and then . . . consider[s] whether
legal constraints external to the parties’ agreement foreclosed
the arbitration of those claims.” 473 U.S. at 628. But such
external constraints may be found only in other federal statutes, not in state law or policy. See id. (“We must assume that
if Congress intended the substantive protection afforded by a
given statute to include protection against waiver of the right
to a judicial forum, that intention will be deducible from text
or legislative history.”) (emphasis added).
Broughton, upon which Ferguson and In re DirecTV Litigation relied, found an inherent conflict between arbitration
and public injunctive relief claims under California law. 988
P.2d at 78-79. The Broughton court then explained why its
rule prohibiting the arbitration of claims for public injunctive
relief was consistent with the FAA: “Although both California
and federal law recognize the important policy of enforcing
arbitration agreements, it would be perverse to extend the policy so far as to preclude states from passing legislation the
purposes of which make it incompatible with arbitration.” Id.
at 79.
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But the very nature of federal preemption requires that
state law bend to conflicting federal law — no matter the purpose of the state law. It is not possible for a state legislature
to avoid preemption simply because it intends to do so. The
analysis of whether a particular statute precludes waiver of
the right to a judicial forum — and thus whether that statutory
claim falls outside the FAA’s reach — applies only to federal,
not state, statutes. On the several occasions that the Supreme
Court has considered whether a statutory claim was unsuitable
for arbitration, the claim at issue was a federal one. See Gilmer, 500 U.S. at 35 (Age Discrimination in Employment
Act); Rodriguez de Quijas v. Shearson/American Express,
Inc., 490 U.S. 477, 479-484 (1989) (Securities Act of 1933,
overruling Wilko v. Swan, 346 U.S. 427 (1953)); McMahon,
482 U.S. at 238, 242 (Securities Exchange Act of 1934 and
RICO); Mitsubishi Motors Corp., 473 U.S. at 629 (Sherman
Act). Although some members of the Court have expressed a
desire to interpret § 2 as allowing states to preclude arbitration
on public policy grounds, that view has not carried the day.
See Perry, 482 U.S. at 495 (O’Connor, J., dissenting)
(“[T]here can be little doubt that the California Legislature
intended to preclude waiver of a judicial forum . . . . California’s policy choice to preclude waivers of a judicial forum for
wage claims is entitled to respect.”); Southland, 465 U.S. at
21 (Stevens, J., concurring in part and dissenting in part)
(“We should not refuse to exercise independent judgment
concerning the conditions under which an arbitration agreement, generally enforceable under the Act, can be held invalid
as contrary to public policy simply because the source of the
substantive law to which the arbitration agreement attaches is
a State rather than the Federal Government.”).
We read the Supreme Court’s decisions on FAA preemption to mean that, other than the savings clause, the only way
a particular statutory claim can be held inarbitrable is if Congress intended to keep that federal claim out of arbitration
proceedings:
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That is not to say that all controversies implicating
statutory rights are suitable for arbitration. There is
no reason to distort the process of contract interpretation, however, in order to ferret out the inappropriate. Just as it is the congressional policy manifested
in the Federal Arbitration Act that requires courts
liberally to construe the scope of arbitration agreements covered by that Act, it is the congressional
intention expressed in some other statute on which
the courts must rely to identify any category of
claims as to which agreements to arbitrate will be
held unenforceable.
Mitsubishi Motors Corp., 473 U.S. at 627 (emphasis added).
See also Dean Witter Reynolds, Inc., 470 U.S. at 221 (“The
preeminent concern of Congress in passing the Act was to
enforce private agreements into which parties had entered,
and that concern requires that we rigorously enforce agreements to arbitrate, . . . at least absent a countervailing policy
manifested in another federal statute.”) (emphasis added).
[6] In the end, we circle back to the Supremacy Clause.
The FAA is “the supreme law of the land,” U.S. Const. art.
VI, and that law renders arbitration agreements enforceable so
long as the savings clause is not implicated. The BroughtonCruz rule “prohibits outright the arbitration of a particular
type of claim” — claims for public injunctive relief. Concepcion, 131 S. Ct. at 1747. This prohibition cannot be described
as a “ground[ ] as exist[s] at law or in equity for the revocation of any contract,” 9 U.S.C. § 2, because it “appl[ies] only
to arbitration [and] derive[s] its meaning from the fact that an
agreement to arbitrate is at issue,” Concepcion, 131 S. Ct. at
1746. Although the Broughton-Cruz rule may be based upon
the sound public policy judgment of the California legislature,
we are not free to ignore Concepcion’s holding that state public policy cannot trump the FAA when that policy prohibits
the arbitration of a “particular type of claim.” Therefore, we
hold that “the analysis is simple: The conflicting [Broughton-
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Cruz] rule is displaced by the FAA.” Concepcion, 131 S. Ct.
at 1747. Concepcion allows for no other conclusion.
E
Unconscionability
The district court, having determined that Plaintiffs’ claims
were not arbitrable under Broughton and Cruz, did not decide
whether the Note’s arbitration clause is unconscionable.
Given our conclusion that the Broughton-Cruz rule is no longer viable post-Concepcion, we accept the parties’ invitation
to consider this issue.
[7] Concepcion did not overthrow the common law contract defense of unconscionability whenever an arbitration
clause is involved. Rather, the Court reaffirmed that the savings clause preserves generally applicable contract defenses
such as unconscionability, so long as those doctrines are not
“applied in a fashion that disfavors arbitration.” Concepcion,
131 S. Ct. at 1747.
Unconscionability under California law “has both a procedural and a substantive element, the former focusing on
oppression or surprise due to unequal bargaining power, the
latter on overly harsh or one-sided results.” Armendariz v.
Found. Health Psychcare Servs., Inc., 6 P.3d 669, 690 (Cal.
2000) (internal quotation marks omitted). Courts use a “sliding scale” in analyzing these two elements: “[T]he more substantively oppressive the contract term, the less evidence of
procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” Id. No
matter how heavily one side of the scale tips, however, both
procedural and substantive unconscionability are required for
a court to hold an arbitration agreement unenforceable. Id.
[8] In Circuit City Stores, Inc. v. Ahmed, 283 F.3d 1198,
1199-1200 (9th Cir. 2002), we applied California law and
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determined that an arbitration agreement was not procedurally
unconscionable, in large part because it contained an opt-out
provision allowing the plaintiff to reject the arbitration program within 30 days of signing the contract. The provision
constituted a “meaningful” opportunity to opt out, notwithstanding the plaintiff’s arguments that “he did not have the
degree of sophistication necessary to recognize the meaning
of the opt-out provision or to know how to avoid it.” Id. at
1200. We invoked “the general rule . . . that ‘one who signs
a contract is bound by its provisions and cannot complain of
unfamiliarity with the language of the instrument.’ ” Id. (quoting Madden v. Kaiser Found. Hosps., 552 P.2d 1175, 1185
(Cal. 1976). We further held that 30 days was an “ample
opportunity to investigate any provisions [the plaintiff] did
not understand before deciding whether to opt out of [the]
arbitration program.” Id.
[9] Here, the arbitration clause in the Note, like that at
issue in Circuit City, withstands scrutiny. The arbitration
agreement is not buried within the document; it is conspicuous and appears in its own section of the Note. The Note contains more than one statement setting forth in plain language
the rights that Plaintiffs would waive if they did not opt-out
of the arbitration clause: the right to litigate in court, the right
to a jury trial, and the right to proceed on a class basis. The
arbitration clause even points out that the costs of arbitration
could be higher than those of a trial.
Plaintiffs attempt to dismiss these obvious statements by
asserting that KeyBank never communicated the existence of
the clause to them other than in the Note; further, all of the
face-to-face interaction the students had regarding the Note
was with SSH, not with KeyBank. Plaintiffs claim also that
they had “no guidance on what to do in the event” they had
any questions about the Note and that it is therefore “[n]ot
surprising[ ] [that] not a single SSH borrower exercised
his/her opt-out right.”
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We do not see how these allegations are relevant given the
clarity of the contract that Plaintiffs signed. The Note states
that the opt-out notice must be in writing and that telephone
calls do not suffice. It lists precisely what information must
be included in the notice and the address to which the notice
must be sent. Far from accepting Plaintiffs’ suggestion at oral
argument that these requirements were intolerably onerous,
we view them as clear, easy-to-follow instructions as to how
Plaintiffs could have opted out of the arbitration agreement
had they chosen to do so. To the extent Plaintiffs claim that
they were so “intoxicated by helicopters” that they never saw
the arbitration clause, we refer them to the end of the Note.
Immediately above each Plaintiff’s signature line is a warning
that the student should read the contract carefully before signing, as well as a promise from the student that he would do
so “even if otherwise advised.”
[10] The arbitration agreement was not forced upon the
Plaintiffs leaving them with no meaningful choice. We will
not relieve Plaintiffs of their contractual obligation to arbitrate
by manufacturing unconscionability where there is none.
Because we hold that the arbitration clause in the parties’ contract is not procedurally unconscionable, we need not address
whether the terms of that clause are substantively unconscionable. It is enough that when faced with a 60-day opt-out provision and a conspicuous and comprehensive explanation of
the arbitration agreement, Plaintiffs did not reject that agreement.
F
KeyBank’s Motion to Dismiss
At oral argument, both counsel urged us to reach the issues
raised in Appeal No. 10-15934 even if we were to conclude
that the case must proceed to arbitration. It would be inappropriate for us to do so. Because the motion to compel arbitration should have been granted, the subsequent judgment in
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favor of KeyBank is a nullity. For this reason, and given our
decision to vacate the judgment, Appeal No. 10-15934 is
moot. We express no opinion on the central issue in that
appeal — whether Plaintiffs’ UCL claims would be preempted by the NBA or the OCC regulations.
V
CONCLUSION
[11] The FAA preempts California’s Broughton-Cruz rule
that claims for public injunctive relief cannot be arbitrated.
Plaintiffs must be held to their decision to sign the Note —
and accept at least a portion of the benefit of their contract
with KeyBank — without opting out of the arbitration agreement.
For the foregoing reasons, in Interlocutory Appeal No. 0916703, we REVERSE the district court’s denial of KeyBank’s
motion to compel arbitration, VACATE the judgment, and
REMAND to the district court with instructions to enter an
order staying the case and compelling arbitration.
We DISMISS Appeal No. 10-15934 as MOOT.
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