A Bit More on Mandatory Arbitration of Claims for Injunctive Relief

On Monday, Allison posted about the 9th Circuit's grant of rehearing en banc in Kilgore v. Key Bank. The question is whether the Federal Arbitration Act preempts a California-law rule that says that claims for a so-called "public injunction" cannot be forced into arbitration (even if an arbitration agreement's terms puts those claims there). The plaintiffs' effort to obtain rehearing en banc was supported by several amicus briefs, including this one written by law professor Hiro Aragaki. If you are interested in the arbitration wars, I think you'll be interested in this brief. An excerpt appears in bold after the jump.

The Panel’s opinion stands for the sweeping proposition that [state-law] rules such as Broughton and Cruz are preempted by the FAA simply because they “‘prohibit[] outright the arbitration of a particular type of claim.’” Id. at *6, *10 (quotation omitted). This leads to absurd results. It implies, for instance, that a state may not prohibit a prosecutor and a charged defendant from agreeing to arbitration, even though it has long been recognized that criminal matters are not amenable to arbitration because of the significant third party and public interests at stake. See, e.g., Harris v. Shearson Hayden Stone, Inc., 441 N.Y.S.2d 70, 74 (N.Y. App. Div. 1981).[footnote in brief omitted]

It implies that divorcing parents may now agree to arbitrate child custody disputes privately and outside the supervision of courts, even though their decision may completely overlook the best interests of their children. For such agreements must now be “‘enforced according to [their] terms even if a rule of state law would exclude such claims from arbitration,’” Kilgore, 2012 WL 718344, at *5 (quotation omitted), as they typically do, for good reasons. See, e.g., Glauber v. Glauber, 600 N.Y.S.2d 740, 743 (N.Y. App. Div. 1993); Masters v. Masters, 513 A.2d 104, 113 (Conn. 1986); Stone v. Stone, 292 So. 2d 686, 691 (La. 1974).

It implies that a lienor and a lienee may not only use arbitration to settle issues such as the amount due on a lien (as they always have), but also to conduct foreclosure proceedings in private, even though this uniquely judicial remedy presupposes the power to exercise jurisdiction over third parties with an interest in the foreclosed property, to monitor the sale, to enforce statutory bonding requirements, and to appoint and supervise rent receivers. See Salley v. Option One Mortgage Corp., 925 A.2d 115, 128 (Pa. 2007); B & M Const., Inc. v. Mueller, 790 P.2d 750, 752 (Ariz. Ct. App. 1989); see also Walther v. Sovereign Bank, 872 A.2d 735, 748 (Md. 2005); Donald Lee Rome & David M.S. Shaiken, Arbitration Carve-Out Clauses in Commercial and Consumer Secured Loan Transactions, 61 Disp. Resol. J. 43, 44 (2006). For these same reasons, state law prohibits the arbitration of most types of in rem proceedings. See, e.g., Thomas H. Oehmke, Commercial Arbitration § 24:8 (3d ed. 2011) (noting that, unlike probate courts, arbitral tribunals cannot make determinations that affect unknown heirs or local taxing authorities); cf. id. § 39:13 (3d ed. 2011) (noting that although the FAA requires parties to arbitrate in personam claims, associated in rem claims must be brought in a court of law).

The grounds for these and other sensible limitations has nothing to do with “policy,” Kilgore , 2012 WL 718344, at *10-11, or with a distrust of arbitrators or the arbitration process. [footnote in brief omitted] Rather, it has to do with the unavoidable fact that arbitration is structurally unable to handle certain kinds of disputes—typically, but not exclusively, those that directly implicate the rights of third parties. The same rationale animates the holdings in Broughton and Cruz that public injunction claims are non-arbitrable. See Aragaki, Equal Opportunity, supra, at 1250-54. They also inform the state arbitration statutes on which the FAA was originally modeled, all of which clearly recognized that certain types of disputes were not amenable to arbitration. See Hiro N. Aragaki, Arbitration’s Suspect Status, 159 U. Pa. L. Rev. 1233 (2011); cf. Julius Henry Cohen & Kenneth Dayton, The New Federal Arbitration Law, 126 Va. L. Rev. 265, 281 (1926).

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