Kilgore v. Keybank, Nat’l Ass’n

Under California state law, an arbitration clause that also prohibits claims from being brought as a class action may be overcome only if it is both procedurally and substantively unconscionable.

Former students of a defunct California flight-training school sought public injunctive relief using California’s Unfair Competition Law (“UCL”) in a class action suit against KeyBank and Great Lakes Educational Services (“Defendants”). When the students were unable to graduate because the school failed they brought this suit to enjoin Defendants from enforcing promissory notes against class members and from reporting loan defaults. Students claimed that there was a violation of the Federal Trade Commission’s Holder Rule because the note for their student loans lacked statutorily required language. The rule creates vertical privity between a debtor and any holder of the consumer credit contract used to purchase services or goods, thereby making the holder subject to all claims and defenses the debtor could assert against the seller. Defendants sought to enforce an arbitration clause from the notes, which also prohibited students’ arbitration claims from class action form. Students countered that they met the exception contained in the savings clause of the Federal Arbitration Act (“FAA”) because the clause was unconscionable under California law. Although the FAA makes arbitration clauses enforceable, the clauses are still subject to defenses that arose in applicable state law “governing issues of validity, revocability, and enforceability of contracts generally”. The Ninth Circuit held that the clause was neither substantively or procedurally unconscionable, and both are required by state law. The panel also held that the UCL did not apply here because its public injunctive remedy is only applicable to claims that will accrue benefit to the general public, and not exclusively to the party bringing the action. Since KeyBank no longer offers private school loans, no future risk to the general public was even possible. VACATED dismissal of Plaintiffs’ claims, REVERSED, and REMANDED with instructions.