Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—9thCir: Students Required to Arbitrate California Unfair Competition Law Claims Against Lender , (Apr 12, 2013)

By Jody Coultas, J.D.

The U.S. Court of Appeals in San Francisco reversed a district court’s dismissal of California Unfair Competition Law (UCL) class action claims filed by student loan holders against KeyBank, N.A. and reversed the denial of the bank’s motion to compel arbitration (Kilgore v. KeyBank, N.A., April 11, 2013, Hurwitz, A.).

After applying to a helicopter vocational school, the students sought loans from the school’s preferred lender, KeyBank. The school failed prior to the students’ graduating. In their complaint, the students sought to enjoin KeyBank from reporting loan defaults to credit agencies and from enforcing the loans. The students alleged that the note and schools contracts were misleading and failed to include language required in the Federal Trade Commission’s "Holder Rule." KeyBank sought to enforce the arbitration clause contained in the loans

Under the Federal Arbitration Act, district courts must determine whether a valid arbitration agreement existed and, if it does, whether the agreement encompasses the dispute at issue. The FAA savings clause provides that state laws that arose to govern issues concerning the validity, revocability, and enforceability of contracts generally remain applicable to arbitration agreements.

There was nothing substantively unconscionable about the terms of the arbitration clause, according to the court. A contractual provision is unenforceable if it is both procedurally and substantively unconscionable. The students argued that the note’s ban on class arbitration was unconscionable under California law, but that argument is now expressly foreclosed by the holding in AT&T Mobility, Inc. v. Concepcion, 131 S. Ct. 1740 (2011), which requires enforcement of arbitration clauses. Concepcion held that the saving clause of the FAA permits agreement to arbitrate to be invalidated by generally applicable contract defenses 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. The fact that students could not afford the arbitration fees did not render the agreement unenforceable.

The arbitration agreement was not procedurally unconscionable, according to the court. Procedural unconscionability focuses on the factors of surprise and oppression. The clause allowed the students to reject the arbitration clause and was not buried in the contract. In Broughton v. Cigna Healthplans of California, (988 P.2d 67 (Cal. 1999), the court held 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. Even if the Broughton rule still applied, the concern for public benefit was absent in this case. The alleged violations already ended, the class affected by the alleged practices was small, and there was no real prospective benefit to the public at large from the relief sought.

The dissenting opinion disagreed that the arbitration clause was enforceable and not unconscionable. Because there was no option other than signing the loan agreement with KeyBank, the contract was one of adhesion and unenforceable under California law, it argued. The contract also was one-sided and overly harsh on the students. The confidentiality provision overwhelmingly favored KeyBank because a student who wins in arbitration could not alert other students or arbitrators to the predatory practices. The high cost of arbitration favored KeyBank, and the arbitration process itself greatly favors banks over consumers.

The case is No. 09-16703.

Attorneys: James C. Sturdevant (The Sturdevant Law Firm) for Matthew Kilgore. W. Scott O’Connell (Nixon Peabody LLP) for KeyBank, N.A.

Companies: KeyBank, N.A.

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