Kilgore v. KeyBank: Ninth Circuit Reverses, Finds Arbitration Clause Not Subject to “Public Injunction” Exemption

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Last week, a twelve-member Ninth Circuit en banc panel issued a new decision in the battle over arbitration and the U.S. Supreme Court’s holding in AT&T Mobility v. Concepcion. See Kilgore v. KeyBank Nat’l Assn., No. 10-15934 (9th Cir. Apr. 11, 2013) (slip opinion available here). In Kilgore, students at a flight-training school sued KeyBank, the originator of their student loans, after KeyBank and the school allegedly colluded to mislead and defraud the students. A three-judge Ninth Circuit panel previously ruled that Concepcion overruled Broughton v. Cigna Healthplans, 21 Cal. 4th 1066, 988 P.2d 67 (1999), and Cruz v. PacifiCare Health Systems, Inc., 30 Cal. 4th 303 (2003), which held that public injunctive relief claims are not arbitrable as a matter of California public policy, in the CLRA and UCL contexts, respectively. See slip op. at 14-16.

In an opinion by Andrew D. Hurwitz, the en banc panel held that the district court should have compelled arbitration because the at-issue arbitration clause did not fall under the public injunction exception to the Federal Arbitration Act (FAA). See slip op. at 6. Accordingly, as the public injunction exception did not apply, the decision did not take the position that Concepcion overruled Broughton and Cruz. Instead, the decision embraces a public/private distinction that could inform the continuing debate around Concepcion’s scope. See slip op. at 16-17. The majority also rejected the plaintiffs’ contention that the at-issue arbitration clause is unconscionable under California law. See slip op. at 12-14.

In a compelling dissent, grounded in the case’s real-life facts rather than arcane doctrines purporting to divine the FAA’s application to Kilgore’s claim against KeyBank, Judge Harry Pregerson detailed the career “crash landing” awaiting the flight-training students who found themselves deeply in debt and without a job. See slip op. at 19-21 (Pregerson, J., dissenting). Pregerson concluded that “the majority opinion strips [the plaintiffs] and their classmates of the ability to find recourse in state or federal court,” and contrary to the majority found the at-issue arbitration clause substantively and procedurally unconscionable under California law. Slip op. at 22-26.

Connecting the unconscionability analysis to the purported efficiencies realized through arbitration, with distinctive candor and pragmatism, Pregerson explained that filing a claim in arbitration costs at least eight times more than filing the same case in California Superior Court, and that “[t]he high cost of arbitration will prevent many students from vindicating their rights, but will not limit KeyBank’s ability to defend itself. This asymmetry makes arbitration all the more unconscionable.” Slip op. at 25 (Pregerson, J., dissenting).