The court of appeals vacated a district court’s dismissal of claims, reversed its denial of a motion to compel arbitration, and remanded the action with instructions to compel arbitration. The court held that claims asserted by former students of a failed flight-training school, who sought broad injunctive relief against the bank that originated their student loans and the loan servicer, did not fall within the “public injunction” exception to the Federal Arbitration Act’s mandate that claims subject to a contractual arbitration provision be arbitrated.
Matthew Kilgore and William Fuller (Kilgore) were students at a California-based flight training school called Silver State Helicopters, LLC (SSH). SSH identified KeyBank, N.A., to prospective students as a “preferred lender” for student loans. Like every student who borrowed from KeyBank, Kilgore’s educational loan included an arbitration clause. Among other things, the clause banned class arbitration.
SSH failed before Kilgore graduated. Kilgore brought a putative class action against KeyBank and Great Lakes Educational Loan Services, which serviced the KeyBank loans. The complaint alleged California Unfair Competition Law (UCL) violations in that the loan note and SSH’s contracts with students failed to include language mandated by the Federal Trade Commission regarding consumer credit agreements.
The defendants removed the action and unsuccessfully moved to compel arbitration. While their appeal was pending, the district court granted their motion to dismiss for failure to state a claim. The court of appeals vacated the dismissal, holding that the district court should have compelled arbitration.
The court of appeals first considered whether the district court erred by refusing to compel arbitration. If indeed the district court erred, then under the Federal Arbitration Act (FAA) the district court should never have reached the merits of Kilgore’s claims.
The court observed that under the FAA, district courts must direct parties to arbitration on issues as to which there exists an arbitration agreement. The FAA contains a savings clause, however, which provides that arbitration agreements are subject to generally applicable contract defenses.
Here, Kilgore advanced two reasons why the FAA savings clause defeated the loan agreement’s arbitration clause. The court rejected both.
First, under California law, a contractual provision is unenforceable if it is both procedurally and substantively unconscionable. Kilgore maintained that the note’s ban on class arbitration was unconscionable under state law. That argument, however, was expressly foreclosed by AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740(2011), which held that the FAA preempted a California rule that made class action waivers unconscionable. Nor did Kilgore identify any other aspect of the arbitration clause at issue that would render it substantively unconscionable.
The arbitration provision also was not procedurally unconscionable. In particular, it allowed the students to reject arbitration within sixty days of signing the loan agreement, and it was not buried in fine print in the note.
The court concluded further that Kilgore’s claim for injunctive relief did not fall within a narrow exception to the rule that the FAA requires state courts to honor arbitration agreements. Kilgore sought an injunction barring the defendants from reporting non-payment of a note by putative class members to credit agencies, from enforcing a note against any class member, and from disbursing the proceeds of any loans to a seller whose consumer credit contract did not include the FTC language. The requested relief would affect only about 120 putative class members, and to the extent KeyBank had completely withdrawn from the private school loan business, the relief sought would relate only to past harms suffered by members of the limited putative class.
The court discussed a line of case authority that previously exempted a public injunction claim from arbitration, and which the defendants maintained was no longer governing law. The court did not have to decide that issue, however, because even if the rule remained viable, Kilgore’s claims did not fall within its purview. In essence, given the nature of Kilgore’s injunctive relief claim, it was clear that it did not seek public injunctive relief that would benefit the general public rather than the putative class. Thus there was no need to prefer a judicial forum over arbitration in order to gain the significant institutional advantages of the former in administering a public injunctive remedy.
The court therefore vacated the dismissal of Kilgore’s claims, reversed the denial of the defense motion to compel arbitration, and remanded with instructions to the district court do compel arbitration.
Judge Pregerson dissented, writing that the provision in the note relegating the flight school students to arbitration was unconscionable and thus unenforceable. Judge Pregerson maintained that the students deserved, and the law required, that their claims be heard and adjudicated by a court.