Matthew Kilgore v. Keybank, National Association

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

MATTHEW C. KILGORE , individually No. 09-16703
and on behalf of all others similarly
situated; WILLIAM BRUCE FULLER, D.C. No.
individually and on behalf of all 3:08-cv-02958-
others similarly situated; TEH
Plaintiffs-Appellees,

v.

KEYBANK, NATIONAL ASSOCIATION ,
successor in interest to Keybank
USA, N.A.; KEY EDUCATION
RESOURCES, a division of Keybank
National Association; GREAT LAKES
EDUCATION LOAN SERVICES, INC., a
Wisconsin corporation,
Defendants-Appellants,
2 KILGORE V . KEYBANK, NAT ’L ASS’N

MATTHEW C. KILGORE , individually No. 10-15934
and on behalf of all others similarly
situated; WILLIAM BRUCE FULLER, D.C. No.
individually and on behalf of all 3:08-cv-02958-
others similarly situated, TEH
Plaintiffs-Appellants,
OPINION
v.

KEYBANK, NATIONAL ASSOCIATION ,
successor in interest to Keybank
USA, N.A.; KEY EDUCATION
RESOURCES, a division of Keybank
National Association; GREAT LAKES
EDUCATION LOAN SERVICES, INC., a
Wisconsin corporation,
Defendants-Appellees.

Appeal from the United States District Court
for the Northern District of California
Thelton E. Henderson, Senior District Judge, Presiding

Argued and Submitted En Banc
December 11, 2012—Pasadena, California

Filed April 11, 2013
 KILGORE V . KEYBANK, NAT ’L ASS’N 3

Before: Alex Kozinski, Chief Judge, Harry Pregerson, M.
Margaret McKeown, William A. Fletcher, Richard C.
Tallman, Consuelo M. Callahan, Milan D. Smith, Jr., Mary
H. Murguia, Morgan Christen, Paul J. Watford, and
Andrew D. Hurwitz, Circuit Judges.

Opinion by Judge Hurwitz;
Dissent by Judge Pregerson

SUMMARY*

Arbitration

The en banc court reversed the district court’s dismissal
of plaintiffs’ claims, reversed the denial of defendants’
motion to compel arbitration, and remanded with instructions
to the district court to compel arbitration.

In an appeal involving a putative class action by former
students of a failed flight-training school who seek broad
injunctive relief against the bank that originated their student
loans and the loan servicer, the en banc court held that the
district court should have compelled arbitration under
California law. The en banc court held that the arbitration
clause was neither substantively nor procedurally
unconscionable under California law. The en banc court held
also that this case does not fall under the narrow “public
injunction” exception to the Federal Arbitration Act that was

*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
4 KILGORE V . KEYBANK, NAT ’L ASS’N

recognized in Davis v. O’Melveny & Myers, 485 F.3d 1066,
1082-84 (9th Cir. 2007).

Judge Pregerson dissented. Judge Pregerson would hold
that the arbitration clause was unconscionable, and thus
unenforceable.

COUNSEL

Andrew A. August and Kevin F. Rooney, Pinnacle Law
Group, LLP; James C. Sturdevant (argued) and Whitney
Huston, The Sturdevant Law Firm, San Francisco, California,
for Plaintiffs-Appellees/Appellants.

W. Scott O’Connell (argued), Courtney Q. Brooks, and
Kristen M. Yasenka, Nixon Peabody LLP, Manchester, New
Hampshire; Matthew A. Richard, Todd C. Toral, and
Stephanie Karnavas, Nixon Peabody LLP, San Francisco,
California, for Defendants-Appellants/Appellees.

David Horton, Davis, California; Hiro N. Aragaki, Los
Angeles, California, for Amici Curiae Law Professors.

Hiro N. Aragaki and David Doeling, Los Angeles, California,
for Amici Curiae Arbitration Professors.

Donald M. Falk, Mayer Brown LLP, Palo Alto, California;
Andrew J. Pincus (argued), Evan M. Tager, Archis A.
Parasharami, and Scott M. Noveck, Mayer Brown LLP;
Robin S. Conrad and Kate Comerford Todd, National
Chamber Litigation Center, Inc., Washington, D.C., for
Amicus Curiae The Chamber of Commerce of the United
States of America.
 KILGORE V . KEYBANK, NAT ’L ASS’N 5

Steve Bullock and Kelley L. Hubbard, Office of the Montana
Attorney General, Helena, Montana, for Amicus Curiae State
of Montana.

Arthur D. Levy; Nancy Barron, Kemnitzer, Barron & Krieg
LLP, San Francisco, California, for Amicus Curiae The
National Association of Consumer Advocates and The
National Consumer Law Center.

Ellen Lake, Oakland, California; Terisa E. Chaw, The
Employee Rights Advocacy Institute for Law & Policy;
Rebecca M. Hamburg, National Employment Lawyers
Association; Cliff Palefsky, McGuinn, Hillsman & Palefsky,
San Francisco, California, for Amici Curiae National
Employment Lawyers Association, The Employee Rights
Advocacy Institute for Law & Policy, and California
Employment Lawyers Association.

Mark A. Chavez, Chavez & Gertler LLP, Mill Valley,
California, for Amicus Curiae The National Consumer Law
Center, National Association of Consumer Advocates, Public
Citizen and National Consumers League.

C. Dawn Causey and Gregory F. Taylor, American Bankers
Association, Washington, D.C., for Amici Curiae American
Bankers Association, Consumer Bankers Association, and the
Clearing House Association, L.L.C.
6 KILGORE V . KEYBANK, NAT ’L ASS’N

OPINION

HURWITZ, Circuit Judge:

This appeal involves a putative class action by former
students of a failed flight-training school who seek broad
injunctive relief against the bank that originated their student
loans and the loan servicer. The central issue is whether the
district court should have compelled arbitration. We hold
that this case does not fall under the narrow “public
injunction” exception to the Federal Arbitration Act we
recognized in Davis v. O’Melveny & Myers, 485 F.3d 1066,
1082–84 (9th Cir. 2007), and remand with instructions to
compel arbitration.

I.

A.

Silver State Helicopters, LLC (“SSH”) operated a flight-
training school in Oakland, California. SSH referred to
KeyBank, N.A. (“KeyBank”) as a “preferred lender” in
marketing materials and encouraged prospective students to
borrow from KeyBank. KeyBank financed virtually all SSH
student tuition; Great Lakes Educational Loan Services
(“Great Lakes”) serviced the loans.

Every SSH student borrowing from KeyBank executed a
promissory note (“Note”). The Note contained an arbitration
clause, located in a section entitled “ARBITRATION,” which
provided, in relevant part:

IF ARBITRATION IS CHOSEN BY ANY
PARTY WITH RESPECT TO A CLAIM,
 KILGORE V . KEYBANK, NAT ’L ASS’N 7

NEITHER YOU NOR I WILL HAVE THE
RIGHT TO LITIGATE THAT CLAIM IN
COURT OR HAVE A JURY TRIAL ON
THAT CLAIM . . . . FURTHER, I WILL
NOT HA VE THE RIGHT TO
PARTICIPATE AS A REPRESENTATIVE
OR MEMBER OF ANY CLASS OF
CLAIMANTS PERTAINING TO ANY
CLAIM SUBJECT TO ARBITRATION. . . .
I UNDERSTAND THAT OTHER RIGHTS I
WOULD HAVE IF I WENT TO COURT
MAY ALSO NOT BE AVAILABLE IN
ARBITRATION. . . .

There shall be no authority for any Claims to
be arbitrated on a class action basis.
Furthermore, an arbitration can only decide
your or my Claim(s) and may not consolidate
or join the claims of other persons that may
have similar claims.

The Note further provided that “[t]his Arbitration Provision
will apply to my Note . . . unless I notify you in writing that
I reject the arbitration provisions within 60 days of signing
my Note.”1

1
The Note contained a choice-of-law clause providing that disputes
would be governed by Ohio law and a forum-selection provision requiring
disputes to be contested in Cuyahoga County, Ohio, KeyBank’s principal
place of business.
8 KILGORE V . KEYBANK, NAT ’L ASS’N

B.

Matthew Kilgore and William Fuller (“Plaintiffs”) were
SSH students, who each borrowed over $50,000 from
KeyBank. The Oakland school failed before they could
graduate. After the school’s demise, Plaintiffs brought this
putative class action suit against KeyBank and Great Lakes
(collectively, “Defendants”) in California Superior Court,
seeking to enjoin Defendants from reporting loan defaults to
credit agencies and from enforcing Notes against former
students.2 The gravamen of the complaint was that
Defendants had violated the California Unfair Competition
Law (“UCL”), Cal. Bus. & Prof. Code §§ 17200–17210,
because the Note and SSH’s contracts with students failed to
include language specified in the Federal Trade
Commission’s “Holder Rule.”3

2
Plaintiffs amended the complaint in state court to add a third
representative plaintiff, Kevin W ilhelmy, and two defendants, Student
Loan Xpress and American Education Services. These parties eventually
settled and are no longer involved in this litigation.

3
The Federal Trade Commission promulgated the Holder Rule in 1975
in response to concerns that sellers of goods and services were
increasingly separating “the consumer’s duty to pay from the seller’s duty
to perform” either by selling loan instruments to a third party after
execution or by acting as a conduit between purchasers and third-party
lenders. Promulgation of Trade Regulation Rule and Statement of Basis
and Purpose, 40 Fed. Reg. 53,506, 53,507 (Nov. 18, 1975) (emphasis
omitted) (codified at 16 C.F.R. pt. 433). The Rule requires consumer
credit contracts to include the following language: “ANY HOLDER OF
THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL
CLAIMS AND DEFENSES W HICH THE DEBTOR COULD ASSERT
AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED
PURSUANT HERETO OR W ITH THE PROCEEDS HEREOF.”
16 C.F.R. § 433.2(a).
 KILGORE V . KEYBANK, NAT ’L ASS’N 9

Defendants timely removed the case to the District Court
for the Northern District of California,4 and filed a motion to
compel arbitration. After the district court denied the motion,
Kilgore v. Keybank, Nat’l Ass’n, No. C 08-2958 TEH,
2009 WL 1975271, at *1 (N.D. Cal. July 8, 2009),5
Defendants appealed. We have jurisdiction over Defendants’
appeal under 9 U.S.C. § 16(a)(1)(C).

After Defendants filed their notice of appeal, the district
court allowed Plaintiffs to file a third amended complaint.
The court then granted Defendants’ motion to dismiss for
failure to state a claim upon which relief can be granted.
Kilgore v. KeyBank, 712 F. Supp. 2d 939, 947–58 (N.D. Cal.

Plaintiffs do not assert that the Holder Rule gives rise to a private
cause of action, but instead seek to vindicate this right through their state
law claim. See Holloway v. Bristol-Myers Corp., 485 F.2d 986, 988–89
(D.C. Cir. 1973) (holding that private actions to vindicate rights asserted
under the Federal Trade Commission Act may not be maintained).

4
The notice of removal invoked federal jurisdiction based on a federal
question, see 28 U.S.C. § 1331; complete diversity of citizenship, see
28 U.S.C. § 1332(a); and minimal diversity under the Class Action
Fairness Act, see 28 U.S.C. § 1332(d)(2). After removal, Plaintiffs
dropped their federal question claims.

5
In denying the motion to compel arbitration, the district court applied
California law, notwithstanding the Ohio choice-of-law provision in the
Note. Kilgore, 2009 W L 1975271, at *5–8 (citing Hoffman v. Citibank
(S.D.), N.A., 546 F.3d 1078, 1082 (9th Cir. 2008) (per curiam) (applying
California conflict-of-law analysis to choice-of-law provision in credit
card contract)). W e need not consider which law is applicable as the
result would be the same in light of our decision that the district court
should have compelled arbitration. See note 11, infra.
10 KILGORE V . KEYBANK, NAT ’L ASS’N

2010).6 Plaintiffs appealed, and we have jurisdiction under
28 U.S.C. § 1291.7

II.

Plaintiffs argue that the district court erred by dismissing
their third amended complaint, and Defendants argue that the
district court erred by refusing to compel arbitration. Under
the Federal Arbitration Act, if Defendants are correct, the
district court should never have reached the merits of
Plaintiffs’ claims. See 9 U.S.C. § 3 (requiring stay of civil
action during arbitration). Therefore, we begin with whether
the district court erred in declining to compel arbitration, a
decision we review de novo. Chalk v. T-Mobile USA, Inc.,
560 F.3d 1087, 1092 (9th Cir. 2009).

A.

The Federal Arbitration Act (“FAA”) makes an
agreement to arbitrate “valid, irrevocable, and enforceable.”
9 U.S.C. § 2. The FAA was intended to “overcome an
anachronistic judicial hostility to agreements to arbitrate,
which American courts had borrowed from English common
law,” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,
Inc., 473 U.S. 614, 625 n.14 (1985), that resulted in “courts’
refusals to enforce agreements to arbitrate,” Allied-Bruce

6
The district court held that the various counts in the third amended
complaint either failed to state a claim upon which relief could be granted,
Kilgore, 712 F. Supp. 2d at 947–53, or were preempted by federal law, id.
at 953–58.

7
W e consolidated the two appeals. Order, Kilgore v. KeyBank, Nat’l
Ass’n, Nos. 09-16703, 10-15934 (9th Cir. June 3, 2010).
 KILGORE V . KEYBANK, NAT ’L ASS’N 11

Terminix Cos. v. Dobson, 513 U.S. 265, 270 (1995). Recent
opinions of the Supreme Court have given broad effect to
arbitration agreements. See, e.g., Marmet Health Care Ctr.,
Inc. v. Brown, 132 S. Ct. 1201, 1203–04 (2012) (per curiam)
(upholding arbitration provision despite state law prohibiting
pre-dispute agreements to arbitrate personal injury and
wrongful death claims); AT&T Mobility LLC v. Concepcion,
131 S. Ct. 1740, 1753 (2011) (holding that the FAA
preempted a California rule that made class action waivers
unconscionable); Circuit City Stores, Inc. v. Adams, 532 U.S.
105, 109 (2001) (confining FAA exemption for workers
engaged in interstate commerce to transportation workers).

The FAA “mandates that district courts shall direct the
parties to proceed to arbitration on issues as to which an
arbitration agreement has been signed.” Dean Witter
Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985). The basic
role for courts under the FAA is to determine “(1) whether a
valid agreement to arbitrate exists and, if it does, (2) whether
the agreement encompasses the dispute at issue.” Chiron
Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130
(9th Cir. 2000).

B.

Section 2 of the FAA contains a savings clause, which
provides that arbitration agreements are “enforceable, save
upon such grounds as exist at law or in equity for the
revocation of any contract.” 9 U.S.C. § 2. This savings
clause “preserves generally applicable contract defenses.”
Concepcion, 131 S. Ct. at 1748. Plaintiffs advance two
theories as to why the FAA savings clause defeats the
arbitration clause in the Note. We find neither availing.
12 KILGORE V . KEYBANK, NAT ’L ASS’N

1.

Under the FAA savings clause, state law that “arose to
govern issues concerning the validity, revocability, and
enforceability of contracts generally” remains applicable to
arbitration agreements. Doctor’s Assocs., Inc. v. Casarotto,
517 U.S. 681, 685–87 (1996) (quoting Perry v. Thomas,
482 U.S. 483, 492 n.9 (1987)). “Thus, generally applicable
contract defenses, such as fraud, duress, or unconscionability,
may be applied to invalidate arbitration agreements without
contravening § 2.” Casarotto, 517 U.S. at 687.

Under California law, a contractual provision is
unenforceable if it is both procedurally and substantively
unconscionable. Armendariz v. Found. Health Psychcare
Servs., Inc., 6 P.3d 669, 690 (Cal. 2000). “[T]he more
substantively oppressive the contract term, the less evidence
of procedural unconscionability is required to come to the
conclusion that the term is unenforceable, and vice versa.”
Id.

“Substantive unconscionability focuses on the one-
sidedness or overly harsh effect of the contract term or
clause.” Harper v. Ultimo, 7 Cal. Rptr. 3d 418, 423 (Cal. Ct.
App. 2003). Plaintiffs claimed below that the Note’s ban on
class arbitration is unconscionable under California law, but
that argument is now expressly foreclosed by Concepcion,
131 S. Ct. at 1753.8 Plaintiffs’ assertion that students may not

8
In holding that California law rendered the class arbitration waiver
unconscionable, the district court relied on Discover Bank v. Superior
Court, 113 P.3d 1100 (Cal. 2005), abrogated by Concepcion, 131 S. Ct.
at 1753. In addressing the issue, the district court did not have the benefit
of the Supreme Court’s later Concepcion opinion.
 KILGORE V . KEYBANK, NAT ’L ASS’N 13

be able to afford arbitration fees fares no better. See Green
Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 90–91 (2000)
(“The ‘risk’ that [a plaintiff] will be saddled with prohibitive
costs is too speculative to justify the invalidation of an
arbitration agreement.”). And nothing else in the arbitration
clause in the Note suggests substantive unconscionability.9
Cf. Armendariz, 6 P.3d at 690–94 (holding unilateral
arbitration provision substantively unconscionable); Harper,
7 Cal. Rptr. 3d at 423 (explaining substantive
unconscionability of arbitration damages limit).

Nor is the arbitration provision procedurally
unconscionable. “Procedural unconscionability focuses on
the factors of surprise and oppression. . . .” Harper, 7 Cal.
Rptr. 3d at 422. The arbitration clause allows students to
reject arbitration within sixty days of signing the Note. This
provision is more forgiving than the one in Circuit City
Stores, Inc. v. Ahmed, where we found thirty days a sufficient
period in which to consider whether to opt out of arbitration.
283 F.3d 1198, 1199–1200 (9th Cir. 2002). Nor was the
arbitration clause buried in fine print in the Note, but was
instead in its own section, clearly labeled, in boldface. Cf. A
& M Produce Co. v. FMC Corp., 186 Cal. Rptr. 114, 124–25
(Cal. Ct. App. 1982) (finding procedural unconscionability of

9
The Note also includes a clause preventing disclosure of any arbitration
award. Although we have found confidentiality provisions to be
substantively unconscionable when applied to a large class of customers,
Ting v. AT&T, 319 F.3d 1126, 1151–52 (9th Cir. 2003), the small number
of putative class members in this case (approximately 120) mitigates such
concerns. In any event, the enforceability of the confidentiality clause is
a matter distinct from the enforceability of the arbitration clause in
general. Plaintiffs are free to argue during arbitration that the
confidentiality clause is not enforceable.
14 KILGORE V . KEYBANK, NAT ’L ASS’N

consequential damage provision contained in middle of last
page of an agreement in inconspicuous font).

2.

a.

The UCL authorizes broad injunctive relief to protect the
public from unfair business practices. Cal. Bus. & Prof. Code
§ 17203. The Supreme Court has suggested that claims
arising from a statute whose underlying purpose creates an
“inherent conflict” with the federal policy favoring arbitration
may be exempt from the FAA.10 Gilmer v. Interstate/Johnson
Lane Corp., 500 U.S. 20, 26 (1991). Relying on Gilmer, the
California Supreme Court has found an inherent conflict
between the FAA policy favoring arbitration and California
statutes authorizing “public” injunctive relief. Broughton v.
Cigna Healthplans of Cal., 988 P.2d 67, 73, 78 (Cal. 1999).

The Broughton plaintiffs “were covered by Medi–Cal,
which had negotiated a contract with Cigna . . . for health
care coverage.” Id. at 71. They sued Cigna under
California’s Consumer Legal Remedies Act (“CLRA”), Cal.
Civ. Code §§ 1750–85, seeking damages for medical
malpractice and injunctive relief against Cigna’s allegedly
deceptive advertising. Broughton, 988 P.2d at 71. The
California Supreme Court held the damages claim subject to
the arbitration clause in the Cigna policy because “[s]uch an
action is primarily for the benefit of a party to the arbitration,
even if the action incidentally vindicates important public

10
The parties dispute whether the “inherent conflict” exemption is
limited to federal statutes or applies to both federal and state statutes. For
the reasons discussed below, we need not resolve this issue.
 KILGORE V . KEYBANK, NAT ’L ASS’N 15

interests.” Id. at 79. But the Court also found that because
the plaintiffs were “functioning as a private attorney general,
enjoining future deceptive practices on behalf of the general
public,” id. at 76, their injunction claims were not arbitrable,
id. at 75–78.

The California Supreme Court expanded upon Broughton
in Cruz v. PacifiCare Health Systems, Inc., 66 P.3d 1157
(Cal. 2003). Plaintiff there alleged that PacifiCare had
fraudulently induced its customers to enroll in health care
programs while at the same time discouraging primary care
physicians from providing services to enrollees. Id. at 1159.
The complaint sought injunctive and monetary relief under
the UCL, Cal. Bus. & Prof. Code § 17200, which prohibits
unfair business practices, and under section 17500 of the
same, which prohibits untrue or misleading statements
designed to mislead the public. Cruz, 66 P.3d at 1164–65.
PacifiCare invoked the arbitration clause in its contract with
enrollees. Id. at 1160.

As in Broughton, the California Supreme Court in Cruz
held that the plaintiff’s claims for monetary relief were
subject to arbitration, because any public benefit from such
relief would be “incidental to the private benefits obtained
from those bringing the restitutionary or damages action.” Id.
at 1166. Extending the reasoning of Broughton to claims
brought under the UCL and Business and Professions Code,
the Cruz court found “the request for injunctive relief is
clearly for the benefit of health care consumers and the
general public” and therefore not subject to arbitration. Id. at
1164.

We applied the Broughton-Cruz framework in Davis,
485 F.3d at 1081–84. There, an employer “adopted and
16 KILGORE V . KEYBANK, NAT ’L ASS’N

distributed to its employees a new Dispute Resolution
Program (DRP) that culminated in final and binding
arbitration of most employment-related claims by and against
its employees.” Id. at 1070. The DRP prohibited the filing
of both judicial and administrative actions. Id. at 1081–82.
Citing the Gilmer dictum, we noted that “employment rights
under the [Fair Labor Standards Act] and California’s Labor
Code” were analogous to substantive “statutory rights
established for a public reason.” Id. at 1082 (internal
quotations and citations omitted). Because the Davis
plaintiffs sought to vindicate these statutory rights through
public injunctions, we found the DRP unenforceable to the
extent that it barred claims for public injunctive relief. Id.

b.

Defendants argue that Davis was vitiated by Concepcion,
and the Broughton-Cruz rule no longer exempts a public
injunction claim from arbitration. We need not reach that
broad argument. Even assuming the continued viability of
the Broughton-Cruz rule, Plaintiffs’ claims do not fall within
its purview.

Public injunctive relief “is for the benefit of the general
public rather than the party bringing the action.” Broughton,
988 P.2d at 78. A claim for public injunctive relief therefore
does not seek “to resolve a private dispute but to remedy a
public wrong.” Id. at 76. Whatever the subjective motivation
behind a party’s purported public injunction suit, the
Broughton rule applies only when “the benefits of granting
injunctive relief by and large do not accrue to that party, but
to the general public in danger of being victimized by the
same deceptive practices as the plaintiff suffered.” Id.
 KILGORE V . KEYBANK, NAT ’L ASS’N 17

The claim for injunctive relief here does not fall within
the “narrow exception to the rule that the FAA requires state
courts to honor arbitration agreements.” Cruz, 66 P.3d at
1162. The third amended complaint seeks an injunction
prohibiting 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 Holder Rule language. The requested
prohibitions against reporting defaults on the Note and
seeking enforcement of the Note plainly would benefit only
the approximately 120 putative class members. The
requested injunction against disbursing loans to sellers who
do not include Holder Rule language in their contracts, while
ostensibly implicating third parties, also falls outside the
Broughton-Cruz rule. The third amended complaint
expressly notes that KeyBank had completely withdrawn
from the private school loan business and does not allege that
the bank is engaging in other comparable transactions. The
injunctive relief sought thus, for all practical purposes, relates
only to past harms suffered by the members of the limited
putative class.

The central premise of Broughton-Cruz is 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.” Broughton, 988 P.2d at 78. That concern is
absent here, where Defendants’ alleged statutory violations
have, by Plaintiffs’ own admission, already ceased, where the
class affected by the alleged practices is small, and where
18 KILGORE V . KEYBANK, NAT ’L ASS’N

there is no real prospective benefit to the public at large from
the relief sought.11

III.

For the reasons above, we VACATE the district court’s
dismissal of Plaintiffs’ claims, REVERSE the denial of
Defendants’ motion to compel arbitration, and REMAND
with instructions to the district court to compel arbitration.

PREGERSON, Circuit Judge, dissenting:

I. Hustled by the school; hustled by the bank.

Silver State Helicopter School did not do a good job
training helicopter pilots, placing them in jobs, or managing
its own finances. But it did make a convincing sales pitch.
Silver State promised its students that they would get the
training required to get good paying jobs as commercial
helicopter pilots.

At flashy career fairs around California, Silver State
worked hard to sign up prospective students for its helicopter
pilot training program. Former Silver State student, Mathew
Kilgore, declared under penalty of perjury:

11
Because we hold that arbitration is required under California law, we
need not address Defendants’ contention that Ohio law (which apparently
has no Broughton-Cruz rule, see Eagle v. Fred Martin Motor Co.,
809 N.E.2d 1161, 1170 (Ohio Ct. App. 2004)) should apply.
 KILGORE V . KEYBANK, NAT ’L ASS’N 19

The seminar was very impressive and glitzy.
There were numerous helicopters onsite and
the school appeared to be very professional.
[Silver State’s CEO, Jerry Airola] was very
convincing and portrayed Silver State as a top
flight school. The presentation made clear
that Silver State was very selective about
which students would be chosen to attend the
school . . . Mr. Airola emphasized that all of
the tuition to fund the entire Silver State
education could be obtained through Silver
State’s partner lender, KeyBank. Mr. Airola
also emphasized that . . . the loans would only
cost the students about [a] hundred dollars a
week at 4% interest.

Airola’s claims were not true. Silver State accepted almost
all applicants who could get their loans approved. Silver
State lacked sufficient equipment or instructors to properly
train its students. The variable rate interest on the loans
would rise far above four percent.1 Matthew Kilgore,
William Fuller, and the other 120 putative class members
believed what Airola told them and signed up. They took out
$55,950 loans, which KeyBank promptly forked over to
Silver State before students took a single class.

But Silver State knew it was headed for a crash landing.
By 2008, Silver State had racked up ten million dollars in
debt against fifty thousand dollars in assets. Moreover,
despite Silver State’s alluring promises, there was no
significant demand for helicopter pilots with a Silver State

1
See Appendix at 9.
20 KILGORE V . KEYBANK, NAT ’L ASS’N

degree. And it wasn’t just the school that knew it. Defendant
KeyBank knew it, too.

KeyBank, an Ohio-based lending giant, participated in the
fraud that Silver State perpetrated on unwitting students.
From 2003 to 2005 KeyBank financed ninety-five percent of
the tuition students paid to Silver State. KeyBank printed up
lengthy loan papers that lacked the Federal Trade
Commission’s Holder Rule Notice. 16 C.F.R. § 433.2 The
Holder Rule required the loan contracts to notify students that
KeyBank was subject to the same claims and defenses as
Silver State. Id. The Holder Rule protects borrowers, such
as the students, from being legally obligated to pay a creditor
like KeyBank “despite breach of warranty, misrepresentation,
or even fraud on the part of the seller.” 40 Fed. Reg. 53,506,
53,507 (Nov. 18, 1975). By omitting that notice from its
printed loan contracts, KeyBank may have sought to insulate
itself from liability for Silver State’s misleading promises.
Silver State then presented those faulty loan contracts to
prospective students and “pressure[d] the students to sign the
[master promissory notes] as soon as possible,” according to
an affidavit of Silver State’s former student finance manager
Jody Pidruzny. And sign up they did.

Once a student signed the promissory note, KeyBank
immediately transferred the full amount of the loans to Silver
State. KeyBank then turned a profit by selling the students’
loans on the securities market to investors. Defendant Great
Lakes Educational Loan Services, Inc. continues to service
those loans by collecting payments from students, and
notifying credit reporting agencies when students fail to pay.

KeyBank loaned students tuition money to attend Silver
State knowing that Silver State was financially volatile. A
 KILGORE V . KEYBANK, NAT ’L ASS’N 21

2004 email between KeyBank Vice Presidents Paul
McDermott and Rodney Landrum predicted that Silver State
“could be the next ‘big one’ to go under.” Nevertheless,
KeyBank made more than ten million dollars in loans to
Silver State students over the following two years. In 2008,
Silver State filed for bankruptcy and closed its doors.
Students could not recoup the amount of their unused tuition
because Silver State sought protection under Chapter 7
bankruptcy proceedings.

Kilgore, Fuller, and their classmates were left holding the
bag with no degree, no helicopter piloting career, and no
opportunity to train. The students’ failed attempts to launch
flight careers saddled them with huge private loans that are
collecting interest and weighing them down.

The private loans students incurred to pay for Silver State
helicopter pilot training were not subsidized or insured by the
federal government. Private student loans are generally more
expensive than federal loans, especially for students with
lower credit scores or limited credit histories. Students could
borrow larger amounts because there are no loan limits for
private loans. Morever, students who hold private loans are
not eligible for federal programs that allow them to reduce
their monthly payments based on their income, or have their
loans forgiven after working for ten years in public service
jobs.2

2
See Editorial, Student Debt and the Economy, N.Y. Times, March 10,
2013, at SR 10 (“Because private loans offer little flexibility, borrowers
in bad straits have few options except default, which makes it difficult for
them to get jobs or credit, or even to rent apartments.”).
22 KILGORE V . KEYBANK, NAT ’L ASS’N

Unlike federally guaranteed loans, private student loans
are not discharged should the school go out of business. The
students themselves cannot discharge these loans in
bankruptcy proceedings unless they can prove that “excepting
such [student] debt from discharge . . . would impose an
undue hardship.” 11 U.S.C. § 523(a)(8).

II. Ignored by the courts.

To make matters worse, the majority opinion strips
Kilgore, Fuller, and their classmates of the ability to find
recourse in state or federal court. The majority holds that we
must compel arbitration in the students’ case, a holding at
odds with the district court’s decision. According to the
majority, the arbitration clause was not unconscionable. I
disagree.

A contract provision is unenforceable under California
law if it is both procedurally and substantively
unconscionable. See Pokorny v. Quixtar, Inc., 601 F.3d 987,
996 (9th Cir. 2010). California applies a sliding scale to
determine if a contract is unenforceable due to
unconscionability. Armendariz v. Found. Health Psychcare
Servs., 6 P.3d 669, 690 (Cal. 2000). The more substantively
unconscionable the contract, the less procedurally
unconscionable it must be to be found unconscionable, and
vice versa. Id. Here, the arbitration clause is highly
procedurally and substantively unconscionable.

A. Procedurally Unconscionable

If both parties agree to give up the protections of the
courts, arbitration can be a just and efficient way to resolve
disputes. But Kilgore, Fuller, and their classmates signed
 KILGORE V . KEYBANK, NAT ’L ASS’N 23

contracts under unconscionable “take it or leave it”
conditions. Pokorny v. Quixtar, Inc., 601 F.3d 987, 996 (9th
Cir. 2010). This means that they did not agree to arbitration.
Without such an agreement, it is wholly inappropriate to stop
them from having their claims decided by a court.

Under California law: “A contract is procedurally
unconscionable if it is a contract of adhesion, i.e., a
standardized contract, drafted by the party of superior
bargaining strength, that relegates to the subscribing party
only the opportunity to adhere to the contract or reject it.”
Ting v. AT&T, 319 F.3d 1126, 1148 (9th Cir. 2003).
Procedural unconscionability focuses on the “the factors of
surprise and oppression in the contracting process.” Pokorny,
601 F.3d at 996.

There can be no doubt that the promissory notes were
contracts of adhesion, and that surprise and oppression
dominated the contracting process. I have attached as an
Appendix the dense, small print, and blurry nine-page
contract that Silver State thrust on the students at career fairs
and open houses. The arbitration clause at issue was buried
in the middle of the contract, split over two pages, and
surrounded by language that was difficult to read and
understand. See Appendix at 3–4; see also Ingle v. Circuit
City Stores, Inc., 328 F. 3d 1165, 1171 (2003) (“Surprise
involves the extent to which the supposedly agreed-upon
terms of the bargain are hidden in the prolix printed form
drafted by the party seeking to enforce the disputed terms.”
(internal quotations and citations omitted)). KeyBank
officials never discussed the loans with students or mentioned
the arbitration clause to them. KeyBank left those jobs to
Silver State’s financial aid staff–employees who, according
to the record, did not know that the loans contained
24 KILGORE V . KEYBANK, NAT ’L ASS’N

arbitration clauses. Silver State staff pressured students to
sign the loans immediately or else risk losing their spots in
the school. Pidruzny, the school’s Student Finance Manager,
explained the strategy in her sworn declaration:

At the direction of my superiors I conveyed
KeyBank’s and Silver State’s directives to
expedite the loan application process and
pressure the students to sign the [Master
Promissory Notes] as soon as possible . . . I
did not discuss the terms of the [Master
Promissory Notes] with Silver State students.
Specifically, I did not discuss the Arbitration
Provision with any Silver State Student . . . .

In light of these facts, it is unsurprising that students felt
pressured to sign the contract without knowing it contained
an arbitration clause. Moreover, the sixty day opt-out
provision was meaningless because students did not know the
arbitration clause existed in the first place. As Kilgore
declared, “I did not know that the Promissory Note contained
an arbitration provision (nor did I know that I could opt out
of the arbitration provision) . . . I believed that the Promissory
Note had to be signed immediately and I felt pressured to do
so. I believed that if I did not sign the Promissory Note I
would lose my spot at Silver State.” Surprise? Yes.
Oppression? Yes. Procedural unconscionability? Definitely.

B. Substantively Unconscionable

A contract provision is substantively unconscionable if it
is “one-sided and will have an overly harsh effect on the
disadvantaged party. Thus, mutuality is the paramount
consideration when assessing substantive unconscionability.”
 KILGORE V . KEYBANK, NAT ’L ASS’N 25

Pokorny, 601 F.3d at 997 (internal quotations and citations
omitted). To make that determination, courts must “look
beyond facial neutrality and examine the actual effects of the
challenged provision.” Ting, 319 F.3d at 1149. KeyBank’s
contract fails the mutuality test in three respects:

1. The confidentiality provision requires both parties to
maintain the confidentiality of any claim they arbitrate.
While facially neutral, this claim overwhelmingly favors
KeyBank. A student who wins in arbitration against
KeyBank cannot alert other students or arbitrators to
KeyBank’s predatory practices that led to the win. But
KeyBank is a repeat player in these arbitrations; it knows the
outcome of each arbitration and can use that knowledge to its
advantage. Id. at 1152 (Defendant “has placed itself in a far
superior legal posture by ensuring that none of its potential
opponents have access to precedent while, at the same time,
defendant accumulates a wealth of knowledge on how to
negotiate the terms of its own unilaterally crafted contract.”).

2. The high cost of arbitration imposes another unequal
burden, creating further substantive unconscionability. Filing
a civil case in California Superior Court costs less than five
hundred dollars. Filing the same claim before an arbitrator,
runs more than four thousand dollars. The 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. See Ting, 319 F.3d at 1151 (finding a fee-
splitting arbitration clause unconscionable “because it
imposes on some consumers costs greater than those a
complainant would bear if he or she would file the same
complaint in court.”).
26 KILGORE V . KEYBANK, NAT ’L ASS’N

3. The arbitration process itself greatly favors banks over
consumers. One study found that the National Arbitration
Forum, one of the two arbitrators named in the contract, ruled
for banks and credit card companies, and against consumers
ninety-four percent of the time.3 This further gives KeyBank
an unfair advantage in resolving any claims.

KeyBank foisted loans on students who staked their
financial well-being on the shaky promises of Silver State
Helicopter school. When Silver State went down, so did the
students. The students deserve, and I submit the law requires,
that their claims be heard and adjudicated by a court. The
provision in the promissory note relegating students to
arbitration is unconscionable and thus unenforceable.
Therefore, I dissent.

3
Public Citizen, The Arbitration Trap: How Credit Card
C o m p a n ies E n sare Consum ers 2 (2007), available at
http://www.citizen.org/documents/ArbitrationTrap.pdf.