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9th Circuit Court Follows Supreme Court’s Lead in Upholding Arbitration Agreements

Tuesday, April, 23, 2013


Recently, the 9th U.S. Circuit Court of Appeals ruled that a dispute between a bank and a group of recipients of student loans should be sent to arbitration rather than litigation.  In the dispute, Matthew Kilgore brought a lawsuit against KeyBank alleging that the bank was guilty of approving student loans to a flight school that it knew was going out of business.  Kilgore petitioned for class action status and sought an injunction that would keep KeyBank and Great Lakes, KeyBank’s loan servicer, from reporting debtor default to credit bureaus or collecting on the loans. 

However, KeyBank has requested that the judge presiding over the case, U.S. District Judge Thelton Henderson, require Kilgore and other disputants to pursue the dispute through arbitration, since the promissory note the students signed contained an arbitration clause.  Henderson refused to do so, citing reasons that the arbitration clause was unconscionable.  However, KeyBank took the case to the 9th Circuit Court of Appeals, which later reversed Henderson’s decision and compelled arbitration in the case. 

The reasons the 9th Circuit Court of Appeals decided that the arbitration clause was valid were: 1) the clause allowed the students 60 days in which they could decide to opt out of the agreement, if they chose to; and 2) the arbitration clause had its own section, which was “clearly labeled, in boldface.”  According to experts, when arbitration clauses are carefully worded and when there is a time-limited opt-out agreement, it is increasingly more difficult for a disputant to convince higher courts that the clause is unconscionable. 

The Supreme Court’s decision in 2011 to uphold an arbitration clause in the AT&T v. Concepcion case has paved the way for the 9th Circuit to follow the same trend of honoring such clauses, even in consumer-related disputes.  Such decisions could also have significant implication for employers who wish to enforce arbitration agreements without worrying that such agreements will be found to be unconscionable by a judge.