Ok, so I thought user ForgetTheNorm had the solution, but it turns out modifying the locate_conditions breaks sign up. The solution is actually much simpler than I originally thought. Downcase the auth-key BEFORE it is submitted with the form. This is true of everywhere you use the key. For instance, to login or sign up.
#login-form
<%= form_tag('/auth/identity/callback', :method => 'post', :id => 'actual-login-form') do %>
<div class="field">
<%= label_tag :auth_key, 'Email' %>
<br />
<%= text_field_tag :auth_key, nil, :class => 'user-auth-field user-auth-key' %>
</div>
<div class="field">
<%= label_tag :password %>
<br />
<%= password_field_tag :password, nil, :class => 'user-auth-field' %>
</div>
<div class="actions">
<%= submit_tag 'Sign in', :class => 'btn-default', :id => 'modal-sign-in' %>
</div>
<% end %>
#signup-form
<%= form_tag('/auth/identity/register', :method => 'post', :id => 'actual-signup-form') do %>
<%= label_tag(nil, 'Choose your username') %>
<%= text_field_tag 'name', nil, :class => 'signup-form-input', :tabindex => '1' %>
<%= label_tag(:email, 'Your current email address') %>
<%= text_field_tag 'email', nil, :class => 'signup-form-input user-auth-key', :tabindex => '2' %>
<%= label_tag(:password, 'Create a password') %>
<input type="password" name="password" id="password" class="signup-form-input" tabindex="3" />
<%= label_tag(:password2, 'Confirm your password') %>
<input type="password" name="password_confirmation" id="password_confirmation" class="signup-form-input" tabindex="4" />
<%= submit_tag('Sign Up for Pholder', :id => 'signup-submit', :tabindex => '5') %>
<% end %>
Relevant jQuery/JS:
$('#actual-login-form, #actual-signup-form').on('submit', function(){
//lower case auth key (email addresses) for all user validation
$(this).find('.user-auth-key').val( $(this).find('.user-auth-key').val().toLowerCase() )
})