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By Perry Cooper
Feb. 11 — Federal courts have followed the lead of the U.S. Supreme Court over the last few years to uphold mandatory arbitration provisions in most circumstances. But a decision involving a small American Indian tribe and some shady lenders shows at least some limits still exist.
Whether it does more than that, including more broadly breathing new life into a vindication-of-rights theory that was once used by plaintiffs' attorneys to knock down arbitration clauses, depends on who you ask.
The contract in question involved an arbitration provision in a payday loan agreement that said that, for all would-be class and other claims related to the loan, only the law of the Cheyenne River Sioux Tribe would apply.
The provision also expressly renounced any application of federal or state law. The U.S. Court of Appeals for the Fourth Circuit cried foul, ruling that an arbitration provision that “purports to renounce wholesale the application of any federal law to the plaintiffs’ federal claims” can't be enforced.
Consumer advocates are hailing the ruling for limiting how far courts will go to uphold arbitration provisions that include class-action waivers.
“This means that businesses can no longer attempt to dodge class-action suits by inserting waivers of federal law into their arbitration agreements,” Leah M. Nicholls of Public Justice P.C. in Washington told Bloomberg BNA recently.
“That may not be a mainstream strategy, but it is certainly one used by plenty of predatory lenders,” she said. Public Justice represented the plaintiffs in this case.
But defense attorney Alan S. Kaplinsky of Ballard Spahr LLP in Philadelphia said that the decision is limited to tribal-law based contracts, a subset of cases that is very small.
“The opinion will have virtually no impact on conventional arbitration agreements which don't disclaim the application of federal and state laws but rather confirm that those laws will apply,” he told Bloomberg BNA.
James Hayes received a $2,525 loan from Western Sky Financial LLC, which charged interest on the amount at an annual rate of 139.12 percent. Eventually Hayes owed $14,093.12. Another named plaintiffs' loan had an interest rate of 233.84 percent.
The plaintiffs filed a putative class action against Delbert Services Corp., which held the loans at issue in the case after a series of transfers from Western Sky. They challenged Delbert's allegedly unlawful collection practices, and the enforceability of the arbitration agreement.
The loan agreement provided that it was “subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe.”
An arbitration provision in the agreement said that any disputes would be resolved by binding arbitration conducted by the tribe. But it also said that the borrower “shall have the right to select” the American Arbitration Association, Judicial Arbitration and Mediation Services or another organization to administer the arbitration.
The Fourth Circuit sided with the plaintiffs, saying the agreement “purportedly fashions a system of alternative dispute resolution while simultaneously rendering that system all but impotent through a categorical rejection of the requirements of state and federal law,” Hayes v. Delbert Servs. Corp., 2016 BL 27830, 4th Cir., No. 15-1170, 2/2/16.
The Fourth Circuit said the tribal arbitration mechanism established by the arbitration agreement had “proved problematic,” and that other courts involved in Western Sky-related litigation had accordingly voided the arbitration agreement.
The Seventh Circuit held that even though the “contract language contemplates a process conducted under the watchful eye of a legitimate governing tribal body, a proceeding subject to such oversight simply is not a possibility,” Jackson v. Payday Fin. LLC, 764 F.3d 765 (7th Cir. 2014).
The tribe has no authorized representatives who conduct arbitrations, or even have a method to appoint such a person, the Seventh Circuit found.
The Eleventh Circuit, when considering the same contract, found that the rules alluded to by the agreement “do not exist,” Inetianbor v. CashCall Inc., 768 F.3d 1346 (11th Cir. 2014).
But instead of following the lead of its sister circuits, the court took a different tack.
“This arbitration agreement fails for the fundamental reason that it purports to renounce wholesale the application of any federal law to the plaintiffs’ federal claims,” the court said.
“With one hand, the arbitration agreement offers an alternative dispute resolution procedure in which aggrieved persons may bring their claims, and with the other, it proceeds to take those very claims away,” the court said.
“The just and efficient system of arbitration intended by Congress when it passed the [Federal Arbitration Act] may not play host to this sort of farce.”
In going beyond the other circuits' decisions, the court revived the effective vindication doctrine, under which arbitration agreements are unenforceable if arbitration would prevent a plaintiff from vindicating his or her federal statutory rights.
The U.S. Supreme Court limited the rule in Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013) , where it held that merchants' antitrust claims against American Express had to be arbitrated individually under the class waiver in the parties' arbitration agreements, even though the cost of individual arbitration far exceeded the potential recovery.
But the Fourth Circuit, in this case, invoked the doctrine to strike down the contract, saying it prohibited the assertion of certain statutory rights.
“It goes well beyond the more borderline cases involving mere disincentives to pursue arbitral relief,” the court said.
Nicholls, the plaintiffs' attorney, said the fate of the doctrine had been unclear after Italian Colors. This decision shows that the doctrine still has some teeth, she said.
“Though this decision may not change the game that much for sophisticated players with legal business models, it does mean that there’s a path to eliminating the most blatantly law-dodging ones,” she said.
But Kaplinsky, on the other side of the class action bar, dismisses its importance.
“Overall, the opinion is not that important and will be limited to its facts,” he said.
Nicholls and Jennifer D. Bennett of Public Justice P.C. in Washington; Matthew W.H. Wessler, Deepak Gupta and Jonathan E. Taylor of Gupta Beck PLLC in Washington; and others represented the plaintiffs.
Brian Jason Fischer, Barry Levenstam and Daniel T. Fenske in Chicago, Katya Jestin and Neil M. Barofsky in New York and Julie M. Carpenter and R. Trent McCotter in Washington, all of Jenner & Block LLP, represented Delbert Services.
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