Arbitration Clause a “Farce”

Posted by NCBRC - February 3, 2016

“The FAA does not protect the sort of arbitration agreement that unambiguously forbids an arbitrator from even applying the applicable law.” Hayes v. Western Sky Financial, No. 15-1170 (4th Cir. Feb. 2, 2016).

Western Sky Financial is an on-line payday lender located on the Cheyenne River Sioux Reservation. It loaned Mr. Hayes $2,600.00, at an interest rate of 139.12%. The lending agreement specified that it was: “subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe,” and included a provision stating that other state and federal laws and regulations do not apply to the loan agreement. An arbitration clause provided that any dispute with Western Sky or its servicers would be resolved by binding arbitration conducted by an authorized representative of the Cheyenne River Sioux Tribal Nation in accordance with its consumer dispute rules, whether “such Dispute is based on a tribal, federal or state constitution, statute, ordinance, regulation, or common law, and including any issue concerning the validity, enforceability, or scope of this loan or the Arbitration agreement.” The agreement included a provision giving the borrower the right to select the American Arbitration Association (AAA) or the Judicial Arbitration and Mediation Services (JAMS), to administer the arbitration. Mr. Hayes’ loan, as well as the loans of other putative class members, traveled a circuitous route through various loan servicers with Mr. Hayes’ loan finally landing with Delbert Services Corp.; a company with no tribal affiliation.

Mr. Hayes filed a putative class action suit in district court against Western Sky and Delbert Services (collectively Western Sky) on the grounds that their debt collection methods violated the FDCPA. He also sought declaratory judgment that the arbitration clause was unenforceable. The district court found that the choice of arbitration administration by the AAA or JAMS rendered the arbitration agreement enforceable.

On appeal, the circuit court bypassed Mr. Hayes’ argument that arbitration in accordance with Cheyenne River Sioux Tribal rules is a sham as there are no authorized representatives nor rules for conducting arbitration, and that the reference to administration by the AAA or JAMS merely added another layer of ambiguity to the agreement.

The court found that it did not have to determine the meaning of the newer language in the contract as the “arbitration agreement fails for the fundamental reason that it purports to renounce wholesale the application of any federal law to the plaintiffs’ federal claims.” Calling it a “farce” the court observed that while the agreement purported to permit arbitration of claims on the one hand, it whisked relevant federal claims away with the other. Discussing Supreme Court analysis of arbitration clauses, the court noted that while the “FAA gives parties the freedom to structure arbitration in the way they choose, [the Supreme Court] has repeatedly cautioned that this freedom does not extend to a ‘substantive waiver of federally protected civil rights’ in an arbitration agreement. 14 Penn Plaza LLC v. Pyett, 556 U.S. 247, 273 (2009).” Western Sky’s arbitration agreement contained just such a waiver. Here, the lending agreement did not merely create a financial disincentive to pursuing certain claims, but eliminated a federal substantive right altogether through an ostensible “choice of law” clause. Acknowledging that arbitration clauses enjoy flexibility to circumscribe the rights of the parties to a large degree, the court found this agreement went too far: “a party may not underhandedly convert a choice of law clause into a choice of no law clause — it may not flatly and categorically renounce the authority of the federal statutes to which it is and must remain subject.”

Because the offending provisions went to the core of the arbitration agreement, the court found they were not severable. The very purpose of the provisions was to liberate Western Sky and its allies “from the strictures of any federal law.” In fact, the entire lending agreement constituted an “integrated scheme to contravene public policy.” On that basis the court reversed and remanded.

NACBA and the NCLC joined in an amicus brief in the Fourth Circuit appeal.

Hayes 4thCir opinion



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