Arbitrator can decide if loan contract provision is enforceable, split panel says

In a significant break with other federal circuits, a divided 9th U.S. Circuit Court of Appeals ruled Thursday that an arbitrator can decide whether an arbitration provision in a loan contract is enforceable.

Instead of allowing a court to decide, the contract said an arbitrator would make the call. Moreover, the arbitrator must apply tribal law, if that is what the contract calls for.

"Already confused? You're not alone," wrote 9th Circuit Judge Danielle J. Forrest in the opinion.

Forrest and Judge Lawrence VanDyke, both appointees of President Donald Trump, remanded the case to the district court to compel the parties to arbitrate. Judge William A. Fletcher, an appointee of President Bill Clinton, dissented.

The case started after borrowers filed a class action against lending companies owned by Chippewa Cree Tribe of the Rocky Boy's Indian Reservation and the Otoe-Missouri Tribe of Indians. The tribal lenders charged interest rates of over 400% per year. The plaintiffs called the loans illegal, alleging that the lenders operated a payday loan enterprise designed to evade state laws and make illegal high interest loans. The lenders were sued on accusations of violating the Racketeer Influenced and Corrupt Organizations Act, RICO.

Judge William H. Orrick of the Northern District of California denied the lenders' motion to compel arbitration. Orrick said that the agreement was unenforceable because it waived the class' right to pursue federal statutory claims since an arbitrator would have to apply tribal law. For the same reason, Orrick said that delegating the responsibility to arbitrate to an arbitrator was also unenforceable.

In remanding, Forrest instead said the delegation provision is lawful since the borrowers could still argue to an arbitrator that the arbitration agreement is unenforceable under the prospective waiver doctrine. The doctrine states that an arbitration agreement that waives a party's right to pursue federal remedies is unenforceable. Kimetra Brice, et al., v. Plain Green LLC, et al., 2021 DJDAR 9672 (Sept. 16, 2021).

"Therefore, we conclude that the delegation provision is not itself invalid as a prospective waiver and that it is for an arbitrator, not the court, to decide whether the parties' arbitration agreement is enforceable," Forrest wrote.

In his dissent, Fletcher wrote that until now, "every federal court but one has refused to compel arbitration in cases involving tribal internet payday loans." The majority misunderstood the effect of the choice-of-law provision in the loan agreements, Fletcher wrote. The arbitrator can only apply tribal law and an irrelevant subset of federal law, the dissenting judge concluded.

"The prospective waivers of most federal law and all state law prevent the arbitrator from applying the law necessary to determine whether the delegation provisions and the arbitration agreements are valid," Fletcher wrote. "This renders both the delegation provisions and the arbitration agreements invalid."

Public Justice in Washington, D.C., argued the case on behalf of the class. The organization's executive director, F. Paul Bland, called the opinion one of the worst decisions he has seen in his over 30 years litigating arbitration clauses.

"If the panel decision stands, predatory lenders, and others, can apparently put any provision they can think of that strips people of their substantive rights under federal statutes into an arbitration clause, and the arbitration clause won't just say that the case goes to arbitration instead of court. Now the clause can say that individuals have no substantive legal rights in arbitration, either," Bland said. "It's an extreme outlier decision that encourages abuse."

Richard L. Scheff, partner at Armstrong Teasdale LLP, argued on behalf of the lenders. Scheff said that they were pleased with the result but declined to comment further.