Debt-relief scammers can’t use arbitration clause to avoid victim’s lawsuit, Ninth Circuit affirms

Debt-relief scammers can’t use arbitration clause to avoid victim’s lawsuit, Ninth Circuit affirms

By Sarah Jones, Public Justice

Unscrupulous debt-relief companies that did not actually provide any services to their customers cannot use an arbitration clause to prevent their customers from suing in court, the U.S. Court of Appeals for the Ninth Circuit held today, affirming the lower court’s ruling that the clause is unconscionable in its entirety. Public Justice Staff Attorney Amy Radon served as lead attorney on the appeal and argued the case on December 3.

Today’s decision in Newton v. American Debt Services shows that some courts are willing to draw boundaries in egregious abuses of arbitration clauses.

“Even though the U.S. Supreme Court has limited the types of challenges consumer advocates can make to arbitration clauses, this decision demonstrates that courts still take a critical look at what a defendant has thrown into its arbitration clause,” Radon said.  “And courts are not willing to enforce arbitration clauses that are blatantly unfair to consumers.”

In Newton, our client, the plaintiff, attempted to sue American Debt Services and its co-conspirators after they failed to fulfill any part of their promise to settle her credit card debt—in fact, none of the defendants named in the suit ever reached out to single creditor in eight months.   

Instead of answering in court, the defendants sought to enforce an arbitration clause that required our client to bring her case in Tulsa, Okla.—far from her home in Santa Clara, Calif. The clause also gave the defendants the sole say in who the arbitrator would be, limited the potential award (to around $100, after paying the defendants thousands of dollars in fees), and may have required our client to pay the defendants’ attorney’s fees if they won.

“Essentially, the defendants had attempted to craft a fail-safe scam that allowed them to take advantage of desperate people and then rig the justice system to avoid accountability,” Radon said. “It’s unusual to see even one of these provisions in consumer contracts. To have all four is completely outrageous.”

Our client challenged the arbitration clause on the ground that it was unconscionable. In California, contracts are primarily deemed unconscionable if they are “unfairly one-sided.”

The U.S. District Court in California held that the arbitration clause was unconscionable and therefore unenforceable under California law.  Public Justice urged the U.S. Court of Appeals for the Ninth Circuit to affirm that ruling because the provisions of the arbitration clause serve no purpose other than to give the defendants an unfair advantage.  In siding with Public Justice, the Ninth Circuit allows our client, representing a putative class of plaintiffs, to proceed with her action in court.

 “Some courts are moving into a ‘Wild West’ state of complete lawlessness,” said Public Justice Senior Attorney Paul Bland. “The U.S. Court of Appeals for the Ninth Circuit said that some basic rules of fairness still apply.”

In addition to Radon, Public Justice Senior Attorney Paul Bland was co-counsel on the appeal. Tavy Dumont of the Law office of Tavy A. Dumont and William F. Kennedy of the Consumer Law office of William E. Kennedy were attorneys at trial and co-counsel on the appeal.

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