No, You Can’t Just Write a Contract that Says No Federal Law Applies
(Even in an Arbitration Clause!)
By Leah Nicholls
When James Hayes took out a loan for $2525 via the Western Sky lending company, he probably expected, like most consumers do, that he would be charged some interest. But by any reasonable standard, the 139.12% rate he was effectively charged—turning his initial $2525 loan into a $14,093 debt—was jaw-dropping.
Obviously, such an interest rate is illegal almost everywhere—or, as the Fourth Circuit said today, “No one appears to seriously dispute that Western Sky’s payday loans violated a host of state and federal lending laws.” So how did Western Sky expect to get away with it? Well, not so coincidentally, Western Sky is technically owned by a member of the Cheyenne River Sioux Tribe, and Western Sky’s loan agreements purported to make the loan subject only to the law of the Tribe and expressly renounced any application of federal or state law.
Today, in a significant ruling for consumers, the Fourth Circuit disagreed. The court found, in Hayes v. Delbert Services Corp., that there is some limit to what lenders can do: No matter what the loan agreements say, they are still subject to federal law.
Before anyone tries to compare this to casinos on reservations, none of the profits went to the Tribe itself—some went to the individual owner of Western Sky, but most appear to have gone to the non-Indian owner of Western Sky’s affiliated companies whose expensive hobbies include owning Kentucky Derby-winning racehorses.
There’s no question the Western Sky agreement specifically attempted to avoid any compliance with those federal laws. But, to make matters even worst, the agreement also said that any disputes with Western Sky, or its servicers and collectors, could not be brought in court. Rather, the disputes would have to be brought in arbitration. But even then, the arbitrator would still be prohibited from applying any state or federal law. And that’s the rub. Mr. Hayes brought a class-action against Delbert, one of the non-tribal entities that collects on Western Sky’s loans, alleging that, in the course of collecting on the loans, Delbert violated several federal statutes. Delbert then tried to defeat the class-action in court by moving to arbitrate his claims.
But today, the Fourth Circuit held that the agreement’s waiver of federal rights meant that the claim could not be sent to arbitration.
That’s a big deal. Why? Though the Supreme Court has long said that arbitration agreements are unenforceable if arbitration would result in a plaintiff’s inability to “vindicate” his or her federal statutory rights, that doctrine has been shrunk significantly over the last several years. In American Express Co. v. Italian Colors Restaurant, for example, the Supreme Court held that even if the terms of the arbitration agreement prevent anyone, as a practical matter, from ever winning certain federal statutory claims, the arbitration agreement was still enforceable. So the Fourth Circuit’s decision today means the effective vindication doctrine still has some teeth after all; the drafter of an arbitration clause can’t simply purport to eliminate federal rights altogether.
Here at Public Justice, we fight to ensure that arbitration clauses aren’t used to take away the substantive rights of consumers, employees, and small businesses. These days, it’s largely an uphill battle, but today’s decision gives us all the more reason to keep fighting.
Hayes was argued in the Fourth Circuit by Matt Wessler of Gupta Wessler, PLLC (formerly of Public Justice), and Leah Nicholls and Jennifer Bennett of Public Justice served as co-counsel.