Two Recent Cases Highlight Mandatory Arbitration Provisions

Mandatory arbitration provisions may be on the endangered species list, but they are not gone yet.  Two opinions from two different courts were published this past week addressing mandatory arbitration clauses. The cases presented different issues and the results were not consistent.

First, some background.

The CFPB has initiated their Rulemaking Process regarding mandatory arbitration provisions. A SBRFA Panel (named for the Small Business Regulatory Enforcement Fairness Act of 1996), which was convened on October 28. See here for insideARM’s October 7, 2015 story on the rulemaking proceedings.

The CFPB’s proposed rule would restrict the use of arbitration clauses except where 1) the clause does not restrict class actions, or 2) a court has already refused to certify the case as a class action or has dismissed the consumer’s class claims. Widely covered by industry and national news, the proposal will impact many businesses within the financial services industry.

The first case, Harrington v. Regions Bank, No. 2:15-cv-522-Ftm-29MRM (M.D. Fla. Jan. 29, 2016) involves alleged Telephone Consumer Protection Act, (“TCPA”) claims and a potential class action proceeding. The matter came before the Court on Defendant’s Motion to Compel Arbitration and Stay the Judicial Proceedings.

The Plaintiffs disputed the Defendant’s position that the Plaintiffs’ claim under the TCPA is subject to the parties’ arbitration provisions found within various loan documentation executed in connection with the subject debt and other account relationships with Regions.

However, Plaintiffs acknowledged that the arbitration provisions contained within the parties’ signed documents include a delegation clause vesting the determination of the arbitrability of a claim or dispute with the arbitrator, not the Court.

The court agreed with the Bank’s position. In the Granting the Motion to Compel Arbitration, the Court noted in its short Opinion and Order that “[w]hile arbitrability is generally a question reserved for the trial court, the arbitrator may interpret the scope of the arbitration agreement if the parties agree and provide for such delegation ‘clearly and unmistakably’ within the agreement.”

The second case, Hayes v. Delbert Services Corporation, No. 15-1170, (U.S. Court of Appeals, 4^th Circuit, Feb. 2, 2016) involved substantially different facts and different claims.

James Hayes, the lead plaintiff-appellant in this case, received a payday loan from a lender called Western Sky Financial, LLC. Defendant-appellee Delbert Services Corporation later became the servicing agent for Hayes’s loan. Because Delbert’s debt collection practices allegedly violated federal law, Hayes initiated a putative class action against Delbert. Hayes claimed that Delbert’s notices and phone calls violated the Fair Debt Collection Practices Act (“FDCPA”) and the TCPA. Hayes also sought declaratory relief to the effect that the loan agreement’s forum selection and arbitration provisions were unenforceable.

Claiming that Hayes and his fellow plaintiffs agreed to arbitrate any disputes related to their loans, Delbert moved to compel arbitration under the Federal Arbitration Act (“FAA”). The district court had previously granted Delbert’s motion.

The court of appeals reversed the district court, ruling that the arbitration agreement in this case is unenforceable.

The 23 page opinion can be found here. In the opinion the court of appeals discusses the lending and collection practices of the original on-line lender, Western Sky Financial, LLC and it various affiliates, including WS Funding, LLC, Cash Call, Inc., Consumer Loan Trust and finally Delbert.  The court’s disdain for the practices is highlighted by use of the term “lending scheme” to describe the history of the loans and collection activity.

The court went through a detailed review of the various contract provisions but, in the end determined that the arbitration agreement failed for the fundamental reason that it purports to renounce wholesale the application of any federal law to the plaintiffs’ federal claims. The court noted: “The arbitration agreement here almost surreptitiously waives a potential claimant’s federal rights through the guise of a choice of law clause.”

insideARM Perspective

As noted above, these two cases are very different. The only common element is the enforceability of a mandatory arbitration provision. One involves a reputable financial institution and traditional lending, the other involves an on-line lender with a dubious history recognized by the court.

From the order:

“Despite Western Sky’s best efforts, the law — or at least the threat of the law — caught up with it. A stream of private litigation and public enforcement actions seems to have led Western Sky to stop issuing new loans in 2013.”

insideARM will continue to monitor and report on mandatory arbitration decisions in the courts. We will also continue to monitor and report on the CFPB  rulemaking in the area.