James Hayes v. Delbert Services Corporation , 811 F.3d 666 ( 2016 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 15-1170
JAMES HAYES; DEBERA GRANT; HERBERT WHITE, on behalf of
themselves and others similarly situated,
Plaintiffs - Appellants,
v.
DELBERT SERVICES CORPORATION,
Defendant - Appellee.
--------------------------------
NATIONAL CONSUMER LAW CENTER; NATIONAL ASSOCIATION OF
CONSUMER BANKRUPTCY ATTORNEYS; CENTER FOR RESPONSIBLE
LENDING,
Amici Supporting Appellants.
No. 15-1217
JAMES HAYES; DEBERA GRANT; HERBERT WHITE,
Plaintiffs - Appellees,
v.
DELBERT SERVICES CORPORATION,
Defendant - Appellant.
--------------------------------
NATIONAL CONSUMER LAW CENTER; NATIONAL ASSOCIATION OF
CONSUMER BANKRUPTCY ATTORNEYS; CENTER FOR RESPONSIBLE
LENDING,
Amici Supporting Appellees.
Appeals from the United States District Court for the Eastern
District of Virginia, at Richmond. John A. Gibney, Jr.,
District Judge. (3:14-cv-00258-JAG)
Argued: December 9, 2015 Decided: February 2, 2016
Before WILKINSON, KEENAN, and HARRIS, Circuit Judges.
Reversed and remanded by published opinion. Judge Wilkinson
wrote the opinion, in which Judge Keenan and Judge Harris
joined.
ARGUED: Matthew W.H. Wessler, GUPTA WESSLER PLLC, Washington,
D.C., for Appellants/Cross-Appellees. Brian Jason Fischer,
JENNER & BLOCK LLP, New York, New York, for Appellee/Cross-
Appellant. ON BRIEF: Deepak Gupta, Jonathan E. Taylor, GUPTA
BECK PLLC, Washington, D.C.; Jennifer D. Bennett, Leah M.
Nicholls, PUBLIC JUSTICE, P.C., Washington, D.C.; James W.
Speer, VIRGINIA POVERTY LAW CENTER, Richmond, Virginia; Dale W.
Pittman, THE LAW OFFICE OF DALE W. PITTMAN, P.C., Petersburg,
Virginia; Leonard A. Bennett, Susan M. Rotkis, CONSUMER
LITIGATION ASSOCIATES, P.C., Newport News, Virginia; Kristi C.
Kelly, Andrew J. Guzzo, KELLY & CRANDALL, PLC, Fairfax,
Virginia, for Appellants/Cross-Appellees. Barry Levenstam,
Daniel T. Fenske, Chicago, Illinois, Katya Jestin, Neil M.
Barofsky, New York, New York, Julie M. Carpenter, R. Trent
McCotter, JENNER & BLOCK LLP, Washington, D.C., for
Appellee/Cross-Appellant. Tara Twomey, NATIONAL ASSOCIATION OF
CONSUMER BANKRUPTCY ATTORNEYS, San Jose, California; Geoff
Walsh, NATIONAL CONSUMER LAW CENTER, Boston, Massachusetts;
Ellen Harnick, CENTER FOR RESPONSIBLE LENDING, Durham, North
Carolina, for Amici Curiae.
2
WILKINSON, Circuit Judge:
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.
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”), 9
U.S.C. § 4. The district court granted Delbert’s motion.
We both respect and appreciate the support of Congress and
the Supreme Court for an arbitration procedure that reduces the
costs and delays of civil litigation. Our review of the record
leads us to conclude, however, that the arbitration agreement in
this case is unenforceable. The agreement purportedly fashions a
system of alternative dispute resolution while simultaneously
rendering that system all but impotent through a categorical
rejection of the requirements of state and federal law. The FAA
does not protect the sort of arbitration agreement that
unambiguously forbids an arbitrator from even applying the
applicable law. We therefore reverse the district court’s order
compelling arbitration and remand for further proceedings.
3
I.
This case originates with the lending practices of Western
Sky. Western Sky was an online lender owned by Martin Webb. Webb
was a member of the Cheyenne River Sioux Tribe, and Western
Sky’s offices were located on the Cheyenne River Indian
Reservation in South Dakota. From its base on the Reservation,
Western Sky issued payday loans to consumers across the country.
Hayes’s loan typifies Western Sky’s lending scheme. Western
Sky issued Hayes a $2,600.00 loan, $75.00 of which consisted of
an origination fee. Hayes thus received $2,525.00 in cash.
Western Sky charged interest on the $2,525.00 at an annual rate
of 139.12%. This rate compelled Hayes to make monthly payments
of $294.46 over the four-year life of the loan. All told, Hayes
was set to pay $14,093.12 for his $2,525.00. J.A. 152-53. The
other named plaintiffs in this case received loans with terms
that were just as bad or worse -- one of the loans came with an
annual interest rate of 233.84%. J.A. 159, 166.
No one appears to seriously dispute that Western Sky’s
payday loans violated a host of state and federal lending laws.
Indeed, a quick glance at Western Sky’s loan agreement suggests
that Western Sky was keenly aware of the dubious nature of its
trade. The agreement provides that it is “subject solely to the
exclusive laws and jurisdiction of the Cheyenne River Sioux
Tribe.” J.A. 152 (emphasis in original). It later states that
4
“no other state or federal law or regulation shall apply to this
Loan Agreement.” J.A. 152.
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.
Unfortunately, however, the financial and legal problems
wrought by Western Sky persisted. After issuing a loan, Western
Sky’s practice was to transfer the loan to an assortment of
allied servicing and collection firms. In this case, Western Sky
transferred Hayes’s loan to WS Funding, LLC, which then named
its corporate parent, CashCall, Inc., as the servicing agent.
Sometime later, WS Funding transferred Hayes’s loan to an entity
called Consumer Loan Trust, which in turn named Delbert as the
servicing agent. The loans issued to the other named plaintiffs
in this case followed a similar path. While Western Sky was
owned by a tribal member, Delbert claimed no tribal ownership or
affiliation.
Delbert’s debt-collection operation raised questions of its
own. The plaintiffs claim that Delbert sent them collection
notices without disclosing its identity as a debt collector or
the identity of the actual creditor. They also allege that
Delbert used an automatic dialing system to make several calls a
week and sometimes multiple calls a day to their homes.
5
Hayes filed a putative class action in the Eastern District
of Virginia to obtain relief from Delbert’s allegedly unlawful
collection practices. Specifically, Hayes claimed that Delbert’s
notices and phone calls violated the Fair Debt Collection
Practices Act, 15 U.S.C. §§ 1692-1692p, and the Telephone
Consumer Protection Act, 47 U.S.C. § 227. Hayes also sought
declaratory relief to the effect that the loan agreement’s forum
selection and arbitration provisions were unenforceable.
The loan agreement contains a number of notable provisions.
Most pertinent to this case, the agreement names a tribal forum
and then purports to disavow the authority of all state or
federal law. As noted above, the agreement provides:
This Loan Agreement is subject solely to the exclusive
laws and jurisdiction of the Cheyenne River Sioux
Tribe, Cheyenne River Indian Reservation. By executing
this Loan Agreement, you, the borrower, hereby
acknowledge and consent to be bound to the terms of
this Loan Agreement, consent to the sole subject
matter and personal jurisdiction of the Cheyenne River
Sioux Tribal Court, and that no other state or federal
law or regulation shall apply to this Loan Agreement,
its enforcement or interpretation. J.A. 152 (emphasis
in original).
Another section confirms the disavowal of state and federal law.
That section, titled “GOVERNING LAW,” states in pertinent part:
Neither this Agreement nor Lender is subject to the
laws of any state of the United States of America. By
executing this Agreement, you hereby expressly agree
that this Agreement is executed and performed solely
within the exterior boundaries of the Cheyenne River
Indian Reservation, a sovereign Native American Tribal
Nation. You also expressly agree that this Agreement
shall be subject to and construed in accordance only
6
with the provisions of the laws of the Cheyenne River
Sioux Tribe, and that no United States state or
federal law applies to this Agreement. J.A. 154.
Much of the rest of the loan document concerns the
arbitration agreement between Western Sky, the loan servicer,
and the borrowers. The main provision of that agreement states
that “any dispute [the borrower] ha[s] with Western Sky or
anyone else under this loan agreement will be resolved by
binding arbitration.” J.A. 154. Another provision says that the
arbitration will be “conducted by the Cheyenne River Sioux
Tribal Nation by an authorized representative in accordance with
its consumer dispute rules and the terms of this Agreement.”
J.A. 155. Moreover, the arbitration agreement states that it
covers “any claim based upon marketing or solicitations to
obtain the loan and the handling or servicing of [the
borrower’s] account 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.” J.A. 155.
Other provisions of the arbitration agreement mirror
portions of the underlying loan agreement in that they purport
to disavow the application of all state and federal law. One
provision states that the agreement “IS MADE PURSUANT TO A
TRANSACTION INVOLVING THE INDIAN COMMERCE CLAUSE OF THE
7
CONSTITUTION OF THE UNITED STATES OF AMERICA, AND SHALL BE
GOVERNED BY THE LAW OF THE CHEYENNE RIVER SIOUX TRIBE. The
arbitrator will apply the laws of the Cheyenne River Sioux
Tribal Nation and the terms of this Agreement.” J.A. 156.
Another provision of the arbitration agreement confirms that the
arbitrator will not apply “any law other than the law of the
Cheyenne River Sioux Tribe of Indians to this Agreement.” J.A.
155.
A final noteworthy provision of the arbitration agreement
says that the borrower “shall have the right to select” the
American Arbitration Association (“AAA”), Judicial Arbitration
and Mediation Services (“JAMS”), or another organization to
“administer the arbitration.” J.A. 155. This provision was not
present in earlier versions of the Western Sky arbitration
agreement. And although there is some dispute on this point,
Appellant’s Br. at 22, it seems as if the provision was added by
Western Sky to compensate for the fact that the tribal
arbitration mechanism set out in the agreement proved in
practice to be illusory.
Relying on these various terms, Delbert filed a motion to
dismiss, claiming that the loan agreement’s forum selection
clause along with the doctrine of tribal exhaustion barred Hayes
and the other plaintiffs from suing Delbert in federal court.
8
Delbert argued as well that the loan agreement’s arbitration
provisions required arbitration of the dispute.
The district court ruled that Delbert could not enforce the
loan agreement’s forum selection clause, and that the doctrine
of tribal exhaustion did not apply to the parties’ controversy.
But the district court agreed with Delbert that it could enforce
the arbitration agreement. The court acknowledged that the
tribal arbitration mechanism established by the arbitration
agreement had “proved problematic,” and that other courts
involved in Western Sky-related litigation had accordingly
“voided the arbitration agreement.” J.A. 268. The court then
noted, however, that the agreements in those cases did not allow
the “parties to choose arbitrators and dispute rules” other than
those provided by the Tribe. J.A. 268. In contrast, the parties
in this case had “recourse to well-recognized arbitration
organizations,” including AAA and JAMS, and this “save[d] the
arbitration agreement from meeting the same fate” as the earlier
Western Sky agreement. J.A. 268. The district court thus issued
an order compelling arbitration.
Hayes and the other plaintiffs appeal the order compelling
arbitration. Delbert conditionally appeals the orders declining
to enforce the forum selection clause and denying the
applicability of tribal exhaustion. On appeal, and certainly at
oral argument, the parties focused heavily on the issue of the
9
dispute’s arbitrability, and we too now address this central
question.
II.
A.
We review de novo a district court’s order compelling
arbitration under the FAA. Seney v. Rent-A-Center, Inc., 738
F.3d 631, 633 (4th Cir. 2013). In undertaking this review, we
remain cognizant of the “strong federal policy in favor of
enforcing arbitration agreements.” Dean Witter Reynolds, Inc. v.
Byrd, 470 U.S. 213, 217 (1985).
The FAA confers near plenary authority on an arbitrator to
resolve a dispute given to him by an arbitration agreement. For
this authority to be validly exercised, however, any agreement
purporting to give a dispute over to arbitration must itself be
valid. The validity of an arbitration agreement is a “question
of arbitrability” and, in the normal course, it “is undeniably
an issue for judicial determination.” Peabody Holding Co. v.
United Mine Workers of Am., Int'l Union, 665 F.3d 96, 102 (4th
Cir. 2012) (quoting AT & T Techs., Inc. v. Commc'ns Workers of
Am., 475 U.S. 643, 649 (1986)). 1
1 Consistent with arbitration’s contractual nature, parties
may give arbitrability questions to an arbitrator. This
practice, however, cuts against the normal rule that these
questions are for the court. Accordingly, a court must find by
“clea[r] and unmistakabl[e]” evidence that the parties have
chosen to give arbitrability questions to an arbitrator. Rent-A-
(Continued)
10
The specific statutory basis for our review comes from the
FAA’s second section, which says that an agreement “to settle by
arbitration a controversy thereafter arising . . . shall be
valid, irrevocable, and enforceable, save upon such grounds as
exist at law or in equity for the revocation of any contract.” 9
U.S.C. § 2. Importantly, any grounds given for revocation must
concern the validity of the arbitration agreement in particular,
not simply the validity of the underlying contract as a whole.
Rent-A-Ctr., 561 U.S. at 70 (citing Prima Paint Corp. v. Flood &
Conklin Mfg. Co., 388 U.S. 395, 403–404 (1967)). Hayes and his
co-plaintiffs raise several related challenges to the
arbitration agreement.
B.
The first challenge involves a bit of history. The
plaintiffs claim that the arbitration agreement is unenforceable
because it sets up a hollow arbitral mechanism. They note that
the agreement provides that arbitration “shall be conducted by
the Cheyenne River Sioux Tribal Nation by an authorized
Ctr., W., Inc. v. Jackson, 561 U.S. 63, 69 n.1 (2010)
(alterations in original) (quoting First Options of Chicago,
Inc. v. Kaplan, 514 U.S. 938, 944 (1995)). Delbert argues that
the parties in this case clearly and unmistakably delegated
arbitrability questions, including questions regarding the
validity of the arbitration agreement, to arbitration. We find,
however, that Hayes and his co-plaintiffs have challenged the
validity of that delegation with sufficient force and
specificity to occasion our review. See id. at 71-72.
11
representative in accordance with its consumer dispute rules.”
J.A. 155. Other courts reviewing a Western Sky arbitration
agreement very similar to the one in this case have determined
that, “[a]lthough th[is] contract language contemplates a
process conducted under the watchful eye of a legitimate
governing tribal body, a proceeding subject to such oversight
simply is not a possibility.” Jackson v. Payday Financial, LLC,
764 F.3d 765, 779 (7th Cir. 2014), cert. denied, 135 S. Ct. 1894(2015). The plaintiffs here take up this line of argument.
Specifically, the plaintiffs claim that the Tribe has no
authorized representatives who conduct arbitrations, and that
the Tribe does not even possess a method through which it might
select and appoint such a person. In fact, one official from the
Tribe has acknowledged that the tribal “governing authority does
not authorize Arbitration” and the tribal court “does not
involve itself in the hiring of an arbitrator.” Id. at 770 n.10
(quoting letters from tribal magistrate Mona R. Demery). Delbert
does not appear to contest these points. Indeed, in other
litigation involving another Western Sky arbitration agreement,
CashCall, Inc. (one of Western Sky’s allied firms, as noted
above) “acknowledge[d] that the arbitral forum and associated
procedural rules set forth in [the plaintiff’s] loan agreement
are not available.” Williams v. CashCall, Inc., 92 F. Supp. 3d
12847, 851-52 (E.D. Wis. 2015), appeal docketed, No. 15-2699 (7th
Cir. Aug. 12, 2015).
The plaintiffs are quick to point out, moreover, that in at
least one Western Sky dispute that made it to arbitration, the
appointed arbitrator was a Mr. Chasing Hawk. But Mr. Chasing
Hawk later admitted that Western Sky’s owner had asked him to
arbitrate the dispute. Inetianbor v. CashCall, Inc., 962 F.
Supp. 2d 1303, 1308 (S.D. Fla. 2013). Evidence in that
litigation was also put forward suggesting that Mr. Chasing
Hawk’s daughter worked for Western Sky. Id. at 1306.
Hayes and his co-plaintiffs argue that the problems
stemming from the lack of a reputable arbitrator or arbitral
appointment authority are compounded by the total absence of the
“consumer dispute rules” contemplated by the arbitration
agreement. J.A. 155. The plaintiffs note that several federal
courts have found that the rules alluded to by the agreement “do
not exist.” Inetianbor v. CashCall, Inc., 768 F.3d 1346, 1354
(11th Cir. 2014), cert. denied, 135 S. Ct. 1735 (2015); see also
Heldt v. Payday Fin., LLC, 12 F. Supp. 3d 1170, 1190 (D.S.D.
2014). According to the plaintiffs, these grave infirmities in
the arbitral mechanism collectively render the arbitration
agreement “a sham from stem to stern,” Jackson, 764 F.3d at 779,
and thus unenforceable.
13
Delbert counters by pointing out that the bulk of the
plaintiffs’ arguments (and the court decisions accepting those
arguments) are based on an older version of the Western Sky
arbitration agreement, one that is materially different from the
agreement entered into by Hayes and the other plaintiffs in this
case. And that material difference is the provision allowing the
borrower to select either AAA or JAMS -- both well respected
arbitral organizations -- to administer the arbitration. J.A.
155. According to Delbert, this addition to the agreement
resolves the problems resulting from the Tribe’s lack of a valid
arbitrator appointment process and consumer dispute rules. By
working within the AAA or JAMS systems, a potential claimant
would avoid the problems associated with the arbitral mechanism
set out in earlier versions of the agreement. As noted above,
the district court ultimately agreed with Delbert on this point,
and ordered arbitration on that basis. J.A. 268.
The plaintiffs respond in turn that the simple addition of
the AAA or JAMS provision cannot save the agreement. It is, they
say, beyond patching up. Chief among the plaintiffs’ arguments
is that the AAA or JAMS provision merely allows AAA or JAMS to
“administer” the arbitration, not actually conduct it.
Therefore, according to the plaintiffs’ reading of the
agreement, some unknown “authorized representative” of the Tribe
still must conduct the arbitration, and that person may rely on
14
AAA or JAMS rules only “to the extent that those rules and
procedures do not contradict either the law of the Cheyenne
River Sioux Tribe or the express terms of this Agreement to
Arbitrate.” J.A. 155.
Needless to say, how one might reconcile the lately added
AAA or JAMS provision with the rest of the arbitration agreement
presents a “conundrum.” Heldt, 12 F. Supp. 3d at 1191. It is not
immediately clear, for instance, whether an AAA- or JAMS-
appointed arbitrator would still need to be an authorized
representative of the Tribe, or when and how the Tribe’s law or
the various convoluted provisions in the agreement would
override the AAA or JAMS default rules.
But institutions like AAA and JAMS excel at solving these
sorts of conundrums, and once the court finds that the parties
agreed to assign their dispute to arbitration, it typically is
for the arbitral authority to sort out both the major and minor
details of how the arbitration will proceed. It is likely for
this reason that the FAA largely leaves judicial review of
questions concerning the basic fairness and function of an
arbitral mechanism for the award enforcement stage. See 9 U.S.C.
10; Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 941 (4th
Cir. 1999). Nevertheless, given the present agreement’s outright
rejection of the application of federal law to resolve the
plaintiffs’ federal claims, which we discuss below, we need not
15
consider whether the agreement is invalid on the separate basis
that the dispute resolution mechanism it establishes has
inconsistencies that are apparently contradictory in substance.
C.
This arbitration agreement fails for the fundamental reason
that it purports to renounce wholesale the application of any
federal law to the plaintiffs’ federal claims. We note at the
onset that, while Western Sky was a tribal-owned entity, Delbert
is not. Accordingly, Delbert does not attempt to ground its
renunciation of federal law in any claim of tribal affiliation.
Both in its briefing and during oral argument, Delbert
understandably did not contend that it was a tribal entity and
therefore not subject to the authority of federal law on that
basis.
Instead, Delbert seeks to avoid federal law through the
prospective waiver of federal law provision found in the
arbitration agreement. But that provision is simply
unenforceable. With one hand, the arbitration agreement offers
an alternative dispute resolution procedure in which aggrieved
persons may bring their claims, and with the other, it proceeds
to take those very claims away. The just and efficient system of
arbitration intended by Congress when it passed the FAA may not
play host to this sort of farce.
16
The Supreme Court has repeatedly upheld arbitration
agreements that give an arbitrator authority to arbitrate
federal statutory rights. E.g., CompuCredit Corp. v. Greenwood,
132 S. Ct. 665, 673 (2012) (CROA claims arbitrable); Gilmer v.
Interstate/Johnson Lane Corp., 500 U.S. 20, 35 (1991) (ADEA
claims arbitrable); Mitsubishi Motors Corp. v. Soler–Chrysler–
Plymouth, Inc., 473 U.S. 614, 640 (1985) (federal antitrust
claims arbitrable); see also Santoro v. Accenture Fed. Servs.,
LLC, 748 F.3d 217, 224 (4th Cir. 2014) (various federal
employment claims arbitrable). Absent a “contrary congressional
command,” causes of action involving statutory rights are every
bit as arbitrable as private contractual disputes. CompuCredit
Corp., 132 S. Ct. at 669 (quoting Shearson/Am. Exp. Inc. v.
McMahon, 482 U.S. 220, 226 (1987)).
Relatedly, the Court has upheld arbitration agreements that
contain waivers providing that arbitration is to proceed on an
individual rather than a class action basis, and that impose
other procedural requirements on potential claimants. E.g., Am.
Exp. Co. v. Italian Colors Rest., 133 S. Ct. 2304, 2312 (2013)
(waiver of class arbitration permissible); Vimar Seguros y
Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 541 (1995)
(arbitration in foreign countries permissible); see also
Muriithi v. Shuttle Exp., Inc., 712 F.3d 173, 181-83 (4th Cir.
2013) (fee splitting between the parties to an arbitration may
17
be permissible). These decisions flow naturally from the
“overarching principle” of the FAA -- “that arbitration is a
matter of contract” and, therefore, that “courts must
‘rigorously enforce’ arbitration agreements according to their
terms.” Am. Exp. Co., 133 S. Ct. at 2309 (quoting Dean Witter
Reynolds Inc., 470 U.S. at 221).
Yet while the Court has affirmed that the FAA gives parties
the freedom to structure arbitration in the way they choose, it
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). In its American Express decision, the Court first
acknowledged that the prohibition of substantive waivers of
federal rights may prevent the imposition of “large arbitration
costs [that] could preclude a litigant . . . from effectively
vindicating her federal statutory rights.” Am. Exp. Co., 133 S.
Ct. at 2311 (alteration in original) (quoting Green Tree
Financial Corp.–Ala. v. Randolph, 531 U.S. 79, 90 (2000)); see
also Muriithi, 712 F.3d at 181 (noting that an arbitration
clause may be unenforceable if high arbitration costs
effectively prevent access to the arbitral forum). But the Court
then clarified that the substantive waiver prohibition does not
go so far as to guarantee a procedural path that would make
proving a federal statutory claim in arbitration “worth the
18
expense involved” for all claimants under all circumstances. See
Am. Exp. Co., 133 S. Ct. at 2311-12. Rather, the Court
explained, the primary aim of the prohibition is to “prevent [a]
‘prospective waiver of a party's right to pursue statutory
remedies.’” Id. at 2310 (emphasis in original) (quoting
Mitsubishi Motors Corp., 473 U.S. at 637 n.19). The Court thus
upheld the class arbitration waiver in American Express, because
the waiver only reduced the economic incentive to bring a
federal antitrust claim. It did not prevent a party from
pursuing an antitrust claim altogether. In fact, the Court
stated that the rule against substantive waivers “would
certainly cover a provision in an arbitration agreement
forbidding the assertion of certain statutory rights.” Id.That sort of outright prohibition is exactly what we have
here. It goes well beyond the more borderline cases involving
mere disincentives to pursue arbitral relief. As the plaintiffs
point out, the arbitration agreement here almost surreptitiously
waives a potential claimant’s federal rights through the guise
of a choice of law clause. 2 In the section entitled “Applicable
Law and Judicial Review” the arbitration agreement provides that
it “IS MADE PURSUANT TO A TRANSACTION INVOLVING THE INDIAN
2
Delbert claims that the plaintiffs waived this argument by
not raising it before the district court. We disagree and find
that it was a “theory plainly encompassed by the submissions”
made below. Volvo Const. Equip. N. Am., Inc. v. CLM Equip. Co.,
Inc., 386 F.3d 581, 604 (4th Cir. 2004).
19
COMMERCE CLAUSE OF THE CONSTITUTION OF THE UNITED STATES OF
AMERICA, AND SHALL BE GOVERNED BY THE LAW OF THE CHEYENNE RIVER
SIOUX TRIBE. The arbitrator will apply the laws of the Cheyenne
River Sioux Tribal Nation and the terms of this Agreement.” J.A.
156. Another section of the arbitration agreement confirms that,
no matter where the arbitration occurs, the arbitrator will not
apply “any law other than the law of the Cheyenne River Sioux
Tribe of Indians to this Agreement.” J.A. 155. Instead of
selecting the law of a certain jurisdiction to govern the
agreement, as is normally done with a choice of law clause, this
arbitration agreement uses its “choice of law” provision to
waive all of a potential claimant’s federal rights.
A party to an arbitration agreement may of course agree to
waive certain rights as part of that agreement. To give just one
example, the waiver of “the right to a jury trial is a necessary
and fairly obvious consequence of an agreement to arbitrate.”
Sydnor v. Conseco Fin. Servicing Corp., 252 F.3d 302, 307 (4th
Cir. 2001) (quoting Pierson v. Dean, Witter, Reynolds, Inc., 742
F.2d 334, 339 (7th Cir. 1984)). So long as such waivers pass the
applicable knowing and voluntary standard, they will typically
be enforced. See id. at 306-07. Moreover, parties are free
within bounds to use a choice of law clause in an arbitration
agreement to select which local law will govern the arbitration.
See Rota-McLarty v. Santander Consumer USA, Inc., 700 F.3d 690,
20
697 n.7 (4th Cir. 2012). These provisions often bring a welcome
measure of predictability and thus efficiency to the dispute
resolution process. But 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. See
Kristian v. Comcast Corp., 446 F.3d 25, 48 (1st Cir. 2006);
Hadnot v. Bay, Ltd., 344 F.3d 474, 478 n.14 (5th Cir. 2003);
Graham Oil Co. v. ARCO Products Co., a Div. of Atl. Richfield
Co., 43 F.3d 1244, 1248 (9th Cir. 1994), as amended (Mar. 13,
1995). Because the arbitration agreement in this case takes this
plainly forbidden step, we hold it invalid and unenforceable.
Moreover, we do not believe the arbitration agreement’s
errant provisions are severable. It is a basic principle of
contract law that an unenforceable provision cannot be severed
when it goes the “essence” of the contract. 8 Samuel Williston &
Richard A. Lord, A Treatise on the Law of Contracts § 19:73 (4th
ed. 1993). Here, the offending provisions go to the core of the
arbitration agreement. It is clear that one of the animating
purposes of the arbitration agreement was to ensure that Western
Sky and its allies could engage in lending and collection
practices free from the strictures of any federal law.
And although our focus must be on the arbitration
agreement, not the underlying loan agreement, it is only natural
21
for us to interpret the arbitration agreement in light of the
broader contract in which it is situated. As noted above,
provisions in the loan agreement starkly proclaim that “no
United States state or federal law applies to this Agreement.”
J.A. 154. The brazen nature of such statements confirms that
Western Sky’s arbitration agreement is little more than an
attempt “to achieve through arbitration what Congress has
expressly forbidden.” Graham Oil Co., 43 F.3d at 1249. Good
authority counsels that severance should not be used when an
agreement represents an “integrated scheme to contravene public
policy.” Id. (quoting E. Allan Farnsworth, Farnsworth on
Contracts § 5.8, at 70 (1990)). We thus decline to sever the
provisions here.
III.
We recognize that the FAA establishes a “liberal federal
policy favoring arbitration agreements.” Home Buyers Warranty
Corp. v. Hanna, 750 F.3d 427, 436 (4th Cir. 2014) (quoting Moses
H. Cone Mem'l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24
(1983)). But rather than use arbitration as a just and
efficient means of dispute resolution, Delbert seeks to deploy
it to avoid state and federal law and to game the entire system.
Perhaps in the future companies will craft arbitration
agreements on the up-and-up and avoid the kind of mess that
Delbert is facing here. We reverse the order of the district
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court compelling arbitration and remand the case for further
proceedings consistent with this opinion. 3
REVERSED AND REMANDED
3 As noted, Delbert had argued that the controversy should
proceed solely in tribal court, and that the doctrine of tribal
exhaustion forbade plaintiffs from bringing their claims in
federal court in the first instance. The district court rejected
both of Delbert’s arguments on this score. It noted that the
forum selection clause could not be enforced by Delbert because
the “plain language of the forum selection clause does not reach
Delbert, a third party debt collector.” Mem. Op. at 4, J.A. 265.
And it determined that the doctrine of tribal exhaustion did not
apply because “the conduct at issue in this action did not
involve an Indian-owned entity, did not occur on the [Tribe’s]
reservation, and did not threaten the integrity of the [T]ribe.”
Mem. Op. at 6, J.A. 267. We find no fault with the court’s
ruling on these points and adopt the reasons set forth in the
district court’s opinion.
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