The Fourth Circuit struck down an arbitration clause in connection with an online payday loan scandal the Fourth Circuit characterized as clearly violating numerous state and federal lending laws. Hayes v. Delbert Services Corp., No. 15–1170 (4th Cir. Feb. 2, 2016) (click here for a copy of the decision).
The loan documents contained provisions disavowing the application of any federal or state laws, and instead, the online loan transactions were “subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe, Cheyenne River Indian Reservation.”
The Fourth Circuit questioned, but did not decide, whether the arbitration system was a sham. (The Seventh Circuit had struck down an earlier, similar version of the arbitration clause as a “sham from stem to stern” because the clause required arbitration before a tribal court, which did not administer arbitration. In the newer version of the clause, the customer purported to consent to tribal jurisdiction, but with proceedings to be administered by organizations like the American Arbitration Association or JAMS.)
Citing the Supreme Court’s American Express v. Italian Colors decision and its recognition that arbitration cannot be used to waive substantive rights, the Fourth Circuit held that the arbitration clause was not enforceable “for the fundamental reason that it purports to renounce wholesale the application of any federal law to the plaintiffs’ federal claims.”