In Mendez v. Loanme, Inc., No. 20-cv-00002 (S.D. Cal. Oct. 13, 2020), a case involving allegations of a predatory loan, the court addressed an interesting argument to avoid a delegation provision in the arbitration clause. The arbitration clause at issue contained a 60 day opt-out clause. I typically see courts rely on such clauses when enforcing an arbitration agreement, reasoning that consumers or employees had an opportunity to reject the agreement but did not do so. Here, the consumer claimed that he had timely opted-out of the arbitration agreement, while the lender claimed it had never received such a request to opt-out.
The arbitration agreement at issue also contained a delegation provision, whereby arbitrators resolve threshold arbitrability matters. It’s tough for someone challenging an arbitration clause when the clause contains a delegation provision. After the Supreme Court’s Rent-A-Center decision, a party seeking to avoid arbitration must generally raise a focused attack against the narrow delegation provision, while attacks against the broader arbitration clause, such as unconscionability defenses, are generally resolved by the arbitrator through the delegation.
The lender in Mendez argued that whether the consumer timely exercised his opt-out right is an issue for the arbitrator to resolve due to the delegation clause. However, the court found that the very existence or formation of the arbitration agreement was at issue due to the opt-out argument. Consequently, the opt-out argument was for the court to resolve, not the arbitrator, and thus the consumer was able to avoid the delegation.
Because the making of the arbitration agreement was at issue (there was a dispute over whether the consumer had properly exercised his opt-out right), the court recognized the necessity of a trial pursuant to section 4 of the FAA. In a hypertechnical point, the court found that the consumer’s general demand for a jury trial was insufficient to trigger the right to a jury trial for the making of the arbitration agreement pursuant to section 4. The court concluded with setting a date for an evidentiary hearing to determine the authenticity of the consumer’s opt-out request.