There were a lot of cases on Thursday and Friday, so I had to drop some otherwise interesting material. I hope I can pick them up later. In today’s “Highlights,” I particularly recommend reading Dunn, not only because of its analysis of practically every issue involved in determining whether an enforceable arbitration agreement was formed, but also as a reminder of a problem in internet lending.
Arbitration of payday loans
Judge Jung opens the opinion in Dunn v. Global Trust Management, LLC., 2020 U.S. Dist. LEXIS 232217 (M.D. Fla. Dec. 10, 2020) with a fourteen-page description of the issues involved in high interest loans by companies organized by Native American Tribes and located on reservations. As the judge phrases it, after describing the tribe’s laudatory efforts to preserve its heritage, “The Tribe has embraced other ancient traditions, albeit ones that are new to the Tribe: loansharking and usury.” He, then, goes into a description of a payday loan program that generated consumer credit with annual interest rates of up to 440%. For those who are not familiar with how payday loan programs work, I suggest that you read the opinion. In summary, they are small loans, sometimes under $500, which become payable on the next payday. If, as often happens, the borrower cannot repay the loan on such a short time frame, the indebtedness is rewritten as a new obligation, to which is added the already past due finance charge. According to the court, assuming the loan continues to be rolled over, finance charges can accumulate to reach a rate of 1,000% per year. States have generally capped interest rates on consumer loans, effectively abolishing or limiting the practice within their jurisdictions. However, since the reservation lands of recognized tribes are sovereignties separate from the states within which they are located, those state regulations do not apply to business transactions operating from the tribal lands. Hence, the growth in tribal lending.
Having described the program, the court does a deep analysis of the parties’ agreement to arbitrate. In a detailed, but customary, analysis, the court holds that the decision as to contract formation has not been delegated to the arbitrator and that, under Florida law, the parties entered into a valid arbitration agreement. However, Judge Jung, then, finds that the contract is unconscionable and unenforceable. Since the loans are non-negotiable and “are designed for, and cater to, unsophisticated people” and payday lenders are “usually lenders of last resort”, the agreements are, per Judge Jung, “a classic adhesion contract. . . .” After criticizing the method by which the contract discloses the dispute resolution provision, the court holds that the arbitration requirement is procedurally unconscionable. The particularly interesting analysis comes in the court’s consideration of substantive unconscionability. The contract’s choice-of-law provision designates tribal law, which contains none of the consumer protections normally available to Florida borrowers and bars any effective judicial review of the arbitrator’s decision. Applying the Restatement (Second) of Conflict of Laws, the court holds that the elimination of Florida’s normal lender regulation and of rate ceilings constitutes such a major deviation from the law of the District Court’s forum state as to render the choice of laws provision unconscionable. Finding that the choice of law provision is central to the contract and, therefore, not severable, the court invalidates the entire arbitration agreement and denies the motion to compel.
This is an opinion that should be read for two reasons. First, it is an exemplar on how to analyze whether the parties have entered into an enforceable arbitration agreement. Judge Jung deeply analyzes state law issues of contract formation and both procedural and substantive unconscionability. Second and of equal importance, it represents a judge’s recognition of a pernicious practice and demonstrates the law’s ability to deal with its effects. It will be interesting to read follow up opinions as the court, having rejected arbitration, deals with the merits of the collection action.
Arbitration clauses, “affiliates” and unrelated claims
The October 2, 2020 “ADR Highlights” discussed the Ninth Circuit’s decision in Revitch v. DIRECTTV, 977 F.3d 713 (9th Cir. 2020), in which the court held that an arbitration agreement which covered claims against “affiliates” did not include claims against an after-acquired company. In Thomas v. Cricket Wireless, LLC, 2020 U.S. Dist. LEXIS 232590 (N.D. Cal. Dec. 10, 2020), the court refuses to apply the inverse principle. While the opinion also deals with the claims of Jermaine Thomas, the “continuing use” arbitration formation issues in that analysis are straightforward. The important part of the opinion for arbitration law fans and for precedential value regards Plaintiff Sarah Waters. In 2013, Waters signed an arbitration agreement with Cricket, a telephone service which she alleged promised “unlimited” “nationwide 4G” service and which she claims it failed to provide. In 2014, AT & T Mobility (“Mobility”) acquired Cricket. In 2018, in a separate transaction, Waters become a Mobility customer. The 2018 contract contained a provision requiring that she arbitrate disputes with Mobility and its affiliates. The court held that Waters thereby formed a contract to arbitrate which could conceivably involve some claims against Cricket. However, Mobility’s victory on that issue is Pyrrhic, as the court then holds that, as to Waters herself, the agreement is unconscionable. According to Judge Alsup, the problem is that the agreement is not limited to disputes related to the contract in which the arbitration claim resides. “Waters happened to sign unrelated wireless services agreements with Mobility years after her relationship with Cricket had ended, and Cricket is now trying to take advantage of this happenstance.” Accordingly, he denies Cricket’s motion to compel arbitration.
Enforceability of an affiliate’s claim of a right to arbitrate by an agreement with its related entity also arises in Donnelly v. Linden Capital Partners III, LP. 2020 U.S. Dist. LEXIS 232353 (D.S.C. Dec. 9, 2020). In 2017 Plaintiff became CEO of Advarra, Inc. His employment agreement required arbitration of any claims against Avarra and “any of its subsidiaries or affiliates. . ..” Linden, at that time, was an affiliate of Advarra. From 2017 to 2019, Donnelly served both as CEO of Advarra and “carried out his duties as a Linden Operating Partner and consultant,” services which he performed under an Operating Partnership Agreement (“OPA”) separate from his Advarra employment agreement. In October 2020, after he stopped his employment at Advarra, Donnelly commenced this action, seeking compensation for amounts owed him under the OPA. Linden sought to compel arbitration under the provisions of the Advarra employment contract. At the time of the application to compel, Linden was no longer owned and controlled by Advarra. The court, Gergel, J., denies the motion to compel, holding the arbitration agreement inapplicable as Linden was no longer an “affiliate” of Advarra. However, the court does not explain why “affiliate” status is determined as of the date of the demand for arbitration, rather than the date of the arbitration agreement. The court also holds that the doctrine of equitable estoppel is inapplicable because there is no “substantial relationship” between the claims which Plaintiff asserts against Linden and his employment relationship with Advarra. Absent such “intertwining claims,” there is no estoppel under state law. The motion to compel arbitration is denied.
State law v. law of arbitration
Berry v. PreCC, Inc., 2020 U.S. Dist. LEXIS 231959 (N.D. Tex. Dec. 9, 2020) is included for two reasons. First, it joins that panoply of cases with great opening lines, as Judge Starr opines, “Well it looks like we need to have a jury trial on whether or not to eventually have a jury trial.” To make the snark even better, the court inserts a footnote with a “cf” quoting Robert Wagner in his role as Number Two in the classic, “Austin Powers: International Man of Mystery.”
Second, the opinion provides an analysis of whether parties have entered into an agreement to arbitrate. The opinion is a particularly good primer for those new to the issue, since the court finds that some of the plaintiffs must arbitrate, while others need not and explains why individuals fall on one side or the other of that divide. A second issue considered is the scope of a choice of law clause. The parties’ agreement provides that Illinois substantive law applies to determining the parties’ rights. However, there is no reference as to what “law of the arbitration” applies, i.e., what law governs issues related to the procedures which will govern the dispute. Absent such a designation by the parties, the court applies the FAA and its provision providing the option for jury trial on a motion to compel arbitration.
Arbitrator conflicts; sanctions
Torres v. Morgan Stanley Smith Barney, 2020 U.S. App. 38618 (11th Cir. Dec. 10, 2020) reminds us of two principles. First, if you are an arbitrator, be sure that your disclosures are complete. Although the court held that the arbitrators did not conceal any material information, the case reenforces the extent to which losing parties will examine panel members’ backgrounds in an attempt to set aside the award for bias. Second, the deference afforded arbitrators in managing a proceeding is demonstrated as the court affirms an award of $3 million in discovery sanctions.
There has not been a clickwrap or browsewrap case in a while. Hansen v. Ticketmaster Entertainment, Inc., 2020 U.S. Dist. LEXIS 233538 (N.D. Cal. Dec. 11, 2020), which upholds a website-based acceptance of arbitration, provides a good basic education on those two methods for obtaining on-line disclosure of a transaction’s terms and conditions, including an arbitration mandate.
In International Union of Painters & Allied Trades v. Clearview Glass and Glazing, 2020 U.S. Dist. LEXIS 232331 (M.D. Tenn. Dec. 10, 2020), the court is asked to enforce an arbitrator’s subpoena under Section 301 of the Labor Management Relations Act. The defendant argued that the court needed to look at the propriety of the underlying arbitration in order to determine whether the subpoena should issue. Rejecting this argument, the court holds that the appropriate standard is one of deference to the arbitrator, not a de novo review of his or her judgment about the relevance of the material which the subpoena seeks. Accordingly, Magistrate Judge Holmes recommends that the court enforce the subpoena. In a footnote of interest to Civil Procedure nerds, she addresses whether enforcement of an arbitration subpoena is dispositive and subject to a de novo review by the District Court, or non-dispositive and subject to a more deferential appraisal.
As regular readers know, I bleed Pittsburgh Black and Gold. The last two weeks have been painful, with two consecutive Steelers losses. Maybe – with a healing offensive line – their prospects will improve. However, living in the New York City area and watching the Jets, I feel guilty complaining.
See you Wednesday.