On August 29, 2016, the Eleventh Circuit upheld a Northern District of Georgia decision invalidating an arbitration clause in Jessica Parm v. National Bank of California, N.A. (Docket No. 15-12509). Defendant National Bank of California (National Bank) argued that plaintiff Jessica Parm’s (Parm) payday loan contract compelled her to arbitrate her claims individually with National Bank. The Eleventh Circuit disagreed, however, finding that the arbitration clause was illusory because the chosen arbitration forum was unavailable, and refused to dismiss the putative class on the basis that Parm was required to arbitrate her claims.
Parm entered into a payday loan contract with Western Sky Financial, LLC (Western Sky) in 2013, and filed a putative class action alleging that a provision in the contract authorizing Western Sky to auto-debit her bank account was illegal. See Parm at 2-4. Parm sued National Bank because it was the financial institution that authorized electronic transfers from her bank account. Id. at 3. The agreement contained an arbitration clause that required the parties to arbitrate their dispute before the Cheyenne River Sioux Tribe (CRST), and National Bank moved to compel arbitration and dismiss the complaint. Id. at 4-5. The Northern District of Georgia denied the motion, finding that the arbitration clause was illusory and invalid, and National Bank appealed to the Eleventh Circuit. Id. at 5.
Relying on similar precedent in Inetianbor v. Cashcall, Inc., the Eleventh Circuit affirmed the district court’s ruling. The Eleventh Circuit concluded that because the CRST had no practical mechanism to arbitrate cases, the CRST was unavailable as an arbitration forum. Id. at 12. The court noted, however, that unavailability alone is not a reason to invalidate an arbitration clause—if the parties’ selection of CRST as arbiter was not “integral” to the contract, then the arbitration clause would survive CRST’s unavailability. Id. But the court found that, because the parties referenced tribal law and authority throughout the contract, the parties’ selection of the CRST as arbiter was integral to the contract. Id. at 13-14. Finding that the CRST was unavailable to arbitrate and integral to the contract, the Eleventh Circuit upheld the District Court’s decision invalidating the arbitration clause.
As we previously reported, this is not the first time a Western Sky arbitration clause was invalidated. In Hayes v. Delbert Services Corporation (Docket No. 15-1170), the Fourth Circuit found that the arbitration clause in that payday loan contract—which also required arbitration before a Sioux-tribal arbitration panel—was invalid because it could allow the defendant to evade liability by arguing that neither federal nor state law applied to the contract. See Hayes at 16. The court concluded that such a result was impermissible under 14 Penn Plaza LLC v. Pyett (556 U.S. 247, 273 (2009)) because it would have resulted in a “substantive waiver of federally protected rights.” Id. at 20-21.
As arbitration clauses continue to come under scrutiny by courts and regulators—arbitration clauses in consumer financial services contracts in particular have become a target of the CFPB—lenders should be mindful of the evolving law in this area, to ensure that their arbitration clauses withstand potential challenges. In the case of an arbitration clause similar to the one at issue in Parm, a simple change—clarifying that the chosen arbitrator is not integral to the contract in the event that the chosen arbitrator becomes unavailable—might have resulted in the court finding that the clause was enforceable. LenderLaw Watch will continue to monitor this developing area, and bring you updates as they arise.