Hayes v. Delbert Servs. Corp., Nos. 15-1170, 15-1217 (4th Cir. Feb. 2, 2016).
James Hayes took out some payday loans. These loans had very high interest rates—one of them was 233.84%—and violated a bunch of state and federal lending laws.
Not surprisingly, Hayes couldn’t pay the loans back, so the loans were turned over to a collection agency. This collection agency’s practices were themselves of dubious legality under federal law. So Hayes filed a proposed class action against the collection agency.
The collection agency, in response, invoked an arbitration provision in the agreement between Hayes and the payday lender, and asked that the case be sent to arbitration. This arbitration provision says that only the laws of the Cheyenne River Sioux Tribe—and no other laws, state or federal—will apply to the arbitration.
Should Hayes’s claims against the collection agency be sent to arbitration?
The Fourth Circuit says they shouldn’t be. Contracting parties have a good deal of freedom to structure arbitration agreements, but they don’t have the power to renounce federal law wholesale. The arbitration clause is void.
After reading this persuasive opinion, I do have one lingering question. The arbitration provision disavows federal law, and the Fourth Circuit quotes nothing in the contract that explicitly invokes the Federal Arbitration Act—the Act under which the collection agency is trying to compel arbitration. So isn’t that yet another reason to refuse to compel arbitration here? How can you renounce federal law in your arbitration agreement and yet rely on it to compel arbitration?
UPDATE: In response to my question, a friend (and a very fine lawyer) pointed out to me that the Federal Arbitration Act applies even if the parties do not invoke it, so long as the arbitration provision occurs in a contract in interstate commerce. Thus the FAA acts as a kind of choice-of-law rule providing that federal law governs arbitration contracts. Even if that’s true, couldn’t a federal court tell a defendant, as a matter of contract interpretation rather than choice of law, that it has renounced its right to use the FAA to compel arbitration—that even if the contract were enforceable, it would not allow the defendant to invoke the FAA? It’s entirely possible I’m missing something here, but the collection agency’s reliance on the FAA still doesn’t make sense to me.
UPDATE (II): On further thought, the paradox I’ve pointed to probably wouldn’t get the plaintiff very far. If the collection agency couldn’t invoke the FAA, the fundamental choice-of-law question—what law determines the enforceability of the arbitration provision—would still remain. And then the plaintiff is left in a potentially worse situation, since he would have to argue that, despite the contract’s choice-of-law provision, federal law does apply.