686 F.Supp.3d 734
N.D. Ill.2023Background
- FSST Management Services LLC (affiliated with the Flandreau Santee Sioux Tribe) operated high‑rate online loans via 605lending.com; First Direct Mediation collected loans; Harris borrowed $450 at ~775% APR and filed a class action alleging usury and violations of Illinois consumer protection laws, RICO, and FDCPA.
- Defendants moved to dismiss and compel arbitration under the Harris loan agreement, which contained a broad "dispute" definition and a delegation clause; defendants also invoked tribal sovereign immunity as alternative grounds; the court bifurcated the motion to resolve arbitration first.
- The Harris Agreement contains a general choice‑of‑law clause applying tribal law, an arbitration clause stating the FAA governs but that arbitrator awards may be filed "ONLY with the courts of the Flandreau Santee Sioux Tribe," and language disclaiming consent to state or federal law.
- Harris specifically challenged the delegation and arbitration provisions as (1) prospectively waiving federal and state statutory remedies and (2) being procedurally and substantively unconscionable.
- The court held the delegation provision and the arbitration agreement unenforceable because the contract effectually waived federal/state rights (prospective waiver) and was both procedurally unconscionable (referenced tribal arbitration law that does not exist) and substantively unconscionable (tribal‑only review and lack of tribal jurisdiction over nonmember borrowers).
- As a result, the court denied the motion to compel arbitration and to dismiss for improper venue, and ordered briefing on the remaining defenses.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the delegation clause is enforceable | Harris: delegation is unenforceable because it prospectively waives federal/state statutory remedies | Defendants: delegation is valid and gateway arbitrability issues belong to arbitrator | Court: delegation unenforceable (prospective waiver) so court decides arbitrability |
| Whether the arbitration clause prospectively waives federal/state rights | Harris: choice‑of‑law and arbitration terms effectively displace federal/state remedies | Defendants: FAA references and lack of explicit waiver mean no prospective waiver | Court: practical effect of clauses (tribal law + filing only in tribal courts + disclaimers) constitutes an implicit prospective waiver — unenforceable |
| Procedural unconscionability of arbitration agreement | Harris: borrowers could not know or understand tribal arbitration law referenced because it does not exist | Defendants: FAA incorporation and availability of AAA/JAMS cures any defect | Court: agreement is procedurally unconscionable because it expressly incorporates nonexistent tribal arbitration law despite naming AAA/JAMS |
| Substantive unconscionability (tribal review & jurisdiction) | Harris: awarding exclusive enforcement/review to tribal courts (that lack jurisdiction over nonmember borrowers) unfairly insulates lender and blocks vindication of rights | Defendants: tribe’s laws & asserted jurisdiction and FAA references permit review and federal remedies | Court: substantively unconscionable — tribal‑only review plus likely lack of tribal jurisdiction over borrowers defeats fair vindication of federal/state rights |
Key Cases Cited
- Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 581 U.S. 246 (2017) (courts may apply general contract defenses to invalidate arbitration agreements)
- Rent‑A‑Center, W., Inc. v. Jackson, 561 U.S. 63 (2010) (parties may delegate gateway arbitrability questions to arbitrator if agreement is clear)
- Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019) (FAA enforces delegation agreements like other arbitration agreements)
- Mitsubishi Motors Corp. v. Soler Chrysler‑Plymouth, Inc., 473 U.S. 614 (1985) (an arbitration agreement is unenforceable if it prospectively waives statutory remedies)
- Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528 (1995) (public‑policy concerns can render arbitration enforcement improper if review is unavailable)
- Jackson v. Payday Fin., 764 F.3d 765 (7th Cir. 2014) (tribal courts may lack jurisdiction over nonmember borrowers; nonmember consent is insufficient)
- Hengle v. Treppa, 19 F.4th 324 (4th Cir. 2021) (refusal to enforce tribal‑lender arbitration that functionally waived federal rights)
- Hayes v. Delbert Servs. Corp., 811 F.3d 666 (4th Cir. 2016) (similar analysis of rent‑a‑tribe arbitration clauses)
- Gingras v. Think Finance, 922 F.3d 112 (2d Cir. 2019) (tribal arbitration terms that prevent meaningful federal review can be substantively unconscionable)
- Gibbs v. Haynes Invs., 967 F.3d 332 (4th Cir. 2020) (loan agreements that implicitly disavow federal law may be unenforceable)