CHRISTINA WILLIAMS; MICHAEL STERMEL, On Behalf of Themselves and All Others Similarly Situated v. MEDLEY OPPORTUNITY FUND II, LP; MARK CURRY; BRIAN MCGOWAN; VINCENT NEY; OTHER JOHN DOE PERSONS OR ENTITIES; RED STONE INC, As Successor In Interest to MacFarlane Group, Inc.
Nos. 19-2058, 19-2082
United States Court of Appeals for the Third Circuit
July 14, 2020
2020 Decisions 664
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
Nos. 19-2058, 19-2082
CHRISTINA WILLIAMS; MICHAEL STERMEL, On Behalf of Themselves and All Others Similarly Situated
v.
MEDLEY OPPORTUNITY FUND II, LP; MARK CURRY; BRIAN MCGOWAN; VINCENT NEY; OTHER JOHN DOE PERSONS OR ENTITIES; RED STONE INC, As Successor In Interest to MacFarlane Group, Inc.
Red Stone, Inc. Appellant in No. 19-2058
CHRISTINA WILLIAMS; MICHAEL STERMEL, On Behalf of Themselves and All Others Similarly Situated
v.
MEDLEY OPPORTUNITY FUND II, LP; MARK CURRY;
Mark Curry, Brian McGowan, Vincent Ney, Appellants in No. 19-2082
Appeals from the United States District Court for the Eastern District of Pennsylvania (D.C. No. 2-18-cv-02747) District Judge: Honorable Mitchell S. Goldberg
Argued February 5, 2020
Before: SHWARTZ, SCIRICA, and COWEN, Circuit Judges.
(Filed: July 14, 2020)
Arpit K. Garg
Tamara S. Grimm
Molly M. Jennings
Jonathan E. Paikin
Thomas L. Strickland
Daniel Volchok [ARGUED]
Seth P. Waxman
WilmerHale
Charles K. Seyfarth
O’Hagan Meyer
411 East Franklin Street Suite 500 Richmond, VA 23219
Counsel for Appellant Red Stone, Inc.
Robert M. Cary
Sarah M. Harris [ARGUED]
Michael J. Mestitz
Christopher Yeager
Williams & Connolly
725 12th Street, N.W. Washington, DC 20005
Counsel for Appellant Mark Curry
David F. Herman
Richard L. Scheff
Armstrong Teasdale
One Commerce Square, 2005 Market Street 29th Floor Philadelphia, PA 19103
Counsel for Appellants Brian McGowan and Vincent Ney
Michael J. Quirk
Motley Rice
Matthew W.H. Wessler [ARGUED]
Gupta Wessler
1900 L Street, N.W. Suite 312 Washington, DC 20036
Counsel for Appellees Christina Williams and Michael Stermel, On Behalf of Themselves and All Others Similarly Situated
Stephen F. Raiola
Covington & Burling
850 10th Street, N.W. One City Center Washington, DC 20001
Counsel for Amicus Curiae Online Lenders Alliance in Support of Appellants
Patrick O. Daugherty
Van Ness Feldman
1050 Thomas Jefferson Street, N.W. Seventh Floor Washington, DC 20007
Counsel for Amicus Curiae Native American Financial Services Association in Support of Appellants
Anthony M. Sabino
Counsel for Amicus Curiae Anthony Michael Sabino in Support of Appellant Red Stone, Inc.
Mark C. Stephenson
Ward Law
1617 John F. Kennedy Boulevard Suite 500 Philadelphia, PA 19103
Counsel for Amici Curiae American Legislative Exchange Council, The Center for Individual Freedom, and the American Consumer Institute in Support of Appellant Red Stone, Inc.
Jeffrey R. White
American Association for Justice
777 6th Street, N.W. Suite 200 Washington, DC 20001
Counsel for Amicus Curiae American Association for Justice in Support of Appellees
OPINION
Christina Williams and Michael Stermel (“Plaintiffs”) obtained loans from AWL, Inc., an online entity owned by the Otoe-Missouria Tribe of Indians (“Tribe”). Plaintiffs assert that AWL charged unlawfully high interest rates and sued AWL’s holding company, Red Stone, Inc., and three members of AWL’s board of directors, Mark Curry, Vincent Ney, and Brian McGowan (collectively, “Defendants”) for violations of federal and Pennsylvania law. Defendants moved to compel arbitration. The District Court denied their motion, holding that the loan agreements—which provided that only tribal law would apply in arbitration—stripped Plaintiffs of their right to assert statutory claims and were therefore unenforceable. Because AWL permits borrowers to raise disputes in arbitration only under tribal law, and such a limitation constitutes a prospective waiver of statutory rights, its arbitration agreement violates public policy and is therefore unenforceable. As a result, the District Court correctly denied Defendants’ motion to compel arbitration.
I1
A
Plaintiffs entered into payday loan agreements with
To obtain loans from AWL, Plaintiffs had to sign a loan agreement that set forth the interest rates, payment terms, and other provisions.2 The loan agreement states that it “is between you, as borrower/debtor, and AWL, Inc., an arm of [the Tribe], as lender,” J.A. 280, and includes the following “IMPORTANT DISCLOSURE” to the borrower:
YOU AGREE THAT THIS LOAN IS MADE WITHIN THE TRIBE’S JURISDICTION AND IS SUBJECT TO AND GOVERNED BY TRIBAL LAW3 AND NOT THE LAW OF YOUR RESIDENT STATE. IN MAKING THIS LOAN, YOU CONSENT TO TRIBAL JURISDICTION FOR THIS LOAN. YOUR RESIDENT STATE LAW MAY HAVE INTEREST RATE LIMITS AND OTHER CONSUMER PROTECTION PROVISIONS THAT ARE MORE FAVORABLE. IF YOU
WISH TO HAVE YOUR RESIDENT STATE LAW APPLY TO ANY LOAN THAT YOU TAKE OUT, YOU SHOULD CONSIDER TAKING A LOAN FROM A LICENSED LENDER IN YOUR STATE.
J.A. 280 (capitalization in original).4 The loan agreement also makes disclosures pursuant to the Truth in Lending Act, but states that “we do not concede that the Truth in Lending Act applies to this transaction.” J.A. 283. The loan agreement further informs the borrower that “[o]ur inclusion of any disclosures does not mean that Lender consents to the application of federal law to any Loan or to this [Loan] Agreement.” J.A. 281.
Following these disclosures, the loan agreement contains twenty-five numbered sections. One section is titled “WAIVER OF JURY TRIAL AND AGREEMENT TO ARBITRATE.” J.A. 289 (capitalization in original). This section of the loan agreement is defined in the contract as “the Agreement to Arbitrate.” Compare J.A. 289 (defining the “Waiver of Jury Trial and Agreement to Arbitrate” as the “Agreement to Arbitrate”), with J.A. 280 (defining “this loan agreement” as the “Agreement” (capitalization omitted)). We refer to this section as the “arbitration agreement.”
In a subsection called “APPLICABLE LAW AND JUDICIAL REVIEW OF ARBITRATOR’S AWARD,” the arbitration agreement states: “THIS [LOAN] AGREEMENT SHALL BE GOVERNED BY TRIBAL LAW.” J.A. 291 (capitalization in original). The subsection then specifies that “[t]he arbitrator shall apply Tribal Law and the terms of this [Loan] Agreement, including [the arbitration agreement].” J.A. 291. The subsection further provides that
[t]he arbitrator shall make written findings and the arbitrator’s award may be filed with a Tribal court. The arbitration award shall be supported by substantial evidence and must be consistent with this [Loan] Agreement and Tribal Law, and if it is not, it may be set aside by a Tribal court upon judicial review.
J.A. 291. The tribal court may confirm an arbitration award “only if” the court “determines that the award is supported by substantial evidence and is not based on legal error under
The arbitration agreement makes numerous other references to tribal law:
- “The policies and procedures of the selected arbitration firm applicable to consumer transactions will apply provided such policies and procedures do not contradict this [arbitration agreement] or Tribal Law.” J.A. 290.
- “Unless prohibited by Tribal Law, the arbitrator may award fees, costs, and reasonable attorneys’ fees to you if you substantially prevail in the arbitration.” J.A. 290.
- “Any arbitration under this [Loan] Agreement may be conducted either on Tribal land or within thirty (30) miles of your then current residence, at your choice, provided that this accommodation for you shall not be construed in any way . . . to allow for the application of any law other than Tribal Law . . . .” J.A. 291.
- “The arbitrator has the ability to award all remedies available under Tribal Law . . . .” J.A. 291.
- “As an integral component of accepting this [Loan] Agreement, you irrevocably consent to the exclusive jurisdiction of the Tribal courts for purposes of this [Loan] Agreement.” J.A. 291.
- “In the event you opt out of the [arbitration agreement], any disputes shall nonetheless be governed under tribal law and must be brought within the court system of [the Tribe].” J.A. 289 (capitalization omitted).
Another section of the loan agreement, titled “GOVERNING LAW,” mentions federal law and its application to the loan agreement and the Tribe. J.A. 292 (capitalization in original). It provides, in relevant part:
You understand and agree that this [Loan] Agreement is governed only by Tribal Law and such federal law as is applicable under the Indian Commerce Clause of the United States Constitution . . . . [N]either we nor this [Loan] Agreement are subject to any other federal or state law or regulation, nor to the jurisdiction of any court, unless so stated in this [Loan] Agreement . . . . The Lender may choose to voluntarily use certain federal laws as guidelines for the provision of services. Such voluntary use does not represent acquiescence of the Tribe to any federal law unless found expressly applicable to the operations of the Tribe.
J.A. 292.
B
Plaintiffs, on behalf of themselves and a putative class, sued Defendants in federal court, alleging that AWL’s lending practices violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”),
The District Court denied the motion to compel, reasoning that: (1) the arbitration agreement was unenforceable because the arbitrator is permitted only to consider tribal law and, therefore, the arbitrator could not consider any of Plaintiffs’ claims as they are based on federal and state law; and (2) “a ‘choice of arbitrator’ provision permitting the parties to select the AAA or JAMS does not provide an available arbitral forum” because it only permitted the arbitrator to apply policies and procedures that do not “contradict the agreement or ‘Tribal law,’” J.A. 5 (quoting MacDonald v. CashCall, Inc., 883 F.3d 220, 229-30 (3d Cir. 2018)).
Defendants appeal.
“The Federal Arbitration Act requires courts to enforce covered arbitration agreements according to their terms.” Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1412 (2019) (citing
A
We first address who decides whether the arbitration agreement is enforceable: the court or the arbitrator. The
“[P]arties may agree to have an arbitrator decide not only the merits of a particular dispute but also . . . ‘whether the parties have agreed to arbitrate,’” in what is called a “delegation clause.” Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524, 529 (2019) (quoting Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 68-69 (2010)). The Supreme Court explained that “before referring a dispute to an arbitrator, the court determines whether a valid arbitration agreement exists. But if a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court may not decide the arbitrability issue.” Id. at 530 (citation omitted). In accordance with this principle, our Court has held that when an agreement contains a clause that delegates to an arbitrator the decision whether an arbitration agreement is enforceable, “[a] court cannot reach the question of the arbitration agreement’s enforceability unless a party challenged the delegation clause and the court concludes that the delegation clause is not enforceable.” MacDonald, 883 F.3d at 226. While a party “must ‘challenge the delegation provision specifically,’” id. (quoting Rent-A-Center, 561 U.S. at 70, 72) (alteration omitted), “a party may rely on the same arguments that it
Plaintiffs contested the delegation clause in their opposition to the motion to compel, and they challenged the clause based upon arguments they made concerning the enforceability of the entire arbitration agreement. Pls.’ Opp’n to Mot. to Compel at 15, ECF No. 100 (“A contract that contains an FAA-prohibited prospective waiver is unenforceable in its entirety, delegation clause included . . . . As a result, any delegation clause here is unenforceable for the same reason the rest of the arbitration contract is unenforceable.”). Because “[t][hese explicit references to the delegation clause are sufficient to contest it,” MacDonald, 883 F.3d at 227, we will proceed to examine Plaintiffs’ enforceability arguments.
Plaintiffs contend that the arbitration agreement, including the delegation clause, is unenforceable under the prospective waiver doctrine. The prospective waiver doctrine in the arbitration context refers to a situation in which the parties agree that, if disputes arise between them, then they waive the right to rely on federal law. The Supreme Court has observed that such waivers violate public policy. E.g., Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228, 236 (2013). Thus, while federal policy favors arbitration, “the Supreme Court has . . . made clear that arbitration is only appropriate so long as the prospective litigant effectively may vindicate his or her statutory cause of action in the arbitral forum.” Blair v. Scott Specialty Gases, 283 F.3d 595, 605 (3d Cir. 2002) (internal quotation marks, alterations, and citations omitted). Put differently, while arbitration may be a forum to resolve disputes, 14 Penn Plaza LLC v. Pyett, 556 U.S. 247, 266 (2009), an agreement to resolve disputes in that forum will be enforced only when a litigant can pursue his statutory rights there, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985). Accordingly, arbitration agreements that limit a party’s substantive claims to those under tribal law, and hence forbid federal claims from being brought, are unenforceable. Gingras, 922 F.3d at 117-18; Dillon v. BMO Harris Bank, N.A., 856 F.3d 330, 332 (4th Cir. 2017); Hayes v. Delbert Servs. Corp., 811 F.3d 666, 668 (4th Cir. 2016); Smith v. W. Sky Fin., LLC, 168 F. Supp. 3d 778, 785 (E.D. Pa. 2016).8
1
To determine whether the prospective waiver doctrine applies, we must identify the law that would apply in arbitration under the agreement here, and thus what claims Plaintiffs could pursue in arbitration. To do so, we interpret the contract. We apply the forum’s contract interpretation law, DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463, 468 (2015), unless the contract has a choice-of-law provision, see Gay v. CreditInform, 511 F.3d 369, 389-90 (3d Cir. 2007). Here, the applicable law subsection of the arbitration agreement states that tribal law applies, and the governing law section of the loan agreement states that “this [Loan] Agreement is governed only by Tribal Law and such federal law as is applicable under the Indian Commerce Clause of the United States Constitution.” J.A. 292. However, because “the parties have not provided the Court with any such [tribal] law” nor have they identified any “such federal law as is applicable under the Indian Commerce Clause” regarding contract interpretation, we will “apply the forum’s contract interpretation principles.” MacDonald, 883 F.3d at 228.
a
Other language in the arbitration agreement also demonstrates that the rule of decision in arbitration is tribal law. The arbitration agreement provides that (1) “[t]he arbitrator has the ability to award all remedies available under Tribal Law,” J.A. 291; (2) “the arbitrator may award fees, costs, and reasonable attorneys’ fees” “[u]nless prohibited by Tribal Law,” J.A. 290; (3) if the parties conduct the arbitration off tribal land, the lender’s “accommodation” of that request “shall not be construed . . . to allow for the application of any law other than Tribal Law,” J.A. 291; and (4) the arbitration firm can only apply “policies and procedures” that “do not contradict . . . Tribal Law,” J.A. 290.
b
Defendants, nonetheless, contend that borrowers may bring claims in arbitration that arise under “such federal law as is applicable under the Indian Commerce Clause.” To make this argument, Defendants interpret the arbitration agreement’s applicable law subsection to incorporate the term “such federal law as is applicable under the Indian Commerce Clause” from the governing law section because the applicable law subsection states that “[t]he arbitrator shall apply Tribal Law and the terms of this [Loan] Agreement,” and the governing law section is a term of the loan agreement. We disagree with Defendants’ interpretation for two reasons.
First, “the specific controls the general when interpreting a contract.” Dominic’s Inc. v. Tony’s Famous Tomato Pie Bar & Rest., Inc., 214 A.3d 259, 269 (Pa. Super. Ct. 2019) (citation omitted). Because the arbitration agreement specifically directs that tribal law applies in arbitration, with no mention of any other body of law, and because the Indian Commerce Clause language comes from a separate section in the general loan agreement, the arbitration agreement’s applicable law subsection is “more likely to reflect the intent
Second, if we read the phrase “such federal law as is applicable under the Indian Commerce Clause” in the context in which it appears, it becomes clear that that phrase does not provide a separate rule of decision for arbitration. Khawaja v. RE/MAX Cent., 151 A.3d 626, 632 (Pa. Super. Ct. 2016) (instructing that we consider the context in which a contractual phrase appears). The phrase appears in a section separate from the arbitration agreement, titled “GOVERNING LAW.” J.A. 292 (capitalization in original). That section further states that “neither we nor this [Loan] Agreement are subject to any other federal or state law or regulation,” meaning that the lender and loan agreement are subject only to tribal law and some limited group of unidentified “federal law as is applicable under the Indian Commerce Clause.” J.A. 292. Read in its entirety, the governing law section, therefore, identifies only the laws to which the Tribe and loan agreement are subject. The laws to which the Tribe and loan agreement are subject, however, are not the same as what laws can serve as the basis for claims in arbitration.10
2
Because the arbitration agreement mandates that only tribal law applies in arbitration, federal law does not. As a result, the arbitration agreement effects as an impermissible prospective waiver of statutory rights. The Supreme Court has said that “a provision in an arbitration agreement forbidding the assertion of certain statutory rights” renders an arbitration agreement unenforceable. Italian Colors, 570 U.S. at 236; see also Mitsubishi,
tribal-law claims, the arbitration agreement here requires a borrower to prospectively waive claims based on any other law. Like our sister circuits, we conclude that this requirement violates public policy and renders the arbitration agreement unenforceable. Gingras, 922 F.3d at 117-18; Dillon, 856 F.3d at 332; Hayes, 811 F.3d at 668.
Defendants’ arguments to the contrary are unpersuasive. First, Defendants argue that for an agreement to be invalid under the prospective waiver doctrine, it must affirmatively disclaim federal law. As support for this affirmative-disclaimer requirement, Defendants rely on language from Supreme Court opinions where the Court declined to credit arguments that the arbitrator would not entertain federal claims because it was not clear from the contracts that the contract waived federal rights. That is not the case here because the arbitration agreement is clear that only tribal-law claims are available, and that pronouncement is enough to show that federal-law claims are unavailable. Gingras, 922 F.3d at 127 (“By applying tribal law only, arbitration . . . appears wholly to foreclose [borrowers] from vindicating rights granted by federal and state law.”); Dillon, 856 F.3d at 335-36 (concluding that because the arbitration agreement provides “that the arbitrator shall not allow for the application of any law other than tribal law,” the court “interpret[s] these terms in the arbitration agreement as
Second, the individual Defendants assert that the arbitration agreement is not an impermissible prospective waiver because borrowers can still “vindicate the substance” of their RICO claim under tribal law. Curry Br. at 36 (emphasis omitted).12 That is, the individual Defendants argue that Plaintiffs could bring a RICO-like claim under tribal law and receive similar relief. The Supreme Court, however, has framed the prospective waiver question as whether the contract effects an “elimination of the right to pursue [a] remedy.” Italian Colors, 570 U.S. at 236 (emphasis omitted); see also Mitsubishi,
Finally, even if we interpreted the arbitration agreement to allow borrowers to assert claims in arbitration arising under “such federal law as is applicable under the Indian Commerce Clause,” the agreement still effects a prospective waiver. RICO, the federal claim Plaintiffs brought here, is a law passed under Congress’ Interstate and Foreign Commerce Clause powers. E.g., Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786, 788 n.4 (3d Cir. 1984), abrogated in part
Furthermore, the text of the loan agreement makes clear that the phrase “such federal law as is applicable under the Indian Commerce Clause” does not capture all federal law or even laws of general applicability. By using the language “such federal law as is applicable under the Indian Commerce Clause,” the contract conveys a reference to some subset of federal laws, which notably Defendants never identified to this Court. Even if that subset had been identified, it would demonstrate that at least some federal claims would be excised and hence could not be relied upon (for example, RICO). Our interpretation of the clause “such federal law as is applicable under the Indian Commerce Clause” as referring to a subset of federal law is bolstered by (1) other language in the same section that states that the Tribe and the loan agreement are not “subject to any other federal or state law or regulation,” J.A. 292, and (2) several statements in the loan agreement that the lender’s voluntary use of federal laws as guidelines “does not represent acquiescence of the Tribe to any federal law unless found expressly applicable to the operations of the Tribe,” J.A. 292; see also J.A. 281 (stating that the lender’s use of
C
The prospective waiver of statutory rights renders the entire arbitration agreement (delegation clause included) unenforceable because the prohibited waiver here is not severable.14 “Pennsylvania courts have held that if
The arbitration agreement here repeatedly states that only tribal law claims can be brought in arbitration. Were we to remove the invocations of tribal law in the arbitration agreement, we would “impermissibl[y] rewrit[e]” the contract. MacDonald, 883 F.3d at 231; accord Dillon, 856 F.3d at 336 (“[A] borrower’s] consent to application of federal law would defeat the purpose of the arbitration agreement in its entirety.”). Because tribal law provisions are “integral to the entire arbitration agreement,” they “cannot be severed.”16 MacDonald, 883 F.3d at 232.17 As a result, “the entire arbitration agreement, including the delegation clause, is unenforceable.” Id.; see also Gingras, 922 F.3d at 128 (same).18
For the foregoing reasons, we will affirm the District Court’s order denying Defendants’ motions to compel arbitration.
Notes
Ryan v. Delbert Servs. Corp., No. 5:15-cv-05044, 2016 WL 4702352, at *5 (E.D. Pa. Sept. 8, 2016) (internal quotation marks, alterations, and citations omitted).[t]he arbitrator would be expressly forbidden from relying on any federal or state law, which means that the arbitrator could not ask whether the arbitration clause—and its complete exclusion of federal law—would violate the federal public policy against arbitration clauses
that operate as a prospective waiver . . . . Quite possibly, the arbitrator would uphold the arbitration clause, because there would be no principle of federal law standing in the way. Enforcing the delegation clause would effectively allow [the lender] to subvert federal public policy and deny [the borrower] the effective vindication of her federal statutory rights before the arbitration of her claims even began.