Jackson v. Payday Financial, LLC, No. 12-2617 (7th Cir. Aug. 22, 2014)
The Seventh Circuit reversed the district court’s holding that it could not hear consumer claims against payday lenders doing business from a tribal location.
Martin Webb was an enrolled member of the Cheyenne River Sioux Tribe and owned/did business with the other defendant entities. Defendants made short-term loans using the internet, allegedly in violation of Illinois civil and criminal statutes. The district court held that the loan agreements required that all disputes be resolved through arbitration conducted by the Cheyenne River Sioux Tribe on the Cheyenne River Sioux Tribe Reservation, located within the geographic boundaries of South Dakota.
After further proceedings, the district court concluded that, although written tribal law was available to the public and thus to the consumers if they investigated, the arbitral mechanism detailed in the agreements didn’t exist. Thus, the court of appeals held, plaintiffs’ action shouldn’t have been dismissed because the arbitral mechanism specified in the agreement was illusory. The court of appeals also rejected defendants’ alternative argument that the loan documents require that any litigation be conducted by a tribal court on the Cheyenne River Sioux Tribe Reservation. Tribal courts “have a unique, limited jurisdiction that does not extend generally to the regulation of nontribal members whose actions do not implicate the sovereignty of the tribe or the regulation of tribal lands.” Because there was no colorable claim of tribal jurisdiction, exhaustion in tribal courts wasn’t required.
The defendants charged approximately 139% in interest each year; the $2,525 loans received by plaintiffs cost approximately $8,392. The loan agreements recite that they are “governed by the Indian Commerce Clause of the Constitution of the United States of America and the laws of the Cheyenne River Sioux Tribe” and are not subject “to the laws of any state.” Unless the plaintiff opts out within sixty days, any disputes arising from the agreement “will be resolved by Arbitration, which shall be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules and the terms of this Agreement.” Arbitration would be conducted by either “(i) a Tribal Elder, or (ii) a panel of three (3) members of the Tribal Council.” The consumer doesn’t have to pay fees or travel to the reservation but may participate by phone or video.
To the court of appeals, the case turned on whether the Tribe had an authorized arbitration mechanism available to the parties and whether the arbitrator and method of arbitration required under the contract was actually available. As plaintiffs argued, “[t]ribal leadership … have virtually no experience in handling claims made against defendants through private arbitration.” The district court found that “[t]he intrusion of the Cheyenne River Sioux Tribal Nation into the contractual arbitration provision appear[ed] to be merely an attempt to escape otherwise applicable limits on interest charges. As such, the promise of a meaningful and fairly conducted arbitration [wa]s a sham and an illusion.” The district court referenced a similar case, Inetianbor v. CashCall, Inc., 962 F. Supp. 2d 1303 (S.D. Fla. 2013), where the arbitrator selected was a tribal elder who wasn’t a lawyer, had no training in arbitration, was a co-member with Webb, and was the father of an employee of one of Webb’s companies. Arbitrators should be free of bias and conflict of interest. As the district court concluded, “No arbitration award could ever stand in the instant case if an arbitrator was similarly selected, nor could it satisfy the concept of a ‘method of arbitration’ available to both parties.” This kind of selection wasn’t a “method” in any reasonable sense of the word.
The arbitration clause was a specialized forum selection clause whose validity had to be analyzed under some sovereign's law. As a choice of law matter, the court of appeals looked to the choice of law clause in the loan agreements, which referred to the laws of the Tribe. Though there was no tribal precedent on forum selection clauses, tribal courts borrow from tribal law where necessary. So to federal law it was.
(In a footnote, the court noted a “more-than-colorable” argument that the choice of law clause shouldn’t be enforced and Illinois law ought to govern. According to the Illinois AG (amicus), the loan agreements violated Illinois public policy, which included a policy against “provisions requiring plaintiffs to adjudicate claims in a distant, inconvenient forum where, as in this case, the clause is embedded in contracts ‘involving unsophisticated consumers in small transactions in the marketplace without any real opportunity to consider [whether to accept the clause].’” Further, the plaintiffs noted that the contracts violated Illinois public policy against usury because they exceed the allowable interest rate under state law. Small consumer loans were exempted from this requirement if they complied with Illinois’s Consumer Installment Loan Act. But defendants weren’t entitled to this exemption because they weren’t licensed in the state and didn’t contend that they otherwise complied with the other consumer protections in the law, such as the protection against transfer of debt to an unlicensed owner. However, the court of appeals found it unnecessary to decide the issue, since the result was the same under anyone’s law.)
Under federal law, “[t]he presumptive validity of a forum selection clause can be overcome if the resisting party can show it is ‘unreasonable under the circumstances.’” This occurs if (1) the forum selection clause was the result of fraud, undue influence or overweening bargaining power; (2) if the selected forum is so “gravely difficult and inconvenient that [the complaining party] will for all practical purposes be deprived of its day in court”; or (3) if enforcement of the clauses would contravene a strong public policy of the forum in which the suit is brought, declared by statute or judicial decision.
Under this standard, enforcing the forum selection clause would be unreasonable. While the agreement provides for arbitration by “either (i) a Tribal Elder, or (ii) a panel of three (3) members of the Tribal Council,” the record clearly established that such a forum didn’t exist. The Tribe “does not authorize Arbitration,” it “does not involve itself in the hiring of … arbitrator[s],” and it does not have consumer dispute rules. “[A]n illusory forum is unreasonable.”
If the choice of law provision in the contract was invalid, Illinois law would then govern the validity of the choice of forum provision. Illinois also used the concept of reasonableness; the prima facie validity of a forum selection clause was defeated by the unreasonableness of this one. “[T]he clause was not the product of equal bargaining: It imposes on unsophisticated consumers a nonexistent forum for resolution of disputes in a location that is remote and inconvenient.” The usual criteria for evaluating a forum selection clause didn’t work well because they presupposed that the designated forum actually existed and was available to resolve the underlying dispute.
The related concept of unconscionability was helpful here: the choice of forum provision was both procedurally and substantively unconscionable, applying general law that was not preempted by the FAA. It was procedurally unconscionable because the Tribe lacked rules for conducting arbitrations or even for selecting arbitrators. Plus, the court of appeals agreed with amicus FTC that “[t]he inconsistent language in the loan contracts, specifying both exclusive Tribal Court jurisdiction and exclusive tribal arbitration without reconciling those provisions, also ma[de] it difficult for borrowers to understand exactly what form of dispute resolution they [we]re agreeing to.” Plus, defendants’ claims concerning the scope of tribal jurisdiction, as well as their invocation of an irrelevant constitutional provision, “may [have] induce[d] [the Plaintiffs] to believe, mistakenly, that they ha[d] no choice but to accede to resolution of their disputes on the Reservation.” Substantively, the dispute resolution mechanism set out in the loan agreements didn’t exist. “[T]here simply was no prospect ‘of a meaningful and fairly conducted arbitration’; instead, this aspect of the loan agreements ‘[wa]s a sham and an illusion.’”
The FAA didn’t preclude this conclusion. Defendants argued that the FAA preempted arbitrator bias arguments because arbitrator bias is a defense that applies only to arbitration. The court of appeals disagreed. “The arbitration clause here is void not simply because of a strong possibility of arbitrator bias, but because it provides that a decision is to be made under a process that is a sham from stem to stern.” The contract language indicated a process “conducted under the watchful eye of a legitimate governing tribal body,” but that was in fact impossible. “It hardly frustrates FAA provisions to void an arbitration clause on the ground that it contemplates a proceeding for which the entity responsible for conducting the proceeding has no rules, guidelines, or guarantees of fairness.” Likewise, there was no preemption of Illinois rules on unconscionability on the ground that they had a disproportionate impact on arbitration agreements; the court of appeals was just applying general forum selection rules.
The FAA also provides that a court can designate arbitrators if there’s a failure to name them, but that provision assumes that the only infirmity was the unavailability of a particular arbitrator or class of arbitrators. “Here, however, the likelihood of a biased arbitrator is but the tip of the iceberg.” The court couldn’t save the process by substituting an arbitrator in the absence of supervision by the Tribe or rules for arbitration. Substituting an arbitrator when the parties have agreed to arbitrate makes sense. But “[t]he contract at issue here contains a very atypical and carefully crafted arbitration clause designed to lull the loan consumer into believing that, although any dispute would be subject to an arbitration proceeding in a distant forum, that proceeding nevertheless would be under the aegis of a public body and conducted under procedural rules approved by that body.” (Atypical, really?) Parties can agree to arbitrate even if the initially designated arbitrator or the rules might change. The “auspices of a public entity of tribal governance” was a basic part of the bargain, for which there was no substitute. As a result of this unconscionability, the forum selection clause was unreasonable.
The court of appeals then rejected the defendants’ alternative argument that the forum selection clause required any litigation to be conducted in the courts of the Cheyenne River Sioux Tribe. I’m not going to go into detail on that part; here’s some interesting commentary from an Indian law perspective, focusing on the dangers the opinion poses for tribal sovereignty more generally.