I’ll give you four factors, and the last three don’t count: Lovelace film is fair use

Arrow Productions, LTD. v. Weinstein Company LLC, No. 13 Civ. 5488 (S.D.N.Y. Aug. 25, 2014)

Someday I might stop blogging copyright fair use and trademark defendant wins on the pleadings, but today is not that day.  Also, I appreciate the court’s avoidance of smutty puns; given the topic, not all judges would have remembered to respect the person whose story this case is ultimately about.

Arrow, which owns the copyright to Deep Throat and marks for DEEP THROAT and LINDA LOVELACE, sued Weinstein for copyright and trademark infringement based on the movie Lovelace, a biography of Linda Lovelace, Deep Throat’s star.  The court characterized Deep Throat as a “famous pornographic film replete with explicit sexual scenes and sophomoric humor.”  The plot features a woman who can’t achieve orgasm until a doctor tells her that she can only achieve orgasm by performing oral sex because her clitoris is in her throat.

Lovelace, by contrast, is a biographical film that “provides a two-pronged look at the tragic life of Linda Lovelace.”  It documents her marriage to Chuck Traynor, her decision to enter the pornography business, and her development into a cultural icon. “Then, the film provides a behind-the-scenes depiction of Lovelace’s life that focuses on the physical and emotional abuse that Traynor inflicted upon her, and the manner in which he coerced her into participating in Deep Throat and its subsequent marketing.”  The film shows how Lovelace, once the most famous pornography star in the business, became an outspoken critic of pornography.  It has no pornographic scenes or even nudity.

Arrow identified three scenes in Lovelace copied from Deep Throat.  Deep Throat “opens with Lovelace driving down the road in a blue Cadillac” while the credits roll.  This scene has music but no dialogue.  Lovelace provides “a behind-the-scenes depiction of the filming of this scene,” roughly thirty minutes into the film.  The Cadillac is red; the film depicts Lovelace struggling with nerves and uncertainty while the director tells her to “Just drive and pretend we’re not here,” which she ultimately does.

The second scene was Deep Throat’s second scene (and first pornographic scene).  Lovelace arrives at home to find a man performing oral sex on her housemate, Helen, in the kitchen. Lovelace says to Helen, “that’s a pretty sight. I hope that I’m not interrupting anything,” then when says she’s not, begins to put away some groceries.  Helen asks Lovelace for a cigarette and asks the man, “mind if I smoke while you’re eating?”  In Lovelace, this scene is recreated about halfway through and shown during a red-carpet screening of Deep Throat.  Lovelace sits with Hugh Hefner, watching the film and discussing her future, intercut with shots of the recreated scene.  There are no groceries in the recreated scene, and Lovelace is complaining to Helen about her inability to achieve orgasm, saying “there’s got to be more to sex than a lot of little tingles. There’s got to be bells ringing, dams bursting, or bombs going off.”  Helen asks, “you want to get off or wreck a city,” causing the screening audience to erupt in laughter.  Later in the film, during the behind-the-scenes part of the story focusing on Lovelace’s suffering, this scene returns, with the detail that during the screening, Hefner asks Lovelace to perform oral sex on him in an apparent quid pro quo.

The third scene was the pivotal diagnosis scene.  In Deep Throat, Lovelace meets with Dr. Young, “an eccentric and quirky man [who provides] no evidence that he is an actual doctor apart from his title. His office is in his home and he is assisted by a young nurse, who also doubles as his sexual companion.”  He starts the consultation blowing bubbles with a children’s toy.  Lovelace tells Dr. Young that there must be more to sex than “little tingles” and that she wants “to hear bells, bombs, and dams bursting.” Dr. Young performs a vaginal exam, using a telescope and his fingers.  He then determines that her clitoris is actually in her throat. This diagnosis makes Lovelace cry; Dr. Young consoles her and encourages her to try deep throating him with the encouragement, “try it. You’ll like it.” “A pornographic scene ensues and Lovelace is finally able to achieve an orgasm.”

In Lovelace, this scene appears in a behind-the-scenes account of its filming.  The first half (diagnosis) is filmed one day, and the second (sexual content) is filmed on the next.  Lovelace shows the performers as well as the directors and producers in the frame.  Dr. Young doesn’t conduct a full physical exam, though the bubbles, key dialogue, and Lovelace crying are the same as in Deep Throat.  When the first day of filming ends, Traynor is aggravated and intimidates Lovelace; the producers decide to get him out of the way for filming the pornographic parts of the scene.  Lovelace shows the directors and producers in the frame for that second half as well.  One of the producers jokes, “we’re all gonna win Oscars.”  Dr. Young ejaculates prematurely in what’s clearly the first take; the surprised producers mock him.  Lovelace sheepishly asks, “I’m really sorry, did I do something wrong?” The producers and director reply, “no…no…no.”

To the defense: fair use is a mixed question of law and fact, but fair use can be determined on the pleadings despite the requisite caution.  The factual record here was “complete” and discovery wouldn’t help.  (This is because the only issue for which extrinsic evidence might be developed would go to a market for copyright-owner-licensed biographies; because such a market is legally irrelevant, nobody cares.)  “All that is necessary for the court to make a determination as to fair use are the two films at issue—Deep Throat and Lovelace.”

Purpose and character of the use: A use listed in the preamble to §107 is presumptively fair.  Bill Graham explained that “[b]iographies in general and critical biographies in particular, fit comfortably within these statutory categories of uses illustrative of uses that can be fair.”  Thus, Lovelace, a critical biographical work, was entitled to a presumption of fair use.  Lovelace’s use or recreation of three scenes from Deep Throat was transformative, “adding a new, critical perspective on the life of Linda Lovelace and the production of Deep Throat.” (Note the implicit, and entirely correct, rejection of the folly and detour of Salinger v. Colting’s suggestion that criticism of an author wasn’t transformative of a work; providing insight on Linda Lovelace and providing insight on Deep Throat are linked and neither can nor should be distinguished for purposes of fair use analysis.) 

The three scenes were recreated to focus on a defining part of Lovelace’s life: her starring role in Deep Throat. Two of the scenes provided a behind-the-scenes perspective to show Lovelace’s apprehension and unfamiliarity during filming.  The scenes were “markedly different from the originals—they include actors playing the parts of the director, producers, sound directors, and videographers as well as entirely new dialogue surrounding the filming of the shots.” But, “most importantly,” Lovelace portrayed Lovelace as a vulnerable amateur. Whereas the driving scene in Deep Throat doesn’t meaningfully advance the plot but just allows the display of the credits, Lovelace makes the driving scene important to establish the theme of Lovelace’s anxiety and amateurism.

Likewise, the infamous Dr. Young scene was split in two and became “a behind-the-scenes account of its young, inexperienced, and susceptible star,” stripped of the sexually explicit part of Dr. Young’s physical exam as well as of the pornographic components of the scene.  Dialogue was copied, but as Bill Graham said, “it is both reasonable and customary for biographers to refer to and utilize earlier works dealing with the subject of the work and occasionally to quote directly from  such works.”  Dividing the scene in two allowed Lovelace to highlight Lovelace and Traynor’s fraught relationship, furthering the most important plotline in the film—“Traynor’s control, abuse, and manipulation of Lovelace.”

As for the scene with Helen, it too had an “entirely different context.” The recreated scene appeared before a screening audience, with different dialogue and a different set, but more importantly “an entirely different purpose.”  Lovelace removed the nudity and instead juxtaposed the positive response to the film with Lovelace’s suffering, a central theme of the film.

That Lovelace was made for profit was of little significance.  Nor was the creative nature of the copied work, even though that favored Arrow. Factor three basically asks whether the defendant took no more than necessary given its purpose.  The three scenes at issue last about four minutes, out of a 61-minute running time for Deep Throat; “each scene, as discussed above, serves a distinct and important purpose in telling the story of Linda Lovelace.”  Thus Lovelace didn’t copy more than necessary.  Nor did it copy the core of Deep Throat.  The “heart” of Deep Throat was pornographic depiction of deep throating, while Lovelace was a critical biography.  “[G]iven that the two films have entirely different purposes, it is impossible that defendants could have copied the core of Deep Throat.”  Factor three favored fair use.

Factor four: Courts must consider harm to derivative markets, but only “if the market is traditional, reasonable, or likely to be developed and is not a protected transformative use.” A copyright owner’s willingness to license transformative uses can’t prevent others from entering fair use markets.  “Lovelace could not supplant demand for Deep Throat, because the two films have entirely different subjects—one is a pornography and the other is a critical biography.”  As for derivative markets, Arrow alleged that it licensed Deep Throat for Inferno, a film that was also to be a biography of Linda Lovelace, but that Inferno lost funding when the press began to report on the production of Lovelace.  That doesn’t matter because Lovelace was transformative.  (RT: Indeed, the evidence of a lost market in Cariou was much more persuasive, and still didn’t count.) “[P]laintiff cannot prevent defendants from entering this fair use market.”

Fair use as a matter of law.  (Sadly, though, the court declined to award attorneys’ fees to defendants, stating that the claims weren’t “so unreasonable” as to merit a fee award.  I know this is a big production company and all, but until courts are willing to pull the trigger on fees for claims this obviously unwinnable, they’ll keep getting made.)

Now to trademark infringement and dilution.  Rather than going the Rogers/noncommercial use absolute exemption route, the court chose an approach that is in some ways even stronger: it rejected the claims as insufficiently pled as a matter of law. For infringement, Arrow alleged that defendants infringed by “advertising and distributing Lovelace, a movie whose title infringes upon plaintiff’s Linda Lovelace mark, and advertising and promoting Lovelace by repeated mention of plaintiff’s ‘Deep Throat’ movies and mark.”  Further, the complaint alleged that defendants’ “use of ‘Lovelace’ and ‘Deep Throat’ are false designations of origin which are likely to cause confusion, to cause mistake and to deceive as to the affiliation, connection or association with plaintiff as to the origin, sponsorship, or approval of Lovelace by plaintiff.”

But Arrow failed to plausibly allege that consumers were likely to be confused. These were mere conclusory labels.  Arrow didn’t offer any reason that consumers would believe that Arrow was involved with Lovelace’s production.

So too with dilution (both blurring and tarnishment).  Arrow alleged that Lovelace was “likely to cause dilution by blurring the distinctiveness of plaintiff’s famous marks Linda Lovelace and Deep Throat” and “likely to cause dilution by tarnishment by harming the reputation of Plaintiff’s famous marks Linda Lovelace and Deep Throat.”  These conclusory allegations merely recited the elements of the cause of action, without any factual basis for a claim of impaired distinctiveness or tarnished reputation of the marks.  (I remain interested to see how one could allege facts supporting a dilution claim, particularly blurring.)

Bring me my (bonded) leather: deceptiveness claims were just opinion

Design Resources, Inc. v. Leather Indus. Am., 2014 WL 4159991, No. 1:10CV157 (M.D.N.C. Aug. 19, 2014)

DRI sued defendants LIA and Ashley under the Lanham Act and the North Carolina Unfair and Deceptive Trade Practices Act.  Dr. Nicholas Cory was a research scientist and the director of LIA, which was a trade association representing leather sellers in the US. Dr. Cory headed LIA’s research laboratory. The core of the case was statements Dr. Cory made to a trade magazine, Furniture Today, about “bonded leather.”  (Previous discussion, with comment from someone who thinks LIA’s hands aren’t clean.)

“Leather” traditionally means upholstery derived entirely from the hide of an animal. There’s alsy a product called bycast/bicast, “generally lower quality leather coated with polyurethane and printed with a pattern to appear as it is genuine leather.”  Bonded leather was originally a synthetic material with leather fibers glued together to form a complete layer. DRI created a new version by attaching leather fibers, not a complete layer, under/behind a synthetic furniture covering consisting of a polyurethane face. DRI sold this new product under the name NextLeather®.  (Given the facts of this case, it seems to me that this registration is problematic.)

DRI contacted Dr. Cory in 2006 to ask if NextLeather could be labeled as leather in the US. Without a physical sample, Dr. Cory responded, “ABSOLUTELY NOT!” be labeled as leather and that it would have to be called “Bonded leather,” “Reconstituted leather,” or “Not leather” under the applicable FTC regulations. Dr. Cory offered to have his lab perform a chemical analysis to determine the percentage of leather fibers used in NextLeather, which was a requirement for labeling bonded leather under FTC regulations.

In 2006, defendant Ashley began running ads with the caption “Caveat Emptor.”  One asked, “Is It REALLY LEATHER?” The said “[s]ome upholstery suppliers” were “using leather scraps that are mis-represented as leather; adding a denim barrier to this material and using it for bicast, and as corrected grain leather in locations where you would expect top grain.” The ad concludes: “Know What You Are Buying” and “REMEMBER ... The Overseas Manufacturer Has NO Liability In The U.S.A. YOU DO!”  Ashley contended that it wasn’t aware that DRI sold bonded leather until over two months after the first ad ran, and also argued that its ad was referring to a Chinese product consisting of “glued-together leather ‘scraps’ for backing material” as opposed to NextLeather’s “ground-up leather ‘shavings.’”  DRI nonetheless argued that the ad specifically targeted it and accused it of violating the law, at a time coinciding with a criticial industry meeting where retailers make many purchasing decisions.

In 2007, Ashley asked Dr. Cory if it could market and label a bonded leather product similar to NextLeather as bonded leather. Dr. Cory responded it would be deceptive to label such a product as bonded leather. At Ashley’s request, Dr. Cory conducted an interview with Furniture Today to warn of the potential confusion from labeling these new products (consisting of leather scraps glued to the underside of a synthetic cover) as bonded leather.  

DRI’s claims against LIA stemmed from two Furniture Today articles.  One was by Joan Gunin, titled “Chemist fears confusion over imitators may hurt category.” The article states: “‘To call it “leather” is outright deception, outright fraud,’ said Cory, director of the Leather Research Laboratory at the University of Cincinnati, of bonded leather. ‘It’s not real leather.... It’s a synthetic that has leather fibers glued to the underside.’”  The other was by Susan M. Andrews, titled “For consumers’ sake, let’s not call it ‘bonded leather.’” Dr. Cory is quoted as stating “calling these products bonded leather ‘is deceptive because it does not represent its true nature. It’s a vinyl, or a polyurethane laminate or a composite, but it’s not leather. If you tar and feather someone, does that make them a chicken?’”  Dr. Cory didn’t refer to DRI or NextLeather by name, but one article mentioned an unaffiliated product, Oekopelle.  Furniture Today published at least 13 other articles about bonded leather during this period, none quoting Dr. Cory but many focusing on the deceptive nature of the “bonded leather” label.

Meanwhile, in 2007, the FTC requested public comments on its Leather Guides, which provide that “[a] material in an industry product that contains ... bonded leather and thus is not wholly the hide of an animal should not be represented, directly or by implication, as being leather.” LIA submitted comments seeking to clarify whether the practice of adhering leather fibers to the bottom of a synthetic product (as opposed to leather fibers glued together to form a continuous layer) could be marketed as bonded leather. In 2008, the FTC declined to change the Leather Guides, concluding that their provision requiring disclosure of the leather fiber content gave adequate information to consumers.

The court granted summary judgment to LIA because Dr. Cory’s statements weren’t false or misleading.  First, as to the Gunin article with its “outright fraud”/“not real leather” statements, the court noted that the Leather Guides “unambiguously prohibit representing bonded leather as simply ‘leather,’” and DRI admitted that describing NextLeather by the unqualified term “leather” would be both false and misleading. “[I]n light of the governing FTC Leather Guides’ provisions, no reasonable juror could find the above quote literally false.”

DRI argued that the necessary implication of Dr. Cory’s statements was that it was deceptive and fraudulent to sell bonded leather as such because the phrase contains the word ‘leather.’”  But this wasn’t a necessary implication.

DRI then argued misleadingness, claiming that “many [customers] refused to purchase bonded leather due to their perception that they could face legal liability for selling it.” But the evidence—two depositions—failed to show consumer confusion.  One deponent, Silver, testified that consumers generally “weren’t confused about the product [bonded leather],” but “[retailers] got this controversy and stuff in the thing you’re being deceptive. They didn’t want to get involved in it.”  His references to confusion about bonded leather didn’t link Dr. Cory’s statements to confusion.  (As stated, that’s an error of law: the question of whether the statements were misleading concerns whether the statements would likely confuse a reasonable consumer.  If similar statements elsewhere caused DRI’s harm, that’s a damages issue; it doesn’t make these statements not misleading.)  Regardless, even testimony about one retailer, Macy’s, being confused wasn’t enough to show that Dr. Cory’s statement misled a “substantial portion of consumers.”  The other deposition didn’t identify any potential customer who was confused by or based a purchasing decision on Dr. Cory’s statements.  Summary judgment for LIA.

As for the Andrews article, which stated that “calling these products bonded leather ‘is deceptive because it does not represent its true nature,’” DRI argued that this was literally false because FTC regulations were clear and Dr. Cory knew that the labeling was lawful.  The court found Dr. Cory’s statement to be nonactionable lay opinion.  The article “clearly and accurately described the composition of bonded leather,” and wasn’t a discussion of legal standards generally or NextLeather specifically. Rather, the article stated that, “[t]he term ‘bonded leather’ is convenient shorthand within the industry, but it’s bound to confuse consumers who are likely to hear only the word ‘leather.’”  “The disclosed facts and larger context of the article demonstrate that Dr. Cory was giving his opinion on how a customer would perceive the term bonded leather.”  His claim that customers would be deceived wasn’t like a factual, falsifiable claim.  (Hunh?  I understand that, considered as legal opinion, the statement’s not actionable, but it is blatantly obvious how a claim about consumer understanding of a term could be tested and verified or falsified.  A better understanding: in the context of the article, he’s clearly giving an opinion about deceptiveness to consumers rather than claiming that he’s verified this deceptiveness with empirical evidence, and the audience for Furniture Today would understand the nature of his claim.)

Again, there was no necessary implication that it was deceptive and fraudulent to sell bonded leather as such because the phrase contains the word ‘leather.’”  Even assuming that Dr. Cory was offering a legal conclusion about NextLeather’s labeling under the FTC Guides, “[a]bsent a clear and unambiguous ruling from a court or agency of competent jurisdiction, statements by laypersons that purport to interpret the meaning of a statute or regulation are opinion statements, and not statements of fact.” Dr. Cory spoke while the FTC was considering the issue, so summary judgment was also appropriate with respect to this article.

Ashley’s Caveat Emptor ad: DRI again argued falsity by necessary implication because the ad warned potential purchasers of bonded leather to be aware of “leather scraps that are misrepresented as leather,” but DRI never labeled NextLeather as leather alone.  But this argument rested on the unproven assumption that Ashley’s reference to bonded leather referred specifically and exclusively to NextLeather.  To reach DRI’s conclusion, the reader would have to infer that the ad referred to “bonded leather” instead of bicast or similar products; a Furniture Today article so characterized Ashley’s ads (“Ashley is urging buyers to ‘be aware’ of bonded leather.”), and an expert report indicated that informed readers of the ads understood them to be about bonded leather, but the Furniture Today article explicitly mentioned a number of other companies making bonded leather.  Given that explicit falsity requires that a reader “recognize the claim as readily as if it had been explicitly stated,” the leap to NextLeather was too far.

Nor could DRI prove implicit falsity. Deponent Greenfield said that Ashley’s ads “opened our eyes” and that “everyone was talking” about the ad/bonded leather, but he viewed the ad as Ashkey’s opinion.  And he didn’t link bonded leather to NextLeather in a way that indicated consumers would perceive them as synonymous. Silver did testify that the ad was misleading and frightened people into not buying, but didn’t identify any specific potential customer who was deceived, and he admitted that he didn’t know about other furniture industry companies’ operations.  Summary judgment for Ashley.

The state law claims similarly failed, whether analyzed under North Carolina or Washington law.  Among other things, DRI didn’t show that the Ashley ads proximately caused a legally cognizable injury to DRI’s business.

DRI also alleged negligent misrepresentation on the theory that by providing advice via email to DRI, Dr. Cory owed DRI a duty of care in rendering such advice that Dr. Cory breached by: (1) “failing to disclose and concealing his allegiance to his other clients and the leather manufacturing industry members of LIA”; (2) taking a “public position contrary to the advice he had given to DRI”; and (3) “calling DRI a fraudster after it followed his advice.”  But there was no authority for the proposition that “a testing facility owes a legal duty to refrain from expressing opinions (arguably) contradicting advice given to a prior client.” Without a legal duty owed, there could be no claim.

Consumers can't be forced to use nonexistent arbitration proceeding

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.