In Hayes v. Delbert Servs. Corp., No. 15-1170 (4th Cir. Feb. 2, 2016), the Fourth Circuit refused to enforce an arbitration agreement that forbid pursuit of federal statutory rights by mandating application of tribal law.

Western Sky was an online lender owned by a member of the Cheyenne River Sioux Tribe (the “Tribe”) and located on reservation land. From the reservation, Western Sky issued payday loans with staggering interest rates to consumers across the country. The loan issued by Western Sky to named Plaintiff-Appellant James Hayes (“Hayes”) was transferred to other servicing and collection firms and finally transferred to Defendant-Appellee Delbert Services Corporation (“Delbert”) as loan servicing agent. Delbert had no tribal affiliation.

By their terms, Western Sky’s payday loans evidently violated many state and federal lending laws, but Western Sky’s loan agreement provided that it was subject to the laws and jurisdiction only of the Tribe and that no other state or federal law or regulation applied. The agreement provided that any disputes must be resolved by binding arbitration conducted by a representative appointed by the Tribe. The arbitration clause purported to cover all potential claims, whether based on tribal, federal, or state law. Another provision stated that the arbitrator must not apply any law other than the law of the Tribe. The Western Sky agreements signed by Plaintiffs provided that the borrower had a right to select the AAA, JAMS, or another organization to administer the arbitration. Although disputed, evidence suggested that Western Sky added this provision because the tribal arbitration mechanism proved in practice to be illusory.

On behalf of several other individuals whose Western Sky payday loans were also serviced by Delbert, Hayes filed a putative class action against Delbert for unlawful collection practices that violated the Fair Debt Collection Practices Act and Telephone Consumer Protection Act—both, federal laws. Hayes also sought declaratory judgment that the forum selection and arbitration clauses of the loan agreement were unenforceable. Delbert moved to dismiss the action arguing that (1) the forum selection clause and the doctrine of tribal exhaustion barred Plaintiffs from pursuing their claims in federal court; and (2) the dispute must be referred to arbitration under the loan agreement’s arbitration provision.

Although the district court decided that Delbert could not enforce the forum selection clause and the doctrine of tribal exhaustion did not apply, the court concluded that the arbitration provision was enforceable. The district court acknowledged that other courts in Western Sky-related litigation had rejected the arbitration provision in those loan agreements, but concluded that the arbitration provision in this case gave the borrowers recourse to well-recognized arbitration organizations including AAA and JAMS, and therefore, the arbitration provision was enforceable. The district court issued an order compelling arbitration, from which Plaintiffs appealed. Delbert conditionally cross-appealed the district court’s orders rejecting the other grounds asserted for dismissal.

The Fourth Circuit concluded that the arbitration agreements here failed because they purported “to renounce wholesale the application of any federal law to [P]laintiffs’ federal claims.” Although Western Sky was a tribal entity, Delbert was not. The Fourth Circuit reasoned that “a party may not underhandedly convert a choice of law clause into a choice of no law clause—it may not flatly and categorically renounce the authority of the federal statutes to which it is and must remain subject.” Arbitration agreements can include procedural restrictions such as waiver of class action relief or waiver of a jury trial, but they cannot substantively waive federally protected rights. The Western Sky arbitration agreements in this case purported to waive Plaintiffs’ federal statutory rights through the guise of a choice of law clause and, therefore, were held unenforceable.