On February 2, the Fourth Circuit held that an arbitration agreement “may not flatly and categorically renounce the authority of the federal statutes to which it is and must remain subject.” Because the arbitration agreement at issue sought to “avoid state and federal law and to game the entire system,” the three-judge panel concluded that the agreement was unenforceable.
In Hayes v. Delbert Services Corporation, Plaintiff originally filed a putative class action in the Eastern District of Virginia, alleging that Defendant Delbert Services Corporation violated the Fair Debt Collection Practices Act and the Telephone Consumer Protection Act. Plaintiff’s claims arose from a payday loan for which Delbert served as the servicing agent.
The loan agreement between Hayes and the original lender provided that it was “subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe,” and “no other state or federal law or regulation shall apply.” The agreement also provided that any dispute between the borrower and original lender shall be resolved by binding arbitration. Based on those provisions, Delbert moved to dismiss, claiming that the loan agreement’s forum selection clause barred Hayes from suing Delbert in federal court, and that the loan agreement required arbitration of the dispute. The district court agreed to compel arbitration.
However, the Fourth Circuit reversed and concluded that the arbitration agreement was unenforceable. “The agreement purportedly fashions a system of alternative dispute resolution while simultaneously rendering that system all but impotent through a categorical rejection of the requirements of state and federal law. The [Federal Arbitration Agreement (FAA)] does not protect the sort of arbitration agreement that unambiguously forbids an arbitration from even applying the applicable law.” In sum, the Court held: “This arbitration agreement fails for the fundamental reason that it purports to renounce wholesale the application of any federal law to the plaintiffs’ federal claims.”