The U.S. Court of Appeals for the Ninth Circuit recently reversed a district court’s ruling, which had denied a motion to compel arbitration of Opportunity Financial (OppFi) on the basis that the arbitration clause was substantively unconscionable due to the choice of law provision in the loan agreement containing the arbitration clause. The Ninth Circuit vacated the decision and directed the district court to refer the matter to arbitration.

The lawsuit originated from plaintiffs’ loan agreements with FinWise Bank, for which OppFi is the loan servicer. The agreements contained arbitration clauses governing all claims between the parties except those related to the clause’s “validity, enforceability, coverage or scope.” The loan agreements also provided that — other than the arbitration clause, which is governed by the Federal Arbitration Act — the agreements’ terms are governed by federal and Utah law.

In their putative class action lawsuit against OppFi, plaintiffs alleged that the loans violated California and federal usury law. OppFi moved to compel arbitration. The district court denied OppFi’s motion, holding that the arbitration clause was substantively unconscionable because it required the arbitrator to apply Utah law to the loan agreement, which would effectively “eliminate the substantive basis for [the plaintiffs] claims.” The Ninth Circuit reversed this decision, finding that the application of the loan agreement’s choice of law provision must be decided in the first instance by the arbitrator.

Our Take:

The Ninth Circuit reached the correct result. Courts are supposed to enforce arbitration agreements as they are written and allow the arbitrator to decide the issues the parties agreed to submit to arbitration. Here, the determination of the correct law to apply was delegated to the arbitrator and the district court improperly decided a substantive issue reserved for the arbitrator in invalidating the arbitration clause on unconscionability grounds.