Is It Time to Take a New Look at Your Arbitration Agreements?

By Casey C. Sullivan, Esq. on February 09, 2016 | Last updated on March 21, 2019

Arbitration remains an essential litigation prevention tool, and one that's regularly been given favorable legal treatment by the Supreme Court and Congress.

But two recent opinions, one from the Supreme Court and one from the Fourth Circuit, serve as an important reminder of some of the limits to arbitration agreements, at least when it comes to choice of law provisions. Here's a quick review.

"Your State's Law" or That of Czarist Russia

One of the most interesting arbitration decisions of the past year comes from the Supreme Court, and it's recent. In mid-December, the High Court struck down a California Court of Appeal's ruling that an arbitration agreement was unenforceable.

In that case, DIRECTV v. Imbrugia, DIRECTV customers had signed a service agreement which included binding arbitration, except where prohibited by "the law of your state." When consumers filed a putative class action of early termination feels, "the law of your state" was California law.

California law prevents waiving the right to arbitrate as a class, per a 2005 ruling by the California Supreme Court. Sure, the U.S. Supreme Court struck down that very ruling, as an impermissible attempt to preempt the Federal Arbitration Act. But no bother. According to the California Court of Appeals, the term "law of your state" meant the laws of California in a vacuum, without the Supreme Court's ruling.

The Supreme Court didn't buy that reading. While parties to an arbitration agreement "might choose to have portions of their contract governed by the law of Tibet, the law of pre-revolutionary Russia, or (as is relevant here) the law of California," that does not allow the courts to read out Supreme Court precedent on those laws.

The take away: Isolating the laws applicable to an agreement doesn't mean you can escape interpreting opinions altogether, whether you're a TV provider or court of appeals.

Arbitration Agreements Can't Wholly Evade the Law

Speaking of the laws of Tibet, one tribal payday lending company tried to employ something similar. In a recent arbitration case, the Fourth Circuit rejected an arbitration agreement by Western Sky Financial. Western Sky gave payday loans with interest rates of well over 300 percent. Before getting their money, borrowers agreed to have "any disputes" resolved in arbitration -- arbitration that was to be "subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe."

There was little question that Western Sky's usurious loans were illegal under state and federal law, the Fourth Circuit wrote, but under the terms of the arbitration agreement, Western Sky would be able to avoid those laws by simply contracting around them. The court was not willing to permit it. Though the Federal Arbitration Act gives parties "the freedom to structure arbitration in the way they choose," the court wrote, that freedom "does not extend to a 'substantive waiver of federally protected civil rights,'" including the right to pursue statutory remedies.

The take away here? Despite the Supreme Court's dicta about the applicability of Tibetan and Czarist laws, arbitration agreements that seek to wholly evade federal and state law are likely to be unsuccessful, at least in the Fourth Circuit.

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