Consumer arbitration has been on the ropes for some time now, with consumer advocates and plaintiffs’ attorneys railing against these provisions, which limit a consumer’s ability to file a lawsuit in court, as unfair and oppressive. The U.S. Congress has taken up the cause of banning consumer arbitration with Section 1028 of Senator Christopher Dodd’s Restoring American Financial Stability Act of 2010 specifically authorizing the Consumer Financial Protection Bureau to ban arbitration agreements between consumers and financial firms. Indeed, in oral arguments before the U.S. Supreme Court in the employment arbitration case of Jackson v. Rent-A-Center West, Inc., Justice Ruth Bader Ginsburg noted that mandatory arbitration agreements are “very common in consumer, credit card agreements, in employment contracts,” and “one party has no say except to sign or not to sign.”
With all the hew and cry over arbitration, we can report that at least one federal district court (in Jackson v. The Payday Loan Store of Illinois Inc., 2010 U.S. Dist. LEXIS 25266 (N.D. Ill. March 17, 2010)) has sided with lenders that adopt arbitration agreements in their loan documents – even where the arbitration agreement directs arbitration to an arbitration organization no longer in the business of arbitrating consumer disputes.
Deborah Jackson and other consumers obtained payday loans from The Payday Loan Store of Illinois Inc. The agreement they signed to obtain the loan contained an arbitration clause that provided that the borrower and the lender agreed to arbitrate any claim, dispute, or controversy arising from the loan, any actions of the parties to the agreement or a third party, and the validity of the arbitration clause.
The agreement named the National Arbitration Forum, the American Arbitration Association, and JAMS (the more commonly used acronym for the Judicial Arbitration and Mediation Service). The loan agreement also banned class action arbitration, but allowed the consumer to opt out of the arbitration clause. Jackson and the other consumers did not opt out of the clause but instead sued Payday Loan Store for violations of the federal Truth in Lending Act. Payday Loan Store moved to compel arbitration.
The U.S. District Court for the Northern District of Illinois granted Payday Loan Store’s motion to compel arbitration. The court noted that the Federal Arbitration Act makes arbitration agreements in contracts valid, irrevocable, and enforceable in most cases. The consumers protested that they could not arbitrate their claims because none of the arbitration organizations named in the loan agreement were available to arbitrate the dispute and no substitute arbitration organizations were available. In the litigation, the parties agreed that NAF could not arbitrate the dispute, as NAF announced last year that it will no longer accept consumer arbitration cases, but disagreed about the other two organizations.
The consumers claimed that AAA would not accept any new arbitration case where the company is the filing party. In fact, last year, AAA placed a moratorium on consumer debt collection arbitration cases. The federal trial court rejected this reading of AAA’s policy. The court noted that if it rules that the loan agreement is enforceable and that arbitration is therefore mandated, it would be the consumers – not the lender – that would file the claim in arbitration. If the consumers did not file their claim in arbitration, they would risk dismissal of the lawsuit for failure to prosecute. Thus, the AAA policy would not preclude AAA from arbitrating this dispute.
Finally, the court examined JAMS’ policy that it would not arbitrate disputes where the arbitration agreement precludes the parties from seeking remedies in small claims court. JAMS’ Policy on Consumer Arbitrations Pursuant to Pre-Dispute Clauses Minimum Standards of Procedural Fairness provides that JAMS will only enforce an arbitration agreement that reciprocally binds all parties such that: (A) if a consumer must arbitrate her claims or all claims of a certain type, the company is so bound; and (B) no party is precluded from seeking remedies in small claims court for disputes or claims within the scope of its jurisdiction.
The plaintiffs argued that the loan agreement violated JAMS’ policy because the arbitration clause gives either party an absolute right to elect arbitration, regardless of the claim. The federal trial court rejected the plaintiffs’ argument, noting that the plaintiffs filed a federal claim under TILA that could never be heard in a state small claims court, as federal claims must be heard in federal courts. The court further held that even if none of the named arbitration organizations were available, the court could appoint a substitute arbitrator, as the selection of a single particular arbitrator was not so central to the agreement as to merit voiding it. Finally, the court upheld the class action waiver in the arbitration clause, noting that the consumers had an opportunity to opt out of the arbitration agreement but failed to do so.
While arbitration remains alive and well – for the moment – auto dealers, sales finance companies, and other lenders who include arbitration provisions in their agreements should take the time to ensure that their arbitration agreements provide a “wildcard” arbitration organization that can hear disputes. Even though the Jackson case stands as a victory for credit agreements that have not necessarily been updated on a timely basis, courts in other jurisdictions do not necessarily have to follow it.
Catherine M. Brennan is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Cathy at 410-865-5405 or by email at cbrennan@hudco.com.