Where Purported Forum for Arbitration is Non-Existent, Arbitration Agreement Will Not be Enforced

MacDonald v. Cashcall, Inc., 883 F.3d 220 (3d Cir. 2018).  There have been some outlandish circumstances in decisions involving arbitration, especially in the class action context.  But today’s case, a putative class action in which Judge Shwartz wrote a wise opinion for a unanimous Third Circuit panel, takes the cake.  Applying a “plenary” standard of review, the court affirmed a District Court ruling that had denied defendants’ motion to compel arbitration.  As Judge Shwartz summarized, “[b]ecause the parties’ agreement directs arbitration to an illusory forum, and the forum selection clause is not severable, the entire agreement to arbitrate, including the delegation clause, is unenforceable.”

Plaintiff signed an electronic agreement for a loan.  The agreement provided that any disputes “will be resolved by Arbitration, which shall be conducted by the Cheyenne River Sioux Tribal [“CRST”] Nation by an authorized representative in accordance with its consumer dispute rules and the terms of this Agreement.”  But Judge Shwartz observed (citing Seventh and Eleventh Circuit rulings) that, “as our sister circuit courts have noted, such a tribal arbitral forum does not exist.”  Indeed, defendants did not dispute that its purported arbitration forum was not available.

Defendants contended, however, that alternative fora, such as the American Arbitration Association or JAMS, were available.  Judge Shwartz rejected that argument, noting that it contradicted the language of the parties’ agreement quoted above.

Next, defendants asserted that if the arbitration forum provision was unenforceable, it should be severed from the rest of the agreement, since the agreement permitted severance of invalid provisions.  Judge Shwartz did not agree.  She observed that New Jersey law bars severance of a contractual provision where severance would “defeat the central purpose of the contract.”  Here, the contractual language quoted above, as well as other terms that repeatedly iterated that  CRST jurisdiction and CRST law governed “exclusive[ly],” showed that “the CRST arbitration provision was an integral, not ancillary, part of the parties’ agreement to arbitrate,” and it could not be severed despite the severability clause.  Severance would have constituted an impermissible re-writing of the agreement.

In a footnote, the panel observed that Judge Vanaskie, while agreeing with the foregoing rationale, would also have affirmed on the basis that the agreement “impermissibly waives a borrower’s federal and state statutory rights, thereby rendering the arbitration clause unenforceable.”  He endorsed a Fourth Circuit opinion that “a party may not underhandedly convert a choice of law clause into a choice of no law clause.”

On any basis, the loan agreement’s arbitration clause, and the overall agreement itself, pervaded as it was by CRST provisions though the tribe had nothing to do with the loan, was deservedly rejected by the District Court and by Judge Shwartz and the panel.