My students are sometimes surprised to learn that statutory rights are, with a handful of very minor exceptions, fully arbitrable. That surprise often turns to indignation when they read Justice Scalia’s majority opinion in American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), and realize that this is true even absent class-wide proceedings. Without aggregative process, of course, the enforcement many statutory rights becomes prohibitively expensive. But Italian Colors makes it clear that individuals still have the right to pursue their statutory claims, even if doing so just doesn’t make a lick of economic sense.
In short, Italian Colors deflated the “effective vindication” doctrine. Civil rights are arbitrable even when people can’t “effectively” vindicate those rights.
But something important might have survived Italian Colors. Or, that’s, at least, what the Second Circuit says in a hot-off-the-presses decision, Gingras v. Think Finance, Inc., 2019 WL 1780951 (April 24, 2019).
In Gingras, borrowers brought a putative class action against individuals and companies involved in an online lending operation owned by the Chippewa Cree Tribe in Montana. The borrowers alleged that the “payday” loans offered by the lender violated Vermont and federal consumer protection laws. Some defendants moved to dismiss on the basis of tribal sovereign immunity, and all defendants moved to compel arbitration under terms of loan agreements.
The loan agreements provided that Chippewa Cree tribal law would govern. Additionally, the arbitral clauses specified that the arbitrator “shall apply Tribal Law” and any arbitral award must “be supported by substantial evidence and must be consistent with [the loan agreement] and Tribal Law.” Chippewa Cree tribal courts were then empowered to set aside the arbitrator’s award if it did not comply with tribal law. Finally, and perhaps most significantly, the agreements provided that they were not “subject to the laws of any state of the United States” and “no other state or federal law or regulation shall apply.”
The tribal sovereign immunity arguments are quite interesting, but obviously beyond the scope of our interest here. Suffice it to say, the Second Circuit held that sovereign immunity was not a bar. The then court when on to hold that the arbitration clauses were not enforceable.
The first, and a sufficient, reason why the arbitration clauses couldn’t be enforced was because they were “designed to avoid federal and state consumer protection laws.” The court went on to clarify that
[b]y applying tribal law only, arbitration . . . appears wholly to foreclose [the plaintiffs] from vindicating rights granted by federal and state law. . . . [T]he just and efficient system of arbitration intended by Congress when it passed the FAA may not play host to this sort of farce.
Although the Second Circuit doesn’t connect all of the doctrinal dots, its animating idea derives from dicta in Italian Colors. There, SCOTUS suggested that an arbitration provision could amount to a substantive waiver of federally protected civil rights if the agreement were to forbid the very assertion of those rights. See Italian Colors, 133 S. Ct. at 2310. Remember, the actual arbitral clause at issue in Italian Colors didn’t forbid assertion of anything. Instead, by waving class-wide proceedings, it just made it stupidly expensive to assert the antitrust rights at issue.
By latching onto this dicta, the Second Circuit joins at least the Fourth and Seventh Circuits. See Hayes v. Delbert Servs. Corp., 811 F.3d 666 (4th Cir. 2016); Jackson v. Payday Fin., LLC, 764 F.3d 765 (7th Cir. 2014). (Liz wrote about Hayes, but she focused on the procedural aspects of the case.)
The Second Circuit also joins at least the spirit, if not the particulars, of California’s jurisprudence on this issue, which looks at five factors to determine if the arbitration of statutory rights would amount to a substantive waiver of them. See, e.g., Ramos v. Superior Court, 28 Cal. App. 5th 1042, 1047 (Ct. App. 2018) (confirming the continuing validity of the California Supreme Court’s watershed decision in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000)). In California, those five factors evaluate process issues to make sure, fundamentally, that arbitration gives rights holders a fair shake. I’m not persuaded that all of these factors can be squared with Italian Colors, but I think that the bigger thematic point is that California courts aren’t willing to completely abandon the effective vindication concept.
Anyway, the Second Circuit’s decision in Gingras also noteworthy because it raises at least one objection to the arbitral process: the arbitration clause was substantively unconscionable because tribal courts were given “unfettered discretion to overturn an arbitrator’s award” and this “effectively insulates the tribe from any adverse award and leaves [the plaintiffs] without a fair chance of prevailing in arbitration.”
In short, Gingras serves as a reminder that employers and commercial parties wanting to include broad arbitration provisions covering statutory rights can’t be cavalier. The effective vindication doctrine may not be what it once was, but it seems like courts aren’t yet ready to give up on the notion that statutory rights holders must be assured some sort of meaningful opportunity to present their claims.