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  • Writer's picturePaul Peter Nicolai

Forced Waiver of Claims Kills Arbitration Clause

Updated: Jan 3, 2023

An arbitration agreement that requires parties to waive federal statutory claims is unenforceable. According to the U.S. Court of Appeals for the Third Circuit, limiting a plaintiff’s claims to those arising under tribal law is an impermissible prospective waiver of statutory rights and a violation of public policy. The appellate court also concluded that the clause limiting claims to tribal law was an essential term of the contract and, therefore, not severable, rendering the entire arbitration agreement unenforceable. The case reminds contract drafters to be cautious when attempting to limit the scope of claims available to a claimant in arbitration.

The conflict began when the plaintiffs got payday loans from an online lender. Payday loans are short-term cash advances used by borrowers facing unexpected obligations or emergencies. The borrowers filed a class action against the lender and related parties in federal court, saying the lender’s practices violated the federal RICO Act and state consumer protection laws.

The loan agreements imposed interest rates ranging from 496.55 percent to 714.88 percent a year. An arbitration clause requires the borrowers to arbitrate disputes before an arbitrator. The loan agreements also included a section that waived the borrowers’ right to participate in class actions. In denying a motion to compel arbitration, the district court explained that requiring an arbitrator to consider only tribal law violated public policy because the arbitrator could not consider any of the plaintiffs’ claims based on federal law, rendering the arbitration agreement unenforceable.

The appeals court affirmed, holding that the prospective waiver doctrine barred enforcement of the arbitration agreement. The prospective waiver doctrine refers to a situation in which the parties agree that, if disputes arise between them, then they waive the right to rely on federal law. The Supreme Court has observed that such waivers violate public policy. As the loan agreements restricted the borrowers from bringing claims under tribal law, the contracts imposed an impermissible prospective waiver of statutory rights.

WHY THIS IS IMPORTANT… The principles used by this court are used widely, especially in the employment context where several states have ruled that arbitration clauses requiring employees to waive rights under employee protection or antidiscrimination laws make the arbitration agreement unenforceable.

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