Summary
The Fourth Circuit affirmed the district court's denial of a motion to compel arbitration in a putative class action alleging state usury violations. The court held that disputes over contract formation, such as whether a change-in-terms clause renders an agreement illusory, must be decided by a court rather than an arbitrator. Under Maryland law, the court found the lender's unilateral change-in-terms clause lacked consideration and rendered the arbitration agreement unenforceable.
Topics
Practice areas
Questions Presented
- Whether the threshold issue of contract formation/illusoriness is for the court or the arbitrator.
- Whether the contract’s choice‑of‑law clause can be applied before determining whether the arbitration agreement was formed.
- Whether the arbitration agreement is illusory under Maryland law because the change‑in‑terms clause eliminates consideration.
Holdings
- The court holds that the threshold issue of contract formation is for the district court, not the arbitrator.
- The court holds that the choice‑of‑law provision cannot be applied because the contract’s existence must be decided first; therefore Maryland law governs the formation issue.
- The court holds that the arbitration agreement is illusory because the unilateral change‑in‑terms clause eliminates any meaningful reciprocal promise, rendering the agreement lacking consideration.
Key quotations
“No agreement, no arbitration. We have since applied Granite Rock on multiple occasions.” (at 529)
“The change‑in‑terms clause here is so one‑sided as to deprive the purported contract of any meaningful idea of reciprocity that a contractual bargain is meant to embody.” (at 529)
Factual background
Continental Finance Company offered credit‑card agreements containing a unilateral change‑in‑terms clause that allowed it to modify any term at its sole discretion. Plaintiffs Tiffany Johnson and Tracy Crider alleged usury violations and challenged the arbitration provision as illusory, arguing that the clause destroyed consideration for the arbitration agreement.
Procedural history
The district court denied Continental's motions to compel arbitration, holding that the arbitration agreement was illusory under Maryland law because of a unilateral change‑in‑terms clause. Continental appealed.