Summary
The Seventh Circuit affirmed the denial of defendants' motion to compel arbitration in a putative class action involving high-interest consumer loans. The court held that the arbitration and delegation provisions lacked mutual assent because they selected tribal law that did not exist when the plaintiffs entered into their loan agreements. The court also discussed, but did not decide, whether the arbitration agreement impermissibly required prospective waiver of Illinois statutory rights.
Topics
Practice areas
Questions Presented
- Whether the arbitration and delegation provisions were formed through mutual assent when they required application of a body of tribal contract law that did not exist when the parties contracted.
- Whether the court could compel arbitration under the Federal Arbitration Act despite the provisions' lack of mutual assent.
- Whether the prospective-waiver doctrine independently rendered the arbitration provision unenforceable by requiring plaintiffs to waive Illinois statutory rights.
- What standard of review applies to the district court's denial of the motion to compel arbitration.
Holdings
- The delegation provision was not enforceable because the parties did not mutually assent to an essential term: the substantive law that would govern the arbitrator's resolution of gateway questions of arbitrability.
- The Arbitration Agreement was not enforceable because the parties did not mutually assent to arbitrate future disputes under a predetermined body of substantive law that did not exist at the time of contracting.
- The court did not decide whether the prospective-waiver doctrine applies to state-law rights after Viking River Cruises; it affirmed without reaching that issue because ordinary contract-formation principles independently defeated the motion to compel arbitration.
Key quotations
“Here, defendants drafted an arbitration agreement directing an arbitrator to apply a body of law that did not exist, which they maintained a unilateral ability to invent. Absent any indication that the plaintiffs intended this, we find no mutual assent.” (2)
“It is one thing for parties to agree to be bound by a settled body of law that is subject to later change; it is quite another to select a nonexistent body of law, which is subject to later invention.” (11)
“But on the record before us, we cannot conclude that the parties mutually assented to arbitrate (including on issues of arbitrability) where their specific agreement directed the arbitrator to apply a body of governing law that did not exist at the time of contracting.” (14)
Factual background
Harris and Olds, Illinois residents, obtained $600 online loans from WithU Loans in 2022 and 2023 at annual interest rates of approximately 497% to 499%, allegedly exceeding Illinois statutory limits. Their loan agreements contained arbitration and delegation provisions requiring an arbitrator to decide questions of formation, enforceability, scope, and arbitrability under tribal law and applicable federal law. The Otoe-Missouria Tribe adopted its Tribal Contract Code after the plaintiffs entered their agreements, and the agreements did not identify an existing body of substantive contract law governing the arbitration provisions.
Procedural history
Harris and Olds filed a putative class action alleging violations of Illinois interest-rate and consumer-protection statutes, the Racketeer Influenced and Corrupt Organizations Act, and the Electronic Funds Transfer Act. Defendants moved to compel individual arbitration based on arbitration and delegation provisions in the loan agreements. The Northern District of Illinois denied the motion, concluding that the provisions were unenforceable under the prospective-waiver doctrine. The Seventh Circuit affirmed on the alternative and independent ground that the arbitration and delegation provisions lacked mutual assent.