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11th Cir. Confirms Arbitration Delegation Clause Must Be Challenged Specifically

The U.S. Court of Appeals for the Eleventh Circuit recently held that a party challenging an arbitration agreement containing a delegation clause – requiring threshold determinations, such as whether an arbitration agreement is enforceable, to be made by an arbitrator – must challenge the delegation clause specifically, and not simply the agreement as a whole.

A copy of the opinion is available at: Link to Opinion

The plaintiff, a Georgia resident, responded to a television advertisement for short-term loans by applying for the $1,000 loan using his computer. The lender was a South Dakota limited liability company located on Indian tribal land.

The loan agreement contained a provision that required any dispute be submitted to arbitration.

After making his final payment, the plaintiff sued in state court, alleging that the lender’s business practices violated the Georgia Payday Lending Act.

The lender removed the case to federal court and moved to compel arbitration. The district court denied the motion, reasoning that the plaintiff properly challenged the arbitration provision, which was unconscionable. The lender appealed.

On appeal, the Eleventh Circuit noted that the FAA “sets forth a clear presumption — ‘a national policy’ — in favor of arbitration” and governs the loan agreement because “the parties conducted their business across state lines.”

“Section 2 of the FAA requires the courts to enforce an arbitration provision within a contract unless ‘such grounds exist at law or in equity for the revocation of any contract’ … [and such] … provisions will be upheld as valid unless defeated by fraud, duress, unconscionability, or another ‘generally applicable contract defense.’ ”

In addition, section 4 of the FAA “permits one party to seek the assistance of the district court when the other party refuses to proceed with arbitration, and requires the court to ‘make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.’ ”

“Importantly, parties may agree to commit even threshold determinations to an arbitrator, such as whether an arbitration agreement is enforceable. The Supreme Court has upheld these so-called ‘delegation provisions’ as valid … and explained that they are severable from the underlying agreement to arbitrate.”

“When an arbitration agreement contains a delegation provision and the plaintiff raises a challenge to the contract as a whole, federal courts may not review his claim because it has been committed to the power of the arbitrator. Instead, the plaintiff must ‘challenge the delegation provision specifically.’ … In sum, absent a challenge to the delegation provision itself, the federal courts must treat the delegation provision ‘as valid under § 2, and must enforce it under §§ 3 and 4, leaving any challenge to the validity of the Agreement as a whole for the arbitrator.’ ”

The question of whether the parties committed an issue to arbitration is governed by state contract law.  “However, as the Supreme Court has explained …, ‘[c]ourts should not assume that the parties agreed to arbitrate unless there is clear and unmistakable evidence that they did so.’ ”

The loan agreement at issue provided that the laws of the Cheyenne River Sioux Tribe governed, but the parties did not provide the Court — nor could the Court discover on its own — any rule of tribal law regarding contract interpretation. In such situations, the Court explained that “the plain-meaning rule is a foundational principle of common law contract interpretation widely adopted in the United States, including Georgia” and, accordingly, the Court looked “to Georgia law for a statement of the plain-meaning rule and apply it in this case.”

The loan agreement committed all “disputes” to arbitration, and defined dispute as including “any issue concerning the validity, enforceability, or scope of this loan or the Arbitration agreement.” Applying the Georgia rule of contract interpretation that if the language is plain and unambiguous, no further inquiry is required and the plain meaning governs, the Court held that “the Loan Agreement’s plain language contains an express delegation provision [and] [t]his provision conveys the parties’ intent to submit to an arbitrator the threshold issue of arbitrability.”

The Court found that the plaintiff’s “complaint only challenges the arbitration provision generally, and therefore falls short of the … pleading requirement [established by the Supreme Court in Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 130 S. Ct. 2772 (2010)].”

Because the plaintiff did not specifically challenge “the parties’ agreement to commit to arbitration the question of the enforceability of the arbitration agreement … [but instead asked the Court] to review the validity of the arbitration agreement as a whole, a task which the delegation provision expressly commits to an arbitrator [,] …” the Court held that “§ 2 of the FAA requires us to treat it as valid and enforce the Loan Agreement according to its terms.”

Accordingly, the Court reversed the district court’s denial of the lender’s motion to compel arbitration and remanded for further proceedings, noting that “[a]s this case remains in its pre-trial stages, [plaintiff] may still seek leave from the district court to amend his complaint to reflect a proper challenge to the delegation provision.”

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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