Third Circuit Upholds Pennsylvania Federal Court's Finding That an Arbitration Agreement Is Unenforceable Where It Limits Borrowers Claims To Only Those Under Tribal Law

In Williams v. Medley Opportunity Fund II, LP, plaintiffs Christine Williams and Michael Stermel obtained payday loans from American Web Loan, Inc. (AWL), an online entity owned by the Otoe-Missouria Tribe of Indians. The loan agreement stated that the loan was governed by tribal law and that the borrowers consented to the application of tribal law. The plaintiffs filed a purported class action against AWL's holding company, Red Stone, Inc., and three members of AWL's board of directors, asserting that AWL charged unlawfully high interest rates, in violation of federal and Pennsylvania law, including the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. 1961-1968.

The defendants moved to compel arbitration pursuant to the arbitration clause in the loan agreement. The United States District Court for the Eastern District of Pennsylvania denied the defendants' motion, holding that the loan agreement, which provided that only tribal law would apply in arbitration, stripped the plaintiffs of their right to assert statutory claims and were therefore unenforceable. Defendants appealed.

On appeal, the Third Circuit affirmed the district court's decision, finding that because AWL permits borrowers to raise disputes in arbitration only under tribal law, and such a limitation constitutes a prospective waiver of statutory rights, its arbitration agreement violates public policy and is therefore unenforceable.

The Third Circuit specifically rejected defendants' argument that plaintiffs could bring similar RICO-like claims under tribal law and receive similar relief. The panel noted, "The question is whether a party can bring and effectively pursue the federal claim - not whether some other law is a sufficient substitute."

Williams v. Medley Opportunity Fund II, LP, 965 F.3d 229 (3d Cir. July 14, 2020)