Forced Waiver of Claims Proves Fatal to Arbitration Clause

• Pages: 24-24
• Date: 01 July 2023
• Author: Derek Wallen
• Subject Matter: Civil Law

Published in Litigation News Volume 48, Number 4, Summer 2 023. © 2023 by the Amer ican Bar Association . Reproduced with pe rmission. All rights re served. This info rmation or any porti on thereof may not be c opied or disseminated in an y

form or by any means or sto red in an electronic da tabase or retrieval sy stem without the ex press writt en consent of the Amer ican Bar Associatio n.

yet decided the terms of the future

license. The university specif‌ically

stated that it might grant an exclusive

license and let the licensee decide

whether to sublicense, which is the

course of action the university ulti-

mately chose. The court of appeals

rejected the company’s argument that

the option was an agreement with

open terms because the agreement

provided no guidance as to how those

open terms would be f‌illed.

“Parties tend to put the amount

of eort into f‌leshing out contract

terms that they think is due, based on

the value of what they are getting,”

explains Richard F. Kurz, New York,

NY, cochair of the Litigation Section’s

Intellectual Property Committee’s

Patents Subcommittee. “This case

shows that the parties in this particular

action did not put as much thought or

eort into the contract as they should

have,” Kurz notes, adding that start-

ups and invention owners tend to take

shortcuts when they are not sure the

invention will be commercialized.

Kurz expresses concern about

whether justice was served. “The par-

ties thought the university was grant-

ing something very specif‌ic. The

agreement states, ‘Phytelligence is

hereby granted an option to partici-

pate as a provider and/or seller’ of WA

38 plant materials,’” he observes. “The

university was transferring some def‌in-

itive right, presumably in exchange

for consideration from Phytelligence,”

Kurz continues.

“The decision makes sense,” asserts

Chad S.C. Stover, Wilmington, DE,

cochair of the Section’s Intellectual

Property Committee. “Distinguishing

between an ‘agreement to agree’ and

an ‘agreement with open terms’ is

often dicult. Here, however, the pre-

contract communications make it clear

the parties did not have a meeting

of the minds on licensing terms.” To

avoid this problem in the future, Stover

advises parties to “include material

terms of the future agreement in the

original agreement, or at least specify

how the material terms will be deter-

mined at the later date.”

Forced Waiver of

Claims Proves Fatal

to Arbitration Clause

By Derek Wallen , Litigation News

Contributing Editor

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 plainti’s claims to those aris-

ing 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 unenforce-

able. The case is a reminder to contract

drafters to be cautious when attempting

to limit the scope of claims available in

an arbitration.

The conf‌lict in Williams v. Medley

Opportunity Fund II, LP began when

the plaintis obtained “payday loans”

from an online lender owned by the

Otoe-Missouria Tribe of Indians. Payday

loans are short-term cash advances

used by borrowers facing unexpected

obligations or emergencies. In Williams,

the loan borrowers f‌iled a putative class

action against the lender and related

parties in the U.S. District Court for the

Eastern District of Pennsylvania, alleg-

ing that the lender’s practices violated

the federal RICO Act and Pennsylvania

consumer protection laws.

The loan agreements at issue

imposed gargantuan interest rates,

ranging from 496.55 percent to 714.88

percent per year. A clause required

the borrowers to arbitrate disputes

before an arbitrator who would exclu-

sively apply tribal law. The loan agree-

ments also included a section that

waived the borrowers’ right to partici-

pate in class actions. The defendants

unsuccessfully moved to compel arbi-

tration. In denying their motion, 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 agree-

ment unenforceable.

On appeal, the Third Circuit armed,

holding that the prospective waiver

doctrine barred enforcement of the arbi-

tration agreement. The appellate court

explained that, in the context of arbitra-

tion, the prospective waiver doctrine

“refers to a situation in which the par-

ties 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 to bringing

claims under tribal law, the contracts

imposed “an impermissible prospective

waiver of statutory rights.”

On related grounds, the court of

appeals rejected the defendants’ argu-

ment that the parties had delegated to

an arbitrator, not the court, the author-

ity to resolve challenges to the arbitra-

tion agreement.

According to ABA leaders, although

the facts were startling in some ways,

the circuit court applied well-settled

principles. “When you look at the facts,

you know right away: there is a prob-

lem here,” observes Neil M. Eiseman,

New York, NY, chair of the Arbitration

Subcommittee of the ABA Litigation

Section’s Alternative Dispute Resolution

Committee. “Nobody should be able to

charge interest rates anywhere near the

type of rates that allegedly were being

charged. So the court found a way to get

around that, and it found a way to get

around it under well-settled legal prin-

ciples that that were applied correctly.”

“The biggest hurdle in all Indian

businesses, or Indian-involved service

contracts, is what do you do if the deal

falls apart?” poses Robert O. Saunooke,

Cherokee, NC, chair of the ABA Section

of State and Local Government Law’s

Native American Tribal Law Committee.

“I rarely have seen a contract, especially

a contract that is to be performed on a

reservation, contain language that does

not follow or bind participants to tribal

law to some degree.”

“Most arbitration agreements do

not contain language that tries to limit

the scope of claims,” states Henry R.

Chalmers, Atlanta, GA, cochair of the

Litigation Section’s Alternative Dispute

Resolution Committee. “But for those

drafters who do want to limit the scope

of claims available to a claimant in arbi-

tration, they need to be careful that

they don’t run afoul of this doctrine.”

SUMMER 2 023 • VOL. 48 NO. 4

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