(Reuters) - When Meeka Hunter borrowed $800 from a personal lender known as King of Kash in 2006, she signed contracts that included a provision requiring her to arbitrate any disputes before the National Arbitration Forum. That’s what the agreements said: Any dispute, including a class action claim by Hunter, was to be “resolved by binding arbitration by the National Arbitration Forum.”
In 2015, when Hunter went into default, the National Arbitration Forum was no longer providing arbitration services on consumer loans. NAF shut down that operation in 2009, after entering a consent decree with the Minnesota attorney general to resolve allegations that it rigged proceedings in favor of creditors. King of Kash, via its official name, A-1 Premium Acceptance, sued Hunter in state court in Jackson County, Missouri, alleging that she owed $275 in principal and nearly $7,000 in interest on those 2006 loans.
Hunter responded with a class action counterclaim on behalf of King of Kash borrowers, alleging a violation of Missouri’s consumer protection law. A-1 then moved to compel arbitration under Hunter’s 2006 contracts. Even though NAF is no longer handling consumer arbitrations, the company argued, Hunter agreed to arbitrate any disputes with A-1. Under the Federal Arbitration Act, A-1 said, her case must still be arbitrated, just in front of a forum other than NAF.
The Missouri Supreme Court ruled this week that A-1 and other companies can’t rewrite the language of the contracts they require consumers to sign when it suits corporate interests to do so. “The plain and unambiguous language of the agreement shows Hunter and A-1 agreed to arbitrate before – but only before – NAF,” wrote Judge Paul Wilson. “A-1 drafted this provision and it freely chose to require such an agreement from Hunter (and other borrowers) as a condition of obtaining loans from A-1. Having made the choice to insist upon NAF – and only NAF – as the arbitration forum, A-1 cannot now look to … the FAA to expand the arbitration promise it extracted from Hunter in the agreement.”
The Missouri court distinguished between provisions in which the parties agree to arbitrate regardless of the availability of a particular arbitration and those in which the two sides agree to arbitrate only in a particular forum. Under the first kind of agreement, it said, the FAA authorizes courts to name a substitute arbitrator if the forum contemplated in the original agreement is unavailable. But under the second kind of contract, in which the agreement specifies the arbitration forum, the FAA doesn’t grant courts the authority to swap in a new arbitrator. “Nothing in the FAA authorizes (let alone requires) a court to compel a party to arbitrate beyond the limits of the agreement it made,” the Missouri court said.
The state Supreme Court’s reasoning seems straightforward, but, as the Missouri court acknowledged, federal courts have been all over the map when it comes to interpreting consumer contracts that called for arbitration before the NAF. Before that consent decree with the Minnesota AG, NAF dominated the market for arbitration of consumer loans. When it exited the business, courts were left to sort out all of the contracts that called for NAF arbitration. That’s led to apparently divergent results. The 3rd and 7th U.S. Circuit Courts of Appeal have both granted motions to compel arbitration in cases in which consumer contracts specified NAF proceedings, as the Missouri opinion explained. But the 2nd, 5th and 11th Circuits have all held that consumers can’t be compelled to arbitrate, despite the FAA, if their contracts specified NAF as a forum.
Paul Bland of Public Justice, who argued Hunter’s case at the Missouri Supreme Court, said in a blog post about the court’s decision that the state court’s analysis is important in the face of these different views of the enforceability of NAF arbitration clauses. “It is a great victory for consumers,” Bland said. “The court concluded there was no agreement because the selection of NAF was ‘integral’ to the parties agreement and NAF was closed by government enforcement.”
But A-1 lawyer Mark Murphy of the Murphy Law Firm told me his client intends to ask the U.S. Supreme Court to take this case to bring certainty to the scope of the FAA’s clause on substituting arbitrators. Murphy said he “respectfully disagreed” with the Missouri Supreme Court’s distinction between contracts that specify arbitration and those that specify arbitration in a particular forum, arguing that the FAA calls for substituting a different arbitration forum in both circumstances. “There’s a split all across the country,” Murphy said. “The time is ripe for the Supreme Court to settle it.”