W6LS, Inc. (W6LS) offers consumer loans online as “WithU Loans.” Caliber Financial Services, Inc. manages the underwriting and collection of the online loans. W6LS and Caliber (Defendants) are both organized under the laws of the Otoe-Missouria Tribe of Indians, and the Tribe owns a stake in the defendants. The named members of the putative plaintiff class took out $600 loans in 2022 and 2023 at annual rates of interest of about 500%, which exceeds the interest rate allowable under Illinois law.
The Loan Agreement included arbitration provisions which delegated to the arbiter threshold questions regarding the parties’ agreement to arbitrate and the scope of that agreement. The arbiter was to apply Tribal Law, which referred to the Otoe-Missouria Tribal Contract Code (the Code), which was adopted on May 2, 2024 and thus was not in place at the time the named plaintiffs entered into their Loan Agreements. The Loan Agreement was very clear that only Tribal Law and applicable federal law applied. The arbiter was not to apply state law.
Plaintiffs brought claims under Illinois statutory law, RICO, and the Electronic Funds Transfer Act. Defendants moved to compel arbitration, but the District Court denied that motion because the agreement forced plaintiffs to waive their substantive rights under Illinois law prospectively. That ruling reflects the broad principle that arbitration provides only an alternative forum for resolving disputes and should not change the nature of the underlying rights at issue. Defendants appealed. In Harris v. W6LS, Inc., the Seventh Circuit affirmed the denial of defendants’ motion to compel arbitration.
Ordinarily, courts can decide whether an issue is arbitrable. But where the parties have delegated issues of arbitrability to the arbiter, the arbiter decides. Here, however, neither the arbitration agreement nor the delegation provision is enforceable. The parties could not consent to have their agreement governed by a non-existent body of Tribal law, and the federal law backstop to their choice-of-law provision fails because no federal law governs the Loan Agreement’s formation or interpretation. The applicable federal law, the Federal Arbitration Act (FAA), does not “provide a substantive law governing the formation or general interpretation of contracts.” The Defendants argued that the Code, once promulgated provided that it had retroactive effect, but the dispute has to be governed by law in effect at the time of the Loan Agreement.
The parties differed on which law relevant to contract formation should govern their dispute. Plaintiffs wanted Illinois law, while Defendants opted for Tribal Law. The court saw no need to resolve that dispute, as the parties agreed that mutual consent is required for contract formation under both bodies of law.
Here, there is a bit of fancy footwork. Defendants pointed to Seventh Circuit precedent in which the court enforced arbitration agreements while finding a choice-of-law agreement unenforceable. Here, the Court claimed to make no ruling on the enforceability of the parties’ Governing Law provision. Rather, it held that the indefiniteness of the Governing Law provision reflects the parties’ lack of mutual assent to the arbitration and delegation provisions.
I find this too clever by half. In this case, it seems the Court could very well say both. The part of the Governing Law provision that purports to bind the parties to a non-existent body Tribal contract law is unenforceable. Dictum from a prior Seventh-Circuit case, Jackson v. Payday Financial, LLC, supports this holding. The part of the Governing Law provision that binds them to federal law is irrelevant because no federal law speaks to formation or interpretation questions. The FAA provides no substantive law relevant to questions of interpretation. I suppose that the part of the Governing Law provision that purports to make state law inapplicable is unenforceable because state law is the only possible body of law that remains.
The Court makes a further argument about fairness which it characterizes as an additional indication of the lack of mutual consent. The Court found nothing in the record to indicate that the Tribe disclosed to plaintiffs its ownership interest in the defendant entities or that they were aware of that interest. They were thus unaware that they were essentially agreeing to be subject to a law to be promulgated by their counterparty and which may omit relevant contract defenses, such as unconscionability. In fact, the Code, promulgated after the lawsuit was filed, does not include an unconscionability provision. Citing Flores v. New York Football Giants, Inc., 150 F.4th 172, 184–85 (2d Cir. 2025), about which we blogged here, the Court notes that the an agreement might not be considered arbitration under the FAA where one party can draft rules of contract formation and defense that protect the Defendants’ interests.
Defendants argued that Plaintiffs cannot contest the enforceability of arbitration and delegation provisions while pressing statutory claims that presume the enforceability of the Loan Agreement as a whole. However, arbitration and delegation provisions are severable. Plaintiffs challenged the enforceability of two nested provisions, not the container agreement as a whole. A court can elect, as the Seventh Circuit does here, not to enforce severable provisions without invalidating the contract as a whole.
As to the District Court’s invocation of the prospective waiver doctrine, the Court did not take issue with that basis for denying the motion to compel but did not find it necessary to take that route. The question of whether the doctrine applies to state statutory rights as well as federal rights is unresolved, and the Court chooses not to wade into those uncertain waters. Rather, the Court affirmed based its finding, applying ordinary formation principles, that the parties had never agreed to arbitrate.
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