Gibbs v. Sequoia Capital Operations, LLC

• Decision Date: 21 July 2020
• Docket Number: No. 19-2108, No. 19-2113,19-2108
• Citation: 966 F.3d 286
• Parties: Darlene GIBBS; Stephanie Edwards; Lula Williams; Patrick Inscho; Lawrence Mwethuku; George Hengle; Tamara Price ; Sherry Blackburn, on behalf of themselves and all individuals similarly situated, Plaintiffs – Appellees, v. SEQUOIA CAPITAL OPERATIONS, LLC; Sequoia Capital Franchise Partners, L.P. ; Sequoia Capital IX, L.P.; Sequoia Entrepreneurs Annex Fund, L.P.; Sequioa Capital Growth III Principals Fund, LLC; Sequoia Capital Franchise Fund, L.P. ; Sequoia Capital Growth Partners III, L.P. ; Sequoia Capital Growth Fund III, L.P., Defendants – Appellants, and Michael Stinson ; 7HBF No. 2; John Drew; Technology Crossover Ventures; TCV V, L.P. ; Linda Stinson; The Stinson 2009 Grantor Retained Annuity Trust; Startup Capital Ventures, L.P. ; Stephen Shaper; Sequoia Growth Fund IIII, L.P.; Sequoia Capital Franchise Partners, LLC ; Sequoia Capital Growth III Principals Fund, L.P., Defendants. Native American Financial Services Association, Amicus Supporting Appellants. Darlene Gibbs; Stephanie Edwards; Lula Williams; Patrick Inscho; Lawrence Mwethuku; George Hengle; Tamara Price ; Sherry Blackburn, on behalf of themselves and all individuals similarly situated, Plaintiffs – Appellees, v. Michael Stinson ; 7HBF No. 2; Linda Stinson; The Stinson 2009 Grantor Retained Annuity Trust; Startup Capital Ventures, L.P. ; Stephen Shaper, Defendants – Appellants, and Sequoia Capital Operations, LLC; Sequoia Capital Franchise Partners, L.P. ; Sequoia Capital IX, L.P.; Sequoia Growth Fund IIII, L.P.; Sequoia Entrepreneurs Annex Fund, L.P.; Sequioa Capital Growth III Principals Fund, LLC; Sequoia Capital Franchise Fund, L.P. ; Sequoia Capital Growth Partners III, L.P. ; Sequoia Capital Franchise Partners, LLC ; Sequoia Capital Growth III Principals Fund, L.P. ; Sequoia Capital Growth Fund III, L.P. ; John Drew; Technology Crossover Ventures; TCV V, L.P., Defendants. Native American Financial Services Association, Amicus Supporting Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

966 F.3d 286

Darlene GIBBS; Stephanie Edwards; Lula Williams; Patrick Inscho; Lawrence Mwethuku; George Hengle; Tamara Price ; Sherry Blackburn, on behalf of themselves and all individuals similarly situated, Plaintiffs – Appellees,

v.SEQUOIA CAPITAL OPERATIONS, LLC; Sequoia Capital Franchise Partners, L.P. ; Sequoia Capital IX, L.P.; Sequoia Entrepreneurs Annex Fund, L.P.; Sequioa Capital Growth III Principals Fund, LLC; Sequoia Capital Franchise Fund, L.P. ; Sequoia Capital Growth Partners III, L.P. ; Sequoia Capital Growth Fund III, L.P., Defendants – Appellants,andMichael Stinson ; 7HBF No. 2; John Drew; Technology Crossover Ventures; TCV V, L.P. ; Linda Stinson; The Stinson 2009 Grantor Retained Annuity Trust; Startup Capital Ventures, L.P. ; Stephen Shaper; Sequoia Growth Fund IIII, L.P.; Sequoia Capital Franchise Partners, LLC ; Sequoia Capital Growth III Principals Fund, L.P., Defendants.

Native American Financial Services Association, Amicus Supporting Appellants.

Darlene Gibbs; Stephanie Edwards; Lula Williams; Patrick Inscho; Lawrence Mwethuku; George Hengle; Tamara Price ; Sherry Blackburn, on behalf of themselves and all individuals similarly situated, Plaintiffs – Appellees,

v.Michael Stinson ; 7HBF No. 2; Linda Stinson; The Stinson 2009 Grantor Retained Annuity Trust; Startup Capital Ventures, L.P. ; Stephen Shaper, Defendants – Appellants,andSequoia Capital Operations, LLC; Sequoia Capital Franchise Partners, L.P. ; Sequoia Capital IX, L.P.; Sequoia Growth Fund IIII, L.P.; Sequoia Entrepreneurs Annex Fund, L.P.; Sequioa Capital Growth III Principals Fund, LLC; Sequoia Capital Franchise Fund, L.P. ; Sequoia Capital Growth Partners III, L.P. ; Sequoia Capital Franchise Partners, LLC ; Sequoia Capital Growth III Principals Fund, L.P. ; Sequoia Capital Growth Fund III, L.P. ; John Drew; Technology Crossover Ventures; TCV V, L.P., Defendants.

Native American Financial Services Association, Amicus Supporting Appellants.

No. 19-2108

No. 19-2113

United States Court of Appeals, Fourth Circuit.

Submitted: May 29, 2020

Decided: July 21, 2020

Stephen D. Hibbard, San Francisco, California, Todd R. Geremia, Shirley M. Chan, JONES DAY, New York, New York; Richard L. Scheff, David F. Herman, ARMSTRONG TEASDALE LLP, Philadelphia, Pennsylvania, for Appellants. Kristi C. Kelly, Andrew J. Guzzo, KELLY GUZZO, PLC, Fairfax, Virginia; Matthew W.H. Wessler, GUPTA WESSLER PLLC, Washington, D.C.; Leonard A. Bennett, Craig C. Marchiando, Elizabeth W. Hanes, CONSUMER LITIGATION ASSOCIATES, P.C., Newport News, Virginia; Anna C. Haac, TYCKO & ZAVAREEI LLP, Washington, D.C., for Appellees. Patrick O. Daugherty, Frances B. Morris, VAN NESS FELDMAN LLP, Washington, D.C., for Amicus Curiae.

Before GREGORY, Chief Judge, MOTZ, and AGEE, Circuit Judges.

Affirmed by published opinion. Judge Agee wrote the opinion, in which Chief Judge Gregory and Judge Motz joined.

AGEE, Circuit Judge:

In this appeal, we again consider the enforceability of arbitration agreements included within the terms of payday loans issued by two online lenders. After a group of borrowers filed suit against certain entities and individuals (collectively, the "Sequoia Defendants"), challenging the legality of the loans issued, the Sequoia Defendants filed a motion to compel arbitration. The district court denied the motion on the basis that the arbitration agreements amounted to a prospective waiver. The Sequoia Defendants now appeal. For the reasons set forth below, we affirm the judgment of the district court.

I.

The plaintiffs are Virginia consumers who borrowed money between 2013 and 2016 from one of two online lenders owned by a sovereign Native American tribe.¹ The first lender, Plain Green, LLC, is owned and operated by the Chippewa Cree Tribe of the Rocky Boy’s Reservation in Montana. The second, Great Plains Lending, LLC, is owned and operated by the Otoe-Missouria Tribe of Oklahoma.² Although Virginia usury law generally prohibits interest rates in excess of twelve percent, Va. Code Ann. § 6.2-303, the laws of both Tribes permit higher rates. As a result, the interest rates on the loans—which varied in principal amounts from $500 to $1,700—ranged from 219.38% to 373.97%. J.A. 234, 246.

As recounted in Haynes Investments, No. 19-1434, slip op. at 45, ––– F.3d at –––– —which considered the same agreements that are at issue here—each borrower completed the loan application process by electronically signing a contract containing (1) the terms governing the loan (the "loan agreement") as well as (2) an agreement to arbitrate any disputes (the "arbitration agreement"). Both agreements contained choice-of-law provisions requiring the application of tribal law. For example, Gibbs’s 2016 Plain Green loan agreement stipulated that the loan "shall be governed by the laws of the tribe," J.A. 202, and that "[t]his Agreement and the Agreement to Arbitrate are governed by Tribal Law," J.A. 207. In turn, Gibbs’s arbitration agreement stated that it "shall be governed by tribal law" and the "arbitrator shall apply Tribal Law." J.A. 209. Similarly, Mwethuku’s 2013 contract provided that both the loan and arbitration agreements would be "governed by the law of the Chippewa Cree Tribe." J.A. 250; see also J.A. 245 (providing the loan agreement was "subject solely to the exclusive laws and jurisdiction of the Chippewa Cree Tribe").

Likewise, all three 2015 and 2016 Great Plains loan agreements indicated the lender could choose to voluntarily use federal laws as guidance, but that the agreements ultimately would be governed by tribal law: "This Agreement and the Agreement to Arbitrate are governed by Tribal law and such federal law as is applicable under the Indian Commerce Clause," but "[s]uch voluntary use [of federal laws as guidelines for the provision of services] does not represent acquiescence of the Otoe-Missouria Tribe to any federal law unless found expressly applicable to the operations of the Otoe-Missouria Tribe." J.A. 218, 229, 239. Similarly, all of the Great Plains arbitration agreements specified that "[t]his agreement to arbitrate shall be governed by tribal law"; "[t]he arbitrator shall apply Tribal Law"; and the arbitration award "must be consistent with this Agreement and Tribal Law[.]" J.A. 220, 230, 241.

Finally, a number of other provisions in both lenders’ loan and arbitration agreements reinforced the application of tribal law. For instance, although the borrowers could opt out of arbitration, any dispute resolution process had to occur in the tribal court system and comply with tribal law. Thus, Mwethuku’s 2013 loan agreement provided that "[i]n the event you opt out of this agreement to arbitrate, any disputes hereunder shall nonetheless be governed under the laws of the Chippewa Cree Tribe and must be brought within the court system thereof." J.A. 249; see also J.A. 208, 218–19, 229, 240.

After receiving the loans, the borrowers brought a putative class action complaint alleging, among other claims, that the lenders’ loans were unlawful under Virginia’s usury laws and that the Sequoia Defendants’ conduct violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"). In response, the Sequoia Defendants moved to compel arbitration under 9 U.S.C. § 4 or, alternatively, to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6). The district court denied both motions.

As relevant to the motion to compel arbitration, the district court relied upon two Fourth Circuit cases— Hayes v. Delbert Services Corporation , 811 F.3d 666, 671 (4th Cir. 2016), and Dillon v. BMO Harris Bank, N.A. , 856 F.3d 330, 332 (4th Cir. 2017) —both of which also considered tribal arbitration agreements with choice-of-law clauses providing for the nearly exclusive application of tribal law, to the exclusion of state and federal law. As in those cases, the district court concluded that because the choice-of-law provisions of the arbitration agreements "sought to apply Tribal law to the exclusion of federal law"—including the assertion of any federal statutory claims by the borrowers—the agreements "contravene[d] the prospective waiver doctrine[.]" J.A. 363, 365. Thus, the court concluded, the arbitration agreements were unenforceable.

The Sequoia Defendants timely appealed, arguing that: (1) the district court ignored the arbitration agreements’ delegation provision requiring an arbitrator to resolve all threshold issues of arbitrability, including whether the choice-of-law provisions amounted to a prospective waiver; and (2) even if the court was correct to consider the effect of the choice-of-law provisions, they did not amount to a prospective waiver. We address each issue in turn, mindful of the "strong federal policy in favor of enforcing arbitration agreements." Dean Witter Reynolds, Inc. v. Byrd , 470 U.S. 213, 217, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985).

II.

We turn first to the delegation clauses. Each of the arbitration agreements contained a delegation clause stipulating that the parties would arbitrate "any issue concerning the validity, enforceability, or scope of this Agreement or this Agreement to Arbitrate." J.A. 240; see also J.A. 208, 219, 229, 249. As a result, the Sequoia Defendants argue, any threshold questions as to the enforceability of the arbitration agreement should have first been sent to an arbitrator. We disagree. Because the borrowers sufficiently challenged the enforceability of the delegation clauses, the district court was correct to consider the enforceability of the arbitration agreements.

A.

The Supreme Court has concluded that when a litigant specifically challenges the enforceability of an arbitration agreement with a delegation clause, the challenge must be submitted to the arbitrator unless the plaintiff has lodged a specific objection to the delegation clause. When such a specific objection is made, the court may consider it. Rent-A-Center, W., Inc. v. Jackson , 561 U.S. 63, 68–69, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010). Thus,...