In a recent unpublished memorandum opinion in a putative class action, Carpenter et al. v. Opportunity Financial, LLC, the U.S. Court of Appeals for the Ninth Circuit upheld an arbitration clause in an agreement governing loans serviced by fintech Opportunity Financial, LLC (“OppFi”).  After a de novo review of a California U.S. District Court decision denying OppFi’s motion to compel arbitration, the Ninth Circuit vacated the denial of OppFi’s motion and directed the district court to refer the matter to arbitration.

The complaint in Carpenter, like three other putative class actions brought in different states by the same plaintiff’s counsel against OppFi, raised claims that OppFi, not its out-of-state, state bank partner, was the “true lender” on the subject loans, and the interest rates therefore should not be higher than those permitted under the laws of the plaintiffs’ states.  In Carpenter and these other putative class actions, OppFi’s marketing and servicing arrangements on behalf of the state banks that made the loans were characterized in the complaint as a “rent-a-bank scheme.”  The complaint also raised Racketeer Influenced and Corrupt Organizations Act (RICO) claims and other claims against OppFi.  In each of the other three actions, the federal district courts compelled individual arbitration and dismissed or stayed the action, based on the arbitration clause: see our earlier blogs here and here.  However, in Carpenter, the district court denied OppFi’s motion to compel arbitration, finding the arbitration clause to be “procedurally unconscionable due to legibility and technological issues, and substantively unconscionable because it impermissibly waives Plaintiff’s substantive rights under the California Financial Code.”

In order for an arbitration clause to be deemed unconscionable under California law, there must be a showing of both procedural and substantive unconscionability.  The Ninth Circuit held that the plaintiffs in Carpenter did not show that the arbitration clause was substantively unconscionable:

  • The district court held that the arbitration clause was substantively unconscionable because it required the arbitrator to apply Utah law to the loan agreement pursuant to the agreement’s choice of law provision, which, according to the district court, would allegedly “eliminate the substantive basis for [Carpenter’s] claims.”  The Ninth Circuit found the district court erred in making this determination because application of the loan agreement’s choice of law provision “must be decided in the first instance by the arbitrator.”  The Ninth Circuit distinguished its holding from that in Bridge Fund Cap. Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 998 (9th Cir. 2010), in which the court determined district courts may conduct a choice of law analysis to invalidate an arbitration clause, pointing out that in Bridge Fund the court did not speculate as to which law the arbitrator might apply but instead just determined which state law applied to the unconscionability question.
  • The plaintiffs also argued that the arbitration clause was substantively unconscionable because the arbitrator “must enforce” the loan agreement’s choice of law provision even if doing so would render the loan illegal under California law.  According to the Ninth Circuit, this “claim is premature” because “[a]t this interlocutory stage it is not established what law the arbitrators will apply.”  The Ninth Circuit noted that “even if California law applies, arbitrators are not required to enforce invalid contracts.”

The California Department of Financial Protection and Innovation (DFPI) case against OppFi is scheduled for trial in March 2025.  As we previously blogged, in late October 2023, the Superior Court denied DFPI’s motion for preliminary injunction that sought to force OppFi to stop facilitating loans to California borrowers from its partner FinWise Bank at interest rates above the interest rate cap (generally 36% plus the Federal Funds Rate) imposed by the California Financing Law.  The Court explained that valid-when-made concepts under California’s usury law and Constitution, and “obstacle preemption,” served as bases for its denial of the motion.

On June 6, 2024, from 1:00 p.m. to 2:30 p.m. ET, we will be holding a webinar “Interest Rate Exportation Under Attack,” in which we will be covering DIDMCA Section 525 opt-outs, “true lender” and anti-evasion laws, attacks on “valid when made,” and more.  Click here to register.