James Hayes took out a loan from Western Sky for $2525. Little did he know that the interest rate was 139 percent — which turned his loan into a $14,000 debt.

Western Sky says that it is owned by the Cheyenne River Sioux Tribe and therefore its loan agreements are not subject to federal or state law.

The Fourth Circuit Court of Appeals disagreed, ruling in Hayes v. Delbert Services Corp. that “no one appears to seriously dispute that Western Sky’s payday loans violated a host of state and federal lending laws” and that no matter what the loan agreements say, they are still subject to federal law.

“Before anyone tries to compare this to casinos on reservations, none of the profits went to the tribe itself — some went to the individual owner of Western Sky, but most appear to have gone to the non-Indian owner of Western Sky’s affiliated companies whose expensive hobbies include owning Kentucky Derby-winning racehorses,” said Leah Nicholls of Public Justice. Nicholls was co-counsel for Hays in the case.

“There’s no question the Western Sky agreement specifically attempted to avoid any compliance with those federal laws,” Nicholls said. “But, to make matters even worst, the agreement also said that any disputes with Western Sky, or its servicers and collectors, could not be brought in court. Rather, the disputes would have to be brought in arbitration. But even then, the arbitrator would still be prohibited from applying any state or federal law. And that’s the rub. Mr. Hayes brought a class-action against Delbert, one of the non-tribal entities that collects on Western Sky’s loans, alleging that, in the course of collecting on the loans, Delbert violated several federal statutes. Delbert then tried to defeat the class-action in court by moving to arbitrate his claims.”

But the Fourth Circuit held that the agreement’s waiver of federal rights meant that the claim could not be sent to arbitration.

Nicholls says that’s a big deal.

“Though the Supreme Court has long said that arbitration agreements are unenforceable if arbitration would result in a plaintiff’s inability to vindicate his or her federal statutory rights, that doctrine has been shrunk significantly over the last several years,” Nicholls said. “In American Express Co. v. Italian Colors Restaurant, for example, the Supreme Court held that even if the terms of the arbitration agreement prevent anyone, as a practical matter, from ever winning certain federal statutory claims, the arbitration agreement was still enforceable. So the Fourth Circuit’s decision today means the effective vindication doctrine still has some teeth after all; the drafter of an arbitration clause can’t simply purport to eliminate federal rights altogether.”