Fourth Circuit Holds that Federal Rights Cannot Be Waived Ex Ante

November 30, 2021

Christopher F. Quirk

Sands Anderson PC

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Virginia

A recent ruling by the United States Court of Appeals for the Fourth Circuit serves as a warning to healthcare providers against entering into service contracts that attempt to avoid being sued under 42 U.S.C. § 1983.

Hengle v. Treppa[1] involved a scenario that has become more common in the last decade, in which Tribal lenders offer high-interest loans to the public. Sometimes charging rates that are nine times the legal cap on interest in Virginia, these lenders attempt to circumvent anti-usury laws with a specific type of arbitration agreement. Under the terms of these agreements, the borrower submits to have all prospective claims decided by an arbitrator who will apply exclusively Tribal law. With these favorable choice-of-law provisions, the lenders effectively eliminate the borrowers’ state and federal rights relating to arbitration and fair lending.

In reviewing the arbitration agreement in Hengle, the Court explained that a party may agree to waive certain rights. But that agreement may not prospectively reject the authority of federal statutes or deny a party’s federal rights. Here, swapping federal law out for tribal law effectively stripped borrowers of their federal rights. That made the choice of law provision unenforceable.

Moreover, because the choice-of-law terms were so integral to the arbitration agreement, the offending terms could not be severed to preserve the remainder of the agreement. In sum, the Court in Hengle stated that, if a choice-of-law provision or any integral part to an arbitration clause operates as a waiver of federal rights, the entire arbitration clause is unenforceable.

More broadly, this principle is often referred to as the “prospective waiver doctrine.” Not limited to just arbitration agreements,[2] the prospective waiver doctrine applies to any contract that seeks to  limit a party’s important federal rights.[3] Thus, in the correctional setting, medical contractors cannot enter into any agreements (e.g., patient waivers, subcontracting specialized care, or agreements to indemnify) that prospectively limit an inmate’s rights to recover, under Section 1983, for prospective violations of their constitutional or civil rights.

If you have any questions about how your contracts limit or fail to limit your exposure to federal civil rights litigation, please contact Chris Quirk at cquirk@sandsanderson.com.

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[1] 2021 U.S. App. LEXIS 33964, *16.

[2] Gibbs v. Stinson, 2021 U.S. Dist. LEXIS 198680, *18, 2021 WL 4812451 (E.D. Va. Oct. 14, 2021) (“Although the prospective waiver doctrine has most commonly been associated with arbitration agreements, the rationale behind the doctrine supports its application in contexts beyond mandatory arbitration agreements.”) (citations omitted).

[3] Williams v. Big Picture Loans, LLC, 2021 U.S. Dist. LEXIS 130251, *16, 2021 WL 2930976 (E.D. Va. July 12, 2021).