Courts Must Decide Contract-Formation Attacks on Arbitration Clauses; Choice-of-Law Clauses Cannot Govern Formation; Unilateral “Sole Discretion” Change-in-Terms Renders Arbitration Illusory Under Maryland Law

1. Introduction

The Fourth Circuit’s published decision addresses a recurring modern arbitration problem: when consumers allege that an arbitration provision (and its delegation clause) is not a real agreement at all because the drafter reserved a sweeping unilateral power to rewrite the contract. Plaintiffs Tiffany Johnson and Tracy Crider—Maryland residents who obtained high-interest credit cards marketed and serviced by Continental Finance Company, LLC and Continental Purchasing, LLC (collectively, “Continental”)—filed Maryland class actions alleging violations of Maryland usury and licensing laws via a “rent-a-bank” arrangement. Continental removed to federal court and moved to compel arbitration under cardholder agreements containing (i) an arbitration clause with a delegation provision and (ii) a “change-in-terms” clause allowing Continental to “change any term” in its “sole discretion,” with only whatever “notice … required by law.”

The litigation raised three gateway issues: (1) who decides whether the arbitration arrangement is illusory—court or arbitrator; (2) whether the agreements’ Utah/Missouri choice-of-law clauses control that gateway inquiry; and (3) whether the arbitration agreement is illusory under Maryland law because Continental could unilaterally change “any term” at will.

2. Summary of the Opinion

The Fourth Circuit affirmed the district court on all grounds:

• Formation is for courts: A claim that the agreement to arbitrate is illusory is a contract-formation challenge, implicating whether any agreement to arbitrate was “made” under FAA § 4. Courts must decide it before compelling arbitration, notwithstanding a delegation clause.
• Choice-of-law clause cannot decide formation: The court refused to apply Utah/Missouri choice-of-law provisions to the formation dispute because enforcing those provisions assumes a validly formed contract.
• Arbitration agreement is illusory under Maryland law: Under Maryland precedents—particularly Cheek v. United Healthcare of Mid-Atlantic, Inc.—a unilateral modification clause that lets one party change “any term” in its “sole discretion,” with only vague “notice … required by law,” deprives the arrangement of the reciprocity necessary for consideration, rendering the arbitration agreement unformed/unenforceable.

Judge Wynn concurred to clarify that, in his view, plaintiffs and the district court targeted the arbitration/delegation agreement specifically (not necessarily the entire cardholder contract), relying on Maryland’s concept that arbitration provisions can require separate consideration. Judge Niemeyer concurred in part and dissented from the illusoriness holding, arguing that notice plus the consumer’s ability to terminate/assent by continued use tracks Maryland law and industry practice, invoking DirectTV, Inc. v. Mattingly and Holloman v. Circuit City Stores, Inc..

3. Analysis

3.1 Precedents Cited (and How They Shaped the Result)

A. Federal arbitration “first principles”: consent and judicial gatekeeping

• Coinbase, Inc. v. Suski (2024): The opinion uses Coinbase to foreground the foundational question—“What have these parties agreed to?”—and to frame arbitration as deriving authority only from consent. This supports treating formation as a judicial prerequisite to enforcement.
• Rent-A-Center, W., Inc. v. Jackson (2010): Cited for the proposition that a delegation clause is itself an “antecedent agreement” the court is asked to enforce. The Fourth Circuit leverages this to reject the “cart before the horse” logic: if the container agreement may not exist, the delegation clause cannot be enforced to decide its own existence.
• AT&T Tech., Inc. v. Comm’cs Workers of Am. (1986): Reinforces that arbitrators’ authority is derivative of party agreement, supporting judicial responsibility to confirm agreement formation.

B. Severability doctrine—and its boundary at formation

• Prima Paint Corp. v. Flood & Conklin Manufacturing Co. (1967) and Buckeye Check Cashing, Inc. v. Cardegna (2006): Continental relied on these to argue that attacks on the contract “as a whole” go to the arbitrator. The Fourth Circuit limits these cases to validity challenges to an existing contract and emphasizes Buckeye’s own footnote distinguishing “validity” from whether any agreement “was ever concluded.”
• Granite Rock Co. v. International Brotherhood of Teamsters (2010): This is the doctrinal pivot. Granite Rock states that “where the dispute at issue concerns contract formation, the dispute is generally for the courts to decide,” and it reiterates arbitration as strictly a matter of consent. The Fourth Circuit treats Granite Rock as dispositive: formation questions—including illusoriness—must be resolved by courts pre-arbitration.
• Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ. (1989) and First Options of Chi., Inc. v. Kaplan (1995): Quoted via Granite Rock to underscore that arbitration reaches “only those disputes” the parties agreed to submit.

C. Fourth Circuit applications of formation-first doctrine

• Berkeley County School District v. Hub International Ltd. (2019): Authority-to-bind is a formation issue for courts; used as an analogy to illusoriness as another formation challenge.
• Rowland v. Sandy Morris Financial & Estate Planning Services, LLC (2021): Conflicting versions/no meeting of the minds is for courts; cited to reinforce formation disputes are judicial.
• Amos v. Amazon Logistics, Inc. (2023): Distinguished in a footnote: the Fourth Circuit characterizes Amos as a contract-validity (unconscionability) context, not true formation, warning against relabeling.

D. Choice-of-law and the “nonexistent contract” problem

• Klaxon Co. v. Stentor Mfg. Co. (1941): Required the court to use Maryland’s choice-of-law rules (forum state rules) in diversity/removal posture.
• Jackson v. Pasadena Receivables, Inc. (Md. 2007): Continental invoked Jackson for the idea that parties can choose governing law “even as to issues going to the validity of the contract.” The Fourth Circuit distinguishes: Jackson did not involve a formation denial; it presupposed a contract existed.
• Realogy Holdings Corp. v. Jongebloed (5th Cir. 2020): Cited for the proposition that courts do not resort to contractual choice-of-law provisions when determining the preliminary question of formation.
• Konover Prop. Tr., Inc. v. WHE Assocs., Inc. (Md. App. 2002) and Francis v. Allstate Ins. Co. (4th Cir. 2013): Used to identify Maryland’s lex loci contractus approach—law of the place where the “last act necessary” to form the contract occurs (here, Maryland, where plaintiffs accepted/used the card).

E. Maryland illusoriness/consideration for arbitration: the core merits

• Cheek v. United Healthcare of Mid-Atlantic, Inc. (Md. 2003): The controlling Maryland authority in the majority’s view. A clause allowing unilateral modification “at any time with or without notice” made the employer’s promise to arbitrate “entirely illusory,” defeating consideration for the arbitration agreement.
• Holloman v. Circuit City Stores, Inc. (Md. 2006): Continental’s best Maryland counterexample. The majority distinguishes Holloman on its concrete limitations (annual change date + 30 days written notice), which meaningfully bound the drafter and preserved reciprocity.
• DIRECTV, Inc. v. Mattingly (Md. 2003): The majority rejects the dissent’s reliance on DIRECTV because DIRECTV’s change clause expressly gave the consumer a right to cancel and required written notice describing the change and effective date—features absent from Continental’s vague “notice … required by law” wording.
• Coady v. Nationwide Motor Sales Corp. (4th Cir. 2022): Supports reading the contract “as a whole,” defeating the argument that courts may only look at the “arbitration provision” heading rather than other provisions (like change-in-terms) that apply to “any term.”

F. Substantive background on the asserted claims (non-arbitration merits context)

• CashCall, Inc. v. Md. Comm’r of Fin. Regul. (Md. 2016): Provides the “de facto lender” framing for alleged “rent-a-bank” usury evasion—important context for why plaintiffs sought declarations that loans were void and damages.

3.2 Legal Reasoning

A. Why the court (not the arbitrator) decides illusoriness here

The majority’s structure is explicitly statutory and conceptual:

• FAA § 4 text: A court may compel arbitration only when “satisfied” that “the making of the agreement for arbitration … is not in issue.” If illusoriness defeats consideration, it contests the “making” of the arbitration agreement.
• Delegation clause cannot bootstrap itself: Because delegation is inside the allegedly unformed arrangement, enforcing it prior to formation would assume the very consent in dispute.
• Severability stops at formation: Prima Paint/Buckeye sever invalid terms from an existing contract; they do not permit arbitration to determine whether any agreement exists. Granite Rock supplies the doctrinal boundary.

B. Why choice-of-law clauses do not control formation disputes

The court treats Continental’s choice-of-law argument as circular: applying the clause assumes an extant contract containing that clause. Because plaintiffs deny formation (or, at minimum, deny formation of the arbitration agreement), the court applies Maryland’s conflicts rules to identify Maryland as the place of contracting (acceptance/use in Maryland).

C. Why the arbitration agreement is illusory under Maryland law on these facts

Under Maryland law as the Fourth Circuit reads it, the decisive features are:

• Scope of unilateral power: Continental can “change any term” in its “sole discretion,” which necessarily includes the arbitration clause and any consumer-protective “rights” (including termination).
• Vagueness/emptiness of notice: “Notice … required by law” is not “prior notice,” not detailed notice, and not a bargained-for limitation. The majority emphasizes Continental’s real-world practice: posting an updated agreement online and treating that as “notice.”
• Absence of meaningful constraint or reciprocity: Unlike Holloman’s temporal restrictions and advance written notice, Continental’s clause leaves Continental with an “escape hatch” from its arbitration promise, defeating consideration and thus formation.

3.3 Impact

• Arbitration drafting in Maryland-governed consumer contracts: Drafters who reserve power to change “any term” in “sole discretion,” coupled with ambiguous notice language, risk having arbitration (and delegation) provisions deemed unformed/illusory—especially where notice is effectively post hoc or non-salient.
• Delegation clauses are not a cure for formation defects: The decision reinforces that delegation provisions cannot force arbitration of whether an arbitration agreement exists in the first place.
• Choice-of-law clauses face a formation-first sequencing rule: Parties should expect courts to apply forum conflicts principles to determine which law governs formation when formation is disputed—rather than reflexively applying the contract’s chosen law.
• Rent-a-bank litigation posture: While the merits of “de facto lender” claims are not decided, the ruling makes it procedurally easier for such plaintiffs to remain in court where arbitration agreements are vulnerable under state formation doctrines.
• Federalism and variability: The majority underscores that this result is driven by Maryland common law; other states may take different approaches to unilateral modification clauses and consideration.

4. Complex Concepts Simplified

• “Formation” vs. “validity”: Formation asks whether a contract was ever made (mutual assent + consideration). Validity assumes a contract exists but argues it should not be enforced (e.g., illegality, fraud in inducement, unconscionability). This distinction controls who decides: courts decide formation; arbitrators may decide many validity defenses if the arbitration clause is severable and formed.
• “Illusory promise”: A promise is illusory when one party keeps the unfettered option to perform or not perform—so it did not really commit to anything. If a party can unilaterally rewrite its obligations at will, its “promise” may not count as consideration.
• “Delegation clause”: A clause inside an arbitration provision that assigns gateway questions (like scope or enforceability) to the arbitrator. But it cannot assign the question “did we ever agree to arbitrate?” if that agreement is itself in dispute.
• “Severability” (Prima Paint/Buckeye): Arbitration clauses can be treated as separable from the rest of an existing contract, allowing arbitration even if other contract terms are attacked. But severability does not apply where the attack is that no arbitration agreement was formed at all.
• “Choice-of-law sequencing”: A contract’s choice-of-law clause is itself a contractual term; if contract formation is disputed, courts often will not assume the clause is binding to decide whether the contract exists.

5. Conclusion

The Fourth Circuit’s decision establishes (and forcefully reiterates) a sequencing rule with practical bite: when a party argues an arbitration arrangement is illusory—because unilateral modification authority strips the drafter of any real obligation—courts must decide that formation dispute before compelling arbitration, notwithstanding delegation language. The court also refuses to let a choice-of-law clause govern that threshold inquiry, because enforcing the clause presupposes a contract. On the merits under Maryland law, the court reads Cheek v. United Healthcare of Mid-Atlantic, Inc. broadly and treats Continental’s “sole discretion” change-in-terms clause—paired with vague “notice … required by law”—as too one-sided to support consideration for arbitration. The concurring and dissenting opinions sharpen the stakes: whether Maryland law condemns only “no-notice/no-consent” modification regimes (the dissent’s view) or also condemns “notice” so undefined that it functions as no meaningful constraint (the majority’s view). Either way, the decision is a major drafting and litigation signpost for arbitration clauses embedded in consumer credit agreements governed by Maryland contract principles.