The Clause Is Presumed Valid — Until You Give a Court a Reason to Think Otherwise
Federal courts begin from the premise that arbitration agreements are enforceable. That presumption can be displaced, but it requires more than an objection to the forum or a general complaint that the process is unfair. The challenge must identify a specific legal defect in the agreement itself, and it must be raised at the right procedural moment before the court decides whether to compel arbitration.
What follows are the five approaches that have produced results in MCA litigation.
Unconscionability: Both Prongs Must Be Present
Unconscionability doctrine requires showing two things simultaneously. Procedural unconscionability arises from the circumstances of the agreement’s formation — a take-it-or-leave-it contract presented without time for review, with no meaningful opportunity to negotiate, or with material terms buried in fine print. Substantive unconscionability arises from the terms themselves — arbitration fees that exceed the value of any possible award, provisions that allow only one-sided discovery, or clauses that strip the merchant of all meaningful remedies while leaving the funder’s options intact.
California courts in particular have found MCA-adjacent agreements unconscionable when those agreements imposed high arbitration costs on the weaker party while insulating the drafter from comparable exposure. Courts applying New York law have been more resistant but have begun to examine cumulative unfairness more carefully since 2024.
The Void-ab-Initio Argument: Challenge the Contract Itself
An arbitration clause cannot survive in a contract that never legally existed. If the underlying MCA agreement constitutes a criminally usurious loan under New York Penal Law, the entire contract is void, and a void contract cannot produce an enforceable arbitration obligation. The New York Appellate Division held in early 2024 that at least one class of MCA agreements constitutes exactly that — a criminally usurious loan — which means the arbitration clause within such agreements is not merely voidable but void from inception.
This argument requires litigation on the threshold question of whether the MCA is a loan or a true sale of receivables, which courts have increasingly been willing to entertain before compelling arbitration.
Forum Unavailability: When the Designated Arbitrator Cannot Hear the Case
Some MCA arbitration clauses designate a specific forum — often AAA or JAMS — that has in fact barred the funder from using it. Both organizations maintain consumer and business registers of companies that have defaulted on arbitration fees. When the named forum is unavailable, the arbitration clause may fail for lack of a valid forum, and a court may decline to substitute an alternative forum if doing so would require rewriting the parties’ agreement.
This is not a theoretical argument. Several MCA funders have lost the right to use major arbitration services and their clauses have consequently become inoperative.
Waiver by Conduct: When the Funder Already Litigated
A party that participates in court litigation — filing motions, conducting discovery, seeking judgment — may waive its right to compel arbitration. If an MCA company obtained a confession of judgment, filed suit, or served garnishment papers before invoking arbitration, that sequence of conduct can constitute a waiver of the arbitration right, particularly where the merchant has incurred expense in reliance on the funder’s choice of forum.
One must document the funder’s litigation activity carefully. The waiver argument is stronger where the funder chose the court forum initially and only sought arbitration after encountering resistance.
Delegation Clause Challenges: Attacking the Clause That Protects the Clause
If the arbitration agreement contains a delegation clause sending all threshold questions — including enforceability — to the arbitrator, the delegation clause itself must be challenged specifically and directly. Courts in Rent-A-Center, West, Inc. v. Jackson (2010) made clear that a general challenge to the contract as a whole does not suffice; the party opposing arbitration must specifically argue that the delegation provision is unenforceable. This means identifying procedural unconscionability, mutual assent defects, or other contract-formation problems that attach specifically to the delegation language, not merely to the arbitration clause or the broader agreement.
Consultation is where this conversation begins. What appears to be a closed door at the procedural level often contains a narrow opening that only becomes visible after examining the specific language of the delegation provision.
