Dollar General reported its employee Rebecca Keyes to the police for embezzlement, causing her to be arrested. Keyes later sued Dollar General under a number of legal theories, including malicious prosecution, false imprisonment, and intentional infliction of emotional distress. The trial court ordered arbitration for all of her claims, but the Mississippi Supreme Court reversed for all but one claim. The Court found that disputes over the alleged embezzlement and the fraudulent conversion of property from one’s employer, were not covered under an arbitration provision which defined “covered claims” as those “arising out of your employment with Dollar General.” This decision is but the latest by the Mississippi Supreme Court, one of which we previously wrote about here, refusing to enforce broadly worded arbitration clauses for certain types of claims. These cases are troubling for the financial services industry in that plaintiffs may be able to avoid even very broadly worded arbitration clauses through inflammatory allegations or in cases where there is alleged criminal conduct. The case was styled Rebecca Keyes v. Dollar General Corporation, No. 2017-IA-00010-SCT. Click here to read the opinion in full.
In Dasher v. RBC Bank, the Eleventh Circuit held that a bank could not retroactively apply a newly-inserted arbitration provision in its customer account agreement to a dispute that was already in litigation unless the existence of the arbitration provision was communicated to counsel. Michael Dasher filed suit against RBC Bank arising out of certain practices implemented by RBC Bank related to overdraft fees. In 2012, PNC Bank acquired RBC Bank and issued a newer version of customer account agreements than those issued by RBC Bank in 2008. The PNC Bank agreement did not contain an arbitration provision, but PNC Bank moved to compel arbitration based on an arbitration provision in the 2008 RBC Bank agreement. The trial court denied this motion and the ruling was upheld on appeal.
After a customer pawned a television that he had leased from Rent-A-Center, the manager swore out a criminal complaint for theft of rental property. When the State subsequently retired the charges without prosecution, the customer sued Rent-A-Center and its manager for malicious prosecution and false imprisonment. Relying on language in the arbitration clause that it “shall be interpreted broadly as the law allows” to include “any dispute or controversy . . . based on any legal theory, including, but not limited to allegations based on . . . tort, fraud, . . . , [and] the common law . . . ,” the trial court entered an order compelling arbitration. However, the Mississippi Supreme Court reversed, holding that “the agreement did not contemplate” a criminal complaint, based in part on the fact that such claims were not specifically listed in the arbitration agreement. This case is troubling for the financial services industry in that plaintiffs may be able to avoid even very broadly worded arbitration clauses through inflammatory allegations or allegations related to criminal conduct. The case was styled Brian Ray Pedigo v. Rent-A-Center, Inc., Civil Action No. 2016-CA-00572-SCT.
Lenders who move to compel arbitration should always consider the complex interplay between the Federal Rules of Civil Procedure and the Federal Arbitration Act. In Ryan D. Burch v. P.J. Cheese, Inc., 861 F.3d 1338 (2017), the Eleventh Circuit held that a general jury demand in the plaintiff’s complaint was not enough to preserve his statutory right to a jury trial on questions of arbitrability. Specifically, the Court held that the FAA’s procedural requirements for demanding a jury trial on arbitrability trumped the normal requirements for a jury demand found in Federal Rule of Civil Procedure 38. While the case specifically concerns a jury demand, it also demonstrates that the FAA contains procedural requirements and that the Federal Rules only fill the gaps. Therefore, when arbitrability will be an issue, lenders should take care to consider the procedural requirements of the FAA in conjunction with those of the Federal Rules.
What to do now about the new CFPB rule on arbitration? (1) begin planning now and (2) begin actual preparation after the 60 days runs.
Congress has 60 days after publication of the new CFPB rule to take action to stop the application of this rule. Publication occurred on Wednesday (July 19th). It is impossible to predict what Congress will do. However, we can be virtually certain that absent such Congressional action, this new rule will apply 180 days after those 60 days expire. While there are other possible hurdles for this rule (for instance, an expected lawsuit challenging the rule; a possible new CFPB Director in the future; a challenge to the CFPB’s structure, etc.), these other impacts are unlikely to prevent the rule from beginning to have application.
We suggest you use the next 60 days to plan but wait to make any substantial expenditures until it is certain what Congress will do. Here are some key questions which financial institutions should consider during those 60 days:
The Dodd Frank Act expressly provided that any CFPB rule on arbitration would not apply to existing contracts. 12 U.S.C. § 5518(d). Therefore, the CFPB rule released last week will only bar class action waivers for contracts “entered into after” the applicable date for the regulation (60 days after publication of the rule in the Federal Register and then 180 days after that date).
However, the CFPB has taken an aggressive position on what is an existing contract. Therefore, for existing customers, lenders and other “covered persons” will need to examine every change in any product or services they offer that is subject to the arbitration rule. If any “new product or service” is given to an existing customer, the new regulation applies to that product or service even if it is covered by the terms of an existing contract (assuming that the new product or service is within the scope of the rule). In such a case, the lender would need to amend the previous agreement or provide a new agreement for the new product and could not rely on the arbitration clause to avoid a class action.
The Consumer Financial Protection Bureau (CFPB) issued a rule on Monday prohibiting class action waivers in arbitration provisions of certain consumer contracts. The rule—to be codified at 12 C.F.R. § 1040—also requires covered businesses to submit records to the CFPB regarding any arbitration filed by or against their customers regarding covered products and services. The provided records will be made public and hosted by the CFPB on a searchable database. The likely impact of this rule (should it be allowed to go into effect) will be significant for financial institutions and dramatically alter their relationships with their customers.
The Alabama Supreme Court recently held in Hanover Insurance Company v. Kiva Lodge Condominium Owners’ Association, Inc. (No. 1141331) that where a dispute is governed by a contract that requires arbitration the arbitrator must determine whether particular claims are time barred under the contract, not the courts.
The Eleventh Circuit recently held in Parm v. National Bank of California, that a payday lender’s arbitration clause was unenforceable because the forum selected was unavailable and no alternative forum was provided for.
Last week, the Eleventh Circuit refused to compel arbitration because the defendant financial institution failed to prove that its online deposit agreement actually included an arbitration clause. This decision reflects the importance of (1) documenting the original agreement (both the actual terms and the assent of the consumer), (2) retaining the documentation, (3) documenting any change in terms (and the customer’s assent to them) and (4) carefully proving the existence of these agreements (and the customer’s assent) in Court.