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.
Last week, the Consumer Financial Protection Bureau (“CFPB”) issued a proposed rule which would prohibit mandatory arbitration provisions in millions of banking contracts, including contracts with consumers for credit cards and bank accounts. While financial institutions would still be allowed to offer arbitration as an option to customers individually, they would no longer be able to require it be done individually for claims brought as class actions. The intended, and drastic, result of the rule is that consumers would be free to join together in class action suits against their financial institutions for grievances which they had previously only been able to negotiate individually.
Following the Alabama Supreme Court’s decision last Friday in Moore-Dennis v. Franklin, Nos. 1131142, 1131176, Alabama lenders should immediately review their account agreements to ensure any amendments to those agreements will survive judicial scrutiny. This is especially true for any lenders who have used electronic means to notify account holders of an amendment.
When Joseph Franklin became a customer of PNC Bank, he received an account agreement in the mail. This agreement did not contain an arbitration provision, but it did provide that PNC could unilaterally amend the agreement by providing proper notice to Franklin. In 2013, Franklin’s niece, Tamara Franklin, suspected a PNC employee was stealing from him. At PNC’s urging, Tamara was added to Franklin’s account. At that time, Tamara changed Franklin’s email address but, according to her, did not consent to receive online notifications from PNC. Shortly after Tamara was added, PNC unilaterally amended the account agreement to add an arbitration provision. PNC communicated this change to Franklin and Tamara by posting a notice to Franklin’s online-banking profile. Later, when Franklin sued PNC for theft among other things, PNC moved to compel arbitration. The trial court denied this motion.
On appeal, Chief Judge Moore authored an opinion affirming the trial court. Judge Moore concluded that electronic notification of an arbitration agreement is insufficient to show that a customer was aware of the arbitration provision and had agreed to be bound by it. Instead, a bank must show that customer actually accessed the specific e-mail or visited the specific web page containing the arbitration provision. Though PNC had sent Tamara emails stating that Franklin’s bank statements were ready for review electronically, none of the e-mails contained the text of the arbitration provision, a link to the provision, or any indication that the message was important and would impact Franklin’s legal rights. Because PNC Bank had not proved that Tamara or Franklin had accessed an e-mail or visited a web page containing the arbitration provision, it had failed to show that there was a binding agreement to arbitrate Franklin’s claims.
Importantly, only one judge (Judge Parker) joined Chief Judge Moore’s opinion. Seven judges concurred in the result only. Judge Shaw, writing specially, explained that PNC’s account agreement appeared to require PNC to provide notice of an amendment by mail. Therefore, PNC’s electronic notice to Franklin was insufficient to amend that agreement and add the arbitration provision.
Because Chief Judge Moore’s opinion was only joined by one other justice, it is not binding upon lower courts. Still, lower courts that are already hostile to arbitration may adopt its reasoning and require lenders to show that a customer specifically accessed the email or webpage containing the arbitration provision. For that reason, lenders should review whether they could make this showing if required to do so. Even if Chief Judge Moore’s opinion is not followed by lower courts, Judge Shaw’s concurrence is a reminder that an amendment must be made according to the terms of the controlling account agreement. Thus, if a lender has used electronic means to notify its customers of an amendment to an account agreement, that lender should review the controlling agreement and determine whether such notice was effective. If there is doubt, it may be appropriate for the lender to resend proper notice to ensure the amendment will withstand judicial scrutiny.
The text of the opinion is available here.