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.
The Eleventh Circuit recently dismissed an appeal from an order compelling arbitration because the appealing party failed to file a notice of appeal within thirty days of that order. For lenders, this opinion serves as a sharp reminder that a trial court order can be final and appealable even though a final judgment has not yet been entered. Instead, an order can be final and appealable if it effectively resolves the case on the merits. Thus, lenders should always examine whether an adverse order should be appealed immediately. If there is any doubt about the proper time to appeal, the lender should consider filing a notice of appeal so that it does not lose the right to appeal that decision.
In the case United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union AFL-CIO-CLC, USW Local 200 v. Wise Alloys, LLC, 807 F.3d 1258 (11th Cir. Dec. 8, 2015), a union and Wise Alloys LLC (“the Company”) entered a collective bargaining agreement (“CBA”) which, among other things, created a schedule of gradually increasing health care premiums over a five-year period. To offset these increases, the CBA included cost-of-living adjustments designed to offset the increasing premiums. The CBA also included an arbitration provision.
One year after the parties signed the CBA, a dispute arose between the union and the Company regarding the manner in which the cost-of-living adjustments and premium increases would work. The parties failed to resolve their differences and, in 2010, the union invoked the CBA’s arbitration provision. When the Company refused to arbitrate, the union sought an order compelling arbitration . Importantly, the only relief requested in the union’s Complaint was an order compelling arbitration. Following cross-motions for summary judgment, the trial court granted the union’s motion and compelled arbitration. However, in its order, the trial court expressed an opinion, sua sponte, that “the case should be stayed, rather than dismissed, pending a final resolution following arbitration.” The court determined that Section 3 of the Federal Arbitration Act, as well as Circuit precedent, required a stay. Consequently, the clerk administratively closed the case.
The case proceeded to arbitration where the union prevailed. The district court case was reopened and the court granted the union’s motion to enforce the arbitration award and entered a final judgment.
The Company appealed the decision to compel arbitration to the Eleventh Circuit, which dismissed the appeal for lack of jurisdiction. The Court concluded that the order compelling arbitration had effectively ended the case on the merits because it resolved the only claim for relief and left nothing for the trial court to do but enforce its decision. Thus, the order compelling arbitration became final and appealable on the date it was entered rather than the date of the judgment. Because the Company had not filed a notice of appeal within 30 days of the order compelling arbitration, the Court had no jurisdiction to consider that appeal. The Eleventh Circuit rejected the argument that the district court’s “stay” had extended the time to appeal. It noted that the only claim in the Complaint was for an order compelling arbitration. Because there were no substantive claims contained in the Complaint, there was nothing for the district court to stay. Thus, the purported stay was without force or effect.
United Steel is a reminder that a trial court order can be final and appealable even if a final judgment has not yet been entered. For that reason, lenders should review adverse and largely dispositive rulings from a trial court to determine whether the decision should be immediately appealed. If there is any doubt as to the appropriate time to appeal, the lender should consider filing a notice of appeal. Even if the appeal is ultimately dismissed as premature, that result may be preferable to losing the right to appeal entirely.
Banks already looking over one shoulder to maintain compliance with regulatory reforms coming at them from the Dodd-Frank Wall Street Reform and Consumer Protection Act may soon need to start looking over the other. Class action lawsuits by customers are likely coming, despite contracts to the contrary.
Many banks and other financial service providers include arbitration clauses in their consumer contracts; because arbitration is generally much less expensive (and quicker) than litigating in court, the cost of resolution is more in line with the minimal amounts often at issue. Class-action claims, however, can disrupt this balance—the cost to defend the most frivolous complaint is overshadowed by the potential exposure where these otherwise “minimal amounts” are aggregated.
In an effort to maintain the balance, lenders frequently require customers to waive any right to participate in a class-action lawsuit. In passing Dodd-Frank, Congress directed the Consumer Financial Protection Bureau (CFPB) to conduct a comprehensive study on the impact of mandatory arbitration clauses and class-action waivers in consumer financial products (including checking accounts, debit cards, auto loans, and payday loans). And going one step further, Congress authorized the CFPB to “prohibit or impose conditions or limitations on the use of” arbitration clauses if it finds that such actions are “in the public interest and for the protection of consumers” and are “consistent with the study.”
What did the CFPB find in its study? After spending over two years to review hundreds of consumer finance agreements and thousands of arbitration disputes, individual consumer lawsuits and class actions, the CFPB issued a 728-page report. Among the conclusions of the report:
- Consumers rarely pursue claims—either in arbitration or court—for small disputes ($1,000 or less). In contrast, millions of consumers were eligible for monetary relief through class action settlements where such relief was permitted by the relevant contracts.
- Lenders frequently waive the right to compel arbitration of individual lawsuits, but routinely invoke the arbitration clause to block class actions.
- There was no statistically significant evidence of lower borrowing costs or increased access to credit for consumers by requiring arbitration and prohibiting class action lawsuits.
- The vast majority of consumers do not know whether they agreed to arbitration, do not understand that they cannot file a lawsuit, and do not consider arbitration or dispute resolution when selecting financial service providers.
What can banks expect? Based on the CFPB’s report, banks should expect significant regulation—if not elimination—on their use of mandatory arbitration clauses and class action waivers. The CFPB clearly believes that these practices lead to an uneven playing field for consumers, and that the justifications are not supported by the evidence they gathered. Formal rulemaking is undoubtedly soon to commence.
What can banks do to prepare?
- Be heard. In submitting public comment, trade groups and industry stakeholders will need to provide hard data evidencing a commitment to consumers.
- Increase customer satisfaction efforts. Banks can expect fewer customer disputes—whether in arbitration, individual lawsuits, or class actions—if there are fewer unhappy customers. Increase employee training and internal resolution processes.
- Monitor customer disputes. Although it is impossible to foresee and prevent every lawsuit, frequent and repetitious disputes of the same type can signal a larger problem that may require priority.
- Stay informed. Many class-action lawsuits follow on the heels of smaller consumer victories that are under the radar. Work with counsel to stay abreast of developments, including whether your practices or contract terms should be modified to reduce exposure.
- Do not overreact. Any regulation by the CFPB may be prospective as to future contracts and may provide for at least some field of operation for arbitration, depending on the rules of the arbitration forum (e.g., is the forum “consumer friendly”) and the contract formation (is the arbitration clause sufficiently prominent, and can the consumer “opt out”). If/when such regulations are finalized, banks should make a fully-informed decision on how to move forward.
Greg Cook and Conrad Anderson, partners in Balch & Bingham’s Birmingham office, represent banks and other institutions in financial services litigation. Mr. Cook is a former Co-Chair of the ABA Class Action & Derivative Suits Committee and has defended over 60 class actions. Both he and Mr. Anderson regularly handle matters involving lender liability, mortgage servicing, bank fraud, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and RESPA, among others.