Bank (Finally) Gets Plaintiffs’ Claims Sent to Individual Arbitration

Financial Services Law

A major national bank won a motion to dismiss in a multidistrict litigation challenging its overdraft fee practices, sending the individual plaintiffs’ disputes to arbitration pursuant to customer account or deposit agreements.

The decision is the latest ruling in the long-running case, demonstrating that the bank’s strategy of continuing to litigate—through a series of appeals and over several years even as other bank defendants agreed to multimillion-dollar settlements—can be successful.

What happened

The dispute involves five class actions transferred to Florida federal court for pretrial purposes for a multidistrict litigation. Each of the complaints was based on the former practices of the bank relating to overdraft fees, asserting that the practices breached the covenant of good faith and fair dealing under the bank’s contracts with its consumer checking account customers.

Two contracts were involved in the cases: a consumer account agreement and a deposit agreement. Both agreements required individual, non-class arbitration of any disputes concerning the customer’s account. In each contract, the arbitration terms were set off by a heading in large, highlighted or bolded type and were separately listed in the table of contents.

The bank did not move to compel arbitration against any of the named plaintiffs at the outset of the litigation, although it did plead its arbitration rights in answer to each of the complaints and otherwise informed the courts (and plaintiffs) that it was reserving its arbitration rights.

After the district court certified a class of plaintiffs, the bank promptly moved to enforce its arbitration rights. Although the plaintiffs argued that the bank waived its rights by not moving to compel earlier, the U.S. Court of Appeals, Eleventh Circuit ruled that the bank “did not act inconsistently with its arbitration rights.”

The bank then moved to compel arbitration of the individual disputes and dismiss the claims of the unnamed plaintiffs. U.S. District Judge James Lawrence King granted the motion.

Emphasizing the Federal Arbitration Act’s public policy strongly favoring arbitration, the court found the plaintiffs failed to demonstrate a valid basis to refuse enforcement of the arbitration agreements.

Judge King rejected the plaintiffs’ arguments that the agreements required the bank to affirmatively initiate arbitrations against the unnamed class members and were either illusory or unconscionable. The plaintiffs faced a problem with their contention that the contract as a whole was illusory for lack of consideration, the court said.

“Plaintiffs’ argument would require the Court to find that the [bank] agreement as a whole was illusory for lack of consideration,” the court wrote. “But as discussed above, the Court has already concluded that all members of the class are subject to ‘common and materially uniform’ contracts—the same contracts on which Plaintiffs’ claims in this litigation are based. It would be inconsistent for Plaintiffs to rest on these contracts as a basis for their claims while also asserting that there are no contracts at all because the agreements are illusory.”

As for unconscionability, binding precedent in the Eleventh Circuit foreclosed the argument that the agreements were procedurally unconscionable simply because they were contracts of adhesion, while Judge King noted that the Supreme Court has “repeatedly and emphatically” rejected the plaintiffs’ substantive unconscionability argument that it would be an economically losing proposition for class members to arbitrate low-value claims in a nonclass setting.

The plaintiffs also failed to demonstrate that any element of the arbitration agreement that they challenged could not be severed from the agreement if necessary, the court said.

“Having found that unnamed class members are subject to contracts that require them to arbitrate, on an individual basis, the disputes asserted on their behalf in this litigation, and finding no basis to refuse enforcement of those contractual commitments, the Court finds that the contracts must be enforced according to their terms,” the court wrote, granting the motion to dismiss all claims of unnamed class members in favor of arbitration.

To read the Florida court order, click here.

Why it matters

The court’s decision illustrates that it can still be valuable to engage in years-long litigation to achieve an order sending the plaintiffs to individual arbitration, rather than paying out millions in a settlement agreement, as several other banks named in the original complaints elected to do.