The Eleventh Circuit recently allowed a defendant to enforce the arbitration provision in its consumer agreement despite some missteps that could have led to the opposite result, particularly if this case had been in another circuit. In re Checking Account Overdraft Litigation, No. 11-14318 (11th Cir. July 6, 2012), involves allegations that a bank charged overdraft fees when accounts had sufficient funds, provided inaccurate information about balances, and failed to inform consumers of changes to policies (leading to more overdraft fees). That named plaintiff brought claims under the North Carolina Unfair Trade Practices Act, breach of contract, and breach of the covenant of good faith and fair dealing.
The bank moved to compel arbitration under it services agreement, which the district court denied. Following AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Eleventh Circuit remanded for reconsideration. The district court again refused to compel arbitration. It held that the bank waived the right to submit the question of arbitrability to the arbitrator after having litigated the matter for more than a year. It also found the arbitration clause to be unconscionable because the bank could recover its fees from the arbitration, even if it did not prevail, and by withdrawing those fees from the customer’s account without notice. [Slip op. at 4]
The Eleventh Circuit affirmed the conclusion that the bank waived its argument that the agreement gave the arbitrator the authority to decide enforceability and arbitrability. While Rent-A-Center West, Inc. v. Jackson, 130 S. Ct. 2772 (2010), confirms the validity of such delegation provisions, it did not address whether a party may waive them by inconsistent conduct. By litigating the case for a year without raising this threshold issue of arbitrability, the bank gave ample grounds to the district court to find waiver. [Id. at 6]
The fee shifting provision, indeed, allowed the bank to recover its fees and costs incurred from “any dispute involving [the customer’s] account.” [Id. at 7] Thus, the bank was entitled to those fees and costs even if a customer prevailed in a dispute. The bank argued that the provision did not apply to arbitration—it was not in the arbitration section of the agreement, and the arbitration clause specified that AAA rules applied (which have their own costs provisions). The appellate court also backed the district court’s conclusion that the provision applied to this arbitration and, therefore, could be considered in evaluating unconscionability. [Id. at 8-9]
If the fee/cost provision applied, it was not difficult to conclude that it is unconscionable under general principles of contract law. While the arbitration provision was conspicuous and on the agreement’s first page, the unusual fee shifting provision was not highlighted and was on page 14. Its plain language allowed the bank to recover fees even if it lost. [Id. at 18, 20-22]
The last issue was the remedy in light of this unconscionable language. The agreement contained a clause to sever any unenforceable portion of the arbitration provision. Likewise, applicable state law allows for severing unconscionable provisions from broader contracts. While the consumer argued that the bank waived its right to rely on the severance clause, the state law principle still applied. The Eleventh Circuit held hat severing the fee shifting provision was appropriate because the arbitration clause could function effectively without it. [Id. at 25-26] The parties most likely intended the fee shifting provision and arbitration clause to operate separately considering they appeared in separate potions of the agreement and did not reference one another, too. [Id. at 26] Accordingly, the appellate court reversed and instructed the district court to compel arbitration, though without the fee shifting provision.
Had this matter been in the Second or Ninth Circuits, it is quite possible the court would have invalidated the arbitration clause as unconscionable. Of course, we cannot always choose the forum, so we need to consider how to avoid the risks this case presented.
First, lawyers for businesses cannot focus only on the arbitration clauses when advising our clients. We must evaluate how the clause interacts with other provisions or even other documents if they are incorporated by reference, etc. It seems impossible to believe the bank truly intended to recover fees if it lost at arbitration; the provision more likely covered fees incurred if the bank had to litigate garnishment, child support, or spousal maintenance issues as a third party. But the uncertainty regarding the fee shifting provision’s scope nearly invalidated the unrelated arbitration clause, which would have opened up the bank to a class action in federal court. Read and understand every document your client will present to the customer as part of the transaction. Ensure they do not contain surprises like this fee shifting provision or inconsistent arbitration clauses. If your client is interested in including a fee shifting provision, include it in the arbitration clause and try to get the client to agree that it only applies if the consumer’s claim is frivolous. We do not want a court to think the arbitration provision disadvantages the consumer if terms of such risks of fee shifting when compared to litigation.
Second, do not forgo arguments to enforce portions of the arbitration clause unless you and the client are prepared to waive them forever. The bank may have had sound reasons to initially forgo arguing that the arbitrator had the power to determine arbitrability, but it tried to change tactics and to embrace that provision too late. Always look down the road to how your decisions will affect the case in 6 or 12 months.
Third, evaluate including clauses to sever an unconscionable portion of the overall agreement or the arbitration provision. Admittedly, this calls for careful consideration. I do not tolerate the risk of class arbitration well; the lack of appellate review is just too much for a “bet the company” matter if you can avoid it. I am inclined to include a provision invalidating the entire arbitration agreement if a class action waiver is found to be unenforceable or unconscionable to avoid that risk. Your client’s agreement, however, may have provisions that can fall by the wayside but still have the overall agreement provide fair and reasonable dispute resolution processes. Again, think carefully about how to address this issue.
The bank here may have dodged a bullet. Its close call gives defense practitioners another reason to suggest that our clients carefully review their consumer agreements so they avoid the risks seen here.