Interpreting Arbitration Provisions on Class Action Claims Against Banks and Financial Institutions

Like many commercial agreements, agreements with banks and financial institutions often include provisions mandating arbitration for dispute resolution. Sophisticated commercial entities often view arbitration as a favorable forum to resolve disputes because of its expedited discovery and resolution and the resulting decrease in cost. But that calculus can change when banks are faced with the potential for class actions in arbitration. Banks and financial institutions, therefore, sometimes seek to prohibit class actions in arbitration. As a result, arbitrators often must determine whether class actions fall within the scope of the arbitration agreement. In addition, arbitration agreements may contain class action waivers separate from or as part of the arbitration agreement. These provisions are often challenged on grounds of substantive or procedural unconscionability, with little success.

In Wells Fargo Advisors LLC v. Tucker, 373 F. Supp. 3d 418 (S.D.N.Y. 2019), petitioner Wells Fargo Advisors LLC petitioned the court to vacate an arbitrator’s award holding that the parties to an arbitration agreement consented to class-wide arbitration. In Tucker, three former Wells Fargo financial advisors claimed that Wells Fargo failed to pay them overtime pay required by the Fair Labor Standards Act and New York Labor Law. They sought to represent a putative class of others similarly situated. Each of the former financial advisors was a party to a New Financial Advisor Training Agreement, which contained an arbitration provision.

Wells Fargo sought to vacate the arbitrator’s decision on class-wide arbitration. The district court denied the request. The court analyzed the U.S. Supreme Court’s decision in Stolt-Nielsen S.A. v. Animalfeeds International Corp., 559 U.S. 662 (2010), in which the Court found that the parties could not be compelled to submit antitrust claims to class arbitration. In Tucker, the district court found that Stolt-Nielsen “does not preclude the possibility that an agreement to permit class arbitration could be found based on implicit evidence of agreement.” Tucker, 373 F. Supp. 3d at 427 (finding that an arbitrator can infer “such mutual assent from textual cues within the arbitral agreement”). The district court therefore did not vacate the arbitrator’s finding of an implicit agreement to authorize class action arbitration. Id. at 433.

Some banks and financial institutions have sought to protect themselves from exposure to class-wide arbitrations by including class action waivers in their contracts. Courts have found that class action waivers contained in arbitration clauses are not unconscionable or unenforceable. See, e.g., Pleasants v. Am. Express Co., 541 F.3d 853 (8th Cir. 2008) (in a Truth in Lending Act case, the court found that the class action waiver is not substantively unconscionable and that “there are not strong indicia of procedural unconscionability, given the conspicuous manner in which the class-action waiver appeared”); Edelist v. MBNA Am. Bank, 790 A.2d 1249 (Del. Super. Ct. 2001) (finding that the surrender of the class action right was clearly articulated in the arbitration amendment).

Sometimes financial institutions want to arbitrate putative class claims but end up waiving their right to do so. In Vine v. PLS Financial Services Inc., 807 F. App’x 320 (5th Cir. 2020), borrowers brought a putative class action against short-term lenders, which arose from allegations that the lenders, which had asked borrowers for blank or post-dated checks and allegedly assured them that the checks would be used only to verify checking accounts, submitted false worthless-check affidavits to local district attorneys’ offices after borrowers had defaulted on their loans. The Fifth Circuit affirmed the district court’s denial of PLS’s motion to compel arbitration, holding that PLS “substantially invoked the judicial process by ‘submitting false worthless[-]check affidavits’ to the DA’s office, thereby ‘initiat[ing] a process that invite[d] [the DA] to address issues that [were] at stake in the instant action.’” Id. at 327. The Fifth Circuit held that “once PLS waived the arbitration provision, the Borrowers were free to select another form of dispute resolution, including a class action.”

In addition, the loan agreements with the borrowers in Vine included the following language:

2. You acknowledge and agree that by entering into this Arbitration Provision:

(a)   You are giving up your right to have a trial by jury to resolve any dispute alleged against us . . .;

(b)   You are giving up your right to have a court, other than a small claims tribunal, resolve any dispute alleged against us . . . ;

(c)   You are giving up your right to serve as a representative, as a private attorney general, or in any other representative capacity, or to participate as a member of a class of claimants, in any lawsuit filed against us. . . . Your dispute may not be consolidated with the dispute of any other person(s) for any purpose(s).

The Fifth Circuit agreed with the district court that “the most plausible way to interpret a class action waiver in the middle of an arbitration provision is as part of the explanation of the rules, rights, and procedures that apply if a dispute is arbitrated—‘not as an independently effective waiver of the right to pursue a class action outside the arbitration context.’” Id. at 328 (emphasis in original). The Fifth Circuit noted that “the loan agreement’s jury-trial waiver provision confirm[ed]” its conclusion. “The right to a jury trial, like a class action, is included as one of the rights given up as a result of agreeing to arbitrate. But the loan agreement includes an additional jury-trial waiver outside the arbitration provision to show that the parties waived their right to a jury trial, full stop—not just as a consequence of agreeing to arbitrate. PLS chose to treat the class-action waiver differently when it drafted the form contract.” Id. at 328–29.

Therefore, there are two lessons from the PLS decision. First, when drafting agreements that include class waivers in arbitration provisions, consider including a separate class waiver provision if your intention is to waive class action litigation in its entirety. Second, be careful not to inadvertently waive your right to arbitrate by invoking the litigation process, including through filing a claim with a third-party government enforcement agency. The flip side is also true: Individual borrowers can waive litigation by invoking the arbitration process such as filing a demand in arbitration even though the borrower may have had a right to reject arbitration. See, e.g., Harris v. Credit Acceptance Corp., 2022 WL 4533854, at *2 (3d Cir. Sept. 28, 2022).