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11th Circuit enforces delegation provisions in arbitration agreements for tribal loan
On October 3, the U.S. Court of Appeals for the Eleventh Circuit reversed and remanded a decision regarding the applicability of an arbitration agreement within a loan agreement. The loan agreement included arbitration and delegation provisions that assigned threshold questions of arbitrability to an arbitrator. The district court had found these provisions unconscionable and unenforceable, reasoning that the agreements were governed by Tribal law, which it believed did not include the substantive contract law necessary for arbitrability determinations.
The 11th Circuit unanimously reversed the district court’s decision, concluding that the delegation provision was enforceable and required the arbitrator to resolve “all disputes concerning the ‘validity, enforceability or scope of’ the arbitration agreements.” The court also held that the arbitration agreements incorporated the Federal Arbitration Act (FAA) rather than precluded it. Under the FAA, parties may contractually “agree to delegate ‘gateway’ questions of ‘arbitrability’ to an arbitrator.”
Additionally, the court held that the enforceability of an arbitration agreement due to the existence of a choice-of-law provision is an issue for the arbitrator, rather than the court, to properly resolve. As such, the 11th Circuit remanded the case for further proceedings, allowing the arbitrator to decide the enforceability of the arbitration agreements.
CFPB consent order bans company from arbitrating disputes
On October 10, the CFPB issued a consent order against a California-based private arbitration company that offers an online dispute resolution platform, for alleged issues related to its student loan collections. According to the CFPB, in April 2022, respondent allegedly commenced arbitration proceedings against consumers who had not provided consent, in violation of the CFPA. The proceedings were related to consumers’ alleged default on income share loans extended by an online training program provider, which was shut down following a separate CFPB and 11-state enforcement action (previously covered in InfoBytes, here and here). The company was allegedly aware it lacked jurisdiction over the claims because none of the income share loans contained an arbitration clause permitting arbitration by this company.
Additionally, the Bureau found that the company allegedly committed deceptive acts and practices by misrepresenting its neutrality, the nature of the arbitration proceedings, and the consequences of consumers’ actions or inactions. For example, the company allegedly falsely represented itself as a neutral and impartial forum for consumer debt arbitrations and failed to disclose its financial alignment with the creditor that filed the claim against the consumer. Furthermore, the Bureau found that the company allegedly engaged in unfair practices by unlawfully attempting to bind consumers to its terms of service and platform rules. The company has not admitted or denied the CFPB’s claims.
Court grants motion to compel arbitration in class action
On August 14, the U.S. District Court for the Western District of Pennsylvania decided an arbitration provision was valid and enforceable in a class action regarding interest rates against a lender. The plaintiffs had filed a putative class action complaint alleging violations of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law, Loan Interest and Protection Law, and Consumer Discount Company Act related to the interest rates charged on loans obtained through the defendant’s website. The defendant filed a motion to compel individual arbitration pursuant to the Federal Arbitration Act, arguing that the plaintiffs had agreed to a broad arbitration provision contained within a “clickwrap agreement” during the loan application process. The plaintiffs opposed the motion, challenging the validity and enforceability of the arbitration provision.
The court determined that the arbitration provision was valid and enforceable. The court found that the plaintiffs had been adequately informed of the arbitration provision through the clickwrap agreement and binding. The court also noted that the arbitration provision included clear and unambiguous language that the plaintiffs waived their right to litigate claims in court. As a result, the court granted the defendant’s motion to compel arbitration individually.
North Carolina Supreme Court upholds credit union’s right to enforce unilaterally inserted arbitration clause
On May 23, the North Carolina Supreme Court ruled that a defendant credit union can enforce an arbitration clause added to a customer’s contract years after its inception. The case centered on a “Notice of Amendments” provision in the contract, which customers agreed to when opening accounts, allowing the credit union to unilaterally change contract terms with proper notice to the consumer.
In January 2021, the credit union notified the plaintiff that it was updating its membership agreement to include an arbitration requirement for certain disputes and a waiver of class actions. In March 2021, the plaintiff filed a class action lawsuit against the credit union, alleging that it was improperly collecting overdraft fees on accounts that were never overdrawn. The trial court denied the credit union's motion to compel arbitration, but the appeals court reversed that decision and remanded the case with instructions to stay the case pending arbitration, holding that the addition of the arbitration provision was enforceable.
The North Carolina Supreme Court addressed in its opinion whether the inclusion of the arbitration violated the implied covenant of good faith and fair dealing. The Court highlighted the economic necessity for companies to adapt contractual terms efficiently and found that amendments adhering to the original contract's subject matter met the covenant of good faith and fair dealing.
The court then turned to the question of whether the original agreement “reasonably anticipated” the changes and whether the changes reasonably related to “subjects discussed” in the agreement. The court held that the inclusion of an arbitration clause was foreseeable due to the original contract's dispute resolution terms, which stated that the agreement was subject to the laws of North Carolina and set the venue for any dispute. Since the agreement’s changes addressed the forum for disputes, the court deemed this to be within the “same universe of terms.” Moreover, the court determined the contract was not illusory because the language included in the change to the contract limited its scope by stating “[e]xcept as prohibited by applicable law.”
Finally, the court rejected the plaintiff’s argument that she did not accept the offer to arbitrate “through silence,” holding that there was an agreement between the credit union and the plaintiff that the credit union could change the terms upon proper notice, not with consent of the plaintiff.
State appeals court says electronic bank statement constituted notice of new terms
On May 4, the Colorado Court of Appeals held that a plaintiff had constructive notice of updated terms and conditions in her membership agreement with a defendant credit union, which included an arbitration agreement with an opt-out provision. Plaintiff entered into a finance agreement with an auto dealer, which assigned the agreement to the defendant. To complete the assignment, the plaintiff opened a savings account and signed an agreement, in which she consented to receiving and accepting statements, notices, and disclosures electronically. A few years later, the defendant updated its membership agreement’s terms to include the arbitration provision and sent notices to members with their monthly bank statements. Plaintiff received an email with information about the updates and was given an opportunity to opt-out of the arbitration provision in writing within 30 days. Records show that the plaintiff received the email but did not open it. Defendant filed a motion to dismiss plaintiff’s class action complaint and compel arbitration, but the district court concluded that the plaintiff did not have actual or constructive notice of the arbitration agreement. In reversing the district court’s ruling, the Court of Appeals wrote “we do not deem the notice as being buried or hidden in [defendant’s] email, or the surrounding information as cluttering the screen to the extent that a reasonable person would be distracted from the important notice about the ‘updated ... Membership and Account Agreement.’” The Court of Appeals also disagreed with plaintiff’s argument that her “express and affirmative consent” was required for the defendant to add the arbitration provision to the terms, stating that “[u]nder the totality of the circumstances, [plaintiff] is deemed to have assented to the addition of the arbitration agreement” as she was constructively notified of the change, did not exercise her right to opt out, and continued to use her account.
While concurring with the majority, one of the judges questioned whether the “current ‘reasonable person’ standard that courts use for constructive notice is outdated given the economic realities of the digital age.” The judge asked whether the monthly bank statement has “significantly diminished in importance” or is becoming obsolete since consumers are able to check bank account balances and transactions “at any time and from any location.”
District Court upholds arbitration in website terms of use
On March 28, the U.S. District Court for the Western District of North Carolina ruled that class members must arbitrate their claims against an online lending marketplace relating to a 2022 data breach that affected current, former, and prospective customers. The court found that a mandatory arbitration clause contained in the defendant’s terms of use agreement “is broad enough to encompass the claims” brought by class members, and adopted recommendations made by a magistrate judge in February, who found that the agreement not only requires users to agree to be bound by its terms of use when they make their accounts, but also requires that users consent, acknowledge, and agree to its terms of use any time they submit consumer loan searches on the website. The plaintiff argued that there was not a binding contract between the parties because he did not “fully and clearly” understand that he had agreed to arbitrate disputes with the defendant. He further attested that because he never saw the terms of use, he “lacked actual or inquiry notice.” In particular, the plaintiff complained about the placement and font size of the notice, which he claimed no reasonable consumer would have seen “as there is no reason to scroll down the page after seeing the ‘Create Account’ tab.” The magistrate judge disagreed, stating that the “[p]laintiff had multiple opportunities to read and decline the terms if he chose,” and that “[t]his is not the needle in a haystack search that [p]laintiff depicts.” In agreeing with the recommendations, the court concluded that the plaintiff failed to show that the magistrate judge’s determination “was clearly erroneous or contrary to law” and said the plaintiff is bound by the arbitration clause.
District Court stays stablecoin suit pending arbitration proceedings
On January 6, the U.S. District Court for the Northern District of California granted a defendant cryptocurrency exchange’s motion to compel arbitration in a class action alleging the exchange, along with the issuer of a stablecoin cryptocurrency, misrepresented the stability of the coin when offering it on the exchange’s platform. The defendants filed separate motions to compel arbitration, however, the plaintiffs claimed, among other things, that since they opened their accounts, the exchange’s user agreement, which contains an arbitration agreement, “has been unilaterally modified more than 20 times.” They further maintained that the exchange’s motion to compel arbitration should be denied because the arbitration provision is “unconscionable and thus unenforceable” and “the delegation clause is inapplicable and unconscionable.”
In granting the exchange’s motion to compel arbitration, the court found that the plaintiffs are parties to the exchange’s terms of use, which specify that an arbitrator, not a court, must decide whether any disputes a customer has with the exchange should be resolved via arbitration. “Plaintiffs do not dispute they agreed to [the] User Agreement, nor do they contest that … it contains an arbitration and a delegation clause,” the court said, noting that since arbitrability must be determined first, it has not reached “the issue of whether the arbitration agreement as a whole is unconscionable.” However, the court denied the defendant issuer’s motion to compel arbitration after finding that the user agreement “contains clear-cut language showing an intent to arbitrate disputes between the signatories [i.e., the exchange and its customers] only.” The user agreement does not state that obligations and rights are extended to a nonsignatory, such as the issuer, the court said—additionally staying all other judicial while arbitration proceedings between the exchange and the plaintiffs are pending.
District Court says consumer not provided meaningful opportunity to opt-out of arbitration provision
On December 9, the U.S. District Court for the Southern District of New York denied a defendant bank’s motion to compel arbitration in an action alleging the bank’s policy on overdraft fees caused customers to pay fees on accounts that were allegedly “never actually overdrawn.” Plaintiff filed a putative class action against the defendant seeking monetary damages from the defendant’s assessment and collection of these fees, and the defendant moved to compel arbitration. The court considered, among other things, whether 2014 and 2021 versions of the bank’s deposit account agreements constituted a request for the plaintiff to enter into a new agreement, in addition to whether “the extent to which a party subject to an agreement containing an arbitration provision with an optout clause . . . has a continuing obligation or opportunity to opt-out of arbitration each time the contract is amended or whether the party is bound by their assent to or rejection of arbitration at the first instance the opt-out procedure is offered.”
The court noted that the plaintiff’s account, which was opened in 2004, was governed by a 2002 version of an agreement that did not contain any dispute resolution provisions, nor did it require mandatory arbitration. However, the agreement did include a change of terms provision that stated customers “could be ‘bound by these changes, with or without notice.’” The agreement was amended in 2008 to include an arbitration provision and contained an opt-out clause allowing customers to reject the arbitration provision within 45 days of opening an account. In 2014, the defendant sent a notice to customers about further modifications made to initial account disclosures. The 2014 notice stated that customers could opt out of the entire amended agreement, which contained the arbitration clause, if they closed their account within 60 days. If they chose not to close the account, customers would be deemed to have accepted the amended agreement. A 2021 amendment agreement also included the arbitration provision. The defendant argued that the plaintiff is subject to the arbitration provision because he could have opted out as early as 2008 but chose not to and continued to use his account after receiving the 2014 notice.
The court disagreed, stating that the plaintiff would still have been obligated to arbitrate disputes under a survival clause in the 2008 contract, which said that the arbitration clause “shall survive the closure of your deposit account.” The court found that the 2014 notice did not provide the plaintiff a meaningful opportunity to opt out of arbitration. Moreover, because the plaintiff was unable to opt out under the 2008 agreement, “no contract to arbitrate was formed, and [the plaintiff] was not required to opt out again when [the defendant] amended the contract in or about January 2014 or thereafter.” “The lack of notice and absolute lack of opportunity for [the plaintiff] to opt out render the 2008 [agreement] unconscionable under New York law, which seeks to ‘ensure that the more powerful party’ — here, [the defendant] — ‘cannot ‘surprise’ the other party with some overly oppressive term,’ like an arbitration provision with an opt-out procedure that could never be exercised,” the court wrote.
FTC, CFPB weigh in on servicemembers’ right to sue under the MLA
On November 22, the FTC and CFPB (agencies) announced the filing of a joint amicus brief with the U.S. Court of Appeals for the Eleventh Circuit seeking the reversal of a district court’s decision that denied servicemembers the right to sue to invalidate a contract that allegedly violated the Military Lending Act (MLA). (See corresponding CFPB blog post here.) The agencies countered that the plain text of the MLA allows servicemembers to enforce their rights in court. Specifically, the agencies argued that Congress made it clear that when a lender extends a loan to a servicemember that fails to comply with the MLA, the loan is rendered void in its entirety. Moreover, Congress amended the MLA to unambiguously provide servicemembers certain legal rights, including an express private right of action and “the right to rescind and seek restitution on a contract void under the criteria of the statute.”
The case involves an active-duty servicemember and his spouse who financed the purchase of a timeshare from the defendants. Plaintiffs entered into an agreement with the defendants, made a down payment, and agreed to pay the remaining balance in monthly installments carrying an interest rate of 16.99 percent, in addition to annual assessments and club dues. None of the loan documents provided to the plaintiffs discussed the military annual percentage rate, nor did the defendants make any supplemental oral disclosures. Additionally, the agreement contained a mandatory arbitration clause (the MLA prohibits creditors from requiring servicemembers to submit to arbitration) and purportedly waived plaintiffs’ right to pursue a class action and their right to a jury trial. Plaintiffs filed a putative class action lawsuit alleging the agreement violated the MLA on several grounds, and sought an order declaring the agreement void. Plaintiffs also sought recission of the agreement, restitution, statutory, actual, and punitive damages, and an injunction requiring defendants to comply with the MLA going forward.
Defendants moved to dismiss, countering “that the plaintiffs lacked standing because they had not suffered any concrete injury and, even if they had, whatever injury they suffered was not traceable to the alleged MLA violations.” Defendants also argued that the loan was exempt under the MLA’s exemption for residential mortgages, and claimed that the MLA does not authorize statutory damages, nor did the plaintiffs state a claim for declaratory or injunctive relief. Further, defendants stated the court lacked jurisdiction to hear the case. The district court dismissed the lawsuit for lack of standing, agreeing with the magistrate judge that, among other things, plaintiffs “failed to allege ‘that the inclusion of the arbitration provision impacted [their] decision to accept the contract,’ and that they could not ‘seek[] relief based on a mere technicality that has not impacted them in any way.’”
Disagreeing with the district court’s ruling, the agencies argued that plaintiffs have a legal right to challenge the contract in court because (i) they made a down payment on an illegal and void loan; (ii) the injuries are traceable to the challenged conduct since “their monetary losses are the product of the illegal and void loan"; and (iii) their injuries “are redressable by an order of the court awarding restitution for the amounts that plaintiffs have already paid on the loan, and by a declaration confirming that the loan is void and that the plaintiffs have no obligation to make additional payments going forward.” The agencies asserted that courts have recognized that economic injury is exactly the sort of injury that courts have the power to redress.
Moreover, the agencies pointed out that the district court’s ruling “risks substantially curtailing private enforcement of the MLA and limiting servicemembers’ ability to vindicate their rights under the statute. It does so by reading the MLA’s voiding provision out of the statute and reading into the statute an atextual materiality requirement. But it may be very difficult, if not impossible, for servicemembers to demonstrate that certain MLA violations had a direct effect on their decision to procure a financial product or caused them to pay money they would not otherwise have paid.”
District Court sends overdraft fee suit to arbitration
On November 16, the U.S. District Court for the District of Massachusetts granted a defendant’s motion to compel arbitration regarding claims that consumers are charged significant overdraft or non-sufficient funds fees on bank accounts linked to discount cards issued by the gas-discount company. According to the plaintiff’s putative class action suit, the defendant advertises fuel discounts through a mobile app and payment card system while claiming that its service acts “like a debit card” by “‘effortlessly deduct[ing]’ funds from linked checking accounts at the time of purchase[.].” While these payments and discounts are represented as being “automatically applied,” the plaintiff alleged that paying with the discount card results in significant processing delays. These delays, the plaintiff contended, cause users to run the risk of having insufficient fees in their checking accounts before the payment is processed, thus resulting in overdraft fees. Additionally, the plaintiff claimed that the defendant does not verify whether a consumer has sufficient funds in the checking account before payments are withdrawn. The defendant moved to compel arbitration, or in the alternative, moved to dismiss the complaint, claiming that during the sign-up process, the plaintiff was presented with terms and conditions that explicitly require users to arbitrate any disputes, claims, or controversies. Moreover, the defendant argued that users cannot sign up for the program unless they first check a button that says “I agree” with the terms of use. While the parties agreed that the plaintiff was presented at a minimum a hyperlink to the terms and conditions, they disputed whether the sign-up process required the plaintiff to affirmatively assent to them. According to the plaintiff, there was no such checkbox button when he signed up for the program.
The court disagreed, ruling that the plaintiff had notice of and agreed to terms and conditions that included an arbitration clause and class action waiver. According to the court, the defendant adequately showed that the checkbox button was part of the process when the plaintiff signed up and that the defendant obtained his affirmative asset to the agreement. Further, the plaintiff failed to support his claim with any specific evidence that the checkbox button may not have been there during the sign-up process, the court maintained.