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Financial Services Law Insights and Observations


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  • 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of the judges questioned whether the “current ‘reasonable person’ standard that courts use for constructive notice is outdated given the economic realities of the digital age.”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.”

    Courts Arbitration Auto Finance Class Action

  • 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.

    Courts Privacy, Cyber Risk & Data Security Class Action Data Breach Online Lending Arbitration

  • 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.

    Courts Arbitration Digital Assets Class Action Cryptocurrency Stablecoins

  • 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.

    Courts Arbitration Overdraft Consumer Finance Class Action

  • 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.”

    Courts FTC CFPB Servicemembers Military Lending Act Appellate Eleventh Circuit Consumer Finance Disclosures Arbitration

  • 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.

    Courts Overdraft Arbitration NSF Fees Consumer Finance Class Action

  • California appellate court affirms arbitration denial


    On November 8, the Sixth Appellate District Court in the Court of Appeal in California affirmed a lower court’s decision denying a defendant collection agency’s motion to compel arbitration in a California Rosenthal Fair Debt Collection Practices Act (RFDCPA) suit. According to the order, the defendant was hired to collect unpaid credit card debt from the plaintiff on behalf of a creditor. The plaintiff asserted that the defendant “engaged in a routine practice of sending initial communications that failed to provide notice as required by Civil Code section 1788.14, subdivision (d)(2), which governs attempts to collect ‘time-barred’ debts—those that are ‘past the date of obsolescence set forth in Section 605(a) of the federal Fair Credit Reporting Act.’” The defendant filed a motion to compel arbitration, submitting two cardholder agreements produced by the original creditor that did not reference the plaintiff’s name, account number, or the plaintiff’s signature. The plaintiff opposed the motion, arguing that the defendant failed to link the plaintiff to the “generic documents” and denied ever seeing or receiving the agreements before. The trial court ruled the documents were not admissible because there was no evidence that they were ever sent to the plaintiff. The trial court concluded that failing to show evidence of mutual assent, the defendant “could not show that the card agreements were enforceable binding arbitration agreements, and thus it denied the motion to compel arbitration.” The defendant appealed.

    The appellate court noted that while the custodian of records for the original creditor declared that the agreements submitted by the defendant were linked to the plaintiff’s account, the custodian did not declare how or if the agreements were provided to the plaintiff for his review and acceptance. The appellate court further found that since the plaintiff declared that he never received the agreements, the burden to prove the existence of a valid arbitration agreement shifted back to the defendant.

    Courts Debt Collection Arbitration State Issues California Rosenthal Fair Debt Collection Practices Act Appellate

  • 2nd Circuit requires second look at “design and content” of online user agreement


    On September 14, the U.S. Court of Appeals for the Second Circuit reversed a district court’s order denying a credit union’s motion to compel arbitration in a case involving the “unique question” of “whether and how to address incorporation by reference in web-based contracts under New York law.” The plaintiff claimed that the credit union wrongfully assessed and collected overdraft and insufficient funds fees on checking accounts that were not actually overdrawn. After the credit union moved to compel arbitration pursuant to a mandatory arbitration clause and class action waiver provision contained in the account agreement, the plaintiff argued that she was not bound by these provisions because they were not included in the original agreement and the credit union did not notify her when it added them to the agreement. According to the credit union, the plaintiff was on inquiry notice of the modified agreement because she separately agreed to an internet banking agreement that incorporated the modified account agreement by reference, and because the modified account agreement was published on the credit union’s website, which the plaintiff used for online banking. The district court disagreed, finding, among other things, that the hyperlink and language related to the account agreement appeared to be “buried” in the internet banking agreement.

    On appeal, the 2nd Circuit held that the district court “erred in engaging in the inquiry notice analysis, which requires an examination of the ‘design and content’ of the webpage, without reviewing the actual screenshots of the web-based contract.” Recognizing that the internet banking agreement was a “clickwrap” or a “scrollwrap” agreement, the appellate court explained that it has “consistently upheld such agreements because the user has affirmatively assented to the terms of the agreement by clicking ‘I agree’ or similar language.” While the plaintiff did not dispute that she signed up for internet banking, this did not end the court’s analysis; according to the 2nd Circuit, when addressing questions concerning digital contract formation, “courts also evaluate visual evidence that demonstrates ‘whether a website user has actual or constructive notice of the conditions.’” The credit union did not provide evidence showing how the internet banking agreement was presented to users—thereby preventing the district court from assessing whether the relevant language and hyperlink were clear and conspicuous. The 2nd Circuit, therefore, instructed the district court to consider on remand the design and content of the internet banking agreement “as it was presented to users” to determine whether the plaintiff agreed to its terms, and to assess whether the account agreements are “clearly identified and available to the users” based on applicable precedents regarding inquiry notice of terms in web-based contracts.

    Courts State Issues Appellate Second Circuit Arbitration Overdraft Fees Consumer Finance New York Class Action

  • Consumer groups urge Chopra to limit forced arbitration

    Federal Issues

    On September 13, a collation of consumer advocacy groups sent a letter to CFPB Director Rohit Chopra, urging him to limit the use of forced arbitration in consumer contracts in cases where consumers have been “victimized by banking abuses or fraud.” Pursuant to the Dodd-Frank Act, Congress directed the Bureau to study the use of forced arbitration clauses in the consumer finance market and authorized it to write a rule to limit or restrict the practice, which resulted in a 2015 Arbitration Study report (covered by InfoBytes here). The report, according to the letter, “found that tens of millions of consumers were subject to forced arbitration clauses and class action bans in their credit card, deposit account, prepaid account, student loan, payday loan, and wireless carrier contracts,” and, among other things suggested only a small minority of consumers actually filed for forced arbitration. The letter argued that mandatory arbitration clauses in banks’ consumer contracts are “blocking millions of consumers from seeking justice,” and urged the Bureau to use its authority to ensure that “consumers are empowered to act as a group and on their own in the courts.” The letter concluded by urging the Bureau to “rein in forced arbitration in financial services.”

    Federal Issues CFPB Dodd-Frank Arbitration Consumer Finance

  • 3rd Circuit: Arbitration valid despite questions about loan assignment


    On September 1, the U.S. Court of Appeals for the Third Circuit concluded that a district court erred in finding that it had the authority to adjudicate the question of arbitrability based on questions concerning the underlying legality of an assignment of a consumer’s loan. The plaintiff took out a personal loan, which included an arbitration clause in the underlying agreement that delegated questions of arbitrability to an arbitrator. The plaintiff’s charged-off debt was assigned to the defendant who filed a lawsuit to recover the unpaid balance but later dismissed the suit rather than litigating. The plaintiff later contended that the defendant reported his loan delinquency to credit agencies in “an unlawful attempt to collect the [l]oan,” and sued, claiming that because the defendant was not licensed in Pennsylvania during the time period at issue it was not lawfully permitted to purchase the debt. The defendant filed a motion to compel arbitration under the purchase agreement with the loan originator. Focusing on the validity of the assignment, the district court denied the defendant’s motion to compel arbitration.

    On appeal, the 3rd Circuit concluded that the district court’s only responsibility was to determine whether the parties to the underlying loan “clearly and unmistakably” expressed an agreement to arbitrate the issue of arbitrability, and, if so, the district court was required to send questions about arbitrability to the arbitrator. The appellate court reasoned that even if the underlying assignment is invalidated later, it would not affect whether the initial agreement to arbitrate was valid. The appellate court vacated the district court’s order denying arbitration and remanded with instructions to grant the motion to stay and refer the matter to arbitration. A dissenting judge countered that the plaintiff never signed an arbitration agreement with the defendant, and that because the underlying assignment was invalid, the plaintiff never consented to arbitration with the assignee of the contract.

    Courts Appellate Third Circuit Arbitration Consumer Finance


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