Saturday, July 28, 2012

FYI: 11th Cir Compels Arbitration in Overdraft Fee Putative Class Action, Severs Allegedly Unconscionable Fee Shifting Provision from Arbitration Provision

The U.S. Court of Appeals for the Eleventh Circuit recently held in a putative class action that:  (1) the Federal Arbitration Act did not preempt South Carolina law regarding the contract defense of unconscionability; (2) a fee-shifting provision in a bank's deposit account agreement containing a separate mandatory arbitration provision was unconscionable and thus unenforceable; (3) the fee-shifting provision was severable from the arbitration provision; and  (4) the mandatory arbitration provision was thus enforceable. 
A copy of the opinion is available at: 
A bank depositor (“Depositor”) filed a putative class action against a bank (‘Bank”), alleging that Bank supposedly charged overdraft fees on checking accounts even when the accounts contained sufficient funds to cover payments, supposedly provided inaccurate and misleading information about account balances, and supposedly failed to notify customers about check processing policies, thereby supposedly increasing overdraft charges assessed against the Bank’s customers. 
Depositor asserted claims for unfair and deceptive trade practices, breach of contract, breach of the covenant of good faith and fair dealing, and unconscionability.  In response, Bank moved to compel arbitration under the Federal Arbitration Act (“FAA”) pursuant to a mandatory arbitration provision in a Bank Services Agreement (“BSA”). 
The district court denied Bank’s motion to compel arbitration, ruling that the arbitration agreement was unconscionable and thus unenforceable under South Carolina law.  Bank appealed the ruling.  In light of the U.S. Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion, 131 S CT. 1740 (2011)("Concepcion"), the Eleventh Circuit remanded.
On remand, Bank renewed its motion to compel.  Again, the district court denied the motion.  The district court ruled in part that the mandatory arbitration provision in the BSA was unconscionable, because a cost-and-fee-shifting provision (“Fee Shifting Provision”) in the BSA provided that only Bank could recover costs and attorneys’ fees resulting from arbitration, regardless of whether Bank prevailed and, further, that Bank could recover those fees by simply withdrawing them from customers' accounts without notice.
Bank appealed a second time.  The Eleventh Circuit reversed and remanded with instructions to compel arbitration, ruling that, severed from the unconscionable Fee Shifting Provision, the mandatory arbitration provision was enforceable.
As you may recall, the FAA provides in part: “[a] written provision in any . . . contract . . . to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  9 U.S.C. § 2 (2006).
In addition, the Fee Shifting Provision provided that Depositor was "liable to the Bank for any loss, costs, or expenses, including, without limitation, reasonable attorneys’ fees, the costs of litigation, and the costs to prepare or respond to subpoenas, depositions, child support enforcement matters, or other discovery that the Bank incurs as a result of any dispute involving [Depositor's] account."  The Fee Shifting Provision also authorized "Bank to deduct any such loss, costs, or expenses from [Depositor's] account without prior notice to [Depositor].” 
Rejecting Bank’s assertion that the Fee Shifting Provision did not apply to arbitration because the arbitration provision expressly provided that the rules of the American Arbitration Association would govern any arbitration, the Eleventh Circuit ruled that the Fee Shifting Provision expressly applied to any “dispute,” and thus to arbitration as well.  
Next, in determining whether, under Concepcion, South Carolina law provided a basis for concluding that the arbitration provision in this case was unenforceable, the Eleventh Circuit noted that the FAA did not preempt “‘generally applicable contract defenses’ provided by state law ‘such as fraud, duress, or unconscionability’"  See Concepcion, 131 S.Ct. at 1746.
In so doing, the Court also observed that South Carolina’s test for unconscionability applied equally to arbitration as well as other agreements.  See, e.g., Community State Bank v. Strong, 651 F.3d 1241, 1267 (11th Cir. 2011)(ruling that generally applicable contract defenses that challenge “defects in the making of the arbitration agreement” and which “do not apply only to arbitration” may be a basis for invalidating arbitration agreements). 
Having thus concluded that South Carolina’s unconscionability doctrine did not specifically target arbitration agreements or interfere with arbitration’s procedural informality, the Court applied South Carolina's two-part test for contract enforceability: (1) whether an agreement contains oppressive terms that benefit one party only; and (2) whether the process of contract formation was flawed such that one  party lacked any meaningful choice.   See, e.g., Carolina Care Plan, Inc. v. United HealthCare Servs., 606 S.E.2d 752, 757 (determining unconscionability on the basis of an “absence of meaningful choice” on the part of one party to the contract and “oppressive contractual terms”); Simpson v. MSA of Myrtle Beach, Inc., 644 S.E.2d 663, 669 (S.C. 2007)(ruling that unconscionability required both “an absence of meaningful choice and oppressive, one-sided terms”).
Ruling that South Carolina’s unconscionability doctrine survived FAA preemption under Concepcion, the Court then addressed specifically whether the Fee Shifting Provision involved both “an absence of meaningful choice” and “oppressive, one-sided terms.”   In examining the circumstances surrounding the formation of the BSA, the Court made a number of observations, including:  (1) the Fee Shifting Provision appeared in an entirely separate portion of the BSA; (2) the arbitration provision on the first page of the BSA nowhere referenced the Fee Shifting provision and appeared to contain all the terms governing arbitration, including those related to fees and expenses; and (3) a thorough reading of the BSA might not allow a party to fully understand the applicability of the Fee Shifting Provision to arbitration. 
Concluding that the terms of the Fee Shifting Provision were unconscionable under South Carolina law, the Eleventh Circuit ruled that the Fee Shifting Provision was unenforceable and noted, among other things, that the Fee Shifting Provision actually negated the arbitration provision itself and contravened basic expectations that losing parties ordinarily do not have their fees and costs paid by the prevailing party.  See, e.g., Ruckelshaus v. Sierra Club, 463 U.S. 680, 685 (1983)(losing parties normally not entitled to recover costs and fees). 
Importantly, however, the Eleventh Circuit also ruled that the unconscionable Fee Shifting provision was severable from the arbitration provision, thereby allowing the arbitration provision to operate according to the rules of the American Arbitration Association, including its rules related to cost apportionment.
The Court thus reversed and remanded with instructions to compel arbitration.

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