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 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.
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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