I Agreed to Arbitrate That? Recent Developments in the Application of Arbitration Agreements

I Agreed to Arbitrate That? Recent Developments in the Application of Arbitration Agreements

Litigation stemming from Wells Fargo’s improper opening of over 1,500,000 checking accounts and 560,000 credit card accounts has tested the limits of arbitration agreements and led to legislation to curb those agreements.1

In 2015, the Bureau of Consumer Financial Protection found that employees of Wells Fargo Bank had engaged in improper sales practices to satisfy sales goals under an incentive compensation program. This discovery resulted in several class action lawsuits, including Jabbari v. Wells Fargo & Co.,2 in the Northern District of California. The lead plaintiffs in the Jabbari lawsuit had opened legitimate accounts with Wells Fargo. They alleged that Wells Fargo had used information from those accounts to open fraudulent accounts and had diverted funds from the legitimate accounts to pay fees generated by the fraudulent accounts.

The account agreements for the plaintiffs’ legitimate accounts contained broad arbitration clauses that covered “any unresolved disputes” between them and provided that the arbitrator would determine arbitrability. Wells Fargo moved to compel arbitration. The district court determined that it could only deny the motion if Wells Fargo’s claim that the dispute fell within the scope of the arbitration agreements was “wholly groundless.”3 The court then held that the argument was not wholly groundless because the allegations of misuse of information and funds “may ‘relate’ to the legitimate accounts.”

After the Jabbari plaintiffs’ claims were compelled to arbitration, bills were introduced in Congress and the California Legislature designed to cure the perceived problem. The federal Justice for Victims of Fraud Act, S.3491, would prohibit enforcement of pre‑dispute arbitration agreements with consumers in an action related to credit card or personal bank accounts unless the account at issue was opened in response to a request or application for that account. The California bill, SB33, is extremely broad and would prohibit imposing a waiver of a legal right that arises as a result of fraud, identity theft, and any other act related to the wrongful use of personal identifying information as a condition of entering into a contract for the provision of goods or services.4

However, legislative action may not be needed, because two arguments can be made that the dispute in Jabbari was not arbitrable. The arbitration agreements cited by the court in Jabbari may not have applied to the dispute at issue. Arbitration contracts, whether broad or narrow, have limitations. They only pertain to the activities that are within the scope of or are significantly related to the contract. A situation similar to Jabbari arose in Aiken v. World Finance Corp. of South Carolina.5 In that case, plaintiff had executed a broad arbitration agreement similar to the one used for Wells Fargo clients. He filed suit after he discovered that employees of the defendant bank had used the personal financial information and social security number that he had provided to defendant to obtain sham loans from other lenders and convert the proceeds for themselves. The rogue employees’ failure to pay back the loans damaged plaintiff’s creditworthiness. The South Carolina Supreme Court affirmed the denial of defendant’s motion to compel arbitration, ruling that “in signing the agreement to arbitrate, Aiken could not possibly have been agreeing to provide an alternative forum for settling claims arising from this wholly unexpected tortious conduct.”

There have been similar results in other cases. In Rogers-Dabbs Chevrolet-Hummer, Inc. v. Blakeney,6 plaintiff purchased and financed an automobile, signing an arbitration agreement which covered all disputes arising from the “sale, lease, or financing of the vehicle”. Later, plaintiff discovered that several of the dealer’s employees had deliberately kept the car’s title and used it to create phony titles for stolen vehicles. Plaintiff filed a lawsuit, alleging various tort claims. The Court denied defendant’s motion to compel arbitration because the subject matter of the lawsuit was outside of the scope of the agreement. The Court determined that “no reasonable person would agree to submit to arbitration any claims concerning… a scheme of using his name to forge vehicle titles and bills of sale to sell stolen vehicles….actions of which (he) was presumably totally unaware at the time of the execution of the documents in question, including the arbitration agreement.”

In Clay v. New Mexico Title Loans, Inc. 7, plaintiff took out a loan from defendant and put up his truck as collateral. The loan agreement provided for the arbitration of any claim or controversy “relating to this agreement or the motor vehicle securing this agreement”. Further, the arbitration agreement specifically included tort claims. Plaintiff fell behind in his payments and defendant sent out agents to repossess the truck. An argument ensued and one of defendant’s agents shot the plaintiff, permanently paralyzing him. Plaintiff filed a lawsuit against defendant, alleging various tort claims and defendant’s motion to compel arbitration was denied because the subject matter of the lawsuit was outside of the scope of the arbitration agreement. The court noted that “(e)ven if (plaintiff) intended to submit to arbitration disputes related to the collateral or default clauses, it is not reasonable to conclude that he intended to give up his right to a jury trial if he was shot during the repossession.”

The disputes in Aiken, Clay, and Blakeney were significantly unrelated to the business relationship contemplated by the contract that contained the arbitration clause and were not arbitrable. The events that gave rise to the dispute in Jabbari were not contemplated by the contracts that contained the arbitration agreements and they, too, should not have been arbitrable.8

[1] In 2015, the federal Consumer Financial Protection Bureau found that employees of Wells Fargo Bank had engaged in improper sales practices to satisfy sales goals under an incentive compensation program devised by Wells Fargo management that included the opening of over 1,500,000 checking accounts and 560,000 credit card accounts. In 2016, the Bureau fined Wells Fargo $100 Million for this practice. https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/
[2] Jabbari v. Wells Fargo & Co., United States District Court for the Northern District of California, Case No. 15-cv-02159
[3] See Qualcomm, Inc. v . Nokia Corp., (Fed. Cir. 2006) 466 F. 3d 1366, 1371; Zenalaj v. Handybook, Inc., (N.D. Cal. 2015) 82 F. Supp. 3d 968, 975.
[4] Although SB 33 does not contain the word “arbitration”, the press release issued by the bill’s author seems to indicate that it is aimed at arbitration contracts. If a court finds that its purpose was to limit arbitration contracts by barring arbitration of any dispute where there is an allegation of fraud, it will be preempted by the Federal Arbitration Act. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., (1967) 388 U.S. 395.
[5] 644 S.E. 2d 707 (S.C. 2007)
[6] 950 So. 2d 170 (Miss. 2007)
[7] 288 P.3d 888 (N.M. 2012)
[8] The case docket in Jabbari reflects that the parties have filed a motion for preliminary approval of a class action settlement. Hence, the court’s ruling on the motion to compel arbitration may never have any precedential effect.