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Financial Services Law Insights and Observations


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  • 5th Circuit finds company delay unfairly prejudiced plaintiff, reverses decision to compel arbitration


    On November 28, the U.S. Court of Appeals for the 5th Circuit reversed a lower court decision to grant a technology analytics company’s motion to compel arbitration, finding that the company substantially invoked the judicial system prior to moving to compel arbitration, and the individual plaintiff was prejudiced by such actions. According to the opinion, in 2015, the plaintiff filed a complaint against the company alleging various violations of Illinois law relating to deceptive practices and unjust enrichment. In response, the company filed a motion to dismiss for failure to state a claim and, in the alternative, moved to transfer the case for forum non conveniens arguing that the plaintiff’s claims were subject to arbitration in Texas. After the case was transferred to Texas, the company filed a subsequent motion to dismiss and reply brief, both of which did not mention arbitration. In 2017, after receiving the plaintiff’s requests for production, the company filed with the district court its motion to compel arbitration. The district court granted the motion to compel, holding that while the company substantially invoked the judicial process, the plaintiff had only “suffered some prejudice” in the form of delay and delay alone is insufficient to deny arbitration.

    On appeal, the 5th Circuit agreed that the company substantially invoked the judicial system, but determined the lower court erred when it found the plaintiff had not been prejudiced unfairly. As a result, the company waived its right to arbitrate. The 5th Circuit noted that after the case was transferred from Illinois to Texas, the company waited 13 months before moving to compel arbitration, in order to first obtain a dismissal from the district court. Acknowledging the damage to the plaintiff’s legal position and additional litigation expenses incurred because of this tactic, the appellate court stated, “[a] party cannot keep its right to demand arbitration in reserve indefinitely while it pursues a decision on the merits before the district court.”

    Courts Fifth Circuit Appellate Arbitration

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  • 7th Circuit: Courts, not arbiters, decide class arbitration questions


    On October 22, the U.S. Court of Appeals for the 7th Circuit held that the availability of class or collective arbitration within an employment agreement is a threshold “question of arbitrability” that must be decided by a court. According to the opinion, an employee filed class and collection action claims against her employer for wage and hour violations. The district court compelled arbitration pursuant to an agreement between the employee and her employer but struck as unlawful a waiver clause that forbid class or collective arbitration of any claim. The case proceeded to arbitration and the arbitrator issued an award of over $10 million in damages to the employee and the other 174 claimants who had opted-in to the arbitration proceeding. The employer appealed the award, arguing that the waiver of collective arbitration provision was valid, rendering the collective arbitration in violation of the employment agreement.

    On appeal, the 7th Circuit reversed and remanded the case to the district court, pointing to the Supreme Court’s recent decision in Epic Systems Corp. v. Lewis, which upheld the validity of similar provisions. (Epic held that “an arbitration agreement does not violate the National Labor Relations Act when it requires plaintiffs to pursue employment-related claims in single claimant arbitrations.”). The plaintiff also argued, however, that despite the presence of the waiver, the arbitration agreement still permitted collective arbitration. This left open the question of who interprets the agreement to determine whether collection arbitration applies—the arbitrator or the court. The 7th Circuit found for the latter, concluding that the availability of class or collective arbitration is a threshold question of arbitrability and therefore a district court, and not the arbitrator should decide its permissibility.

    Courts Seventh Circuit Appellate Arbitration Class Action

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  • District Court denies arbitration bid, rules clauses signed by borrowers are invalid


    On October 18, the U.S. District Court for the Western District of Washington denied a motion to compel arbitration, holding that an arbitration clause was invalid under the “effective vindication” exception to the Federal Arbitration Act (FAA). According to the opinion, borrowers received several loans from an online payday lender, incorporated under tribal law, which charged usurious, triple-digit interest rates on the loans. Per the terms of the loan agreements, the borrowers consented to binding arbitration for any disputes and agreed per the choice-of-law provision that tribal law applied, effectively waiving any protections they might have enjoyed under federal and state law. The lender moved to arbitrate, which the borrowers opposed, arguing that the arbitration agreement was unenforceable under the “effective vindication” exception to arbitration because it implicitly waives a consumer’s state and federal statutory rights. The district court agreed, finding that the arbitration clause operated as a prospective waiver of most federal statutory remedies. The court found that while the FAA gives parties the freedom to structure arbitration agreements as they choose, that freedom does not extend to a substantive waiver of federally protected statutory rights. The lender also argued that the arbitrator, rather than the court, should decide if the agreement’s choice-of-law provision was invalid. The court disagreed, ruling that questions of arbitrability are for the courts to decide, not the arbitrators. Finally, the lender asked to sever the choice-of-law provision of the arbitration agreement. The court rejected such an approach, holding that when the “offending provisions” of an arbitration agreement “go to the essence of the contract,” they cannot be severed.

    Courts Payday Lending Arbitration Interest Rate Usury

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  • California state appeals court partially reverses proposed class action suit addressing arbitration terms


    On October 2, a California state appeals court partially reversed a trial court’s denial of class certification in a putative class action alleging that a written cardmember agreement issued by a credit card company contained unconscionable and unenforceable arbitration terms. According to the opinion, after the cardmember and his company failed to make timely and sufficient payments on their accounts, the credit card company closed the accounts and filed a collection action. The cardmember subsequently filed a putative class action cross-complaint against the credit card company and two other card issuers, alleging the arbitration terms in the cardmember agreements he signed are unlawful under California’s Unfair Competition Law, and asserting, among other things, that the legally unenforceable contract terms prevented negotiations, prohibited injunctive relief, and failed to communicate to cardholders what the rules would be at the time of arbitration. The cardmember further alleged that cardholders were overcharged annual credit card fees or purchase fees “as consideration for the promises contained in the cardmember agreement.” During the course of the litigation, the credit card companies sent certain cardmembers modified contract terms, which allowed cardmembers the option to reject arbitration altogether if a written rejection notice was provided within a specific time period.

    The trial court denied class certification, finding, among other things, that the cardmember was not an adequate class representative and did not have claims typical of the putative class because there was no evidence he paid annual fees and that individual issues would predominate with respect to procedural unconscionability and each individual class member’s entitlement to declaratory relief. On appeal, the court held that the trial court “used improper criteria and erroneous assumptions” when reaching its decision that “procedural unconscionability would involve predominantly individualized issues.” Moreover, the appellants and absent class members were linked by common questions, including whether it was unreasonable for the respondent to modify its arbitration terms during pending litigation, since this denied cardholders who opted out of arbitration the right to join the class.

    Courts Appellate Arbitration State Issues Credit Cards Class Action

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  • Court sends class action TCPA suit against global ride-sharing company to arbitration


    On September 20, the U.S. District Court for the Northern District of Illinois granted a global ride-sharing company’s motion for summary judgment, ruling that a user had consented to arbitrate any disputes when he signed up for an account with the company. Specifically, the named plaintiff of the proposed class action brought the suit against the company for allegedly violating the TCPA when he received a single text message he claims he did not consent to after signing up for the company’s app, and that he claimed he received after he deleted the app. The company moved to compel arbitration, which initially was denied in 2017, when the court held that the company had not shown enough evidence that users were aware of the arbitration agreement and ordered the parties to engage in expedited discovery limited to the arbitration agreement formation. However, following both parties’ cross-motions for summary judgment, the court determined that the plaintiff “failed to raise a genuine dispute as to whether he entered into an enforceable agreement to arbitrate,” and that the app presented a statement that creating an account meant that users agreed to the terms of service and privacy policy, which was presented to users “in an easy-to-read font on an uncluttered screen” and required no scrolling.

    According to the court, “the manner in which this statement and the Terms of Service were presented placed a reasonable person on notice that there were terms incorporated with creating an . . . account and that, by creating an account, he or she was agreeing to those terms.” Concerning the plaintiff’s argument that his TCPA claim does not fall under the arbitration agreement’s purview, the court stated that the question of what falls within the scope of the arbitration agreement is itself subject to arbitration, and also stated that the Terms of Service specifically permitted the texting of promotional offers to customers, arguably requiring the TCPA claim to be arbitrated. The court dismissed without prejudice the plaintiff’s claims against the company and stayed the case until arbitration proceedings are resolved.

    Courts Arbitration TCPA Class Action

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  • Plaintiffs must arbitrate with telecom provider over TCPA claims


    On June 20, the U.S. District Court for the Northern District of Illinois granted a telecommunication company’s motion to compel arbitration and dismissed a putative class action alleging the company violated the Telephone Consumer Protection Act (TCPA). Specifically, the plaintiff brought an action against the telecommunications company for allegedly making unauthorized phone calls using prerecorded messages in an effort to reach account holders to collect unpaid bills. The company moved to compel arbitration because the plaintiff had entered into a “subscriber agreement,” which was provided to him via mail after he agreed to self-install his services, and the agreement requires arbitration of disputes. The court agreed with the company, holding that the arbitration provision of the subscriber agreement covered the dispute because the “Federal Arbitration Act does not require agreements to be signed, only written” and the plaintiff installed and used the telecommunication services, which constituted acceptance of the subscriber agreement.

    Courts Arbitration TCPA Robocalls Debt Collection

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  • Maryland expands scope of unfair and deceptive practices under the Maryland Consumer Protection Act, increases maximum civil penalties

    State Issues

    On May 15, the Maryland governor signed HB1634, the Financial Consumer Protection Act of 2018, which expands the definition of “unfair and deceptive trade practices” under the Maryland Consumer Protection Act (MPCA) to include “abusive” practices, and violations of the federal Military Lending Act (MLA) and Servicemembers Civil Relief Act (SCRA). The law also, among other things:

    • Civil Penalties. Increases the maximum civil penalties for certain consumer financial violations to $10,000 for the initial violation and $25,000 for subsequent violations
    • Debt Collection. Prohibits a person from engaging in unlicensed debt collection activity in violation of the Maryland Collection Agency Licensing Act or engaging in certain conduct in violation of the federal FDCPA.
    • Enforcement Funds. Requires the governor to appropriate at least $700,000 for the Office of the Attorney General (OAG) and at least $300,000 to the Office of the Commissioner of Financial Regulation (OCFR) for certain enforcement activities.
    • Student Loan Ombudsman. Creates a Student Loan Ombudsman position within the OCFR and establishes specific duties for the role, including receiving, reviewing, and attempting to resolve complaints from student loan borrowers.
    • Required Studies. Requires the OCFR to conduct a study on Fintech regulation, including whether the commissioner has the statutory authority to regulate such firms. The law also requires the Maryland Financial Consumer Protection Commission (MFCPC) to conduct multiple studies, including studies on (i) cryptocurrencies and initial coin offerings and (ii) the CFPB’s arbitration rule (repealed by a Congressional Review Act measure in November 2017).

    State Issues UDAAP SCRA Military Lending Act FDCPA Student Lending Arbitration Civil Money Penalties Fintech Cryptocurrency State Legislation

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  • 11th Circuit holds national bank did not waive arbitration for unnamed plaintiffs


    On May 10, the U.S. Court of Appeals for the 11th Circuit held that a national bank did not waive its right to arbitration with respect to the unnamed plaintiffs in five class actions. The decision stems from multiple class action filings against that bank and over a dozen other banks in 2008 and 2009, alleging unlawful overdraft practices. In late 2009, the actions were consolidated and the bank filed answers to the five complaints, in each answer stating, “[a]bsent members of the putative classes have a contractual obligation to arbitrate any claims they have against [the bank].” The bank originally chose to not move for arbitration against the named class members, but after the Supreme Court decision in AT&T Mobility LLC v. Concepcion, the bank filed a motion to compel the named plaintiffs to arbitrate. The appellate court affirmed the district court’s denial of the motion. The bank then moved to compel arbitration against the unnamed class members, which the district court denied and the appellate court vacated, holding that the lower court lacked jurisdiction to rule on the arbitration obligations without a class certification. After the district court granted class certification, the bank moved to compel arbitration against the unnamed class members again and the district court denied the motion, holding that the bank “acted inconsistently with its arbitration rights” during the precertification litigation efforts.

    In vacating the district court’s decision, the appellate court concluded that the bank had not acted inconsistently with respect to the unnamed plaintiffs and had expressly stated it wished to preserve arbitration rights against those class members when the matter became ripe. The panel vacated the district court’s order and remanded for further proceedings.

    Courts Arbitration Eleventh Circuit Appellate Overdraft Class Action

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  • 11th Circuit denies motion to compel arbitration; rules claims relate to BSA violations and not to terms of user agreement


    On April 23, the U.S. Court of Appeals for the 11th Circuit upheld a district court’s decision to deny a global money services business’s motion to compel arbitration under the doctrine of equitable estoppel. According to the unpublished opinion, the plaintiff-appellee—a customer of a now defunct cryptocurrency exchange (defunct exchange)—filed a proposed class action against the money services business and the CEO of the defunct exchange, alleging that when the money services business liquidated bitcoin into cash for two accounts that the CEO opened, it aided and abetted the defunct exchange’s breach of fiduciary duty and the CEO’s theft of customer assets. The customer claimed that the money services business had a duty under the Bank Secrecy Act (BSA) to monitor or investigate the CEO’s actions, detect the CEO’s theft of customer assets, and report the CEO’s suspicious activity to appropriate authorities. However, the business argued that when the CEO opened his accounts, he agreed to be bound by an arbitration clause in the user agreement, and that therefore, under the doctrine of equitable estoppel, the customer was bound by the arbitration clause because the customer’s claims were based on the user agreement. The district court rejected the business’s argument and found that the customer was not asserting any rights or benefits that arose out of the user agreement but rather on duties created under the BSA. The 11th Circuit affirmed the district court’s decision, stating that the customer’s claims were predicated on duties the defendant-appellant owed under federal statutes and regulations as well as state common law and not on enforcing the terms of the user agreement, and, therefore, the customer could not be compelled to arbitrate the claim.

    Courts Financial Crimes Fintech Virtual Currency Arbitration Class Action Appellate Eleventh Circuit Bank Secrecy Act

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  • Court upholds clickwrap agreement, reiterating that general principles of contract apply


    On March 28, the U.S. District Court of New Mexico enforced an arbitration agreement entered into by a consumer on a website. Before completing a purchase of a product through the defendant’s website, the plaintiff had to check a box next to a statement that she had read and agreed to the terms of the hyperlinked user agreement, which included an arbitration clause. The defendant was able to present evidence that it was impossible for the plaintiff to complete the purchase without checking the box and clicking on a button to accept the agreement. Plaintiff provided testimony that she couldn’t remember ever seeing the terms of use or agreeing to them.

    The court, in upholding the agreement, reiterated that electronic contracts are still governed by traditional contract principles, including reasonable notice and unambiguous assent requirements. Because the agreement was made available, twice via hyperlink, and because the plaintiff acknowledged her awareness and assent of the agreement by clicking a button in the affirmative twice, the court held that the plaintiff had sufficient notice and had demonstrated adequate assent to the terms. This decision reinforces the effectiveness of electronic arbitration agreements and the use of hyperlinks to present documents, when presented in a manner consistent with underlying contract law.

    Fintech Courts ESIGN Arbitration

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