11th Circuit Upholds Arbitration Agreement, Severing Unconscionable Provision

The Eleventh Circuit Court of Appeals recently ruled that a consumer who filed a putative class-action suit against a national bank (the “Bank”) for alleged manipulation of overdraft fees was required to arbitrate his claims, overturning the lower court’s ruling that the subject arbitration agreement was unconscionable. The appellate panel ruled that the plaintiff was bound to the arbitration agreement after having converted an individual deposit account into a joint account with his wife, at which time the couple acknowledged receipt of new contractual terms, including an agreement to arbitrate.

The underlying suit was initially brought in 2010 before a Washington district court under state law, alleging that the Bank improperly manipulated the order of debit card transactions in customer accounts in order to maximize the Bank’s collection of overdraft fees. For pretrial purposes, the case was transferred to a multidistrict proceeding pending in the Southern District of Florida. The Bank’s subsequent motion to compel arbitration was denied on grounds that the arbitration agreement was unconscionable.

On appeal, tracking a series of Supreme Court rulings that the enforceability of agreements to arbitrate is strictly a matter of state contract law, the appellate court applied Ohio law—pursuant to the agreement’s choice-of-law provision—to determine the threshold issue of whether an agreement to arbitrate had been formed.

In determining whether the parties had mutually assented to contract, the Court considered a statement signed by the plaintiff and his wife in 2001, acknowledging, first, that “all accounts opened” would be subject to the standard deposit account agreement, which contained a mandatory arbitration provision, and, second, that the plaintiff and his wife had received a copy of the standard agreement.

The plaintiff argued that his opening of the joint account was a mere continuation of a preexisting account he had held since 1993, and, therefore, was governed by an earlier version of the deposit account agreement, which lacked an arbitration provision.   But the Court found this argument “hollow,” chiefly because the plaintiff had “basic awareness” of the implications of signing the 2001 statement in opening a joint account and, nevertheless, had a “responsibility” to make himself aware of the terms of the agreement before signing them.

The Court shrugged in response to claims that the plaintiff could not assent to the agreement because he did not remember receiving a copy of the deposit account agreement. The plaintiff’s failure to remember any details of the transaction was “obviously not sufficient” to rebut the inference drawn from his written, contemporaneous acknowledgement of receipt. Quoting hornbook contract law, the Court noted that “a consumer of ordinary mind has an obligation to read what he signs.”

The Court further concluded that the plaintiff had also assented to subsequent modifications to the deposit account and arbitration agreement in 2009 by failing to reject the subsequent modified agreement and by continuing to use his account under the newly revised terms.

Next, reversing, in part, the district court’s finding that the arbitration agreement was unconscionable, the appellate court concluded that the 2009 arbitration provision was not formed in a procedurally unconscionable manner under either Washington or Ohio law. The plaintiff had a “meaningful choice” as to the terms of the agreement in light of the circumstances surrounding the transaction, the Court found, highlighting the plaintiff’s opportunity to inquire about the terms of the deposit account agreement and the Bank’s clear presentation of the arbitration agreement. Further, the Court found that the opt-out instructions and text of the 2009 amendment were presented in ordinary—not “fine”—print, and that the plaintiff had ample time to review and understand its terms. The mere existence of an opt-out provision weighs strongly against a finding of procedural unconscionability, the Court noted.

The lower court had ruled that confidentiality and fee shifting provisions of the arbitration clause were unduly one-sided, and therefore substantively unconscionable. The appellate court found the fee shifting provision, which closely mirrored that of the American Rule—which generally holds parties responsible for their respective attorneys’ fees—was not unconscionable.  With respect to the confidentially provision, however, the appellate court agreed that the term unfairly benefitted the Bank. Where the outcomes of prior arbitration proceedings remain concealed, future plaintiffs are left to “reinvent the wheel” when it comes to collecting evidence and crafting arguments and, thus, the informational advantage held by the Bank would have the effect of discouraging consumers from pursuing valid claims. Finding the confidentiality provision substantively unconscionable, the appellate court severed it from the agreement.

The case is Johnson v. KeyBank N.A., case number 15-10779.