Reversing a Florida district court action, the U.S. Court of Appeals, Eleventh Circuit agreed with a national bank that a class action challenging overdraft fees should be moved to arbitration.

What happened

David Johnson filed a putative class action suit against a national bank in 2010, charging it with improperly manipulating the order of debit card transactions in customer accounts in order to maximize the collection of overdraft fees. Johnson first opened an account with the bank in 1991 but in 2001, opened a joint checking account with his wife.

At that time, Johnson and his wife visited a branch office and signed a signature card, effectuating the conversion of his former individual account to a joint account. The joint account agreement was governed by a 1997 term sheet, which contained an arbitration provision and preserved the bank’s right to make unilateral changes to the terms of the agreement after providing account holders with appropriate notice.

Several times since 2001, the bank exercised its right. Although the account agreement was updated several times—with the most current version of the agreement in place since 2009—at all times the agreement provided for mandatory arbitration on an individual basis.

Pursuant to the agreement, the bank moved to compel arbitration of Johnson’s lawsuit. He objected, arguing that the joint account was governed by his earlier 1991 account terms or, in the alternative, that the arbitration agreement was unconscionable. A Florida federal court agreed, finding the arbitration provision unconscionable and unenforceable, denying the motion.

But the bank appealed, contending that Johnson was unequivocally bound by the arbitration provision found in the agreement. Siding with the defendant, the Eleventh Circuit reversed and remanded the case with instructions to compel arbitration.

As a threshold issue, the three-judge panel found that Johnson and the bank agreed to arbitrate disputes relating to the joint account. When the plaintiff and his wife executed the 2001 signature card to convert Johnson’s individual checking account to the joint account, they confirmed that the card functioned as a “replacement” of the card associated with the pre-existing account, the court explained.

Although the language the bank used “could be clearer … a straightforward reading of the 2001 Signature Card makes clear that, in signing it, Johnson was displacing his individual account with a new incarnation of that account under new ownership,” the panel said. “The account was plainly characterized as a ‘replacement’ of the preexisting one—not merely a continuation of it. And the Card unambiguously authorized the ‘opening’ of a new account—not merely the modification of one. Given the clear terms of the document, Johnson was on notice that signing the 2001 Signature Card represented the start of a new contractual relationship with [the bank].”

The new contractual relationship was governed by the new deposit account agreement that contained an arbitration provision, the panel added, finding it “irrelevant” whether the plaintiff received a copy of the deposit account agreement.

With the arbitration agreement firmly in place, the Eleventh Circuit then considered whether it was unconscionable. The provision was neither procedurally nor substantively unconscionable, the court determined, rendering it enforceable whether considered under Washington (where Johnson held his account) or Ohio (the headquarters of the bank) law.

Contracts of adhesion are not procedurally unconscionable per se, the court said, and Johnson was offered an opportunity to inquire about and review the 1997 agreement before confirming his understanding that the joint account would be subject to its terms. The arbitration provision itself was not hidden in a maze of fine print but easily visible within the table of contents.

The plaintiff also failed to take advantage of the opportunity to opt out of the arbitration provision via a 2004 amendment, the panel said, noting that the existence of an opt-out provision “strongly weighs” against a finding of procedural unconscionability.

Turning to substantive unconscionability, the court rejected the plaintiff’s complaints about arbitration costs, attorneys’ fees, discovery and the bank’s unilateral right to amend the arbitration provision. A questionable confidentiality term (requiring both parties to “keep confidential any decision of an arbitrator”) was struck from the agreement by the court.

Having severed the problematic term, the panel said the arbitration provision was neither procedurally nor substantively unconscionable and was therefore enforceable, reversing the district court’s order denying the motion and remanding the case with instructions to compel arbitration.

To read the opinion, click here.

Why it matters

A major victory for the bank (and for others seeking to compel arbitration under the plain reading of consumer contracts), the Eleventh Circuit opinion makes clear that the plaintiff was bound by the terms of his account agreement and that the arbitration provision was not unconscionable. This ruling arrives not long after the Consumer Financial Protection Bureau’s final arbitration rule , which would prevent banks and other covered entities from incorporating or enforcing predispute mandatory arbitration to the extent that the clause bars class or collective actions. The future of the rule, which nominally took effect on Sept. 18, remains precarious as Congress is poised to consider a disapproval resolution under the Congressional Review Act to effectuate a repeal of the rule.