The Eleventh Circuit Court of Appeals has reversed a Florida district court’s decision to deny Branch Banking & Trust Company’s (“BB&T”) motion to compel arbitration of a putative class action brought by a BB&T customer. Barras v. Branch Banking and Trust Co. (In re Checking Account Overdraft Litig.), 685 F.3d 1269 (11th Cir. 2012). Although the district court correctly concluded that the cost-shifting provision in BB&T’s Bank Services Agreement (the “Agreement”) — which purported to require the customer to pay all of BB&T’s costs and expenses even if the customer prevails in a dispute — was “unconscionable,” the district court erred when it refused on that ground to enforce the Agreement’s arbitration clause. Instead, the Eleventh Circuit held, the offending cost-shifting provision should have been severed from the Agreement and the independent arbitration provision enforced.
Plaintiff Lacy Barras alleged that she was a customer of BB&T and that “BB&T charged her and charges others overdraft fees for payments from checking accounts even when the account contains sufficient funds to cover the payments.” According to plaintiff, BB&T further “increase[es] overdraft charges assessed against BB&T customers” when it “supplies inaccurate and misleading information about account balances, and fails to notify customers about changes to BB&T’s policies for processing checking account transactions.” The complaint asserted a number of causes of actions against BB&T including the alleged violation of state unfair and deceptive trade practices statutes, breach of contract, and breach of the covenant of good faith and fair dealing. Plaintiff purported to assert such claims on behalf of “a class of BB&T account holders who were likewise charged allegedly inflated overdraft fees on their checking accounts.”
BB&T moved to compel arbitration of all of plaintiff’s claims pursuant to the Federal Arbitration Act, 9 U.S.C. §§ 3 & 4, and the arbitration provision in the Agreement. That arbitration provision “provides both parties a right to submit to arbitration ‘any claim or dispute . . . arising from or relating in any way to [the customer’s] account, this Agreement, or any transaction conducted with the Bank or any of its affiliates.’” Nonetheless, the U.S. District Court for the Middle District of Florida denied BB&T’s motion, in part because “the mandatory arbitration provision was unconscionable because under another provision of the [Agreement], only BB&T could recover any costs and attorneys’ fees resulting from arbitration regardless of whether BB&T prevailed or not, and BB&T could recover these fees by withdrawing them from Barras’s account without notifying Barras.” BB&T appealed to the U.S. Court of Appeals for the Eleventh Circuit.
Issues on Appeal
On appeal, BB&T argued that the district court’s decision should be reversed on multiple grounds, including that (1) “the cost-and-fee-shifting provision [in the Agreement] is not unconscionable” under applicable state law; (2) “the costand- fee-shifting provision in the agreement that the district court held unconscionable does not apply to the arbitration provision”; (3) the Federal Arbitration Act “prohibits application of [this] unconscionability doctrine to the arbitration provision”; and (4) even if it were unconscionable, “the cost-and-fee-shifting provision is severable from the arbitration provision.” The Eleventh Circuit rejected each of BB&T’s arguments, with the (dispositive) exception of the last argument.
Cost Shifting Provision is “Unconscionable”
BB&T argued that the district court had erred in concluding that the cost-shifting provision in the Agreement was unconscionable. The Eleventh Circuit instead agreed with the district court and “determined that the cost-and-fee-shifting provision is unconscionable and unenforceable as written under South Carolina law.” Although “arbitration is a matter of private contract” and “parties are of course free to agree that one party will bear the other party’s costs and attorneys’ fees,” in certain circumstances such a provision will be deemed “unconscionable” and unenforceable. For an agreement to be “unconscionable” under applicable state law, it must involve both: (1) “an absence of meaningful choice on the part of one party due to one-sided contract provisions”; and (2) “terms that are so oppressive that no reasonable person would make them and no fair and honest person would accept them.” “Whereas the first element of unconscionability considers the circumstances surrounding formation of the contract, th[e] second element relates to the substantive contract terms themselves and whether those terms are unreasonably favorable to the more powerful party.” According to the Eleventh Circuit, the cost-shifting provision in the Agreement ran afoul of both of these elements.
First, the court found a “lack of meaningful choice” with respect to the cost-shifting provision because it was “particularly inconspicuous and surprising.” That provision appeared “on page fourteen of the [Agreement], in an entirely separate provision” from the arbitration provision. Moreover, the “arbitration provision on page one nowhere references the fee-recovery provision on page fourteen; instead, the arbitration provision appears to be a comprehensive statement of all rules governing an arbitration proceeding.”
Second, the court determined that “the terms of this provision allowing BB&T, and only BB&T, to recover ‘any loss, costs, or expenses’ arising from ‘any dispute’ with [the customer], regardless of the outcome of the dispute, are so oppressive that no reasonable person would make them and no fair and honest person would accept them.” “By making [plaintiff] responsible for BB&T’s costs even if she prevails on her claim, the cost-and-fee-shifting provision contravenes basic expectations that attorney’s fees and costs generally are not recoverable by a non-prevailing party.” “Moreover, the cost-and-fee shifting provision distorts the fairness and reliability of the arbitration proceeding by forcing [plaintiff] to fund any loss, cost, or expense incurred by BB&T in arbitration, regardless of the merit of her claim against BB&T, and regardless of whether she prevails in arbitration.”
Cost Shifting Provision Applies on Its Face to Arbitrations
BB&T argued “that the cost-and-fee-shifting provision does not apply to arbitration because the arbitration provision dictates that any arbitration under the [Agreement] will be conducted according to a body of rules promulgated by the American Arbitration Association.” According to BB&T, “[b]ecause the AAA rules include provisions pertaining to costs,” those rules “must be deemed as the only ones applicable to arbitration.” The Eleventh Circuit disagreed, finding “no error in the district court’s conclusion that the cost-andfee- shifting provision is applicable to costs arising from arbitration.” According to the Eleventh Circuit, the cost-shifting provision applies to arbitrations because the “plain language” of that provision made it applicable to costs and fees arising from “any dispute” between BB&T and its customer. The court explained that “arbitration is a type of ‘dispute,’ and the broad language of the [cost-shifting] provision contains no limitation that would otherwise prevent its application to arbitration.”
Federal Law Does Not Supplant the State-Law Doctrine of “Unconscionability”
Relying upon the Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011), BB&T next argued that the Federal Arbitration Act “preempts application of [the state-law] unconscionability doctrine” to the Agreement. The Eleventh Circuit rejected that argument. “In Concepcion, the Supreme Court held that Section 2 of the FAA prohibits the invalidation of an arbitration agreement according to a state law that made contractual waivers of class-wide arbitration unenforceable.” “Although Concepcion held that the state law at issue was preempted, it made clear that there are instances wherein a state law may invalidate an arbitration agreement without being preempted by the FAA.” Specifically, the Federal Arbitration Act will not preempt a “generally applicable contract defense” to the enforcement of an arbitration provision.
According to the Eleventh Circuit, the “unconscionability” defense raised here was just such a “generally applicable contract defense.” The court explained that the “doctrine of unconscionability applies to arbitration and to other agreements according to the same basic criteria, and these criteria do not disproportionately impact arbitration agreements.” “Moreover, because an agreement can be held unconscionable under [state] law only if the process of contract formation is determined to have been flawed, [this] unconscionability doctrine is one that is concerned with defects in the process of contract formation.” Therefore, this “unconscionability doctrine is not preempted by the FAA in its application to arbitration agreements.”
Arbitration Provision May Be Severed from Cost Shifting Provision and Enforced
BB&T argued that, even if the cost shifting provision were found “unconscionable” and unenforceable, the arbitration provision should still remain valid and enforceable. The Eleventh Circuit agreed, concluding that “the unenforceable cost-and-fee-shifting provision is severable from the arbitration provision, and the invalidity of that provision does not affect the arbitration provision.” The court explained that “[o]ne term of a contract may be voided without also invalidating another provision when the two provisions are not necessarily dependent upon each other.”
Here, the arbitration provision in the Agreement “is capable of operating independently of the unconscionable cost-and-fee-shifting provision because the arbitration provision incorporates rules promulgated by the American Arbitration Association that govern all aspects of an arbitration proceeding, including the apportionment of costs.” Further, “the fact that the arbitration provision and the unconditional cost-and-fee-shifting provision are located in entirely separate portions of the contract and that the arbitration provision makes no reference to the other provision provides further evidence that the parties intended them to be capable of operating independently of each other.” Accordingly, the Eleventh Circuit reversed the district court’s decision and remanded “with instructions to compel arbitration.”
The Eleventh Circuit’s decision in Barras v. Branch Banking and Trust Co. (In re Checking Account Overdraft Litig.) may be viewed as an example of the operation of the public policy in favor of the enforcement of arbitration provisions. It is also a reminder, however, that legal doctrines like “unconscionability” may offer aggressive plaintiffs the opportunity to attempt to escape otherwise binding arbitration provisions. Accordingly, prudent financial institutions would be well served to give careful consideration to the drafting of arbitration provisions and, in the event of a dispute, to be prepared to defend such provisions from an attack on their enforceability.