Bank Overdraft Fees Lawsuit Stresses Lack of Consumer Sophistication, Unfair Process

Atlanta, GAOn December 17, the U.S. Court of Appeals for the Eleventh Circuit heard oral arguments in Garcia v. Wachovia Bank, one of the bank overdraft fees lawsuits, consolidated in In Re: Checking Account Overdraft Litigation. The checking accountholders are appealing a September 2019 District Court decision that denied them the chance to proceed through a class action lawsuit, forcing them to arbitrate their claims individually. That would effectively end their chance to dispute excessive overdraft fees that resulted from Wells Fargo’s and Wachovia Bank’s practice of reordering checks from high to low amounts in order to maximize profits.

The recorded oral argument, only about a half-hour long, is worth listening to. Beyond the quaint language of appellate argument, the most striking thing is how little the arguments have to do with the real experience of opening a small consumer checking account – having to sign or initial many pages of several agreements without any real opportunity to read or understand them.

Consumers focus on bank overdraft fees; Banks argue contract law

As with many bank overdraft fee lawsuits, what began as an argument about the petty nickel-and-diming of small consumers quickly morphed into a large legal fight about the enforceability of contracts. Wells Fargo (which is the successor to Wachovia) argues that consumers should be held to the terms of the terms of the arbitration agreements they signed when they opened their accounts.

Consumers argue that they should not because the agreements are difficult to understand and fundamentally unfair.

In his recorded argument, plaintiffs’ attorney is Bruce Rogow. Without attempting to summarize his entire appellate argument, two big legal concepts jump out.

The first, the Federal Arbitration Act’s (FAA) requirement that any decision that delegates all or part of an issue to the arbitrator (such as whether a dispute must go to arbitration) be plainly spelled out, has its roots in the principle that parties to a contract must consent to its terms willingly. This requires, of course, that they understand what the agreement is. (In the oral argument, this gets shorthanded as “delegation.”) The second big idea is the common law rule that courts need not enforce contracts that are so unfair as to shock the conscience – in other words, “unconscionable.”

These are two important exceptions to the general rule that contracts should be enforced. They may hold the key to setting straight a legal fight that seems increasingly divorced from the real problem – checking account customers believe that they are being cheated out of their money, one $35 bank overdraft fee after another.

Was the arbitration clause “clear and unmistakable”?

In 2011 in AT&T Mobility v. Concepcion, the U.S. Supreme Court upheld the enforceability of an arbitration clause that, like the one in Garcia, mandated individual arbitration. Among the questions the Court faced was whether the meaning of the arbitration clause was “clear and unmistakable.”

Rogow argues that Wells Fargo’s arbitration clause was not clear about the fact that any decisions concerning its enforceability were to be made by an arbitrator, rather than a court. The distinction between consumer contracts and commercial contracts is at the heart of the matter: “What’s clear and unmistakable to a lay person who has $300 in the bank is not the same thing as what’s clear and unmistakable to a sophisticated party in a commercial transaction.” If consumers cannot be expected to understand the terms of a contract drafted by the bank, they cannot be said to have consented willingly. A court should not hold them to the agreement.

Shockingly bad conduct

The concept of unconscionability requires more than just confusing language. It rests on something more like shockingly bad conduct. Unconscionable contracts are often characterized by unfair surprise, hidden terms or grossly unequal bargaining power – often by reason of education, sophistication or even some degree of incapacity. Consumer contracts, like leases, credit card agreements, or even “check-the-box” computer user agreements, are almost always characterized by unequal bargaining power, but that’s another fight.

Whether a contract is unconscionable is determined under state law, and different states have different standards. They are likely, however, to look for either or both “substantive unfairness” and “procedural unfairness.”

The classic example of procedural unconscionability might be a “heads I win, tails you lose” coin toss. There is no choice; either way you lose. The process cannot produce a fair result. Some would argue that forcing small claims into individual arbitration with a bank (which selects the arbitrator) is procedurally unconscionable.

Substantive unconscionability relates to the content of the contract, rather than the process. For example, if a lender requires repayment in person by the end of the day, but then is completely unavailable for payment, that term might be substantively unconscionable.   

Consumers who bring excessive overdraft fees lawsuits have been successful in securing favorable settlements. Settlements do not make law, however, so the rare case that goes to trial and appeal packs considerable legal weight. A decision by the Eleventh Circuit in Garcia that will either permit consumers to continue with their class action lawsuit or force them into individual arbitration may have an impact on lawsuits and settlements throughout the country.