California Excessive Bank Overdraft Fee Lawsuit Gets Second Wind

San Diego, CAFor months, the law firms that represent banks and other big businesses have worried that the Ninth Circuit’s 2019 decision in Blair v. Rent-A-Center shows plaintiffs how to side-step mandatory arbitration provisions that include class action waivers. Defense counsel’s worst fear is realized in the motion for reconsideration filed in McGovern v. U.S. Bank, a California bank overdraft fees lawsuit. 

The big problem:  how to prevent banks from using excessive overdraft fees and out-of-network ATM fees to wring profits from small-balance checking accounts. The small problem:  how to deal with mandatory arbitration clauses that keep these consumers from going to court to seek justice. 

The solution (one of many, perhaps) is to include a claim for public injunctive relief in the Complaint. The road ahead will not be easy though.

McGovern v. U.S. Bank

Reyna McGovern filed a class action lawsuit against U.S. Bank in 2018, complaining about the bank’s practice of charging overdraft fees for debit card transactions when enough money was in the account if, when the transaction ultimately settled several days later, an intervening transaction had reduced the available funds to less than the amount of the transaction. In addition, she cited USB’s practice of charging accountholders two fees when they used out-of-network automated teller machines to check their balances before withdrawing funds. 

Neither fee, she complained, was permitted by the standard account agreement that regulated checking accounts. These practices amounted to a breach of contract and violations of California’s Unfair Competition Law. She brought a lawsuit on behalf of herself and all similarly situated USB customers.

The same account documents, however, required that customers:

• submit all disputes with USB to arbitration; and 
• waive their right to participate in class action lawsuits.

Procedural slugfest breaks out

The bank moved to dismiss the lawsuit, arguing that the issue must go to arbitration. McGovern countered by amending her Complaint to include a claim for a public injunction that would compel USB to change its practices in order to protect the interests of the public in the future. The bank moved to dismiss the amended Complaint. The Southern District of California agreed with the bank. McGovern has now asked the District Court to reconsider its decision, based on a trio of recent Ninth Circuit cases:  Blair v. Rent-a-Center Inc., McArdle v. AT&T Mobility LLC and Tillage et al. v. Comcast Corp. et al. Despite the urging of the business bar, the U.S. Supreme Court has declined to review (or overturn) these decisions. This is exactly what defendants’ counsel feared would happen.

The big problem

With at least 22 million Americans out of work due to the coronavirus, having enough money to pay bills and buy essentials is a serious issue. Sens. Cory Booker and Sherrod Brown have urged banks to stop charging excessive overdraft fees during the pandemic. These fees hit low-income consumers the hardest. 

It’s not a new problem either. As long ago as 2013, the Pew Trusts queried bank overdraft practices. In 2016, they reported that poorly regulated bank overdraft practices continue to cause consumers to unknowingly incur multiple costly fees for a single transaction. 

The small problem

Nested inside the larger issue is a stubborn, persistent smaller one. The initial wave of litigation against banks for deceptive checking account practices was relatively successful. Many banks responded by amending their account agreements with customers (even without the customers’ knowledge or consent) to require arbitration of disputes with the bank. 

Arbitration sounds good on its face – quicker, less adversarial and less formal. But it is notoriously unfriendly to the small-pocketed plaintiff. Very often the defendant bank gets to choose the arbitrator, who is likely to be someone with whom they have worked before and who would very much like to be hired again.

Facing bad odds, many checking account consumers who are justifiably aggrieved about a few hundred dollars may, nonetheless, decide to move on to other issues.

The solution

In California, several consumer protection laws permit claims for a public injunction. Among these is California’s Unfair Competition Law. A public injunction is designed to prevent future breaches of consumer protection laws that threaten injury to the general public.  More importantly, a private agreement, signed by an individual to submit an individual dispute to arbitration, does not cover a claim for a public remedy. The logic is basically that an individual cannot waive a right that belongs to the community at large. The mighty triumvirate of Blair, McArdle and Tillage, upon which McGovern’s argument for reconsideration relies, itself relies on the California Supreme Court decision in McGill V. Citibank, a case that brings us full circle to a mandatory arbitration clause in a banking contract.  

The problem with the solution

Avoiding the arbitration trap by including a claim for public injunctive relief in a class action lawsuit is not necessarily an all-purpose solution, and it may not succeed in McGovern. First of all, courts are very reluctant to re-consider their own decisions. In addition, although as the decision in Blair points out, there is some overlap between the public purpose of a private injunction and a public injunction, there is a distinction between the two that cannot be entirely obscured through labeling. 

Nonetheless, the fact that the U.S. Supreme Court declined the opportunity to review the cited cases this past spring should be encouraging to accountholders who seek relief from abusive bank practices. It may provide another tool to chip away at the barrier of mandatory arbitration.