Credit Unions Can Avoid Class Action Litigation by Implementing Arbitration and Class Action Waivers

The experts at credit union law firm, Farleigh Wada Witt, weigh in on recent overdraft class actions brought against Northwest credit unions.

FWW1/5/2021

Editor’s Note: The following is a contributed piece from the legal experts at credit union law firm, Farleigh Wada Witt, on how credit unions can avoid class action litigation.

In the last two years, plaintiff attorneys have aggressively targeted Northwest credit union members to initiate overdraft class actions. These solicitations have resulted in over a dozen lawsuits.

The primary motivation for these threats is not necessarily abusive overdraft practices. Rather, the driving force behind the current litigation is a handful of law firms that have made a lucrative practice out of threatening and bringing class action suits against banks and credit unions for technical disclosure defects, inconsistencies between documents and practices, and mischaracterizations of the process by which checks and other payments are handled. These claims are more amenable to class action treatment and more difficult to dismiss than the Americans with Disabilities Act website claims that swept through the credit union world in prior years. As a result, credit unions have been more prone to settle such cases, which has further encouraged the plaintiff firms driving those cases.

Well-drafted account agreements, overdraft opt-in disclosures, and consistent and fair practices provide credit unions a solid defense against overdraft lawsuit threats. However, credit unions can substantially reduce the threat of spurious class action threats by effectively implementing an arbitration agreement and class action waiver.

Consideration of Arbitration and Class Action Waiver Agreements

The value proposition for considering an arbitration and class action waiver has been a moving target in the last few years. Historically credit unions have been a rare target for consumer class action lawsuits due to member-friendly practices and fees.

In 2017, the Consumer Financial Protection Bureau issued a final Arbitration Agreements Rule, which prohibited most consumer class action arbitration provisions. Subsequently, Congress and President Trump approved a joint resolution to invalidate the Arbitration Agreements Rule. At the same time, credit unions were experiencing growing exposure to class-action threats in a variety of arenas, such as ATM surcharge notices under Regulation E, ADA website claims, and Non-Sufficient Funds fees. Since then, many credit unions around the country have adopted arbitration agreements and class action waivers to successfully thwart the use of class action threats to create disproportionate settlement leverage for overdraft lawsuits.

In light of the relentless class action threats to credit unions regarding overdraft practices and documentation, we continue to strongly recommend that credit unions consider adding and utilizing a mandatory arbitration agreement and class action waiver in account agreements with their members. Credit unions should consider the benefits and drawbacks before taking this step, but the benefits are certainly greater than they have been in the past.

Implementation of Arbitration Agreements and Notices to Members

To have the best chance of stopping class action threats, and avoiding a lawsuit successfully gaining class-action treatment if filed, a credit union must have a well-crafted strategy for implementing the arbitration and class action waiver provision. Implementation is not simply a matter of inserting language into an account agreement. A number of areas of operations are affected. The content of the provision and the process for amending your deposit account agreement are critical to ensure enforceability.

Arbitration and Class Action Waiver Agreement

Your credit union’s arbitration and class action waiver agreement, and the notice to members, must be prepared specific to your credit union, not copied from another arbitration agreement that does not fit your operations. Courts are more likely to uphold the enforceability of an arbitration agreement if the agreement and the process for entering into it are fair for both parties. An 11th Circuit case involving KeyBank and its deposit account arbitration clause provides important guidance on the rights that should be extended to account holders and the fair process by which an arbitration agreement must be created. In the KeyBank case, the consumer’s right to reject helped the court conclude that the bank’s arbitration provision was enforceable.

Based on the KeyBank case, we recommend several key provisions to significantly increase the chances that your arbitration agreement will be enforced.

  • Election to Arbitrate. Either party can choose to arbitrate, so if one party chooses to arbitrate, the other cannot opt out.
  • Right to Reject. The members’ right to reject or opt out of the arbitration clause is a significant element that provides strong support for the enforceability of arbitration agreements and, therefore, we recommend including this right. However, please recognize that providing this right will require the credit union to establish and maintain another opt-out database. Credit union members must exercise their right to reject within a reasonable period after receiving the change in terms notice or (once the provision has been fully implemented) account opening.
  • Arbitration Rules. There are a variety of arbitration organizations, each with specific rules, but some are better than others, and some are limited to certain areas of the country. Care should be exercised in choosing the applicable arbitration forum.
Proper Notice to Members

In order for members to agree to an arbitration and class action waiver provision, they need to receive it and have the opportunity to opt-out. A credit union must develop a proper change-in-terms notice and a process for delivering the arbitration and class action waiver terms to both existing and new members. Implementing an effective change-in-terms notice to inform your members of the new provisions is essential for an effective strategy. Failure to carry out the process effectively will render it useless.

The use of arbitration clauses to avoid class action suits of members has been effective in defending all types of consumer claims. You are more likely to stop a class action threat to your credit union with a sound strategy for developing and implementing an arbitration and class action waiver for your members.

Have a question about this story? Please contact the legal experts at Farleigh Wada Witt.