One of the aspects many Nebraskans love so much about our state is that we get to experience all four seasons. As the calendar rolls into the second half of the year, our kids start going back to school, Friday night lights become the focal point of our communities, and we soon get to watch a football being tossed around Memorial Stadium on Saturdays. Fall is right around the corner. Many use the change in seasons as a time to focus on a particular task (how many of us are spring cleaners?) or prepare for the coming season. Likewise, you can use the march toward fall as a Fall Retrospective — a time to review your customer account agreements to determine if you need to update them in any way.
As you review those agreements, one item to which you can direct your attention is whether you spell out how disputes between the customer and the bank will be resolved. A few years ago, many financial institutions shied away from inserting dispute resolution provisions requiring arbitration into their account agreements because the Consumer Financial Protection Bureau (the “CFPB”) went through a process resulting in a rule that would have prohibited such provisions. In particular, the CFPB refused provisions that paired binding arbitration with class action waivers. The CFPB was concerned that without the ability to bring class action litigation, consumers would be limited in their ability to seek relief against financial institutions.
However, Congress acted to prevent that rule from being able to have any force and effect. In fact, Congress was so concerned with the rule, it required that any such provision limiting arbitration in the future would need congressional approval.
Whether you decided not to include arbitration provisions with class action waivers in your customer agreements because of the activity of the CFPB or for some other reason, now would be a good time to look at your customer agreements. Consider using a dispute resolution procedure that would include requiring arbitration of the dispute while at the same time providing that the customer waive any right to be part of a class-action lawsuit.
So, why is now an excellent time to consider making this change? While there are many admirable reasons put forward in support of arbitration provisions with class action waivers, perhaps chief among them today are the current circumstances with which we as a society continue to struggle. As with so many things impacting us today, you do not have to go far to recognize that COVID-19 has had an impact on the courts. An already slow system for commercial litigants has become even slower. The pandemic forced many courts to stop having in-person proceedings, including jury trials, for long periods of time, resulting in a backlog of cases around the state and the country.
As courts work to get back to “normal,” alleviating the case backlog is first focused on criminal cases as the Constitution provides speedy trial rights to criminal defendants. And, as we experience new variants of SARS-CoV-2, the courts’ ability to get back to “normal” could continue to be impacted well into the future. Contractually agreed-to arbitration is a way to avoid this quagmire. One feature long touted about arbitration is that it provides an alternative to resolving disputes through the courts – and in a much more timely and flexible manner than courts can provide. Arbitration is a process that can provide all involved in a dispute a more flexible, timely, convenient, and comparatively inexpensive resolution to that dispute. Combined with a class action waiver, arbitration becomes a forum focusing on the resolution of the dispute. Addressing the customer’s complaint much more promptly and doing so without the threat that the cost of defending a single class-action lawsuit will devastate the financial institution’s ability to remain in business. Arbitration, after all, is not a disfavored method to resolve disputes; quite the opposite, as the United States Supreme Court has repeatedly explained federal law strongly favors arbitration. Similarly, the Nebraska Supreme Court has recently reminded us that the arbitration process is swift and informal precisely because the parties have agreed to be bound by it, including the arbitrator’s view of the facts and the contract.
Our bogged down (and some might say antiquated) judicial system is, of course, not the only reason to consider how an arbitration provision with a class action waiver would be beneficial to customers and financial institutions alike. Another, perhaps not as currently pressing on our minds the way the pandemic has been for well over a year now, but just as practical a reason might come to mind. On occasion, a financial institution leader or a financial service provider will open a letter that turns out to be from a class action plaintiff attorney claiming to represent a customer of the institution or service provider. This attorney threatens to file a class-action lawsuit claiming an alleged statutory violation or contractual breach. Hopefully, you have never received such a letter and experienced the heartburn it inevitably generates regardless of how meritless you may feel the claims may be. After all, you are bankers, and you know that every dollar spent on lawyers defending a lawsuit is a dollar you cannot spend on moving your business forward.
Suppose a letter does come to you, and there is a provision in your agreement where you and your customer have agreed to resolve your disputes through binding arbitration. Your customer has agreed to waive any ability to bring a class-action lawsuit. Then the focus of the conflict can be where it should be: on the disputed issue raised by the customer, instead of the profit the class action plaintiff lawyer is trying to make off your customer. That difference in focus can be important, but it is just one of several considerations you should consider as you review your customer agreements during your Fall Retrospective.
Kenneth W. Hartman is a Partner at Baird Holm, LLP in Omaha, Nebraska. He counsels clients in various ways to resolve their commercial, business and/or constitutional disputes. In doing so, he represents clients in litigation in both federal and state courts. He also represents clients in arbitration proceedings and mediation.
