In response in part to the dozens of cases filed throughout the country related to assessment of insufficient funds (NSF) and overdraft (OD) fees, many banks and credit unions have sought to add arbitration and class action waiver provisions to their deposit agreements. If the financial institution subsequently faces a putative class action based on NSF or OD fees, the institution likely raises the arbitration clause and class action waiver through an early motion. In all likelihood, however, the plaintiff will challenge the application of the class action waiver in particular, arguing that the waiver is not effective for multiple reasons.

As it turns out, on Oct. 24, 2023, two courts – the Wisconsin Court of Appeals in Pruett v. WESTconsin Credit Union, No. 2022AP887, 2023 WL 6991328 (Wis. Ct. App. Oct. 24, 2023), and the Supreme Court of Indiana in Land v. IU Credit Union, No. 23S-CP-115, 2023 WL 6984790 (Ind. Oct. 24, 2023) – issued decisions regarding whether the arbitration clause and class action waiver could be enforced. And both appellate courts said "no."

The Pruett Case

Although the cases arise from common contexts, the principal reason for the Pruett court not enforcing the "new" provisions was the fact that, although the deposit agreement permitted the credit union to "change the terms of this Agreement," the language was not sufficiently broad to allow the credit union to add a provision (i.e., a clause relating to an entirely new subject) to the agreement. Although the court recognized long-standing law supporting the use of arbitration to resolve disputes, the court determined that the credit union's right to "change" the agreement unilaterally did not extend to mandating the use of arbitration to resolve disputes, eliminating the right to file a class action. The court cited precedent involving credit card agreements from various jurisdictions to support its conclusion and rejected out of hand an additional argument made by the credit union that, because the "Governing Law" clause required disputes to be brought "in the county in which the Credit Union as located," it could be inferred that this language could just as easily apply to arbitration. Instead, the court found that the arbitration clause "adds substantive limitations to the manner in which a legal action may be heard … [and] additions to the contract limiting the rights of the parties on the issues that were not contemplated by the original Agreement – arbitration and class actions – rather than amending existing terms." Pruett, at *11 (emphasis by the court). Furthermore, the court found that the credit union's action violated the covenant of good faith and fair dealing by "seeking to retroactively deprive another party of the legal right," namely the bringing of an action in court on behalf of a putative class.

The court also found that to the extent that the amendment constituted an offer to modify the contract, the credit union failed to meet its burden of showing that the customer agreed to accept the new terms because 1) the customer's opt-out right was not clearly explained and 2) under established law, the ambiguity must be construed against the credit union.

The Land Case

The Indiana Supreme Court took a different route to reach the same result. In Land, the court chose to not rule on the issue of whether the amendment rights afforded by the credit union's deposit agreement allowed the credit union to amend its agreement by adding an arbitration and class action waiver provision. Instead, the court focused entirely on whether the new provision was enforceable based on the manner in which it was conveyed and purportedly accepted. Although the court held that an email notice of the deposit agreement's new "addendum," sent with the customer's account statement, was insufficient due to imprecise language, the court determined that a second notice, sent by regular mail with much clearer language, satisfied the "reasonable" notice standard under Indiana law. However, the court rejected the credit union's position that the customer accepted the terms of the "addendum" merely through silence and continued use of the account. Applying Section 69 of the Restatement (Second) of Contracts, which permits acceptance by silence in certain limited circumstances, the court held that the lack of "objective manifestation of intent to accept" was not shown simply through continued use of the account. Instead, because there was nothing in the deposit agreement suggesting that silence and continued use would result in acceptance of agreement modifications and additions, the court deemed mere continued use sufficient to enforce. As with Pruett, Land suggests affirmative assent to the new terms is required unless the original agreement makes very clear that use constitutes acceptance of the original agreement and amended terms as well.

Key Considerations

It is of course potentially prudent for financial institutions to at least consider including an arbitration clause and class action waiver in their account agreements. However, if the institution decides to do so, it must be careful about how to accomplish the desired result, focusing as much on the rights and language of the original agreement as terms relating to acceptance contained in the disclosure associated with the amended terms. As Pruett shows, if the language in the original agreement is not sufficiently clear that the addition of new terms by amendment is allowed, the institution may have to consider publishing an entirely new deposit agreement to existing – and not just new – customers to increase the chances that the arbitration provision will be enforced. Furthermore, the financial institution may not be able to rely on continued use of the account to determine the existence of an added arbitration clause and associated class action waiver.

While the specific facts of the Land and Pruett decisions involved credit unions, their holdings are equally applicable to commercial banks as well. Moreover, the courts' focus on the rights and language of the arbitration provisions is also a focus of federal bank regulatory agencies and the Consumer Financial Protection Bureau (CFPB). Although the CFPB's arbitration rule was overridden by Congress in 2017 under the Congressional Review Act, there has been renewed advocacy by consumer groups in recent months for the CFPB to resurrect its rule, particularly under a more consumer-friendly administration. Given the regulatory scrutiny and guidance from the courts, this is an area that financial institutions of all types and charters should take seriously, including review and possible revision of their existing arbitration clauses to ensure that they pass litigation and supervisory muster.