It’s bad enough that Wells Fargo employees, pressured by unrealistic sales goals, fraudulently opened as many as 3.5 million new bank and credit-card accounts without their customers’ knowledge or approval. The first time many of those customers realized what had been done in their names was when they were hit with fees for the accounts they hadn’t requested.
What’s worse is that the bank, having been caught, has tried to avoid lawsuits by forcing its victims into binding arbitration. Before the bank defrauded them, these consumers had opened Wells Fargo accounts with take-it-or-leave-it user agreements that required them to waive their right to take the bank to court. Wells insisted that these arbitration clauses applied not just to the accounts people chose to open, but also to the ones opened fraudulently in their names. And amazingly, judges in several state and federal courts have agreed.
Wells’ disgraceful efforts to steer these disputes into its preferred venue is just one illustration (albeit an egregious one) of how companies stack the deck against their customers. By requiring each victim to bring a separate complaint to arbitration rather than allowing a few of them to seek relief for the entire group, companies reduce the potential penalty for their bad behavior, because some victims won’t bother to file claims and the ones who do may have trouble finding lawyers for such small stakes. Arbitrators also have a history of siding far more often with companies than consumers.
Wells Fargo’s actions prompted two congressional Democrats, Sen. Sherrod Brown of Ohio and Rep. Brad Sherman of Sherman Oaks, to propose bills last December to shield consumers from having to arbitrate disputes over accounts they did not create. Their legislation has gone nowhere in the Republican-controlled Congress, though, so California lawmakers passed their own version, SB 33 by Sen. Bill Dodd (D-Napa), which Gov. Jerry Brown signed into law Wednesday. Starting in January, the measure will let courts ignore binding arbitration clauses in cases where a bank or other financial services company had fraudulently created the account without the consumer’s consent.
Several bank and business trade groups opposed the bill, arguing that the Federal Arbitration Act preempts state laws like SB 33. But the measure doesn’t try to interfere with valid contracts that include arbitration clauses; instead, it stops banks from stretching an arbitration clause in a valid contract to cover a fraudulent one. It’s ridiculous to argue that consumers consented to arbitrate disputes over a contract they never saw or signed.
And yet, that’s what Wells Fargo’s lawyers continue to argue in Utah as they defend against a lawsuit brought by customers who’d been signed up for accounts without their knowledge. The lawyers did so even though the bank has agreed to a $142 million class-action settlement with other defrauded customers (the ones in Utah have declined to join that settlement).
The passage of SB 33 was just one win for consumers in a much larger battle nationally over forced arbitration. The Consumer Financial Protection Bureau issued a rule in July that bars financial services companies from using arbitration clauses to stop customers from banding together in class-action lawsuits. The House quickly responded by passing a resolution to throw out the rule; the resolution is awaiting action in the Senate. The U.S. Chamber of Commerce and several financial industry lobbying groups also have filed suit (irony alert!) to block the rule, arguing that the consumer bureau’s structure is unconstitutional.
Meanwhile, the U.S. Supreme Court began its term Monday by hearing three cases that all concerned employers’ power to force employees to resolve disputes one by one through arbitration, rather than filing joint claims. Early signs suggested that the court’s conservative majority would side with employers, further amplifying the advantages companies already hold in disputes with their employees.
What’s happening in Congress and the courts makes Brown’s decision to sign SB 33 all the more welcome. Arbitration can be a useful way to cut costs and to speed the resolution of disputes, but its value evaporates if it tilts the scales of justice.
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