Column: How Wells Fargo exploited a binding arbitration clause to deflect customers’ fraud allegations

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In the category of adding insult to injury — or perhaps piling one injury on top of another — Wells Fargo is an expert.

Nothing demonstrates that more than the bank’s insistence on forcing the victims of its vast fake-account scam into binding arbitration, a system in which customers are at an overwhelming disadvantage. As my colleague James Rufus Koren reported last year, the San Francisco-based bank has succeeded in getting several judges to toss fraud lawsuits over the bogus accounts by asserting that, even though the accounts are fake, they stem from legitimate accounts the victims opened, in which they agreed to submit any future disputes with the bank to an arbitrator.

But as the scale of wrongdoing at Wells Fargo has become clearer, the bank’s arbitration dodge is coming under the spotlight. Earlier this month, Wells Fargo paid $185 million to federal and Los Angeles authorities to settle allegations that its employees had opened as many as 2 million bogus accounts for customers and strangers, all in order to meet relentless sales quotas imposed by the bank’s brass.


We believe there’s a shift in the mentality about how these things are perceived.

— Utah attorney Steven Christensen, explaining why forced arbitration clauses like Wells Fargo’s are vulnerable

When he appeared last week before the Senate Banking Committee last week, Wells Fargo Chief Executive John Stumpf was pressed on whether he would cease enforcing mandatory arbitration for customer accounts that were not authorized. (He said he would have to “talk to my legal team.”)

Sen. Elizabeth Warren (D-Mass.) and five other Senate Democrats followed up with a letter Friday urging Stumpf “to immediately end Wells Fargo’s use of mandatory arbitration clauses in your customer agreements.” He hasn’t responded. Nor has the bank replied to our request for an update.

“We believe there’s a shift in the mentality about how these things are perceived,” says Steven Christensen, a Utah lawyer who has filed a class action complaint against Wells Fargo in Salt Lake City federal court.

Arbitration clauses have increasingly become a scourge victimizing customers of big companies. As we observed in 2014, when President Obama effectively outlawed them in workplace discrimination or abuse cases brought against federal contractors, “arbitration clauses are buried in the boilerplate you sign when you enroll with a cable company, go to a doctor or hospital, or take a new job.” Typically they favor the bigger party — a Wells Fargo, for example, will be party to perhaps hundreds or thousands of arbitration hearings per year, while the average customer may face one in a lifetime.

Always favored by judges, who are all too happy to get penny-ante consumer cases off their dockets, arbitration became even more common after 2011, when the Supreme Court upheld an AT&T arbitration clause that forbid its wireless customers to band together in a class action.


None of this gives a flavor of just how abusive the Wells Fargo arbitration strategy is — or how judges effectively collude with big companies to bury fraud allegations. The best example comes from a lawsuit brought last year in San Francisco federal court by Wells Fargo customers Shahriar Jabbari of California and Kaylee Heffelfinger of Arizona. The lawsuit sought class certification.

According to the lawsuit, Jabbari had opened savings and checking accounts with the bank in 2011, but within two years discovered that he had seven more that he hadn’t authorized. Soon enough, he was getting dunning notices from collection agencies for unpaid fees on those accounts, some of which had been opened with manifestly forged signatures or even no signatures at all.

Heffelfinger’s experience was similar. She opened a checking and a savings account with Wells Fargo in March 2012, the lawsuit says. Wells employees started opening bogus accounts in her name even before that, starting in January. She ended up with seven accounts, some opened with forged signatures and fake Social Security numbers.

Wells Fargo demanded in its defense that the case go to arbitration, noting that its arbitration clause was exceedingly broad: Anyone who became a Wells Fargo customer was agreeing to boilerplate in their customer agreements that covered any dispute with the bank whatsoever, including “claims based on broken promises or contracts, torts, or other wrongful actions.” Theoretically speaking, if Wells tried to take your first-born child in settlement of an overdraft, it would be up to an arbitrator to split the baby.

Not only that, but the very question of whether a dispute was subject to arbitration was itself an issue for the arbitrator to judge. This provision, implicit in many arbitration clauses, is a Catch-22 — arbitrators get paid by the case, so only rarely will an arbitrator toss a case that brings him a hefty check.

San Francisco Federal Judge Vince Chhabria agreed with the bank. The bank’s assertion that its employees’ alleged misuse of information related to their legitimate accounts in order to open fake accounts “may ‘relate’ to the legitimate accounts,” so Wells’ contention that it was subject to arbitration was “not wholly groundless.”


The only close call, Chhabria found, involved the accounts opened for Heffelfinger before she opened her legitimate accounts. Even there, however, he bought the bank’s argument that the information used to open those bogus accounts might have come from a meeting she had at a bank branch at which she turned over personal information as a prelude to opening her accounts. Whether that mattered, the judge said, was up to an arbitrator.

Lawyers for Jabbari and Heffelfinger were prepared to appeal Chhabria’s ruling, but they settled with the bank first.

That’s a good example of how the bank could bury facts related to its scandal. With the settlement, not only the details of how the clients could have been defrauded, but the issue of the arbitration clause, was closed.

Christensen, the Utah lawyer, thinks Wells Fargo won’t be able to hide behind the arbitration clause forever. He believes Chhabria’s reasoning won’t hold in other courts. “We feel strongly that if a court ruled you could not bring an action for fraud, that would be against public policy,” rendering the clause unenforceable. He says several of his clients have had customer relationships with Wells Fargo that may have predated the arbitration clause, so it wouldn’t be applicable. And other victims of the bank’s wrongdoing may not have been customers at all.

But the most important consequence of Wells Fargo’s over-reliance on arbitration is that it brings home the drawbacks of allowing big businesses to saddle their customers with clauses the latter probably don’t read and certainly don’t fully understand. If Congress wishes to extract a silver lining from the Wells Fargo scandal, it could do worse than outlawing binding arbitration that keeps aggrieved consumers out of court, entirely.

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