Wells Fargo Seeks to Compel Arbitration to Prevent Fake Account Lawsuits

On November 23, 2016, Wells Fargo successfully defended a class action lawsuit relating to the recent fake account scandal, Mitchell v. Wells Fargo Bank NA.  This class action lawsuit, filed by three Wells Fargo customers in the United States District Court for the District of Utah, called for at least $5 million in damages, as well as potential punitive damages, stemming from the bank’s opening of at least 2 million accounts that its customers did not authorize.  However, Wells Fargo succeeded in having the case referred to arbitration, citing clauses in its account agreements compelling arbitration in the event of a dispute, as well as a September 2015 case from the United States District Court for the Northern District of California that also involved Wells Fargo’s alleged opening of unauthorized accounts.

Wells Fargo’s customer account agreements provide that any disputes between the bank and its customers must be resolved in arbitration with the American Arbitration Association (AAA), or any other arbitration authority that the customer and Wells Fargo mutually agree upon.  The arbitration must also be carried out pursuant to the AAA’s commercial dispute resolution procedures.  Wells Fargo’s requirement that its customers resolve disputes through arbitration is a common practice among financial institutions, who use them to prevent disputes with customers from going to court.

The practice of requiring arbitration is still being criticized by some, due to the limited nature of discovery usually available and the unavailability of trial by jury.  For example, unlike court documents, documents produced in arbitration do not become public records.  It is also known that many arbitration clauses, such as the one in Wells Fargo’s Business Account Agreement, provide that disputes cannot “be consolidated with other disputes or treated as a class.”  This shows that customers who enter into agreements that contain arbitration clauses cannot bring class actions.  It has also been reported that customers who are suing large financial institutions for an insignificant sum of money often have difficulty finding lawyers who will represent them.  Finally, arbitration awards do not set legal precedent which can provide guidance in similar future cases.

The current case involving Wells Fargo has generated additional controversy because the dispute involves the creation of accounts that Wells Fargo customers did not authorize.  It seems logical that customers who incurred fees and expenses from accounts that Wells Fargo opened without their permission should not be compelled to resolve their disputes in arbitration, since the clients never signed new account agreements containing the arbitration provisions.  However, in the prior case from Northern California, the Court granted a motion to compel arbitration in a case that also involved Wells Fargo allegedly opening accounts without authorization from customers.  Most of the victims of the fake account scandal were Wells Fargo customers who had previously opened legitimate accounts with the bank.  Based on both the precedent from the Northern California case and the fact that most of the victims were customers who originally entered into agreements that included arbitration clauses, Wells Fargo was able to successfully argue that the arbitration clauses executed in connection with the legitimate accounts should be extended to include the unauthorized accounts.

Whether the claims involving the unauthorized accounts will be compelled to be resolved in arbitration, though, remains unclear.  Court records have indicated that the case from Northern California has been reopened and joined with a similar lawsuit.  It seems that if this arbitration issue is ultimately resolved in customers’ favor in the Northern California case, it could negatively affect Wells Fargo’s ability to uphold the arbitration clauses in the Mitchell case.

The Consumer Financial Protection Bureau and some politicians, including Democratic Senator Elizabeth Warren, have proposed rules that would prohibit banks and other financial institutions from compelling individuals who open accounts with them to resolve disputes in arbitration.  However, various commentators have predicted that President-elect Donald Trump and a majority-Republican Congress could reduce the Consumer Financial Protection Bureau’s power.  Moreover, some newly-elected Republican lawmakers have expressed a desire to do away with the Consumer Financial Protection Bureau.  Therefore, while it seems possible that a reopening of the Northern California case could set some new precedent which would be favorable to customers, the Consumer Financial Protection Bureau’s proposed rule will likely not be implemented in the near future.  As a result, there is still some uncertainty over whether Wells Fargo customers who were victims of the fake account scandal will be required to resolve their disputes in arbitration.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.

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