Sixth Circuit Refuses to Enforce Unilateral Changes to Arbitration Provision

19 April 2021 Consumer Class Defense Counsel Blog
Authors: Christina M. Kennedy Emily A. Beer

While the United States Supreme Court has made clear that class action waivers in arbitration clauses can be enforced, plaintiffs’ counsel continue to find creative ways to challenge these types of arbitration agreements. Last month, in a 2-1 decision, a three-judge panel of the U.S. Court of Appeals for the Sixth Circuit reversed a district court victory for Branch Banking & Trust (the “Bank”) and ruled that the Bank could not compel arbitration of its customers’ putative class action because the Bank’s unilateral changes to its terms and conditions were insufficient to create an enforceable arbitration agreement. 

The Facts

The case stems from a lawsuit filed by a number of money market account holders.  In 1989, FNB (a predecessor bank) promised plaintiffs that the interest rate on certain money market investment accounts would “never fall below 6.5%.” Following a series of bank mergers and acquisitions between 1989 and 2001, the Bank eventually acquired the subject money market accounts in 2001. After acquiring these accounts, the Bank continued to honor the 6.5% interest rates until 2018, at which time the Bank dropped the interest rate to 1.05%.  Following the Bank’s changes to the interest rates, the customers filed a class action complaint seeking relief for breach of contract.

The District Court Decision

The Bank moved to dismiss the complaint and to compel arbitration.  When the Bank acquired the money market accounts back in 2001, the Bank sent the plaintiffs a Bank Services Agreement (“BSA”), which specified that amendments could be promulgated by written notice and that continued use of an account after receipt of such a notice constituted acceptance of the amendments.  The BSA also included a permissive arbitration clause that permitted either party to require that a dispute be resolved by arbitration.  Sixteen years later, in 2017, the Bank sent out notice of a major overhaul to the BSA, which included replacing the prior permissive arbitration clause with one mandating arbitration and including a broad class action waiver.  The district court found that the Bank was entitled to enforce its arbitration clauses because the plaintiffs “manifested assent” to the BSA by never objecting to it and continuing to hold their accounts.

The Sixth Circuit’s Reversal

The Sixth Circuit reversed last month. The court focused on whether the plaintiffs, after agreeing to the initial two-page account agreement with FNB (which contained no conflict resolution provisions), agreed to the Bank’s new terms by continued use of their accounts.  The court noted that both of the BSAs were “clearly” contracts of adhesion and that they transformed the original two-page agreement into an extensive 33-page agreement.  In applying state contract law, the court observed that where a party with vastly greater bargaining power makes a unilateral change of such magnitude, the court must examine whether the changes are (1) reasonable and (2) do not violate the implied covenant of good faith and fair dealing.

The Sixth Circuit found that the Bank’s changes were unreasonable.  While the original FNB agreement did include a short “change of terms” provision, the original agreement contained no dispute resolution terms at all.  The court found that the new mandatory arbitration clause was not truly a modification of the original contemplated terms – it constituted the addition of an entirely new term.  The court observed that banks do not have carte blanche to unilaterally make this type of change; rather, the subject matter of a modification must have been anticipated when the parties entered into the contract.  Here, the plaintiffs had no choice other than to acquiesce to the new provisions or close their high-yield money market accounts (a “totally unreasonable option,” in the court’s view, given that the high interest rate was the entire purpose of opening the account). The dissent argued that the plaintiffs’ own actions by maintaining their money market accounts should be deemed acceptance.  However, the majority held that this argument was “completely neutralized by the Bank’s own inaction for sixteen and a half years,” in which it continued to honor the 6.5% interest rate.  The court stated that this delay “lulled” the plaintiffs into not caring about the unilateral arbitration provision addition, was the “classic case of the pot calling the kettle black,” and was the “antithesis” of good faith and fair dealing.

What Now?

As Foley has covered extensively, in the right circumstances, there can be a variety of benefits to arbitration agreements for all parties. As this and other recent opinions illustrate, particularly when it comes to agreements including class action waiver, plaintiff’s attorneys are heading back to basics and challenging each and every aspect of the agreement to arbitrate, the scope of any arbitration clause, and the facts and circumstances surrounding the parties’ execution of the agreements. 

Again, while the Supreme Court has upheld class action waivers in arbitration agreements, it has noted that arbitration agreements are subject to challenge consistent with generally applicable state contract law. Given the Sixth Circuit’s willingness to dive into the details of the various account holder agreements dating back to 1989, through various mergers and acquisitions, all the way through 2017, companies should be on the lookout for these types of challenges on a going-forward basis.  The Sixth Circuit’s 2-1 decision is a timely reminder for companies to carefully examine their agreements, including all legacy agreements, to ensure that they are in the best position to align company goals for alternative dispute resolution processes with the continually evolving legal landscape.  Businesses will continue to face challenges from the plaintiff’s bar when seeking to enforce these agreements. 

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.

Related Services

Insights

DOL Rolls Back Trump Administration’s Independent Contractor Rule
05 May 2021
Labor & Employment Law Perspectives
190 Across the Finish Line: CFTC Adopts New Bankruptcy Rules for FCMS and DCOS
05 May 2021
The Journal on the Law of Investment & Risk Management Products, Futures & Derivatives Law Report
Understanding SPACs' Hidden Capital Costs
05 May 2021
Law360
The Export Import Bank of the United States: Priorities and Programs Supporting U.S. Businesses and Jobs
04 May 2021
Manufacturing Industry Advisor
Home Care 100
27-30 June 2021
Marco Island, FL
2021 AANP National Conference
15 June - 31 August 2021
Virtual Conference
HCCA Orange County Regional Healthcare Compliance Conference
11 June 2021
Virtual Conference
Rx Pricing and Reimbursement Summit
24-25 May 2021
Virtual Conference