Business owners, employers, vendors, all of us often use or are confronted with an arbitration clause in agreements.  Busy judges typically enforce the provision and send disputing parties to arbitration, instead of the courts.  But what if an arbitration provision is added to an agreement after the parties are doing business?

In a new matter out of the United States District Court for the Southern District of New York, the answer was ‘no’ for a bank that after-the-fact added an arbitration clause to the bank’s deposit account agreement years after the account was opened and there was no meaningful opt-out clause for the deposit holder/bank customer.  The decision in the case of Lipsett v Banco Popular (a class action) can be found HERE

Lipsett filed the class action lawsuit, claiming that Banco Popular’s policy on overdraft fees was unfair and unconscionable. Banco Popular filed a motion to compel (individual – no class) arbitration under provisions in an amended deposit account agreement from 2008 issued years after Lipsett opened the account and signed the original agreement in 2002.  The original deposit account agreement had no arbitration agreement.  It did have a change in terms clause, saying that the bank was allowed to change the agreement at any time and Lipsett would be bound by the new terms, without notice or further agreement.

While the first amended deposit agreement arbitration clause allowed opt-out and rejection of the arbitration requirement, opt-out had to occur within 45 days of opening the account, which happened years earlier for Lipsett.  Banco Popular sent in 2014 a notice to Lipsett (and other deposit account holders) that they could opt-out now within 45 days of this new notice.  Lipsett did not send a rejection letter to the bank.

Banco Popular argued that Lipsett was required to arbitrate his claim based on this change in terms.  But the court found that unless the offer and acceptance of the allegedly “new” deposit agreement was express and unmistakable, whether a party is bound to arbitrate should be determined by the first instance in which the agreement to arbitrate was offered (i.e. the 2008 provision requiring opt-out within 45 days of the account opening, which timeframe passed long ago in 2002).

The court found that no contract to arbitrate was formed between the parties in 2008, and Lipsett was not required to opt out again when then bank amended the contract in 2014.

Important for us is that the court also found that the 2008 arbitration provision was also unconscionable as it contained a “loser pays” provision, specifying that the losing party to the arbitration would be responsible for the other party’s attorneys’ fees and expenses.  The issue of whether an arbitration agreement is unconscionable for lack of the ability of a consumer to meaningfully opt-out is a hot issue in litigation.  There will be more lawsuits on this issue.

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 Information contained in this memo is intended for informational and educational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.  It is likely considered advertising.  Epps & Coulson, LLP encourages you to call to discuss these matters as they apply to you or your business.