More details have emerged on the proposed Justice for Victims of Fraud Act that would bar arbitration of disputes involving fictitious Wells Fargo accounts. Also, a bill has been introduced in the California Senate that offers a different approach.
As we went to press with SAA 2016-45, we learned that on December 1, Senator Sherrod Brown (D-OH) and Representative Brad Sherman (D-CA had introduced the Justice for Victims of Fraud Act of 2016 (“JVFA”), which according to a Press Release would allow investors to sue Wells Fargo for damages arising from fake accounts, despite the presence of a PDAA in legitimate account agreements. The bills – S. 3491 and H.R. 6423 – have now been posted on Govtrack.us and Congress.gov, allowing us to analyze them. Unlike the Arbitration Fairness Act, the Restoring Statutory Rights Act, and the Justice for Telecommunications Consumers Act, all of which would amend the Federal Arbitration Act (“FAA”) to ban mandatory predispute arbitration agreements (“PDAAs”), the JVFA takes a different approach.
An Effort to Avoid FAA Preemption
The core language is not very different from what’s been used in the past: “No predispute arbitration agreement shall be valid or enforceable in a covered dispute that is related to a credit card that was not issued in response to a request or application for that credit card account.” Rather than seek to amend the FAA, however, the JVFA targets the Truth in Lending Act and the Electronic Fund Transfer Act. This approach seems to us an effort to avoid FAA preemption, and is like that taken by the Investor Choice Act, which sought to amend the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. Recall that the Supreme Court says that where a federal statute expressly bars arbitration, the FAA’s presumption of PDAA validity and enforcement will yield to that statute’s proscription of arbitration (see CompuCredit Corp. v. Greenwood, 132 S.Ct. 665 (2012)). For example, Section 922 of Dodd-Frank amends the Securities Exchange Act of 1934 to prohibit use of PDAAs in Sarbanes-Oxley whistleblower disputes, and section 748 amends the Commodity Exchange Act in the same way. Also, Dodd-Frank section 1414 bans outright PDAAs in residential mortgage contracts. Absent such an express prohibition, however, SCOTUS says PDAAs are fair game.
Doesn’t Seem to Matter
The Senate version has 14 co-sponsors and the House bill has 10 co-sponsors, all Democrats. Govtrack.us gives the proposed law a one percent chance of being enacted by the lame duck Congress. Our take? While the attempt to comply with CompuCredit and related holdings is noble, we can’t imagine Congress passing these bills in the next month. The bills would then expire along with this 114th Congress. Also, the bill would retroactively invalidate existing PDAAs, which we think is an impermissible governmental “taking” absent a compelling governmental interest. While SCOTUS in the past has allowed retroactive application of laws banning, for example, contracts containing racially restrictive covenants, we are not so sure banning PDAAs would be held in the same regard.
California State Senator Bill Dodd on December 5th introduced SB-33, which would add a Section 1624.7 to the Civil Code, relating to contract formation. As described in the bill summary, SB-33 “would prohibit a person from requiring a waiver of a legal right that arises as a result of fraud, identity theft, and any other act related to the wrongful use of personal identifying information as a condition of entering into a contract for the provision of goods or services. The bill would require any waiver of these rights to be knowing and voluntary, express and in writing, and not a condition of entering into the contract or a condition of providing or receiving goods or services.” Although the Senator’s Press Release says the bill is aimed at the Wells Fargo arbitration controversy, the words “arbitration” or “Wells” appear nowhere in the bill, which would amend California law as to contract formation in general. In our view this was done to avoid FAA preemption problems, since: 1) the law is not aimed only at arbitration; and 2) under the FAA, courts turn to state law on contract formation. Also, the law if enacted would be prospective, applying to “any contract entered into, altered, modified, renewed, or extended on or after January 1, 2018.”
(ed: We’ll keep our eye on these bills. Again, we’re sure the Justice for Victims of Fraud Act will die when this Congress finishes up at the end of the year.) (SAC Ref. No. 2016-46-02)
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