Wells Fargo’s Use of Forced Arbitration to Deny Consumers Justice

Since federal agencies announced their $185 million enforcement action against Wells Fargo for widespread fraud, there has been renewed focus on the bank’s use of forced arbitration.

Forced arbitration is a relatively new phenomenon designed to allow corporations to keep misconduct out of public view, evade the law, and escape accountability. Buried in the fine print, “ripoff clauses” force consumer and worker claims into arbitration – a secretive, rigged system where the corporation gets to pick the arbitration provider and which rules will apply – and bars people harmed in similar ways from joining together in class actions to challenge systemic abuses.

Because agencies have limited resources, individual and class action lawsuits brought by consumers and workers often act as the canary in the coal mine to alert agencies to fraud and abuse. The CFPB is in the midst of a rulemaking that would restore consumers’ right to join together to hold banks accountable for predatory behavior like the Wells Fargo scandal. Since May, more than 100,000 individual consumers and 281 consumer, civil rights, labor, and small business groups wrote in to support the proposed rule.

Background on the Wells Fargo Scandal

At least 3,500 Wells Fargo employees opened approximately 1.5 million bank accounts and approximately 565,000 credit cards without the consent of their customers. According to the CFPB, its “investigation found that since at least 2011, thousands of Wells Fargo employees took part in these illegal acts to enrich themselves by enrolling consumers in a variety of products and services without their knowledge or consent.” In February 2012, Wells Fargo started using forced arbitration clauses in all of its customer checking and savings account agreements, shortly after evidence began emerging that it was defrauding its customers.

Customers have been trying to sue Wells Fargo over fraudulent accounts since at least 2013. However, the bank forced those customers into secret, binding arbitration by invoking fine print in consumers’ legitimate account agreements to block them from suing over fake accounts. This practice helped keep Wells Fargo’s massive fraud out of the spotlight for so long.

Shariar Jabbari & Kaylee Heffelfinger et al. v. Wells Fargo (U.S. District Court, N.D. Cal.)

Consumers filed a lawsuit against Wells Fargo claiming that the bank unlawfully opened a series of accounts in their names and then charged fees in connection with those unauthorized accounts. The lawsuit specifically alleged the existence of a corporate policy compensating employees based on the number of accounts opened.

Since this practice was so widespread, the consumers filed their suit on behalf of all consumers subjected to this conduct. In 2015, Wells Fargo vigorously denied the allegations, describing its culture as “focused on the best interests of its customers and creating a supportive, caring, and ethical environment for our team members.”

• Shariar Jabbari opened two accounts in January 2011. By April 2011, two additional accounts were opened in his name, with $100 transferred to each from his savings account. By June 2011, five more accounts were opened for Jabbari without his knowledge or consent.
• Wells Fargo invoked its newly-added arbitration clause to dismiss the complaint, arguing that disputes, including any dispute over whether the clauses applied at all, must be decided by a private arbitrator hired by the bank. The bank claimed that these customers “agreed” to arbitrate everything because the fake accounts “could not have been opened had [the customer] not opened the legitimate accounts which he admits to opening.” Therefore, even completely unauthorized accounts could not escape the “expansive terms of the arbitration agreements.”
• Another customer in the class action, Kaylee Heffelfinger, claimed that Wells Fargo opened two accounts in her name in January 2012, weeks before she opened legitimate accounts in March 2012. Wells Fargo argued that “it is at least plausible that [its] employees generated the unauthorized accounts in January 2012 after Heffelfinger initiated a relationship with, and provided information to, the Wells Fargo branch where her legitimate accounts were opened” and thus even those claims should be forced into arbitration.

Incredibly, the federal district court granted Wells Fargo’s demand for individual arbitration on each of these claims. The customers appealed, and on September 8, 2016 – the day the CFPB announced its enforcement action – Wells Fargo settled with the customers on the condition they not disclose the details of their case.

David Douglas v. Wells Fargo (Superior Ct of Los Angeles, CA)

A customer named David Douglas tried to sue Wells Fargo on his own after he learned that three of the local employees at his Wells Fargo branch used his personal information to open at least eight accounts under his name without his permission, charging him fees for those accounts. More than three years ago, Douglas alleged that Wells Fargo “routinely use[d] the account information, date of birth, and Social Security and taxpayer identification numbers…and existing bank customers’ money to open additional accounts.”

• Wells Fargo moved to compel forced arbitration over the disputed accounts, suggesting that “[s]ince the information allegedly misused was provided in connection with the original account, by definition any such claim of misuse arises out of or relates to the original account.” The bank similarly claimed that Douglas’ allegation that Wells Fargo transferred money into these fake accounts without his permission “is the most routine kind of claim covered by the Arbitration Agreement that one can imagine.”
• Douglas opposed these arguments, adding that he never could have signed a forced arbitration agreement for those unauthorized accounts because they were opened without his knowledge. Incredibly, the court granted Wells Fargo’s demand for arbitration, relying on the arbitration clause from his original, non-fraudulent account with Wells Fargo which claimed to cover “all disputes” between him and the bank.

By pushing these cases into secret arbitration, Wells Fargo was able to keep this scandal out of public view for years and continue profiting from massive fraud. This culture of secrecy was pervasive. As CFPB Director Richard Cordray described at the Senate Banking Committee hearing on September 20, when the Los Angeles City Attorney brought an action against the bank, “one of the first things Wells Fargo did…was aggressively seek a protective order to keep the proceedings as much as possible from public view.” These actions, along with forced arbitration, allowed the bank to evade accountability and transparency for at least five years.

Senate Banking Hearing on September 20

At the Senate Banking Committee hearing, Senator Sherrod Brown (D-Ohio) asked Wells Fargo CEO John Stumpf if the bank would continue to argue in court that mandatory arbitration clauses covering real accounts should apply to fake accounts, forcing defrauded consumers into arbitration. Stumpf was non-committal, replying that he would “have to talk to my legal team, and we can get back to you on that.”

During the second panel, Senator Brown asked Director Cordray, how the agency’s proposed rule to restrict forced arbitration in consumer financial contracts would have helped customers that sued the bank over fraudulent accounts. Cordray replied that Wells Fargo’s arbitration clause might defeat a class action, noting that “as happened here, when there’s massive wrongdoing on a wide scale, but small amounts of harm to individual consumers, it will be very difficult to get any relief other than through a class action.”

Senator Elizabeth Warren (D-Mass.) then asked Director Cordray if he thought that “forced arbitration clauses make it easier for big banks to cover up patterns of abusive conduct, including the years of misconduct by Wells Fargo in this case.” Cordray answered, “I do think so, yes.”

Senator Warren went on to note that the CFPB has “proposed strong new rules that would ban forced arbitration clauses that prevent consumers from joining together to bring a public action in court,” and “[i]f we had class actions on this back in 2010, 2009, 2008, then the problem never would have gotten so out of hand.”

House Financial Services Committee Hearing on September 29

At the House Financial Services Committee Hearing, Representative Brad Sherman (D-Calif.) asked Stumpf if he would continue to invoke ripoff clauses to deprive consumers of their day in court in light of this scandal. Stumpf refused to end this practice.