By: Kim Barnes

After managing to keep its scam under wraps for at least a decade, it came to light that Wells Fargo was ripping off its customers by opening fake accounts in their name and charging them for the fees associated with those accounts. It was all part of a culture of overworking bank employees and pressuring them to meet unrealistic sales goals in an effort to increase Wells Fargo’s stock value. Making matters worse, when defrauded customers tried suing the bank, Wells Fargo would block their access to the courts by enforcing the arbitration clause that many of the customers had agreed to when first opening a bank account. By enforcing these clauses, Wells Fargo could funnel all complaints regarding its deceptive practices into private arbitration, where it would never have to answer to either a judge or a jury.

Arbitration clauses are increasingly universal—nestled in every kind of consumer contract you could imagine—ranging from nursing home contracts to student loan agreements. These clauses, which don’t need to say too much more than “I agree to arbitrate any dispute that arises between me and the corporation,” have quickly become ubiquitous as the corporate “get out of jail free card.”

This is not because arbitration is a slam dunk, per se, for a company like Wells Fargo when up against an individual customer. Arguably, however, the disparity in bargaining power between parties to a dispute has a more material effect on the outcome in arbitration than in traditional litigation. This is understandable. Traditional litigation can be far lengthier and costlier than arbitrating the same dispute; corporations that settle their claims in arbitration likely benefit from a repeat player advantage—that is, the benefit of being familiar with not only the process of arbitrating disputes, but also with individual arbitrators themselves. Statistically, this has made the arbitration process highly pro-corporate and has deterred many customers with small claims from bringing them in the first place.

Unfortunately, even when the dispute involves a corporation defrauding customers and stealing their identity, judges are almost always left with little choice but to enforce an arbitration clause if there is one. This is because over the past three decades, the federal law on arbitration—the Federal Arbitration Act (FAA)—has been interpreted so broadly by the Supreme Court that not only does the FAA now have broad preemptive authority over conflicting state laws, but judges are now instructed to “rigorously” enforce arbitration clauses, even if the underlying contract itself is potentially void. This interpretation allowed Wells Fargo to easily circumvent public courtroom scrutiny and opt for a more favorable, private arbitration tribunal.

SB 33 added one exception to the court’s general obligation to compel arbitration where there is one that covers the dispute. With the passage of the bill, a court can refuse to compel arbitration where the petitioner is a financial institution and the claim being brought involves fraud and identity theft by that financial institution.

This extremely narrow law was unsurprisingly attacked by the usual barrage of banks and chambers of commerce, which, to be fair, raised a valid criticism. SB 33, when viewed in light of the broad and highly criticized jurisprudence pertaining to arbitration, is susceptible to a preemption challenge. Indeed, the Supreme Court has found that the FAA preempts practically any state law that goes against the goals of arbitration, limits the validity of arbitration clauses, or treats arbitration clauses differently than any other provision in a contract. This is precisely what SB 33 does.

However, what is clear is that it will be difficult to argue that preventing defrauded Americans from going to court is good public policy. Whether the banks and public interest groups seek to challenge this law to the furthest extent is unclear; but if they do, with any hope the outcome will be a shift towards narrowing the FAA back to the law Congress intended almost 100 years ago. Of course, I wouldn’t recommend anyone hold their breath on that.

To learn more about SB 33, listen to my interview on “In Session,” a podcast from the University of the Pacific Law Review.

Kim Barnes is a staff writer for the University of the Pacific Law Review and law student student at McGeorge School of Law in Sacramento.

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