Over the last several years, a host of predatory banking practices has received widespread public exposure. It has been notoriously difficult for consumers to litigate class actions against America’s largest banking institutions, but plaintiffs have met with some success. By following several strategies, plaintiff
lawyers can clear the four most significant hurdles consumers face: federal preemption, arbitration clauses, difficulties in getting national classes certified, and “picking off” class representatives.
Consumers have succeeded in challenging one of the U.S. banking industry’s most predatory and profitable practices: unlawful assessment of overdraft fees. Until 2010, banks automatically signed up customers for “overdraft protection” programs without their consent, raking in billions of dollars in overdraft fees. Using sophisticated software programs, the country’s largest banks devised a way to maximize the number of overdraft fees a customer incurs in a given day by manipulating transaction records so that the customer’s daily debit transactions are reordered from largest to smallest. This results in more overdrafts and more fees than if the debit transactions were processed chronologically.
For example, if a customer with a $50 account balance made four $10 transactions and one subsequent $100 transaction on the same day, the bank would reorder the debits from largest to smallest, imposing five overdraft fees on the customer. But if the $100 transaction were debited last—consistent with transaction order—only one fee would be assessed. But for the banks’ manipulation, consumers would not incur overdraft charges because they would have sufficient funds in their accounts. Banks have been reordering debits this way for more than a decade. As of 2009, overdraft fees represented about 74 percent of the total service charges imposed on deposit accounts in the United States.1 It is estimated that U.S. banks earned $31.5 billion in overdraft fees during fiscal year 2012.2
The first consumer class action challenging these unlawful and fundamentally unfair practices was Gutierrez v. Wells Fargo Bank, NA, filed in 2007 in federal district court in California.3 During the case’s pendency, consumers brought numerous class actions against other banks challenging the same practices. In June 2009, these class actions were consolidated in an MDL in the Southern District of Florida as In re Checking Account Overdraft Litigation.4 This litigation has forced many banks to change their overdraft fee policies and practices, and they agreed to pay nearly $1 billion in settlements.5
The most difficult legal obstacle to overcome is the banks’ argument that the National Bank Act (NBA) and the Office of the Comptroller of the Currency’s (OCC) regulations preempt state consumer protection laws and state common law claims. When considering whether to undertake litigation against a national bank, the first thing you must determine is what OCC regulations may apply and possibly preempt state law and whether there is a viable argument that such regulations are inapplicable.
In the overdraft litigation, the banks argued that the NBA preempts all state law claims addressing the assessment of overdraft fees because the statute grants national banks “all such incidental powers as shall be necessary to carry on the business of banking.”6 They also argued that the OCC’s regulations expressly preempt any state law regulation of overdraft fees. A national bank “may charge its customers non-interest charges and fees, including deposit account service charges”7; should establish non-interest fees “in its discretion, according to sound banking judgment and safe and sound banking principles”8; and “may exercise its deposit-taking powers without regard to state law limitations” concerning checking accounts, disclosure requirements, and funds availability.9
In response, the plaintiffs argued that although the NBA preempts state laws contrary to national banking regulations, laws of general application—such as consumer protection laws and common law tort and contract claims—apply to national banks. They also argued that the state laws at issue only incidentally affected a bank’s deposit-taking powers and were not preempted by the NBA. The plaintiffs explained that they were not challenging the OCC regulations’ preemption right but rather the unlawful, bad-faith manner in which the banks operate their overdraft programs to maximize fees at the consumers’ expense.10
These arguments were largely successful in defeating the banks’ preemption claims until December 2012. The Southern District of Florida ruled that the NBA and OCC regulations did not preempt the plaintiffs’ claims. Judge James King held that general areas of law, such as contracts, torts, and consumer protection, only incidentally affected a bank’s deposit-taking power, and these state laws did not vitiate the NBA’s purpose.11
This decision did not put the preemption issue to rest. When Gutierrez went to a bench trial in August 2012, the Northern District of California found that Wells Fargo’s reordering practices violated California’s Unfair Competition Law (UCL). The court enjoined the bank’s reordering practices and awarded the plaintiffs more than $200 million in restitution damages. Wells Fargo appealed. In late 2012, the Ninth Circuit reversed the trial court’s order for injunctive relief and restitution, holding that the NBA “preempts state regulation of the posting order as well as any obligation to make specific, affirmative disclosures to bank customers.”12
But the Ninth Circuit also held that the NBA did not preempt the UCL’s “prohibition on misleading statements under the fraudulent prong of the statute.”13 At least in the Ninth Circuit, consumers alleging UCL violations will have to show that the alleged conduct is likely to deceive the public. It remains to be seen how other circuit courts will treat this issue and whether it will find its way to the Supreme Court.
Almost all banks require account holders to enter into deposit agreements, which almost always contain a mandatory arbitration clause that also prohibits class actions. Before April 2011, many courts around the country found that these arbitration clauses were both procedurally and substantively unconscionable and therefore invalid and unenforceable.14 However, in AT&T Mobility LLC v. Concepcion, the Supreme Court struck down a California law that arbitration agreements containing class action waivers were unconscionable and unenforceable, reasoning that the state law violated the Federal Arbitration Act.15
Many lawyers speculated that the Concepcion decision sounded the death knell for consumer class actions against banks because it made an already formidable hurdle even more difficult to clear. However, the court in In re Checking Account Overdraft Litigation ruled that five deposit agreements were substantively unconscionable and unenforceable.16
Judge King held that “Concepcion has not relieved courts from their obligation to scrutinize arbitration agreements for enforceability on a case-by-case basis where one party resists arbitration; rather, Concepcion provides guidance as to what courts may consider when fulfilling that obligation.”17
The court reasoned that the fee-shift provisions in the deposit agreements, which allowed the banks to automatically recover their costs and attorney fees if they prevailed and also allowed the banks to take fees and costs directly from a plaintiff’s bank account if the plaintiff lost in arbitration, made the arbitration provisions in the future substantively unconscionable.18
While this was a victory for consumers and will likely force banks to draft more consumer-friendly arbitration provisions in the future, it does not eliminate the hurdle that arbitration clauses and the Concepcion decision pose for consumers seeking to challenge banking practices on a classwide basis.
In deciding whether to pursue a class action against any bank, carefully scrutinize the arbitration clause in the consumer agreement to determine whether a viable unconscionability argument exists.
National class certification
Getting a national class action certified based on a bank’s unfair, unlawful, or deceptive consumer practices poses some significant obstacles. Banks will vigorously contend that the plaintiffs cannot meet Federal Rule of Civil Procedure 23’s requirement, typically arguing that individual issues of both law and fact predominate over common issues among class members, and that differences in the application of various state laws make national certification unmanageable.19
Despite these arguments, national classes have been certified against four of the nation’s largest banks in connection with their reordering transactions policy.20 The plaintiffs argued that their claims did not require an individualized inquiry because the claims were based not on each individual customer’s understanding or expectations regarding the deposit agreement’s terms but on the fact that the deposit agreements concealed the unfair reordering scheme.21 They proved that national classes were manageable by presenting the courts with extensive and detailed trial plans, which included well-defined state law subclasses.22 These subclasses grouped together states that applied materially identical legal standards to the claims the plaintiffs pleaded in their complaint.
In a complaint, you should articulate that the bank perpetuated an overarching scheme to defraud all of its customers. For example, in the overdraft litigation the plaintiffs alleged that the banks had a policy of reordering customer transactions to deliberately assess overdraft charges when no charge would be collectible absent the banks’ manipulation.
Also, carefully select a class representative who understands the bank’s overarching deceptive scheme and can articulate it during his or her deposition. Plaintiff counsel often encounter trouble at the class certification stage because a class representative gives deposition testimony regarding specific representations the bank made or about various impressions he or she had regarding the consumer agreement. Finally, craft a detailed trial plan that explains how differences in state laws will be dealt with.
Plaintiff attorneys need to be mindful of some additional defense strategies, such as “picking off” class representatives to forestall class certification. A pick-off occurs when a defendant offers the named putative class action plaintiff a Rule 68 offer of judgment23 before the court has considered the class certification motion. Many courts have held that Rule 68 offers render the named plaintiffs’ claims moot, even if the offer is not accepted, so long as the offer is made before class certification.24 Once the named plaintiffs’ claims are mooted, the entire class action may be dismissed.25
Courts have struggled with the tension between Rule 68 and Rule 23. When a defendant makes a Rule 68 offer that provides the maximum recovery available to the named plaintiff as an individual but offers no relief to the class, this tactic undeniably frustrates Rule 23’s purpose—aggregating numerous small claims into a single action. The Supreme Court has not squarely addressed whether a Rule 68 offer made before a class certification motion moots the named plaintiff’s claims. But three key Supreme Court decisions provide guidance to plaintiffs arguing against class action dismissal due to a pick-off and to lower courts seeking to reconcile the tension between Rule 68 and Rule 23.
In Sosna v. Iowa, the Court held that once a class has been certified, mooting a class representative’s claim does not moot the entire action because the class “acquire[s] a legal status separate from the interest asserted by [the named plaintiff].”26 The Court extended Sosna in U.S. Parole Commission v. Geraghty and Deposit Guaranty National Bank v. Roper, allowing named plaintiffs, whose individual claims were mooted, to appeal denial of class certification in both cases. In Geraghty, the Court applied a “relation back” approach and held that the named plaintiffs may continue to litigate the class certification issue on appeal if the claim is “capable of repetition yet evading review,” and where the claim is so “inherently transitory” that the trial court will not have time to rule on a class certification motion before the named plaintiff’s individual interest expires.27 In Roper, the Court expressed strong disapproval for pick-offs.28
The Third, Fifth, Ninth, and Tenth Circuits have extended the Roper and Geraghty decisions to find that unaccepted offers of judgment will not moot a class action if the offer was received before the court could reasonably be expected to rule on class certification.29 For example, the Third Circuit in Weiss v. Regal Collections and Symczyk v. Genesis Healthcare Corp. held that, absent undue delay in filing a class certification motion, if a defendant makes a Rule 68 offer to a named plaintiff, the appropriate course is to relate the motion back to the filing of the class complaint—treat the motion as if it were filed when the complaint was filed and before the offer was made.30 Symczyk went up to the Supreme Court, which reversed the Third Circuit in April.31 However, the Court sidestepped the ultimate issue: whether an unaccepted offer that fully satisfies a plaintiff’s claim is sufficient to render the claim moot.32 Instead, the majority found that this issue was not properly before the Court because the Third Curcuit had decided that the lead plaintiff’s individual claim was moot, and the plaintiff did not challenge that finding.33 The Symczyk decision did little to resolve the circuit split on the issue.
One way to deal with pick-offs is to substitute a new named plaintiff for the picked-off one. But it is not always easy to find a suitable substitute class representative, and some courts have refused to permit substitution until after the class has been certified.34 The best way to avoid the problem is to file a class certification motion as quickly as possible after filing the complaint so that the defendant does not have time to pick off the named plaintiff, and if the defendant makes an offer of judgment, it cannot argue that there has been undue delay in filing for class certification. While this strategy has its own pitfalls (such as getting a class certified without the benefit of full discovery or thwarting settlement discussions), it may be the best way to ensure that the class action is not rendered moot.
In addition to the overdraft fee litigation, consumers have found success in pursuing class actions against banks and credit card companies for their unlawful sales and marketing of “payment protection” products. JP Morgan Chase, Chase Bank, Discover, Capital One, and HSBC Bank all paid multimillion dollar settlements.35 In the payment protection litigation, the companies marketed payment protection as a service that would pay the minimum amounts due on consumers’ credit card accounts in certain circumstances. However, the payment protection product was virtually worthless because of numerous restrictions that the companies impose after the consumer buys the product, the program’s benefits have restrictive exclusions, and extensive administrative and bureaucratic hurdles were in the consumers’ way when they attempted to secure payments under this coverage. The plaintiffs alleged that the defendants acted unlawfully by misrepresenting and omitting many important facts regarding the terms of the alleged protection, enrolling customers in the program and charging them without their consent and despite the fact that they were ineligible for the benefits, misrepresenting the amount of the fees and charging excessive fees, and devising a procedure for obtaining benefits that was so confusing and difficult that it rendered the product worthless.
Because of the litigation, as well as federal and state enforcement actions, the banks and credit card companies were forced to change their predatory payment protection programs.
The legal obstacles that arise in consumer class actions against banking institutions may seem insurmountable, but it is important to persevere. Although recent preemption and arbitration clause rulings make class actions against banks more difficult, plaintiff attorneys should not be deterred. Success is possible, and resolving these cases often forces banks to change their unfair practices.
- See Pl.’s Memo. in Opposition to Def. Omnibus Mot. to Dismiss 1, In re Checking Account Overdraft Litig. (Feb. 2, 2010).
- Press Release, Moebs Services Report, Overdrafts Rebound Sharply in 2012 (Sept. 24, 2012), www.moebs.com.
- 704 F.3d 712 (9th Cir. 2012).
- 2013 WL 151179 (S.D. Fla. Jan. 11, 2013).
- See Sarah Pierce, Bank of America Overdraft Settlement Checks In the Mail!, Top Class Actions (Nov. 28, 2012), www.topclassactions.com/lawsuit-settlements/lawsuit-news/3019-bank-of-america-overdraft-settlement-checks-in-the-mail; Mike Holter, JPMorgan Chase Reaches $110M Overdraft Fee Settlement, Top Class Actions (Feb. 7, 2012), www.topclassactions.com/lawsuit-settlements/lawsuit-news/1614-jpmorgan-chase-reaches-110m-overdraft-fee-settlement; Mike Holter, Court Approves $62M TD Bank Overdraft Class Action Settlement, Top Class Actions (Mar. 20, 2013), www.topclassactions.com/lawsuit-settlements/lawsuit-news/3749-court-approves-62m-td-bank-overdraft-class-action-settlement; Kimberly Mirando, PNC Reaches $90M Overdraft Fee Class Action Settlement, Top Class Actions (June 27, 2012), www.topclassactions.com/lawsuit-settlements/lawsuit-news/2035-pnc-reaches-90m-overdraft-fee-class-action-settlement; Mike Holter, Citizens Bank Overdraft Fee Class Action Settlement, Top Class Actions (Nov. 21, 2012), www.topclassactions.com/lawsuit-settlements/lawsuit-news/2987-citizens-bank-overdraft-fee-class-action-settlement; Mike Holter, Union Bank Reaches $35M Overdraft Fee Class Action Settlement, Top Class Actions (Nov. 14, 2011), www.topclassactions.com/lawsuit-settlements/lawsuit-news/1463-union-bank-reaches-35m-overdraft-fee-class-action-settlement.
- 12 U.S.C. §24 (2012).
- 12 C.F.R. §7.4002(a).
- 12 C.F.R. §7.4002(b)(2).
- See Pl. Memo. in Opposition to Def. Omnibus Mot. to Dismiss at 17–30, In re Checking Account Overdraft Litig., No. 1:09-MD-02036 (S.D. Fla. Feb. 2, 2010).
- In re Checking Account Overdraft Litig., 694 F. Supp. 2d 1302, 1313–14 (S.D. Fla. 2010).
- Gutierrez v. Wells Fargo Bank, NA, 704 F.3d 712, 716 (9th Cir. 2012).
- Id. at 726.
- See e.g. Fensterstock v. Educ. Fin. Partners, 611 F.3d 124 (2d Cir. 2010); Litman v. Cellco Partn., 381 Fed. Appx. 140 (3d Cir. 2010); Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996 (9th Cir. 2010); Jones v. DirecTV, Inc., 381 Fed. Appx. 895 (11th Cir. 2010).
- 131 S. Ct. 1740, 1749–51 (2011).
- See In re Checking Account Overdraft Litig., 813 F. Supp. 2d 1365, 1372, 1373–81 (S.D. Fla. Sept. 1, 2011).
- Id. at 1373.
- Id. at 1375–76.
- See e.g. Capital One Mem. of Law in Opposition to Pl.’s Mot. for Class Certification 1–3, In re Checking Account Overdraft Litig. (Feb. 6, 2012).
- See Steen v. Capital One, N.A., No. 1:09-MD-02036-JLK (S.D. Fla. Aug. 29, 2012); Hernandez v. PNC Bank N.A., No. 09-MD-02036-JLK (S.D. Fla. May 16, 2012); Mosser v. TD Bank, NA, No. 1:09-MD-02036-JLK (S.D. Fla. Apr. 3, 2012); Larsen v. Union Bank, 275 F.R.D. 666 (S.D. Fla. July 25, 2011).
- See e.g. Pl.’s Reply to Capital One Memo. of Law in Opposition to Pl.’s Mot. for Class Certification 11, In re Checking Account Overdraft Litig. (May 29, 2012).
- Id. at 18.
- Fed. R. Civ. P. 68.
- See e.g. Gonon v. Allied Interstate, LLC, 286 F.R.D. 405, 409–10 (S.D. Ind. 2012); Letellier v. First Credit Servs., Inc., 2001 WL 826873 at *3–4 (N.D. Ill. July 20, 2001).
- David Hill Koysza, Preventing Defendants From Mooting Class Actions by Picking Off Named Plaintiffs, 53 Duke L.J. 781, 789–91 (2003).
- 419 U.S. 393, 399 (1975).
- U.S. Parole Commn. v. Geraghty, 445 U.S. 388, 398–99 (1980).
- Deposit Guar. Natl. Bank v. Roper, 445 U.S. 326, 339 (1980).
- Weiss v. Regal Collections, 385 F.3d 337, 347–48 (3d Cir. 2004); Symczyk v. Genesis Healthcare Corp., 656 F.3d 189 (3d Cir. 2011); Sandoz v. Cingular Wireless LLC, 553 F.3d 913, 920 (5th Cir. 2008); Pitts v. Terrible Herbst, Inc., 653 F.3d 1081 (9th Cir. 2011); Lucero v. Bureau of Collection Recovery, Inc., 639 F.3d 1239 (10th Cir. 2011).
- Weiss, 385 F.3d at 347–48; Symczk, 656 F.3d at 201.
- Genesis Healthcare Corp. v. Symczyk, 2013 WL 1567370 (U.S. Apr. 16, 2013).
- Id. at 5.
- Koysza, supra n. 25, at 798–99.
- Kardonick v. JP Morgan Chase & Co., No. 1-10-cv-23235 (S.D. Fla. 2011); In re Discover Payment Protec. Plan Mktg. and Sales Prac. Litig., No. 1:10-cv-06994 (N.D. Ill. 2010); Spinelli v. Capital One Bank (USA) N.A., No. 8:08-cv-132 (M.D. Fla. 2008); Esslinger v. HSBC Bank Nevada, N.A., No. 2:10-cv-03213 (E.D. Pa. 2010); See also www.kardonicksettlement.com.faqs.