Arbitration Clauses and Wells Fargo

By Derek Willie
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Derek Willie is a sophomore at the University of Pennsylvania

American capitalists have long touted “consumer choice” as the bedrock of our economy. The belief that it is the consumer’s prerogative to purchase goods willingly from producers seems to be the central tenet underlying a “free enterprise” system. If this is the case, it would seem logical that the American legal system should function, in part, as a remedy for consumers who feel that their right to “choice” has been at all corrupted. While this ideal of legal recourse applies more generally to any situation in which a person seeks restitution for injustice, its economic manifestation seems particularly pertinent in an ever-expanding global financial system.

Consider, for instance, Wells Fargo. Recently, the bank fell under regulatory scrutiny after it opened millions of bank and credit card accounts for its existing customers without their consent to meet goals from upper management. The bank then charged these customers fees associated with the fraudulent accounts, essentially forcing them to pay for financial services they never intended to purchase. [1] Pursuant to our understanding of consumer choice and its importance, it is easy to argue that Wells Fargo committed a serious injustice against its customers, violating the implicit terms of the aforementioned producer-consumer relationship. From a practical, legal standpoint, it is within the right of the wronged consumers to demand redress from the perpetrator of fraud—in this case, Wells Fargo.  

To a certain extent, Wells Fargo did pay for its transgression, forfeiting $185 million in penalties to federal and state regulatory agencies. Nonetheless, a mandatory arbitration clause in Wells Fargo’s customer agreements jeopardizes its customers’ ability to sue the bank in court and thus obtain recompense for potential malfeasance. [2]

Before we explore the gravity of these clauses, it is important to understand what arbitration is and why companies require it in their consumer agreements. Arbitration differs from litigation in that it relies on an individual or group chosen by both parties, known as the arbitrator(s), to resolve a legal dispute. In this respect, it helps parties avoid a lengthy jury trial. It should, however, be noted that both the proceedings and result of arbitration are completely confidential unless one party appeals the arbitrator’s decision in court. Furthermore, contrary to popular belief, arbitration is not necessarily cheaper than litigation, as it often involves an initiatory fee and requires the losing party to compensate the winner for legal expenses. [3]

Mandatory arbitration clauses— often hidden in dense customer agreements— are pernicious because they prohibit consumers from suing the contract’s holder in court, instead requiring that they initiate a potentially costly arbitration process. Because most people cringe at the prospect of entangling themselves in legal proceedings with large financial institutions, it is rare for consumers to take legal action individually, instead opting to file class-action suits in conjunction with other plaintiffs. The arbitration clauses, however, prohibit any sort of litigation against the company, including class actions, and consequently discourage many from seeking legal recourse at all. [4] Even if a signatory elects to open arbitration, the agreement bars them from appealing the arbitrator’s final decision, shielding the process’s details from the public eye. [5] Given the legal calculus behind these clauses, it’s not hard to see how corporations like Wells Fargo can use them to evade accountability.

Unsurprisingly, two of the customers that the bank defrauded challenged Wells’ ability to compel arbitration under the mandatory arbitration clause in their agreements. [6] They argued that because the bank’s arbitration clause pertained specifically to accounts they had voluntarily opened, the fraudulent accounts remained outside the clause’s scope; ergo, the bank could not compel arbitration. Quite craftily, Wells Fargo’s attorneys admitted that the bank used information from customers’ existing accounts to open the unauthorized ones, simultaneously proving that the sham accounts were in fact related to the legitimate ones— albeit via fraud—and thus that they fell within the scope of the arbitration clause. [7] In cruel irony, Wells Fargo used one insidious ploy to justify another.  

We should also remark that such clauses are not exclusive to contracts held by Wells or even by other financial service companies: the National Association of Consumer Advocates lists contracts of  “employment, insurance, home-building, car loans and leases, credit cards, retirement accounts, investment accounts, and nursing facilities” among those plagued by arbitration clauses. [8] Fortunately, the ubiquity of these clauses has attracted the federal government’s attention. In 2014, President Obama signed the Fair Play and Safe Workplaces executive order, banning federal contractors from implementing forced arbitration clauses in cases of “workplace discrimination, sexual assault, or sexual harassment.” [9] The Consumer Financial Protection Bureau has also called for ending the practice, along with a group of six Senate Democrats who specifically entreated Wells Fargo to remove arbitration clauses from their customer agreements. [10, 11]

While the public outrage over forced arbitration augurs some sort of reform in the future, it is important to recognize the need for legislative action. Until Congress acts, it will be impossible to implement a wide-reaching ban on these deceptive clauses and protect consumers from corporate duplicity. Indeed, if consumers remain without the legal means to litigate financial crimes waged against them, the scales of justice will continue to tilt towards the rich and powerful.


[1] "Wells Fargo Will Pay $190 Million to Settle Customer Fraud Case." CNBC. September 8, 2016. Accessed September 29, 2016. http://www.cnbc.com/2016/09/08/wells-fargo-reaches-185m-settlement-to-settle-secret-account-fraud-case.html.
[2] Hiltzik, Michael. "How Wells Fargo Exploited a Binding Arbitration Clause to Deflect Customers' Fraud Allegations." Los Angeles Times. September 26, 2016. Accessed September 29, 2016. http://www.latimes.com/business/hiltzik/la-fi-hiltzik-wells-arbitration-20160926-snap-story.html.
[3] "Arbitration." Fight Forced |consumeradvocates.org. Accessed September 29, 2016. http://www.consumeradvocates.org/for-consumers/arbitration.
[4] "CFPB Proposes Prohibiting Mandatory Arbitration Clauses That Deny Groups of Consumers Their Day in Court | Consumer Financial Protection Bureau." Consumer Financial Protection Bureau. May 5, 2016. Accessed September 29, 2016. http://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-proposes-prohibiting-mandatory-arbitration-clauses-deny-groups-consumers-their-day-court/.
[5] "Arbitration." Fight Forced |consumeradvocates.org. Accessed September 29, 2016. http://www.consumeradvocates.org/for-consumers/arbitration.
[6]  Hiltzik, Michael. "How Wells Fargo Exploited a Binding Arbitration Clause to Deflect Customers' Fraud Allegations." Los Angeles Times. September 26, 2016. Accessed September 29, 2016. http://www.latimes.com/business/hiltzik/la-fi-hiltzik-wells-arbitration-20160926-snap-story.html.
[7] SHAHRIAR JABBARI, et al. v. WELLS FARGO & COMPANY, et al., No. 15-cv-02159-VC slip op. at 2 (UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA September 23, 2015).
[8] "Arbitration." Fight Forced |consumeradvocates.org. Accessed September 29, 2016. http://www.consumeradvocates.org/for-consumers/arbitration.
[9] Hiltzik, Michael. "Obama Strikes a Blow against the Scourge of Forced Arbitration." Los Angeles Times. August 8, 2014. Accessed September 29, 2016. http://www.latimes.com/business/hiltzik/la-fi-mh-forced-arbitration-20140808-column.html.
[10] "CFPB Proposes Prohibiting Mandatory Arbitration Clauses That Deny Groups of Consumers Their Day in Court | Consumer Financial Protection Bureau." Consumer Financial Protection Bureau. May 5, 2016. Accessed September 29, 2016. http://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-proposes-prohibiting-mandatory-arbitration-clauses-deny-groups-consumers-their-day-court/.
[11] "Leahy, Brown & Leading Democratic Senators Call On Wells Fargo To End Use Of Forced Arbitration On Consumers | U.S. Senator Patrick Leahy of Vermont." Press Release. September 23, 2016. Accessed September 29, 2016. https://www.leahy.senate.gov/press/leahy-brown-and-leading-democratic-senators-call-on-wells-fargo-to-end-use-of-forced-arbitration-on-consumers.
Photo Credit: Flickr User Mike Mozart


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