Is an arbitration provision enforceable if it is added to a bank’s deposit account agreement four years after the account is opened and contains no meaningful opt-out clause? According to the United States District Court for the Southern District of New York, the answer to that question is no. A copy of the court’s decision and order can be found here.

The litigation arose after the plaintiff filed a putative class action alleging that his bank’s overdraft fees — specifically its authorize positive, settle negative practices — were unfair and unconscionable. The bank responded by filing a motion to compel individual arbitration. While the 2002 deposit account agreement in effect when the plaintiff opened his account contained no dispute resolution provision, it did include a change of terms provision common in bank deposit agreements, which stated the bank was allowed to change the agreement at any time as allowed by law and that the plaintiff would be bound by these changes, with or without notice.

The bank then amended its deposit account agreement in 2008. The 2008 version included an arbitration provision that allowed either party to elect to compel arbitration of any claim. The arbitration provision also contained an opt-out clause that allowed a party to elect to reject the arbitration provision, “[w]ithin 45 days after the date we open your deposit account.” The amended deposit agreement also contained a change of terms provision.

In 2014, the bank sent the plaintiff an amended deposit account agreement. The agreement explicitly stated it replaced, “any previous deposit account agreement and disclosures you may have had with us.” The notice sent with the amended deposit account agreement identified “terms that may warrant special attention,” including the mandatory arbitration provision. Although retaining the clause allowing a new customer to reject the provision within 45 days of account opening, the 2014 deposit account agreement also allowed for an existing customer to reject the arbitration provision if the rejection letter was sent within 45 days after the bank provided the new agreement. The plaintiff did not send a rejection letter to the bank.

The bank argued that the plaintiff was required to arbitrate his claim, relying on the change of terms provision contained in the 2004 deposit account agreement allowing the bank to change the agreement at any time with or without notice. Moreover, the bank argued the plaintiff didn’t object when the bank updated his deposit account agreement to add an arbitration clause in 2008, nor when he received actual notice of the arbitration clause in 2014.

The court found that unless the offer and acceptance of the allegedly “new” agreement is express and unmistakable, whether the party is bound to arbitrate should be determined by the first instance in which the agreement to arbitrate was offered, in this case in 2008 when the bank first amended the deposit agreement. Under the terms of the 2008 deposit account agreement, the plaintiff was unable to opt out of the arbitration provision as the only opt-out provided was for new customers (those who had opened their account less than 45 days prior). Therefore, no contract to arbitrate was formed between the parties in 2008, and the plaintiff was not required to opt out again when then bank amended the contract in 2014.

The court went on to find that the 2008 arbitration provision was also unconscionable as it contained a “loser pays” provision, specifying that the losing party to the arbitration would be responsible for the other party’s attorneys’ fees and expenses.

The issue of whether an arbitration agreement is unconscionable for lack of the ability of a consumer to meaningfully opt-out is a hot issue in litigation, and financial institutions in particular should pay close attention to these issues.