Judge Gerald B. Tjoflat, U.S. Eleventh Circuit Court of Appeals.
Judge Gerald B. Tjoflat, U.S. Eleventh Circuit Court of Appeals. (John Disney/Daily Report)

Lawyers for Wells Fargo Bank squared off Thursday at the U.S. Court of Appeals for the Eleventh Circuit against those representing what they hope remains a class of plaintiffs challenging the bank’s overdraft practices.

The question the judges were tasked with answering seemed deceptively simple: Did Wells Fargo forfeit its right to enforce arbitration clauses in its customers’ contracts years after it began litigating the case in court and after the class had been certified by the trial court?

Wells Fargo argued that, while it had indeed litigated the claims of the named plaintiffs in the long-running dispute, the district court had erred by certifying a class of more than one million unnamed plaintiffs and ruling that they were not barred by the arbitration clause.

The plaintiffs’ lawyers countered that Wells Fargo had made a conscious, strategic decision years earlier to try to finesse the entire underlying issue by going to court and defeating their arguments, only to decide later to reverse course and demand that the unnamed plaintiffs arbitrate their complaints individually.

The underlying case involves multidistrict litigation in the Southern District of Florida challenging the way Wells Fargo and Wachovia—which was acquired by Wells Fargo in 2008—charged customers for overdrafts on debit cards. According to the complaint, the banks used automated systems to reorganize the order of customers’ purchases from highest to lowest rather than chronologically, ensuring that customers’ accounts would be debited for the highest transaction first, depleting the funds so that more overdrafts would accrue and generate penalties.

As described in court filings, dozens of banks were originally sued over the practices, most of which were resolved by settlements and agreements to curtail the practice. Rather than seeking enforce arbitration clauses in its contracts, Wells Fargo opted to litigate the case on the merits for nearly two years until the U.S. Supreme Court’s 2011 decision in AT&T v. Concepcion, 563 U.S. 333.

That 5-4 decision held that state laws barring enforcement of classwide arbitration agreements were preempted by the Federal Arbitration Act and that arbitration agreements with class action waivers can only be enforced by individual arbitrations.

When that decision came down, Wells Fargo moved the court to compel arbitration against the unnamed class members, which Judge James King declined to do.

Wells Fargo appealed, and in 2015 the Eleventh Circuit ruled that, because no class had been certified at that point, King lacked jurisdiction to decide the issue and sent the case back to King.

On remand, King certified the class and again ruled against Wells Fargo’s bid to force arbitration.

That order was the subject of Thursday’s hearing before Judges Gerald Tjoflat, Adalberto Jordan and Judge John Steele of the U.S. Circuit Court for the Middle District of Florida, sitting by designation.

Arguing on behalf of Wells Fargo, Sonya Winner of San Francisco’s Covington & Burling said the “essential question” was whether the bank had waived its right to enforce arbitration when Tjoflat interrupted.

“This is a classic case of issue preclusion,” Tjoflat said, asking whether King’s decision forestalling arbitration in the first case that came before the court meant the bank was barred from arguing the issue now. No, answered Winner, because Wells Fargo had reserved its right to enforce arbitration against the unnamed class members for the case’s outset and retained that right for every customer who signed the contract.

In ruling against Wells Fargo, King had noted that the litigation was years old and had consumed large amounts of court resources and money. Jordan asked why those facts shouldn’t weigh in favor of the plaintiffs’ argument that the bank had effectively waived its arbitration rights.

“It was the plaintiffs who chose to pursue this litigation,” Winner said.

“But it was the bank that decided not to pursue arbitration in a timely fashion in the first place,” Jordan said.

“That’s true,” said Winner, “but the plaintiffs did not have to pursue class certification.”

The Eleventh Circuit’s own precedent, she said, held that an arbitration right held by a defendant against one party cannot be waived for other parties who were not involved in the original litigation.

Rising for the plaintiffs, Fort Lauderdale attorney Bruce Rogow said that Wells Fargo had made a strategic decision to waive its arbitration rights and could not decide to seek their enforcement at this late date.

“Had the bank enforced its arbitration right at the beginning, we would not be here,” said Rogow. “That’s the risk they took.”

“This is not an issue preclusion case,” he said. “This is a waiver case.”