How an Obscure Supreme Court Case Fueled the Wells Fargo Dumpster Fire

On Wednesday, embattled Wells Fargo CEO John Stumpf finally resigned. Stumpf presided over a bank that opened some 2 million bank and credit card accounts on behalf of unwitting customers over the last five years.

The Company’s failure to identify and stop the fraud seems inexplicable, as did Stumpf’s testimony to Congress that he did not consider the fraud sufficiently “material” to disclose it to investors in 2015.

Yet, in assessing the likely consequences of the fraud, Stumpf was not entirely off base. An obscure 2011 Supreme Court ruling, AT&T v. Concepcion, allowed companies to include class action waivers in their arbitration provisions. This meant that customers (and employees) of these companies would have to bring their claims in arbitration, not court.

The Concepcion case also meant that customers and employees can’t bring a class action lawsuit in any forum. Not court. Not arbitration. Not anywhere.

If you are unlawfully charged a $30 fee by your bank, phone company, or any other company with an arbitration clause, you can’t bring a class action claim to get it back. You’ll have to bring an individual arbitration to recover it, and no lawyer can afford to represent you. As one litigant observed, “[O]nly a zealot or a lunatic engages in extensive complex litigation over a $30 claim.”

The LA Times first uncovered Wells Fargo’s use of these arbitration provisions in 2015. Stumpf admitted as much in testimony to Congress, when he declined to waive the provision for the bank’s customers. These arbitration provisions are the reason Stumpf didn’t consider the fraud “material.” He was gambling on the fact that consumers wouldn’t file individual arbitrations over a $35 overdraft fee.

Other companies may be making a similar gamble, knowing their customers and employees have no effective recourse. Before the Concepcion decision, consumer lawsuits succeeded in recovering $1 billion from banks that purposefully sequenced account debits ahead of deposits, making it more likely that customers would be charged overdraft fees. A lawsuit of this scale is no longer available to customers bound to arbitration agreements with class action waivers.

Any service that you use that involves “signing” a contract (typically printed terms and conditions you receive in the mail, or boxes you click for software based services) likely includes an arbitration provision. The Netflix contract includes an arbitration provision with a class action waiver. The same goes for Verizon, Uber, Microsoft, and countless other companies. These provisions are also prevalent in employment settings, preventing employees from, for example, bringing a class action claim over unpaid wages.

Rules this unfair wouldn’t pass muster as a carnival game, yet they are now cemented within our civil justice system. The Consumer Financial Protection Bureau is attempting to help, through proposed regulations that would render class action waivers unenforceable in the financial industry. This is a welcome step but it still leaves many other consumers and employees unprotected. Reversing Concepcion would require Congress to amend the 1927 Federal Arbitration Act, by clarifying that pre-dispute class action waivers are unenforceable.

Senator Brown plans to introduce legislation to address class action waivers. Hilary Clinton has also expressed her opposition forced arbitration. If there is to be any bipartisan action in Congress, let it be to prevent the next Wells Fargo from steamrolling its customers out of a meaningful remedy.

One outraged lawmaker told Stumpf that he succeeded in “doing something here today that no other person has been able to do in the last four years: You have brought true bipartisanship to Congress.” Let’s hope he’s right.