Companies implementing arbitration provisions should ensure that they adequately inform customers about the provision and their options for opting out.  The Second Circuit recently reaffirmed the importance of this exercise in Lipsett v. Popular Bank, 2024WL 111247 (2nd Cir. Jan. 10, 2024), finding a bank’s arbitration provision unenforceable over a decade after it was first implemented.

The plaintiff in this case, Frankie Lipsett, filed a class action lawsuit challenging overdraft fees that Popular Bank charged on his account, but he did not appear to have any basis to litigate his claims in federal court.  The bank included an arbitration provision in updates to Lipsett’s 2002 account agreement in 2008, 2014, and then again in 2021.  So the bank moved to compel Lipsett to arbitrate his claims.  The district court denied that motion, reasoning that the arbitration provision was unenforceable because Lipsett had no meaningful opportunity to opt out.

The Second Circuit affirmed the denial of the bank’s motion to compel, but it did so for a more basic reason: Lipsett “did not receive sufficiently clear notice that he was bound by the arbitration provision” in the first place.  The bank conceded that the only account agreement with an arbitration provision that was actually sent to Lipsett was the 2014 update, which was mailed to Lipsett with an accompanying notice.  According to the panel, the problem with these 2014 documents is that they were not “a definite offer to arbitrate this dispute,” because they “do[] not permit existing accountholders like Lipsett to clearly understand their options for rejecting arbitration.”

The panel identified three issues with the language in the 2014 account agreement and accompanying notice:

  • The bank stated that there “continues” to be an arbitration provision.  This statement signaled to existing customers like Lipsett, “who was not previously informed of the arbitration provision,” that the arbitration provision “does not apply to him.”
  • The opt-out procedures were inconsistent.  The bank stated in the notice that Lipsett could opt out by “closing his account . . . within 60 days,” whereas the bank provided a means to do so in the account agreement “without having to close his bank account.”
  • It was unclear which opt-out procedures applied.  Although one of the opt-out procedures applied to existing customers asked to enter into a “new” deposit agreement, it was unclear whether the 2014 account agreement was “new.”  The accompanying notice “states both that the enclosed agreement ‘replaced’ prior agreements and that [it] is an ‘Amended Account Agreement.’”

Lipsett underscores the need for companies to inform customers about an arbitration provision when it is first implemented, and to ensure that procedures for opting out are clear and consistent across all communication channels.