The ability to transfer funds electronically is an innovation that has made commerce more efficient, improved the security of transactions and given consumers more options and flexibility. Merchants use this technology to promote sales, employers use it to manage pay and benefits, and millions of people every day use it to make retail purchases.
You would think that such a beneficial service would be universally appreciated for the boon it is. Or at least you would if you were unacquainted with the twin plagues of the regulatory state and class-action lawsuits.
Of all the mischief imbedded in the Dodd-Frank Act's hyper-regulatory scheme, the war against fees associated with electronic fund transfers is second only to the Consumer Financial Protection Bureau for both a disconnection from economic reality and an irrational prejudice against businesses being operated for the purpose of making a profit.
To make matters worse, plaintiffs' class-action trial lawyers seem determined to capture whatever money might be left over after the government has squeezed the industry as much as it can.
Class actions filed recently in federal courts across the country seek statutory damages and attorneys fees, the Holy Grail of the class-action bar, for alleged violations of the fee-notice provisions of the Electronic Funds Transfer Act. The essence of these lawsuits is that the named plaintiff has executed a fee-generating transaction at an ATM that does not have affixed to it the prescribed notice that a fee may be charged.
The typical scenario is one where the plaintiff has used his debit card issued by First Bank to withdraw cash from an ATM operated by Second Bank. His account is debited for the amount of the cash withdrawal together with a fee, typically of $3 to $5. Because the EFTA and its implementing regulation, Reg E, require that a physical notice be affixed on the ATM or in close proximity to it, the plaintiff brings a lawsuit to collect the statutory damages associated with this violation together with injunctive relief — a court order requiring the operator to replace the missing fee-notice decal — and attorneys fees.
There is, however, a fundamental flaw with this scheme: If the ATM is otherwise functioning as it is programmed to, before the plaintiff could complete his transaction, a notice appeared on the ATM screen advising him that what he was about to do would generate a fee and telling him that he could not proceed with the transaction without first affirmatively agreeing to pay it.
Why is this significant? Because the framers of our Constitution restricted the jurisdiction of the federal courts to "cases" and "controversies," a limitation that the U.S. Supreme Court has construed to require that a plaintiff must have actually suffered some injury which the courts can redress. This is a concept the courts refer to as "standing." It would be unthinkable that a person could walk down Main Street, see an ATM that for whatever reason was devoid of a fee-notice decal and then head straight to the nearest federal court to collect his statutory damages against the operator of the ATM.
Likewise, a bank customer who executed a non-fee-generating transaction at his own bank's ATM would have no standing to bring a lawsuit against his bank for statutory damages if the fee-notice decal was missing from the machine. A prospective class-action plaintiff who terminated his potentially fee-generating cash withdrawal when the on-screen notice appeared would suffer a similar fate. A plaintiff who is charged a fee that he agrees in advance to pay is no different.
It is inconceivable that the Federal Reserve intended to create such a windfall lawsuit for the hunters of missing fee decals.
Are financial consumers better protected if an ATM operator has to pony up $1,000 per transaction to someone who paid a fee they contractually agreed to pay?
Although the number and frequency of these lawsuits are increasing, this defense has not yet been seized upon by ATM operators, and there is no guarantee that when they do the federal courts will be receptive. Even if the trial courts find the standing argument persuasive, the issue will not die unless the appellate courts uniformly agree. For these reasons a legislative and regulatory fix is required for this problem. The financial services industry's trade associations should put this much-needed reform high on their legislative agendas.
Let's get the EFTA and Reg E properly clarified. Eliminate any ambiguity that allows these lawsuits to waste judicial resources and further drive up the expenses of electronic commerce.
Joseph Woodruff is a partner at Waller Lansden Dortch & Davis LLP and heads the firm's financial services litigation group.