Bank of America, JPMorgan Chase and other big banks have long ago settled class actions accusing them of improper clearing of checks and debits to maximize overdraft fees, but Wells Fargo is refusing to follow suit.

A federal appeals court is scheduled to hear oral arguments in August in a decade-old case against the San Francisco bank. Although Wells was forced to pay $203 million to California customers last year in a similar case after the Supreme Court declined the bank's appeal, it is hoping it can force this case into arbitration.

The stakes are high. If Wells loses its appeal to the 11th U.S. Circuit Court of Appeals, it could ultimately end up paying potentially as much as $1 billion, according to some estimates. B of A paid $410 million in 2011 and JPMorgan paid $110 million in 2012 to settle nationwide litigation on similar overdraft claims.

Wells Fargo sign
“Wells Fargo continues to believe that arbitration is a fair, efficient and effective way for a customer to pursue a legal claim and resolve a legal dispute,” said a Wells spokeswoman. Bloomberg News

Richard McCune, a partner at McCune Wright Arevalo, a law firm in Redlands, Calif., that represented California customers in the case lost by Wells, said the allegations against the bank in this matter are similar. But there could still be a different result.

"There has already been a finding that Wells Fargo misrepresented how these accounts are ordered that had a detrimental affect on consumers," McCune said. "There's no difference between California and what's gone on in the rest of the country, except that California consumers got compensated. By asserting the arbitration clause, consumers elsewhere could get zero even though [Wells] engaged in the same conduct."

At issue is whether Wells has the right to resolve the issue through arbitration rather than a class-action lawsuit. Wells voluntarily waived its right to arbitration early in the case, when there were only a few plaintiffs, but sought to invoke its mandatory arbitration clause once more consumers joined it.

The industry is in the midst of a battle over mandatory arbitration agreements as the Consumer Financial Protection Bureau weighs whether to finalize a rule banning them. Banks argue that arbitration is a benefit to consumers, but some see the Wells case as an argument that lawsuits can provide far greater relief.

"This issue of forced arbitration is a big problem especially when it comes to banks because no consumer is going to arbitrate a $3 or $4 claim," said Peter Prieto, a partner at Podhurst Orseck in Miami, who represents New Mexico consumers in the overdraft litigation.

Wells stopped reordering payments from high to low in 2014, but contends that outstanding issues are best handled through arbitration.

“Wells Fargo continues to believe that arbitration is a fair, efficient and effective way for a customer to pursue a legal claim and resolve a legal dispute,” said Wells spokesman Kristopher Dahl.

Some lawyers commend Wells for fighting the case, noting that consumers typically signed contracts with disclosures that the bank debited accounts from high to low. Some also suggest that reordering payments is legal and that the borrower had overdraft on their account, incurring the typical $35 overdraft fee.

A key element of the case is timing.

The 2010 verdict against Wells in California came a year before the Supreme Court ruled in AT&T Mobility v. Concepcion that the Federal Arbitration Act of 1925 preempts state laws. In Concepcion, the court found that if a business has an arbitration agreement with a class action waiver, customers can only file for individual arbitration, not class actions.

Before Concepcion, there was "a lot written by the courts about banks not initially invoking arbitration and losing the right to do so, but it doesn't say what banks should do going forward," said Thaddeus King, an officer with the consumer banking project at the Pew Charitable Trusts. "Since banks have the Concepcion case on their side, they know that if they invoke arbitration they can avoid class-action lawsuits."

Prieto said Wells initially declined twice to compel arbitration early on in the case, and now is on its third appeal to force arbitration.

"If you want to seek arbitration, you need to exercise it promptly. You can't decline arbitration, and then litigate for two years and if you're unsuccessful, then seek to arbitrate," Prieto said.

The case is set in the shadow of the CFPB's proposal, which would ban mandatory arbitration. But the U.S. Chamber of Commerce has threatened to sue the CFPB if it issues a final rule. The chamber claims the CFPB's supervision and enforcement programs are enough of a deterrent for companies to comply with consumer protection laws. The chamber conducted its own study that found 90% of complaints submitted to the CFPB about arbitration were unique "one-off" claims that could not be litigated in a class.

"If every one of these customers went to arbitration, they would be arbitrating disputes for decades," said King at Pew.

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