Oct. 27, 2023 – A credit union violated the duty of good faith and fair dealing by adding a retroactive arbitration clause and class action waiver provision into its membership agreement, the Wisconsin Court of Appeals District III has ruled in Pruett v. WESTconsin Credit Union, 2022AP887 (Oct. 24, 2023).

In July 2021, Jeffrey Pruett filed a class action lawsuit against WESTconsin Credit Union (WCU) in Dunn County Circuit Court. Pruett claimed that between 2017 and 2020, WESTconsin improperly charged him and other members fees.

Pruett’s complaint alleged multiple counts of breach of contract, unjust enrichment, and a violation of the Wisconsin Deceptive Trade Practices Act.

WCU filed a motion to compel arbitration. WCU based the motion on the fact that it had added an arbitration clause to is membership and account agreement in 2021.

Under the terms of the member and account agreement that Pruett signed in 1991, WCU had the right to “change the terms of this Agreement.”

Notice of Arbitration Clause

In May 2021, WCU had notified Pruett and other members that it was implementing an arbitration clause and class action waiver agreement that would take effect 60 days after receipt of the notice.

Under the notice, a member could opt out of the arbitration clause and class action waiver agreement.

The arbitration clause specified that, in the event of a dispute between WCU and a member or members, either party could compel arbitration, subject to exceptions. The clause, which was retroactive, also prohibited a member from participating in a class action.

Pruett argued that he’d never agreed to the addition of the arbitration clause.

The circuit court denied WCU’s motion. WCU appealed.

Limits to Policy Favoring Arbitration

In making its case on appeal, WCU relied upon the strong state and federal policy in encouraging arbitration.

But Presiding Judge Lisa Stark, who wrote for a three-judge panel, explained that the state policy in favor of encouraging arbitration was not boundless.

“The policy favoring arbitration applies only where the parties have indeed agreed to arbitration,” Stark wrote, after citing both U.S. Supreme Court and Wisconsin Supreme Court caselaw.

Case of First Impression

Pruett argued that under the plain wording of the membership and account agreement, WCU was permitted to only change wording already in the agreement, not add wording.

Judge Stark noted that the issue of whether a financial institution was legally permitted to add an arbitration clause to an existing agreement was one of first impression in Wisconsin.

But she pointed out that courts in other states had addressed the issue.

Stark explained that caselaw from those states invalidated the addition of arbitration clauses to existing contracts on several grounds:

• the addition of the arbitration clause violated the duty of good faith and fair dealing;

• the arbitration clause was beyond the general subject matter anticipated by the account holder when he or she signed the account agreement; and

• whether the ability to “change” the account agreement authorized the institution to “add” wording in the agreement rendered the agreement ambiguous.

‘Change’ Not Synonymous with ‘Add’

Judge Stark concluded that the provision in the WCU member and account agreement that allowed the company to change the agreement did not authorize it to add the arbitration clause.

“According to the plain meaning of the change-of-terms provision in the Agreement, the parties agreed that WCU was authorized to ‘make different,’ ‘replace,’ or modify the terms that already existed in ‘this Agreement,’” Stark wrote.

“The change-of-terms provision does not state that WCU may ‘add new terms.’”

Violation of Duty of Good Faith

WCU argued that the addition of the arbitration clause to the member and account agreement should have been contemplated by Pruett because the agreement contained a provision that: 1) specified that Wisconsin law governed the agreement; and 2) specified that any legal action must be brought in the county in which WCU was located.

WCU cited a case from North Carolina in support of its argument.

But Judge Stark reasoned that the dissent in that case, particularly its argument that allowing the addition of the arbitration clause “ignored the requirement of good faith implied in all contracts of adhesion,” was more persuasive than the majority.

“Here, by adding the Arbitration Clause to the Agreement and making the added provisions retroactive … WCU is attempting to protect itself from actions for which it could be liable under the original agreement,” Stark wrote.

“We conclude that WCU did not act in good faith when it attempted to add a new term to the original Agreement seeking to retroactively deprive another party of a legal right,” Stark wrote.

Documents Weren’t Clear About Opt-Out

WCU also argued that members could opt out of the new arbitration clause.

But Judge Stark concluded that that argument failed because the proposed offer to add the arbitration clause wasn’t clear regarding what Pruett needed to do to communicate his acceptance or rejection of the offer.

WCU argued that the arbitration and class action waiver agreement listed 60 days from receipt of the notice as the only opt-out period.

Judge Stark pointed out that the arbitration clause notice specified that Pruett could opt out by sending written notice within 60 days of opening his account or within 60 days of receiving the notice, “whichever is sooner,” and explained that the arbitration and class action waiver agreement and the notice must be considered together.

The panel determined that Pruett, who opened his account in 1991, could have concluded that he could have opted out in writing 60 days after opening his account, which was impossible because it occurred 30 years in the past.

“The Notice does not specifically clarify the opt-out deadlines,” Judge Stark wrote. “Therefore, WCU’s proposed contract modification remains unclear, and any ambiguity must be construed against WCU as the contract’s drafter.”​