On January 27, a three-judge panel of the U.S. Court of Appeals for the Fourth Circuit issued a significant opinion holding that the Servicemembers Civil Relief Act (SCRA) does not prohibit the enforcement of arbitration agreements in credit card contracts under the Federal Arbitration Act (FAA).
In Espin, servicemembers who opened credit card accounts prior to active duty alleged that the issuing bank’s reinstatement of credit card contract terms, including interest rate terms, after servicemembers left active duty violated the SCRA, Military Lending Act (MLA), Truth in Lending Act, Credit Card Act, as well as state and common law. The bank moved to compel arbitration, but the district court denied the motion, holding that the SCRA’s provision expressly authorizing class actions precluded arbitration. The bank appealed, and the Biden administration filed an amicus brief supporting the plaintiffs’ position. A three-judge panel of the Fourth Circuit reversed.
The Fourth Circuit began with an overview of the FAA, noting that it favors arbitration and requires courts to honor arbitration agreements unless “overridden by a contrary congressional command.” The court found no such command in the SCRA. The SCRA’s class action provision allows a person to file a class action but does not mandate it or prohibit arbitration. In other words, “the provision is permissive,” and “does not prohibit the person from resolving a SCRA claim in another forum, such as the arbitral forum.”
The Fourth Circuit found that allowing the SCRA claims to proceed in forums other than federal court aligns with Supreme Court precedent, which holds that federal statutory remedies do not override arbitration agreements unless explicitly stated. The legislative history of the SCRA shows that Congress considered but did not include a prohibition on arbitration of SCRA claims without mutual consent.
Having concluded that SCRA does not preclude the enforcement of arbitration agreements, the court reversed and remanded with instructions that the district court compel arbitration of plaintiffs’ SCRA claims and other claims except those under the MLA.
As for the MLA, the court recognized that the statute does contain an express prohibition on arbitration but noted the district court had not decided whether the MLA actually applies. The parties’ disputed whether a bank “extend[s] consumer credit” to a customer when a plaintiff first opens a credit card account or each time a customer makes purchases on their credit cards. The court remanded the MLA claims for further determination by the district court.
Our Take
The Fourth Circuit decision deals a major blow to SCRA plaintiffs seeking to avoid arbitration. We anticipate possible further review by the full Fourth Circuit and an eventual appeal to the Supreme Court. It is unclear whether the new administration will continue to side with the plaintiffs as the appeal progresses. What is clear is that financial services companies should look to Espin as a guide for enforcing arbitration agreements in cases brought under the SCRA as the decision green lights such claims.
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