Class Action Against Lending Club and WebBank Headed to Defeat

Financial Industry Alert

January.31.2017

On Monday, a federal district court in the Southern District of New York granted a motion to compel arbitration in Bethune v. Lending Club Corporation, et al., a closely watched putative class action raising important issues for the fintech industry.

The plaintiff filed the complaint in this action in April 2016 against Lending Club and WebBank, challenging a loan obtained through Lending Club's online platform and issued by WebBank. He alleged, on behalf of himself and other similarly situated individuals, that the defendants violated state usury laws, state consumer protection laws, and the federal Racketeer Influenced and Corrupt Organizations Act by lending to borrowers at interest rates above the usury caps in the borrowers' home states. The plaintiff alleged that these laws applied notwithstanding WebBank's status as an FDIC-insured, state-chartered bank presumptively entitled to preemption of state usury laws. He relied on the Second Circuit's 2015 decision in Madden v. Midland Funding (discussed here and here)—which declined to apply federal preemption in the context of a non-bank holder of defaulted debt—and he further alleged that Lending Club, and not WebBank, was the "true lender" with respect to the loans at issue.

The defendants moved to compel arbitration based on the arbitration clause in the loan agreement between the plaintiff and WebBank. That clause provided that "[e]ither party to this Agreement, or LendingClub, may … require that the sole and exclusive forum and remedy for resolution of a Claim be final and binding arbitration." And importantly, it defined "Claim" to encompass "any past, present, or future claim, dispute, or controversy … including … the validity or enforceability of this Arbitration Provision." The defendants argued that the arbitration clause required arbitration of all issues, including the enforceability of the arbitration clause itself.

The district court has now agreed, finding that the threshold question of arbitrability of the dispute was for the arbitrator to resolve. Noting the "emphatic federal policy in favor of arbitral dispute resolution," the court found that there was "clear and unmistakable evidence from the arbitration agreement" that the parties had intended to arbitrate the question of the arbitration clause's enforceability. The court also made quick work of the plaintiff's "perfunctory" suggestion that the arbitration agreement was itself unconscionable. And crucially, the court compelled arbitration on a purely individual—rather than class action—basis, citing language in the arbitration clause that specifically stated that "no arbitration shall proceed on a class, representative, or collective basis."

Under the Federal Arbitration Act, the court's decision is potentially subject to immediate appeal to the Second Circuit under § 1292(b). The decision, especially if it is affirmed, may provide increased certainty and comfort for the marketplace lending industry and investors.

Although the court resolved only the threshold question of whether the enforceability of the arbitration clause is a question for the court or an arbitral tribunal, the court's reading of the plain language of the arbitration clause and rejection of the plaintiff's unconscionability argument suggest that an arbitrator is likely to find the entire dispute arbitrable.
The right to arbitrate a dispute is, of course, not a resolution of the underlying legal claims. Typically, however, arbitration is a less expensive form of dispute resolution, with modified discovery rules, accelerated timetables, and confidentiality restrictions not applicable or available in federal court.
Also highly significant is the court's decision to compel arbitration only on an individual basis. By confining the dispute to the plaintiff's individual claims, the arbitration clause dramatically reduces the defendants' potential exposure even if the claims are resolved adversely.

We will continue to monitor this case if it proceeds to appeal.

Authors

Robert Loeb Partner, Supreme Court & Appellate, Bankruptcy Litigation

Washington, D.C.

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D:+1 202 339 8475
E: [email protected]

Practice:

Finance Sector
Supreme Court & Appellate
Bankruptcy Litigation
Complex Litigation & Dispute Resolution
Energy
Litigation & IP
White Collar, Investigations, Securities Litigation & Compliance

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Robert Loeb Partner

Washington, D.C.

The breadth and depth of Bob's appellate experience, and his consistent track record of success in high-stakes matters, are why clients, including top tech and energy companies, trust him with their most important cases.

The National Law Journal’s Litigator of the Week column recently recognized Bob’s appellate major wins in energy and product liability cases for Broadreach Power and Johnson & Johnson. Bob’s recent victories also include Fifth Circuit wins for energy clients Cheniere and Eni. In the Cheniere-Midship case, Bob obtained an emergency stay from the court of appeals of the regulating agency proceedings and, then after oral argument, achieved a full victory. And for Eni, Bob convinced the Fifth Circuit to vacate a $300M judgment against Eni in a dispute with another energy company. These types of big wins in the most challenging cases show why both Chambers and Legal 500 rank Bob among the Country’s top appellate advocates.

Bob has argued before the Supreme Court multiple times (including a 9-0 victory regarding application of the Fourth Amendment to rental cars), and has filed hundreds of briefs in the Supreme Court. He has also handled cases in highest state courts in California, New York, Maine, Kentucky and New Jersey.

Before joining Orrick, Bob served as one of the leaders of an elite appellate group at the Department of Justice. There, in addition to major national security, commercial, and administrative law, Bob supervised bankruptcy appeals. At Orrick, Bob has continued to handle big ticket bankruptcy matters, such as a billion-dollar dispute over whether DHL’s claim was discharged by United’s bankruptcy, appeals from the City of Stockton bankruptcy confirmation, and a Ninth Circuit matter involving the interplay of the Takings Clause and bankruptcy law.

Bob’s recent work includes matters for Johnson & Johnson, Avon, Microsoft, Eni, Cheniere Energy, Freeport LNG, Broadreach Power, LS Power, Exxon, Medidata, Renco, MSC Cruise Line, Golden 1 Credit Union, Credit Suisse, TravelCenters of America, Gannett, and the City of Stockton.

Christopher J. Cariello Partner, Supreme Court & Appellate, Litigation & IP

New York

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D:+1 212 506 3778
E: [email protected]

Practice:

Supreme Court & Appellate
Litigation & IP

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Christopher J. Cariello Partner

New York

Chris has represented major ISPs in high-stakes copyright litigation, tech titans pushing the cutting edge, national retailers with key trademarks on the line, and global manufacturers facing class action risk. He has authored dozens of appellate briefs, winning results in federal and state courts of appeals and the U.S. Supreme Court. And he is a consummate team player when partnering with trial teams to craft winning legal strategies and themes, brief dispositive motions, win key legal and evidentiary rulings at trial, and construct a record with an eye towards appeal.

Chris is most passionate about the novel issues that arise at the intersection of tech and commerce, implicating the balance between creation, innovation, and competition. Whether it's the DMCA and copyright's intermediary liability doctrines, generative AI, data scraping, or trade secrets, he relishes litigating in the gray areas, presenting what the law ought to be as plain common sense. Chris also has a wealth of experience in class action defense in both trial and appellate courts, including several appellate victories defending the denial of class certification. And his broader experience includes bankruptcy, telecommunications, constitutional law, and various issues confronting Fintech companies.

Chris maintains an active pro bono practice. He led a team that prevailed in both federal district court and in the Second Circuit in one of the nation's most closely watched police transparency cases. The year before, he argued and won a precedent-setting parole appeal in New York’s Appellate Division on behalf of a former juvenile offender. And he has won victories for clients in immigration cases and cases presenting novel legal issues under freedom of information laws.

Prior to joining Orrick, Chris was a law clerk to Judge Robert D. Sack of the U.S. Court of Appeals for the Second Circuit and Chief Judge Carol B. Amon of the U.S. District Court for the Eastern District of New York.

Ned Hirschfeld Senior Associate, Supreme Court & Appellate

New York

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D:+1 212 506 3745
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Practice:

Supreme Court & Appellate

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Ned Hirschfeld Senior Associate

New York

Ned focuses on appellate litigation. He has authored successful merits briefs and petitions for certiorari in the U.S. Supreme Court, as well as dozens of briefs in federal and state appellate courts. Ned's work has covered a wide range of subject areas, including patent, constitutional law, and complex commercial litigation. He has also counseled Fintech clients on novel issues confronting the industry.

Ned maintains an active pro bono practice focused on immigration and criminal justice matters, including a successful appeal in the Second Circuit that vacated an arbitrary change to the meaning of "moral turpitude" under the Immigration and Nationality Act.

Prior to joining Orrick, Ned served as a law clerk to Judge Robert Sack of the U.S. Court of Appeals for the Second Circuit and Judge Kimba Wood of the U.S. District Court for the Southern District of New York. During law school, he served as an Articles Editor for the Yale Law Journal.