Litigation Byte

Fourth Circuit Rules that SCRA Does Not Preclude Arbitration

February 17, 2025

In a decision with potentially wide-ranging implications, the Fourth Circuit Court of Appeals reversed a district court’s decision to deny a national bank’s motion to compel arbitration, finding that amendments to the Servicemembers Civil Relief Act (SCRA) did not override the applicability of the Federal Arbitration Action (FAA) to arbitrate claims under the SCRA.

What Happened?

A number of plaintiffs, on behalf of themselves and a putative class of similar individuals, brought suit under the SCRA against a national bank for purportedly charging them interest in excess of what the SCRA permitted under a credit card agreement.

The national bank pointed to an arbitration clause in the credit card agreement that also precluded a class action and sought to compel arbitration under the FAA. The plaintiffs opposed, arguing that Congress intended to preclude arbitration of SCRA claims and the district court agreed. The National Bank appealed and on appeal, the Fourth Circuit reversed.

The Court’s Analysis

At the center of this dispute are the 2019 amendments to the SCRA which stated: “[a]ny person aggrieved by a violation” of the SCRA “may in a civil action … be a representative party on behalf of members of a class or be a member of a class, in accordance with the Federal Rules of Civil Procedure, notwithstanding any previous agreement to the contrary.” 50 U.S.C. § 4042(a)(3) (Emphasis added). The plaintiffs and district court focused on the highlighted language and found that this precluded arbitration of such claims.

But the Fourth Circuit disagreed. According to the court, only a statute that clearly expresses congressional intention to override the FAA will suffice. This comports with the underlying purpose of the FAA itself which establishes a “liberal federal policy favoring arbitration agreements.” And, pursuant to Supreme Court precedent, the Fourth Circuit found that the court has never concluded that “a federal statute overrode enforcement of the arbitration agreements under the FAA without explicitly saying so.” In light of this precedent, the Fourth Circuit read the SCRA amendments to:

authorize a person with a claim under the SCRA to file a civil action in federal court and to prosecute that action as a class action under the Federal Rules of Civil Procedure. We conclude that the clause “notwithstanding any previous agreement to the contrary” confirms the authority of persons aggrieved to bring federal class actions despite any previous agreement to the contrary. The language in § 4042(a)(3) thus defines the action that the person aggrieved may bring, but it does not indicate that that person must bring a class action or even must file an action in federal court. The provision is permissive, providing undampened authority to bring a federal class action. More importantly, however, the provision does not prohibit the person from resolving a SCRA claim in another forum, such as the arbitral forum. Indeed, the statute does not even mention arbitration, much less prohibit the enforcement of agreements to arbitrate.

This finding was bolstered by the legislative history surrounding the SCRA itself, where the Fourth Circuit noted that the House-adopted version of the 2020 National Defense Authorization Act did include a provision that would have precluded arbitration of SCRA claims but that this provision was never enacted. Finally, and while reversing on the SCRA claims, the Fourth Circuit also remanded back to the district court to consider the claims brought by the plaintiffs under the Military Lending Act (which, unlike the SCRA, does include an explicit provision prohibiting arbitration of such claims).

What Does This Mean?

Many arbitration agreements carve out claims brought by servicemembers to avoid any potential violations of the SCRA. However, under the Fourth Circuit’s analysis, such claims may, in fact, be subject to binding arbitration as Congress did not include an express intent to avoid arbitration of such claims as required under Supreme Court precedent.