Fourth Circuit Upholds Arbitration Despite SCRA Protections for Veterans
The United States Court of Appeals for the Fourth Circuit issued a notable decision at the end of January that could significantly shape how arbitration agreements are applied in cases involving current or former members of the U.S. military. In Espin v. Citibank, 126 F.4th 1010 (4th Cir. 2025), the court ruled that the Servicemembers Civil Relief Act (SCRA) does not prevent the enforcement of mandatory arbitration provisions in consumer contracts—even when servicemembers allege violations of their rights under the SCRA.
This decision clarifies an important and previously unsettled area of law: whether consumer arbitration clauses can be enforced against individuals who seek to bring claims under the SCRA, particularly in the form of a class action. The ruling offers strong support for arbitration as a valid and enforceable mechanism for resolving such disputes, even when statutory rights are at issue.
Background: Servicemember Protections Under the SCRA
The Servicemembers Civil Relief Act is a federal law designed to provide various legal protections to individuals entering or called to active duty in the U.S. military. One of its well-known features is the requirement that creditors reduce interest rates on certain financial obligations—including credit cards—to a maximum of 6% while the servicemember is on active duty. This protection helps alleviate financial pressures while the individual is serving, recognizing the unique burdens placed upon military personnel.
In Espin, the plaintiffs were military veterans who had held credit card accounts with Citibank. While they were on active duty, they received the benefit of reduced interest rates as mandated under the SCRA. However, once their military service concluded, Citibank adjusted the interest rates on their accounts, applying standard civilian rates and fees—typically three to five times higher than the protected 6% cap. The plaintiffs challenged these post-service rate increases, alleging that such adjustments constituted a form of “veteran penalty” and violated the SCRA.
Litigation and Motion to Compel Arbitration
The plaintiffs filed a class action lawsuit against Citibank, seeking relief under the SCRA. In response, Citibank moved to compel arbitration, pointing to arbitration provisions in the plaintiffs’ account agreements. These provisions are standard in consumer financial contracts and typically bind both parties to resolve disputes through private arbitration rather than in court.
The United States District Court for the Eastern District of North Carolina denied Citibank’s motion to compel arbitration. The trial court held that a specific provision in the SCRA—50 U.S.C. § 4042(a)(3)—preserved the plaintiffs’ right to participate in a class action, despite any prior agreements to the contrary. That provision reads: “[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.” (emphasis added)
Based on this language, the district court reasoned that Congress had explicitly allowed servicemembers to pursue class actions under the SCRA, even if they had signed agreements waiving that right.
The Fourth Circuit’s Reversal
On appeal, the Fourth Circuit reversed the district court’s decision and upheld the enforceability of the arbitration agreements. The appellate panel unanimously found that the statutory language in § 4042(a)(3) did not rise to the level of a clear congressional directive that would override the Federal Arbitration Act (FAA).
The core issue before the court was whether Congress had “clearly expressed” an intent to displace arbitration in favor of class action litigation for SCRA claims. The Fourth Circuit noted that the U.S. Supreme Court has repeatedly held that the FAA creates a strong presumption in favor of enforcing arbitration agreements, and that this presumption can only be overcome if Congress has explicitly stated otherwise in the text of a competing statute.
In analyzing the SCRA, the Fourth Circuit emphasized that the relevant provision does not mention arbitration at all. Instead, it simply provides that individuals “may” participate in a class action under the Federal Rules of Civil Procedure. The court concluded that this permissive language does not amount to a prohibition on arbitration:
“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.”
Thus, the court held that the plaintiffs’ arbitration agreements remained binding and that their claims had to proceed in arbitration, not in federal court.
To read the decision, click here.
Implications for Financial Institutions and Military Consumers
The Fourth Circuit’s decision in Espin carries significant implications for both lenders and military consumers. From a business perspective, the ruling affirms that standard arbitration provisions in consumer financial agreements will continue to be enforced—even when the claims at issue involve alleged violations of military-specific legal protections. Financial institutions can take some comfort in the consistency and predictability that the FAA provides, at least within the jurisdiction of the Fourth Circuit.
For military personnel and veterans, the ruling may be more concerning. While the SCRA remains a powerful source of statutory protection, the ability to assert those rights in a public courtroom—especially on a class-wide basis—may be significantly curtailed by prior agreements to arbitrate. Arbitration is often perceived as less favorable to consumers due to limitations on discovery, the confidentiality of proceedings, and the frequent waiver of class action rights.
Nevertheless, the decision underscores the importance of contract terms and the binding nature of arbitration clauses. Individuals entering into consumer agreements should be aware that arbitration provisions may limit the forum in which their legal rights can be asserted—even in the context of protections like the SCRA.
A Continuing Trend Favoring Arbitration
The Fourth Circuit’s analysis aligns with a broader judicial trend of enforcing arbitration clauses, even in the face of competing statutory protections. Courts have been reluctant to infer congressional intent to displace arbitration without a clear, unequivocal statement in the legislative text. As the court noted, the Supreme Court has “never concluded that a federal statute overrode the enforcement of arbitration agreements under the FAA without explicitly saying so.”
This decision serves as a reminder that arbitration remains a durable and judicially supported method of dispute resolution, even where strong statutory rights—like those afforded to servicemembers—are involved.
Unlocking Solutions for Demanding Cases
For parties navigating complex statutory claims, including those involving the rights of servicemembers, having a neutral who understands both the legal landscape and the practical realities of high-stakes arbitration can be crucial. Whether the matter involves the enforceability of arbitration clauses, consumer financial disputes, or nuanced federal protections like the SCRA, Nationwide ADR provides experienced, balanced, and resolution-driven services tailored to demanding cases.
To learn more about arbitration, mediation, or early case assessment options, visit NationwideADR.com.