March 14, 2012

Credit card arbitration clauses

Three California women believed that they would receive $300 in automatic credit when they qualified for and received new Aspire VISA credit cards. Instead they were charged nearly $290 in unexpected fees and finance charges. In 2008, the women decided to file a class action lawsuit in federal court against CompuCredit, the firm that issued the cards. The case was based on alleged violations of the federal Credit Repair Organizations Act (CROA) and a 1996 California statute that reiterated the paramount right of state residents to have the opportunity to seek redress of any issues in a court of law.

CompuCredit sought a ruling from the court that would require the women to seek resolution of their complaints by following the contract clause that required all card holders to use mandatory arbitration thereby forfeiting the right to bring a formal lawsuit in any court. The credit card contract also included language requiring everyone who received a card to seek arbitration resolution in their individual capacity. This precluded card holders from aggregating their claims in arbitration and mandated that every person argue only for the money damages considered owed to him.

There were two practical consequences of these contract provisions. The first was to take away the prospect of putting together a class action in either state or federal court whereby thousands of card holders could aggregate their claims and share attorney fees. Clearly, without the prospect of definitive punitive damages filing litigation to recover less than $300 made little sense. Second, if required to have any and all card issues resolved in arbitration the very possibility of the right to sue in court had been signed away by each applicant. While the appeal of filing a class action in this type of case is readily apparent, the more critical legal issue is the effort of credit card issuers to include contractual language in the application requiring applicants to "knowingly" sacrifice the right to "a day in court" via arbitration.

The women based their case in part on advertising claims made by CompuCredit that the Aspire VISA credit card could be used to rebuild poor credit. By far, however, was the claim that their right to file a lawsuit could not be mitigated by a contractual provision such as the one in CompuCredit's form application. Two federal courts held for the consumer-card holders stating that the right to sue trumped the arbitration clause in the contract. CompuCredit then sought review by the U.S. Supreme Court.

The Supreme Court reversed the previous decisions and held that the women were obligated to have any issues with the company reviewed and decided through the arbitration process pursuant to the application. The court did not agree that the issues presented by the case should be resolved in accordance with the CROA. Instead the majority of justices stated that the case was controlled by the Federal Arbitration Act which provides that when a contract includes a clause such as the one in this case, arbitration is desired and required.

When considering whether to place your signature on a consumer contract of any kind read it carefully to determine if it includes a mandatory arbitration clause. You may not be able to have any objectionable contract clauses removed, but it is important that you enter into the agreement attentive to all of its terms. Also, be aware that the current Supreme Court, through this and other cases, has consistently ruled against allowing class actions in situations where thousands of consumers have been similarly affected by corporate action.

For corporations the CompuCredit decision is significant. The ability to avoid class actions and to enforce contractual arbitration clauses amounts to a much preferred position for corporations. Consumers are not likely to pursue small claims individually or enter the arbitration process without legal representation.

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