Banks and other lenders around the country have inserted mandatory arbitration clauses in their contracts over the last few years, trying to block the consumer's right to sue. But a ruling in Maryland casts doubt that these clauses will withstand judicial scrutiny.
Maryland's highest court ruled yesterday that credit customers of Chevy Chase Bank can sue the bank over its 1996 decision to raise interest rates after promising it would not do so.
The Court of Appeals of Maryland ruled that consumers did not waive their right to a trial when the bank sent a "change of terms" notice saying that henceforth, all disputes would be settled through arbitration rather than through the courts.
In the mid-1990s the bank, which was then based in Maryland, lured customers with a promise that its credit card rates "will never exceed 24 percent," the highest rate permissible under Maryland law.
Then, in 1996, the bank moved its headquarters to neighboring Virginia, which has no state limits on interest rates. A short time later, Chevy Chase began raising its rates, charging some customers as much as 28 percent, even on balances accrued before the move to Virginia.
A group of consumers sued, charging breach of contract. The bank tried to block the suit, arguing that the arbitration clause required the consumers to submit to -- and pay for -- binding arbitration. A Baltimore judge agreed but the high court disagreed and sent the case back to local court for trial.
Paul Bland, an attorney for Trial Lawyers for Public Justice, called the decision "a real victory for cardholders who will now have their day in court instead of in an arbitration process they never agreed to." He estimated several hundred thousand Chevy Chase cardholders will be eligible to be part of the class-action suit that his group has filed.
Businesses that have imposed the arbitration clause on consumers argue that arbitration saves time and money. Consumer advocates say a single arbitration can cost a consumer thousands of dollars while lessening the consumer's chance of prevailing by limiting discovery rights and other safeguards normally accorded in a trial.
While the court's ruling applies only to the Chevy Chase case, it is likely to be cited by consumer attorneys in hundreds of similar cases around the nation. The Washington Post quoted Alan Kaplinsky, a Philadelphia attorney who represents a number of financial institutions, as saying he was "disquieted" by the Maryland ruling.
