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Court Rules Credit Card Arbitration Lawsuit Can Go Forward

Suit charging collusion between banks and creditors against customers

April 29, 2008

The plaintiffs charged that the banks had conspired to universally institute the practice of mandatory arbitration for disputes, rather than allowing claims to be heard in court, and that their actions violated antitrust law.

The Second Circuit Court of Appeals' ruling overturned the ruling of a lower court that threw the suit out on procedural grounds. The appellate judges on the case, Ross v. Bank of America, ruled that there was sufficient evidence to indicate that violations of the Sherman Antitrust Act were taking place.

"According to [the plaintiffs], the banks conspired in order 'to immunize themselves from economic responsibility for antitrust and consumer protection violations, and to reap supra-competitive profits from their cardholders,'" the court said in its ruling.

"The cardholders also contend that the alleged collusion produced several market effects, including the creation of a 'non-price trade advantage over cardholders' and the removal of any economic incentive for the banks to comply with antitrust and other laws, thereby shifting the risk and cost of their non-compliance to cardholders."

"Even if the individual plaintiffs could not demonstrate injury from their claims, the court said, "the [c]omplaint alleges that reduced choice and diminished quality in credit services result directly from the banks' illegal collusion to constrict the options available to cardholders."

"These harms are sufficiently 'actual or imminent,' as well as 'distinct and palpable,' to constitute...injury in fact," the court said.

Defendants in the case include Bank of America, Citigroup, J.P.Morgan Chase, Providian, and Discover Financial Services.

Citigroup spokesperson Janis Tarter said that "The plaintiffs' allegations are without merit, and we are confident that a court will agree once all the facts are presented."

Discover Financial argued that it should be excluded from the lawsuit, as its cardholder agreements allow customers to "opt out" of arbitration clauses. The court agreed, saying that the lower court ruled against the plaintiffs on procedural grounds without examining the specific claims, and that the reinstated lawsuit should be given space to determine whether or not Discover's card agreements were truly different from the other defendants' contracts.

"The injuries alleged by the cardholders are present, ongoing harms that continue to affect the credit market as long as consumer choice and the quality of credit services offered are artificially suppressed. For these reasons, the cardholders' claims are ripe for adjudication," the court said.

Signing away your rights

Mandatory arbitration clauses in contracts are all too commonplace in the modern business world these days, and can be found in everything from credit card agreements to homeowners' contracts, to cell phone agreements and retail contracts.

Consumers often agree to these clauses without even knowing they exist, as they are often buried deep within agreements and written in confusing legalistic language.

Arbitration bars consumers from having disputes heard in court, forcing them instead into private mediation that can be held in different states, forcing them to travel hundreds of miles and pay thousands of dollars in costs. Private arbitrators often enjoy cozy relationships with the very companies they mediate disputes for, particularly in the credit card and financial industry.

A 2007 Public Citizen report studying credit card arbitration cases in California found that the National Arbitration Forum (NAF), a premier player in the financial services arbitration realm, ruled against consumers in 95 percent of cases brought before it.

Various federal and state courts have been ruling in favor of consumers in disputes relating to arbitration of late, calling the arbitration clauses inserted into contracts "unconscionable," for the amount of liability they enable the companies to escape while shielding the customer with ever more risk.

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