By Jon Hood

March 1, 2009
A federal appeals court has handed down a huge win for beleaguered consumers, rejecting American Expresss claim that they can prevent Garden Staters from bringing class actions against them.

The suit arose out of a promotion for the American Express Blue Cash Card, which claimed that consumers could earn up to 5% cash back on purchases made with the card. Lead plaintiff H.R. Homa brought a class action in New Jersey, claiming that the terms outlined in the promotion were misleading, and that he had not earned cash back as promised. The action was brought under the New Jersey Consumer Fraud Act.

The Blue Cash card agreement included a section prohibiting consumers from bringing class actions against American Express in the event of a dispute. The agreement also mandated that any disputes arising from the agreement would be governed by Utah state law, which conveniently recognizes all class-action waivers in consumer credit agreements.

The plaintiff, Homa, argued that New Jersey law should control, since the suit was brought under a New Jersey statute and the state refuses to enforce certain class-action waivers.

The court held that the provision acted as an "exculpatory clause," which essentially releases a party from liability arising from an agreement. These clauses often fall under the umbrella of contracts of adhesion, since the party against whom the clause is enforced has to either take the agreement as it is, or walk away altogether.

The court quoted New Jersey precedent conceding that, Ordinarily, when parties to a contract have agreed to be governed by the laws of a particular state, New Jersey courts will uphold the contractual choice if it does not violate New Jerseys public policy. The court ultimately sided with Homa, however, citing a 2006 New Jersey Supreme Court decision holding that certain class action waiver provisions were unconscionable.

In that case, Muhammad v. County Bank of Rehoboth Beach, the court asserted that, [t]he public interest at stake in [the ability of consumers] effectively to pursue their statutory rights under [New Jerseys] consumer protection laws overrides the defendants right to seek enforcement of the class-arbitration bar in their agreement.

In the Homa case, the court also noted that the Federal Arbitration Act provides that courts can refuse to enforce class action waivers if they violate a legal or equitable rule that would otherwise deem them revoked.

American Express had tried to argue that another Third Circuit decision, Gay v. CreditInform, compelled the court to uphold the class action waiver. In Gay, the court held as valid a clause preventing consumers from bringing class-action arbitration actions, or those held in a non-courtroom setting. The court distinguished the two cases, noting that Muhammad foreclosed all class actions, while the provision in Gay applied only to arbitrations; the former was unconscionable, since it deprive[d] Muhammad of the mechanism of a class-wide action, whether in arbitration or in court litigation.

Following from this logic, the court held that the American Express clause bears the hallmarks of a contract of adhesion — it was presented on a take-it-or-leave-it basis, in a standardized printed form, [and] without opportunity for the adhering party to negotiate except perhaps on a few particulars.

Turning the knife a bit further, the court held that New Jersey — not Utah — law would apply, as New Jersey had a materially greater interest in the outcome of the litigation. The court took pains to note the importance of New Jerseys interest in protecting its consumers ability to enforce their rights under the Consumer Fraud Act.

The decision could have an influence on other circuits presented with the same problem, given its application of general contract and conflict-of-laws principles. The opinion comes on the heels of another pro-consumer New Jersey decision — the states Supreme Court recently rebuffed a car dealers argument that a car buyer had to notify them of an overcharge before bringing suit.