Did major credit card firms conspire to change their member agreements and limit consumer rights? Consumers may find out now that a federal appeals court has revived a class-action lawsuit alleging such anti-competitive practices by banks.
In 2005, a lawsuit was filed against a "Who's Who" of credit card issuers, claiming the companies colluded to limit consumers' rights by implementing mandatory arbitration clauses. The banks even formed an "Arbitration Coalition" and swapped tips on writing enforceable agreements, the lawsuit alleges.
But it was dismissed by the U.S. District Court for the Southern District of New York in 2006, when that court ruled the plaintiffs were unable to prove consumers had suffered any harm. In legal terms, the court found the plaintiffs did not have "standing" -- that is, without identifiable harm, there was no legal claim to argue.
On Friday, the U.S. Court of Appeals in New York reversed that decision, agreeing with the plaintiffs' that it is feasible to prove cardholders had been harmed through a lack of competition. Specifically, the court found the plaintiffs might be able to prove that a card which "limits the holder to arbitration is less valuable ... than a card that offers the holder a choice between court action or arbitration," and that cardholders may have "been forced to accept a less valuable card as a result of the banks' alleged collusion."
The case was sent back to the lower court.
Defendants in the case include of Bank of America Corp. Capital One, Discover, Citigroup and Washington Mutual.
Can't go to court
Mandatory arbitration clauses appear in nearly all consumer contracts now. They force consumers who have a dispute with company to forgo lawsuits -- even class-action lawsuits -- and instead file claims with an arbitration board. Some argue that arbitration is more efficient and brings swifter dispute resolution. But several consumer advocacy groups oppose arbitration clauses, saying they limit consumer rights and could spell the end of class-action litigation. Legislation proposed by Sen. Russ Feingold, D-Wis., would outlaw binding arbitration clauses. Meanwhile, several legal cases challenging arbitration clauses are working their way through the courts, including the conspiracy case revived by the appeals court.
"I think it's an important ruling," said Paul Bland, staff attorney at Public Justice, an advocacy group which opposes arbitration clauses. "The defendants' argument amounted to the idea that even if all of these banks did get together and agree to have an identical term in their credit card agreements that limited the rights of cardholders in significant ways, that the cardholders had no claim under the antitrust laws … because these limitations supposedly benefited the cardholders. The Court rightly rejected this decision, holding that restricting cardholders' choices and rights does harm them."
The case alleges a far-flung conspiracy by credit card companies. "(Beginning) before late 1998 or early 1999, defendants began communicating with each other and their co-conspirators concerning the imposition and use of mandatory arbitration clauses," the lawsuit alleges. "After preliminary meetings and communications, the banks formed an 'Arbitration Coalition' to recruit other credit card issuers into using mandatory arbitration clauses. Over the next four years, the Arbitration Coalition held more meetings, shared plans for the adoption of arbitration clauses, and spun off additional working groups. "
Ultimately, the card issuers' cooperation led to "the removal of all non-arbitration credit cards from the market, thereby depriving the cardholders of meaningful choice in the area of credit card services, and a diminution in the overall quality of credit services offered to consumers," it alleges. "Banks participated in a group boycott by refusing to issue cards to individuals who did not agree to arbitration."
While the appeals court ruling is a victory for arbitration opponents, it is a limited one. The court made no ruling on the legitimacy of arbitration itself, or even on the collusion claims. It merely ruled that the plaintiffs might be able to prove real harm to consumers if they also prove anti-competitive conduct by the card companies.
Card companies say the core allegations of the lawsuit are baseless.
"Today's appellate court ruling is not a decision on the merits of the banks' arbitration policies or practices," Citigroup spokeswoman Janis Tarter told the Reuters news service. "The plaintiffs' allegations, however, are without merit, and we are confident that a court will agree once all the facts are presented."
But Bland thinks the revival of the case will likely create an intriguing opportunity for consumers to gain new insights into cooperation between credit card companies.
"I don't know what the truth is about why pretty much every large credit card company adopted arbitration clauses that are nearly identical in the space of about one year ... but if the plaintiffs are right that the banks did get together and agree to adopt uniform contract terms, that will be very significant in the broader public debate taking place in Congress," Bland said. Arbitration supporters often argue that consumers who dislike arbitration can avoid relationships with companies that require it, but collusion would make that impossible. "If all the major banks got together and agreed to take these rights from their customers, how much choice do they really have?" he said.
While the case goes forward , it still must clear several legal hurdles before a judge entertains arguments about the legitimacy of arbitration clauses. One issue still to be decided: Some of the defendants have asked the court to compel the plaintiffs into arbitration.