Contesting Arbitration Clauses in Credit Card Agreements

Cardholder credit card agreements typically include an arbitration provision requiring that “[a]ny dispute, claim, or controversy ... arising out of or relating to relating to this Agreement” be settled in an arbitral, not a judicial, forum. These provisions have been under attack in two on-going antitrust conspiracy cases before Judge Pauley in the Southern District of New York. In the first case, the plaintiffs alleged that Visa, MasterCard, American Express and several large credit card issuers, conspired to inflate foreign currency transaction fees. (Visa, MasterCard and the issuer defendants have reached an agreement in principle to settle the case that is currently being reviewed by the court.) Although the plaintiffs are not American Express cardholders, AmEx has argued that they should be bound nonetheless by the arbitration provisions in their cardholder agreements. The plaintiffs should not be permitted to circumvent their arbitration agreements, AmEx claims, by joining an outside party to a conspiracy claim.

Judge Pauley agreed with AmEx on that point, finding that principles of equitable estoppel prohibited the plaintiffs from refusing to arbitrate. The court further recognized, however, that the arbitration agreements might nonetheless be unenforceable as a product of the antitrust conspiracy. It ordered a trial on the validity of the agreements before reaching a final decision on whether the plaintiffs could be compelled to arbitrate.

The plaintiffs appealed, and the Second Circuit reversed. Recognizing that a non-party to an arbitration agreement may in some cases rely on principles of collateral estoppel to compel arbitration, the court held that a more significant connection between the parties was required than AmEx could show with the plaintiffs. For example, the Second Circuit pointed to cases dealing with corporate affiliates or others with whom the plaintiff had interacted directly. Since the plaintiffs were not American Express cardholders, and they had no reason to anticipate any direct interaction with AmEx when they entered their cardholder agreements, the plaintiffs could not be compelled to arbitrate. Ross v. American Exp. Co. --- F.3d ----, 2008 WL 4630314 (2nd Cir. 2008).

In the second case, cardholder plaintiffs allege that card issuers have violated the antitrust laws by agreeing to include arbitration provisions in all of their cardholder agreements. Judge Pauley initially dismissed the suit for lack of standing, reasoning that any injury would be contingent on future disputes that cardholders might be forced to arbitrate. Again, however, the Second Circuit reversed, holding that an agreement not to compete on a critical contract provision deprived the plaintiffs of a meaningful choice and thus resulted in injury in fact.

Discover now argues that the claim against it should be dismissed because its arbitration provision permits cardholders to opt out within 30 days. The plaintiffs have responded that the opt out provision is inadequate because it places too high of a burden on cardholders. The court is currently considering Discover’s motion. Ross v. Bank of America, N.A., 524 F.3d 217 (2nd Cir 2008).