Credit card companies win, consumers lose in Supreme Court’s ruling on binding arbitration

Credit card companies scored a major victory this week after the U.S. Supreme Court ruled that consumers may not sue in court if their credit card contracts stipulate binding arbitration to resolve claims.

Since nearly all credit card agreements contain the binding arbitration clause, the court’s 8-to-1 decision (with Justice Ruth Bader Ginsburg dissenting) in CompuCredit Corp. v. Greenwood will severely limit the recourses available for consumers to settle disputes or bring claims against credit card companies. 

What is binding arbitration?

Arbitration is an alternative method of resolving legal disputes without involving costly and time-consuming court proceedings.

Under arbitration, both sides – the consumer and the company – would present their case and evidence to an arbitrator (a third party), who sets the rules for the process. After examining the evidence and weighing the arguments, the arbitrator would issue a decision and, generally speaking, decisions reached in arbitration are not publicly disclosed.

In a voluntary arbitration, either side may choose to comply with the arbitrator’s decision or pursue other legal options (such as proceeding with a lawsuit in court) to reach a settlement.

In a binding arbitration, however, the arbitrator’s decision is final and cannot be appealed by either side. Furthermore, consumers who consent to binding arbitration also waive their rights to pursue class action lawsuits against the company.

Consumer advocates say the secrecy, seclusion, lack of due process safeguards, and the irreversibility of binding arbitration put consumers at a great disadvantage.

In fact, a 2007 study by Public Citizen, a non-profit consumer advocacy organization, looked at 19,000 binding arbitration cases and found that 94% of them were ruled in favor of corporations.

“The [binding arbitration] method is to isolate and conquer, as the cloak of secrecy makes it impossible to see the full picture of wrongdoing or to use the public courts to stop it,” according to the study.

Background on CompuCredit Corp. v. Wanda Greenwood

In 2008, a class action lawsuit was filed against CompuCredit for allegedly charging high hidden fees to cardholders. The complaint claimed CompuCredit, which markets credit cards to people with weak credit history, enticed customers by suggesting that they can “rebuild poor credit” and “improve credit rating” if they sign up for an Aspire Visa card.

According to the complaint, Aspire Visa cardholders were given a $300 credit limit but were charged $257 in fees even if they did not use the card. The charges included an annual fee of $150, an initial finance fee of $29, and a monthly fee of $6.50. The fees imposed by CompuCredit effectively wiped out the borrowers’ credit limit. In other words, Aspire Visa cardholders were paying CompuCredit $257 a year to borrow $43. The cardholders’ lawsuit contended that CompuCredit knew Aspire Visa card, with the various fees, “would not provide any meaningful assistance whatsoever with regard to rebuilding credit and improving a credit rating.”

Although the credit card agreement stated that any claims against CompuCredit shall be settled through binding arbitration, the complaint argued cardholders can sue CompuCredit in court because the company had violated the Credit Repair Organizations Act (CROA) by failing to provide the necessary written disclosures as required.

Under CROA, credit repair organizations are required to provide consumers with a written disclosure of their rights; these include the right to obtain a copy of their credit reports and to dispute inaccurate information on their credit reports with the credit bureau. (Click here to download a PDF of the CROA disclosure requirements.)

The complaint cited two key provisions in CROA that would void the binding arbitration requirement in the card agreement:

  • “You have a right to sue a credit repair organization that violates the Credit Repair Organization Act. This law prohibits deceptive practices by credit repair organizations.”
  • “Any waiver by any consumer of any protection provided by or any right of the consumer under this subchapter – (1) shall be treated as void; and (2) may not be enforced by any Federal or State court or any other person.”

Both a federal court and the Ninth Circuit Court of Appeals sided with the cardholders and denied CompuCredit’s efforts to force arbitration on the claims.

Supreme Court’s ruling

However, the Supreme Court rejected the cardholder’s argument that CompuCredit’s violation of the CROA gives consumers the right to circumvent arbitration and to sue the company in court.

“The flaw in this argument is its premise: that the disclosure provision provides consumers with a right to bring an action in a court of law. It does not,” according to the majority opinion written by Justice Antonin Scalia. “The only consumer right [CROA] creates is the right to receive the [disclosure] statement.”

The disclosure statement, Scalia wrote, describes the protections afforded to the consumer. One of those protections is the “right to enforce a credit repair organization’s ‘liab[ility]’ for ‘fail[ure] to comply with [the Act].’

But, Scalia pointed out, CROA does not specifically grant consumers the right to sue in court nor does it expressly exclude the use of binding arbitration that the consumers agreed to in their credit card contracts. Thus, the consumer protections under CROA were not specific enough to override the mandate in the Federal Arbitration Act (FAA), which requires the “courts to enforce agreements to arbitrate according to their terms.”

In her dissenting opinion, Justice Ginsburg argued that “Congress enacted the CROA with vulnerable consumers in mind – consumers likely to read the words ‘right to sue’ to mean the right to litigate in court, not the obligation to submit disputes to binding arbitration.”

The court’s decision, Ginsburg wrote, “enables the very deception Congress sought to suppress.”

In her concurring opinion, Justice Sonia Sotomayor pointed out that while the cardholders failed to prove that Congress intended CROA to disallow mandatory arbitration, Congress could amend the law to make it so.

Legislation pending in Congress

Last May, Sen. Al Franken (D-Minn.) introduced the Arbitration Fairness Act of 2011 (S.987), which would make mandatory arbitration involving civil rights, employment, and consumer disputes unenforceable. A public hearing was held by the Senate Judiciary Committee in October. Click here to track the bill’s progress.

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