Supreme Court: Credit-Card Agreements May Require Arbitration of Unfair Lending Practice Disputes

Supreme Court: Credit-Card Agreements May Require Arbitration of Unfair Lending Practice Disputes

by Nicholas Turner

Earlier this year the Supreme Court ruled 8-1 to reverse a decision from the Ninth Circuit and enforce a provision in a credit-card agreement requiring plaintiffs to arbitrate claims over unfair lending practices. The decision in CompuCredit Corp. v. Greenwood [an enhanced version of this opinion is available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law]  is the latest Supreme Court case to limit plaintiffs' rights under the Federal Arbitration Act of 1925 following its decision last year in AT&T v. Concepcion.

The plaintiffs filed a class-action suit in the Northern District of California against CompuCredit under the Credit Repair Organization Act (the CROA). The CROA applies to credit card companies that cater to low-income people and promise customers a way to build credit history and improve credit scores. Plaintiffs alleged that CompuCredit provided misleading promotional materials and charged hidden fees that totaled more than $250 on average on an initial credit line of $300 in the first year alone.

CompuCredit moved to dismiss the complaint and class certification and enforce a mandatory arbitration clause contained in the customer credit agreement. The District Court rejected the motion, and the Ninth Circuit affirmed, holding that §1679c(a) of the CROA gave plaintiffs "a right to sue" in court in order to enforce the Act's provisions.  Section 1679c(a) requires companies to include a disclosure in customer agreements stating that: "You have a right to sue a credit repair organization that violates the [CROA]."  Moreover, §1679f  invalidated "[a]ny waiver by any consumer of any protection provided by or any right of the consumer under" the Act, thereby making the arbitration clause unenforceable.

The Supreme Court's majority voted to reverse the lower courts' decisions, holding that §1679c(a) did not give the plaintiffs a substantive right to sue, but only the right to "receive the statement" contained in §1679c(a). Therefore, §1679f  did not incorporate the right to sue and did not make the arbitration clause unenforceable.

Additionally, the majority held that other sections of the Act did not give plaintiffs an express right to sue in court because it left the parties free to choose their own forum. Therefore, plaintiffs who sign arbitration agreements must begin their cases there, and may only resort to traditional courts if necessary to enforce or review awards. 

The majority came to its conclusion in light of the strong presumption in favor of arbitration clauses given by the Federal Arbitration Act of 1925 (FAA). The Court acknowledged that the disclosure contained in §1679c(a) of the CROA was "imprecise," but reasoned that Congress would have specifically invalidated mandatory arbitration clauses in the CROA, if it had intended to do so.

Justice Ginsberg in her dissent argued that §1679c(a) should be read to give plaintiffs the right to sue in court in keeping with the section's plain meaning because "Congress' target audience in the CROA is not composed of lawyers and judges accustomed to nuanced reading of statutory texts, but laypersons who receive a disclosure statement in the mail." Since "a right to sue" typically implies the right to sue in court- not arbitration-consumers should not be able to waive that right, per §1679f. Ginsberg concluded that the majority's decision would allow companies "to deny consumers, through fine print in a contract, an important right" contained in the CROA.

The outcome in CompuCredit only increases the disadvantage given to plaintiffs under the Court's holding in Concepion, which undermined state laws protecting consumers against class-action waivers in arbitration clauses. Taken together, the decisions allow credit companies to deny plaintiffs-particularly low-income ones-the benefit of class-action status, while forcing their claims into the forum that is most favorable to the companies.

Related: Why we need the Arbitration Fairness Act now

Read more articles by the attorneys of Abbey Spanier LLP

For more information about LexisNexis products and solutions connect with us through our corporate site.