Tuesday, October 6, 2009

Cicle v. Chase Bank USA

Opinion handed down October 6, 2009[1]
Link to 8th Circuit Opinion

The Court of Appeals for the Eighth Circuit ruled that a consumer credit card agreement’s provisions barring participation in a class-action lawsuit and compelling arbitration for any subsequent dispute were not unconscionable.

I. Facts and Holding

In April 2002, Virginia Cicle, a Missouri resident, opened a credit card account with Chase Bank USA. [2] She received the credit card in the mail, along with a credit card agreement.[3] The credit card agreement contained provisions barring Cicle from participating in a class-action lawsuit and requiring that any dispute be submitted to binding arbitration.[4] From January 1, 2004, through April 1, 2004, Chase Bank applied a 7.99% annual percentage rate (APR) on Cicle’s unpaid balance.[5] In May 2004, Cicle’s APR significantly increased to 25.99%.[6] In response to an inquiry from Cicle about the increase in her APR, Chase Bank informed Cicle that her APR increased because a credit agency had reported that she was past due on an unrelated loan or account.[7] As a result, she paid approximately $80 in higher finance charges.[8] Cicle contended that she received no notice of the increase.[9]

In 2007, Cicle filed a class-action lawsuit in Missouri state court alleging that Chase Bank imposed illegal penalties and committed an unfair merchandising practice under the Missouri Merchandising Practices Act (MMPA).[10] Chase Bank removed the case to federal court as provided for under the Class Action Fairness Act of 2005 on the basis of diversity jurisdiction and federal question jurisdiction under the National Bank Act.[11] Chase Bank then moved to stay the litigation and compel arbitration pursuant to the credit card agreement.[12]

The United States District Court for the Western District of Missouri ruled that the credit card agreement was both procedurally and substantively unconscionable.[13] The district court determined that Missouri law would apply to the lawsuit despite a choice of law provision in the credit card agreement applying Delaware law.[14] Missouri law applied in the case because enforcing the credit card agreement under Delaware law would be contrary to a fundamental policy of Missouri allowing class-action lawsuits under the MMPA.[15] In effect, the district court determined in a circular analysis that if the contract was unconscionable under Missouri law Missouri law applied. Conversely, if the contract was not unconscionable under Missouri law, Delaware law applied.[16]

Under Missouri law, the district court held that the credit card agreement was both procedurally and substantively unconscionable.[17] The agreement was procedurally unconscionable because it discouraged careful consideration of the contract terms.[18] The agreement discouraged careful consideration because there was no opportunity for negotiation, it did not require a signature for acceptance, and it was in fine print.[19] The agreement was substantively unconscionable because the class-action waiver eliminated the opportunity for redress given the small individual damages at issue.[20] The cost-sharing provisions of the agreement, whereby Chase would be responsible for certain arbitration administrative fees and a costumer could recover his or her legal expenses, and have the option of bringing a small claims action, were not sufficient to overcome the detriment of being barred a class action remedy.[21] Chase’s responsibility for certain administrative fees constituted only a fraction of the fees’ total cost.[22] Further, proving fraudulent actions would require significant resources, making it unlikely that an attorney would undertake an individual action despite the possibility of recovering attorneys fees and making the success of a small claims action unlikely.[23] The District Court then addressed the effects of the severability clause of the credit card agreement.[24] The class-action waiver was not essential to the terms of the agreement and was therefore severable.[25] The cost-sharing provision was not severable from the arbitration provision, given that its severability would be detrimental to the consumer, and the court implicitly reasoned that the arbitration provision was essential to the agreement.[26] Because of the unfairness of the cost sharing structure, the district court provided Chase Bank with a unique opportunity: it would grant Chase Bank’s motion to compel arbitration if Chase Bank agreed to pay all costs and fees associated with the arbitration.[27] Chase Bank declined, and the district court denied its motion.[27] The Court of Appeals for the Eighth Circuit took up the decision on appeal and reversed.[28]

II. Legal Background

The Eighth Circuit ruled that the credit card agreement provisions barring Virginia Cicile from participating in a class action and generally requiring arbitration were not unconscionable.[29] As the issue of whether a contract is unconscionable is an issue of law, the court reviewed the issue de novo.[30]

A. Choice of Law

When reviewing the opinion of the district court, the Eighth Circuit first touched on the issue of whether Missouri or Delaware law should apply in the case.[31] Initially, the court declined to decide whether Missouri law would recognize the contract’s choice of law provision.[32] The court reasoned that, since even Missouri law would not find the contract unconscionable, the court need not decide the choice of law issue.[33] However, the Eighth Circuit determined later in its opinion that the district court’s decision that the contract was contrary to Missouri’s fundamental policy was incorrect.[34] As such, the court was able to address the issue of whether Missouri law would find the arbitration and class-action provisions unconscionable, while also ruling against the district court’s determination that Missouri law should apply.

B. Procedural Unconscionability

The Eighth Circuit next addressed the broad issue of procedural unconscionability. The court first attacked the argument that the terms of the agreement were in fine print because both the arbitration agreement and the class-action waiver were introduced by a boldface heading and a paragraph in all-uppercase font.[35] The court then attacked the argument that consumers do not have an opportunity to negotiate and that the contract is one of unfair adhesion. The court noted that, if there was any change in the contract, consumers had the ability to reject the changes and cancel the account within thirty days.[36] The court recognized “Chase’s superior bargaining position and the lack of opportunity in the ordinary course of negation between consumer and bank in the application for a credit card.”[37] The court, however, noted that “there is no evidence that Chase engaged in ‘high pressure sales tactics to coerce.’”[38] The court reasoned further that “[b]ecause the bulk of contracts signed in this country are form contracts-‘a natural concomitant of our mass production-mass consumer society’- any rule automatically invalidating adhesion contracts would be ‘completely unworkable.’”[39]

C. Class-Action Waiver

The Eighth Circuit then went on to address the more specific issue of whether the class-action waiver provision was unconscionable. The court rejected the district court’s determination that waiver would eliminate redress because the amounts in question were small.[40] The court noted that the agreement provided an exception to the arbitration clause for the cardholder to pursue minor claims in a small claims court, “an inexpensive, quick, and easy adjudication.”[41] As indicated earlier, the court also determined that the class-action waiver provision did not violate a fundamental policy of Missouri.[42] The court reasoned that the MMPA allows for class action but does not suggest Missouri public policy favors class actions over individual suits.[43] Further, the waiver did not limit Chase Bank’s liabilities or Cicle’s remedies under the MMPA, where Cicle may be awarded punitive damages, attorneys fees and equitable relief.[44] As such, the class-action waiver provision was not unconscionable and should not have been severed from the contract.[45]

D. Arbitration

The Eighth Circuit lastly addressed whether the contract provision compelling arbitration was unconscionable. As with the class-action waiver provision, the court rejected the determination that card holders must risk substantial costs.[46] The court noted that under the agreement Chase Bank would reimburse card holders up to $500 for the initial arbitration filing fee and would pay the arbitrator’s and arbitration administrator’s fees for two days of hearings.[47] Further, Chase Bank would reimburse filling fees or other fees if the arbitrator or arbitration administrator determines that there was good reason to do so.[48] The court further reasoned that Cicle had not made the requisite showing that it would be prohibitively expensive for her to pursue arbitration.[49] While Cicle did make a showing that it would be expensive to carry out a class action, she did not make a showing that it would be expensive for her to pursue an individual claim in arbitration.[50] As such, any ruling on the issue of unconscionability would be speculative.[51]

III. Commentary

In Cicle v. Chase Bank USA, the Eighth Circuit sought to strongly convey that credit card form agreements containing class-action waivers and arbitration provisions are not unconscionable. The court determined Missouri law did not apply but went on to apply Missouri law in order to push back against the district court’s strong opinion. In its ruling the Eighth Circuit was effectuating the broad policy objectives of the Federal Arbitration Act that expressed favorability toward arbitration agreements and was intended “to over-come judicial hostility to arbitration agreements.”[52]

Glaringly left unaddressed by the Eighth Circuit and the district court decisions is the central criticism leveled against credit card arbitration agreements- that the fee structure between the credit card companies and the arbitration associations and firms makes equitable resolution for disputes at best unlikely and at worst impossible. The district court most likely did not address this criticism because of the broad policy objectives of the Federal Arbitration Act and sought to undermine credit card arbitration indirectly. The criticism about structural unfairness was highlighted by the Federal Arbitration Forum’s decision in July to discontinue its resolution of such disputes over bias.[53] Up to that point in time, the Federal Arbitration Forum was the largest arbitration firm involved in delinquent credit card disputes.[54] It may be argued that the Forum’s decision will improve the legitimacy of credit card arbitration. More likely, however, is that the Forum’s action will focus attention on other firms in the industry and the structural bias issue by the courts. The issue is also likely to be brought into increasing focus by the political process, where attention has centered on the extreme private indebtedness of American consumers that threatens the larger economy. As has been highlighted, a central aspect of this private indebtedness is the astronomical credit card debt of American consumers that has in part been blamed on the alleged predatory practices of credit card companies.

- Sean Alan Smith

[1] Cicle v. Chase Bank USA, 583 F.3d 549 (8th Cir. 2009).
[2] Id. at 551.
[3] Id.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Cicle v. Chase Bank USA, No. 07-04103-CV-C-NKL, pp. 7-16 (W.D. Mo. Dec. 21, 2007).
[14] Id. at 16.
[15] Id.
[16] Id.
[17] Id. at 7-16.
[18] Id. at 8.
[19] Id. at 7.
[20] Id. at 9-10.
[21] Id. at 10-16.
[22] Id. at 14-15.
[23] Id. at 11-14.
[24] Id. at 16-18.
[25] Id. at 17.
[26] Id.
[27] Id. at 17-18.
[28] Cicle v. Chase Bank USA, 583 F.3d 549, 556 (8th Cir. 2009).
[29] Id.
[30] Id at 553.
[31] Id.
[32] Id.
[33] Id. 553.
[34] Id. at 555-56.
[35] Id. at 554.
[36] Id. at 555.
[37] Id.
[38] Id.
[39] Id. (citing Swain v. Auto Servs., Inc., 128 S.W.3d 103, 107 (Mo. Ct. App. 2003)).
[40] Id.
[41] Id.
[42] Id. at 556.
[43] Id.
[44] Id.
[45] Id.
[46] Id.
[47] Id.
[48] Id.
[49] Id. at 556-57.
[50] Id. at 557.
[51] Id.
[52] Id. at 553.
[53] Dan Beucke, Big Arbitration Firm Pulls Out of Credit Card Business, Businessweek, July 9, 2009, available at http://www.businessweek.com/investing/wall_street_news_blog/archives/2009/07/big_arbitration.html.
[54] Id.