Arbitration Provisions in Credit Card Agreements and in Related Litigation

ARBITRATION AGREEMENTS IN CREDIT CARD DISPUTES 

Which credit card issuers have contracts with arbitration clauses? 

All but a few of the major issuers of credit cards draft cardmember or account agreements with arbitration clauses. Typically, they take up several paragraphs and have their own subheadings.

If a credit card agreement has a table of contents (such as a typical CARDMEMBER AGREEMENT of Discover Bank), "Arbitration of Dispute" or "Dispute Resolution" will be one of the items on it, with a reference to the corresponding page on which the relevant paragraphs are located. Typically, the arbitration agreement extends over several paragraphs, which makes the terms arbitration "clause" technically incorrect.

Sometimes, the arbitration agreement is a separate document that is referenced by the card member agreement. Capital One Customer Agreements pre-dating 2010, for example, consist of two pages, with the last paragraph on the second page referring to an arbitration agreement and incorporating it by reference. The arbitration agreement itself consist of a single page of fine print.

When Capital One sues, it typically produces both documents. Agreements from 2010 and later, however, will likely not contain any arbitration provisions, and do not reference any in the form of a separate document either. For older accounts, this raises an intriguing issue: Can a new version of a cardmember agreement that omits any reference to arbitration eliminate an arbitration agreement that was part and parcel of the prior agreement, the one that was in effect when the superseding one was issued?  

Stand-alone arbitration agreements 

The reason some creditors have separate arbitration agreements may be the absence of an arbitration clause in the original cardmember agreement. Some accounts may have been established long before the insertion of arbitration clauses into cardmember agreements became widespread industry practice.

Credit card banks may, of course, change the terms of the account agreements. They do so with change of terms notices, and sometimes such a notice is utilized to add arbitration clauses to existing agreements.

But a stand-alone arbitration agreement must be supported by consideration different from the existing agreement. Therefore, such stand-alone agreements must be reciprocal, i.e. subject both parties to mandatory arbitration if one party elects to arbitrate.

In rare cases, a consumer may even have elected to reject arbitration if they were given that option at the time the bank announced its plan to add arbitration provisions to the terms of accounts held by existing customers. See-- > Opt-out from arbitration.

Many Discover Bank Cardmember Agreements, for example, contain language in the first paragraph of the cover page informing the card holder of the right to reject arbitration, and the procedure for doing so. Change of terms notices from Citibank have similar opt-out provisions.

Credit card issuers that eschew arbitration clauses 

One major card issuer whose credit card agreements are silent on arbitration is Target National Bank. It files its own lawsuits on defaulted account (some of which were originated by Retailers National Bank, a predecessor).

In such suits, arbitration is not an issue, because the right to arbitrate is a creature of contract, and as such requires an underlying arbitration agreement.

BLOG POSTS ON RELATED TOPICS:

Benefits and Drawbacks of arbitration of debt claims as opposed to litigation
Arbitration Clause as a defense in a credit card collection suit
Waiver of the Right to Arbitrate in credit card suit
Motion to Compel Arbitration and Motion to Abate the Lawsuit Pending Arbitration
Implications of Seeking Order to Compel Arbitration in a credit card debt suit
Motion to Dismiss based on Arbitration Clause vs Motion to Abate
Interlocutory appeal of order denying arbitration in the trial court
Judicial confirmation of arbitration award
Motion or suit to set aside arbitration award

EXAMPLES OF ARBITRATION AGREEMENTS EMBEDDED WITHIN CARD AGREEMENTS: 

US Bank NA ND: North Dakota Arbitration clauses from 2008 Agreement 

Wells Fargo Bank N.A. Arb provisions in customer agreement 

WAIVER OF RIGHT TO ARBITRATION IN A CREDIT CARD CASE 

Like any other contract right, the right to arbitrate under a valid arbitration agreement may be waived. It happens routinely, even though arbitration offers certain benefits over litigation. Typically, waiver does not result from a conscious tactical choice, not to mention an express statement in a pleading.

For the plaintiff, the decision to file suit constitutes a choice in favor of litigation rather than arbitration, which makes it likely that the plaintiff would oppose litigation if the defendant wanted to go that route.

But most defendants do not make an issue of arbitration. They waive the right to arbitrate that they may possess, by failing to take any action to enforce it. This can be done in a number of ways: By asserting the existence of an arbitration clause as an affirmative defense; by filing a motion to dismiss based on arbitrability of the claim, or by filing a motion to compel arbitration.

Each option is the subject of a separate blog post.

Arbitration as a Defense in Credit Card Debt Suit & Waiver of Right to Enforce Arb Clause

ARBITRATION CLAUSE AS A DEFENSE 

Merely asserting arbitration (or arbitrability) as a defense in the defendant's original answer - rather than filing a motion for an order to compel arbitration -- does not require the court to do anything with respect to arbitration; including putting the case on hold (abatement).

It follows that the right to arbitrate, if any, may still be lost if the defendant does not take any further action with respect to arbitration, and instead embraces litigation. Under the existing case law it is not entirely clear at what point a party that has the right to arbitrate loses that right.

On the topic of waiver, the Texas Supreme Court has announced a “totality of the circumstances” test that is really not a standard at all, because it allows for the consideration of numerous factors and provides little or no guidance as to how to weigh their relative importance.

Suffice it to say that the more eagerly the defendant litigates, without taking action to enforce the arbitration clause, the more likely the right to arbitrate will be forfeited under the doctrine of waiver.

The starkest scenario is for the defendant to wait until after trial or an adverse summary judgment has been rendered, and then raise the issue after suffering defeat.

In Devine v. American Express Centurion Bank, the debtor (who now sits on the Texas Supreme Court), did just that. He lost in the trial court, and then argued on appeal that his right to arbitrate should have been respected. Too late, said the Ninth Court of Appeals (Beaumont), and reversed only the award of attorney’s fees. Devine had filed a counter-affidavit on the matter of amount and reasonableness of the Plaintiff’s fees, which created a fact issue unsuitable for resolution by summary judgment. But it affirmed the trial court’s judgment on Amex’s principal claim.

RELATED POSTS:

Debt collections lawsuits by American Express

Attorneys' fees and fee affidavits in debt suits
 

Motion to Dismiss Credit Card Debt Suit Based on Arbitration Clause

MOTION TO DISMISS BASED ON PRESENCE OF ARBITRATION CLAUSE IN THE BANK'S CMA 

Instead of moving for an order compelling arbitration, and thereby triggering the requirement to prove the underlying contract that contains it, the Defendant could instead seek dismissal of the litigation, albeit without prejudice to it being brought as an arbitration claim, by invoking the arbitration clause in the agreement produced by Plaintiff in response to a request for production, or attached by the Plaintiff as an exhibit to its motion for traditional summary judgment.

The argument would go like this:

On such and such date Plaintiff produced an account agreement titled Cardmember Agreement and designated CMA18103 or whatever. The proffered agreement contains arbitration provisions. Plaintiff had the obligation to fully respond to Defendant’s request for production regarding the contractual foundation of its claim, and was required to produce all material contract documents . The document produced by Plaintiff establishes conclusively that it relies on a contract that subject the claim asserted in this lawsuit to mandatory arbitration, upon election of either party. The document is admissible against Plaintiff because Plaintiff produced it in discovery. 

 …. or … 

By moving for summary judgment with CMA 37964 Plaintiff represents to the court, and thus judicially admits, that the contract upon which it relies subjects its claim to mandatory arbitration because said version of a Cardmember Agreement contains an arbitration clause to that effect.  
Defendant hereby elects arbitration and requests that the Court dismiss this suit because no issue remains that does not fall within the scope of the arbitration clause, and is therefore a proper subject of litigation and judicial determination, as opposed to arbitration.

ABATEMENT VS. DISMISSAL 

The conventional manner to deal with arbitration in the context of a lawsuit that is already on file is to request an abatement contemporaneously with a motion to compel.

Abatement, however, does not end the lawsuit, and will likely allow either party to revive the lawsuit for the sole purpose of securing judicial confirmation of an arbitration award. If the defendant prevails in arbitration, there would be no need for judicial confirmation. The option to quickly return to court for confirmation of the award would only serve the interests of the creditor. Such confirmation would allow it invoke the remedies available for enforcement of a judgment, which are not available in the case of an arbitration award, standing by itself.

A dismissal, by contrast, would end the lawsuit. At the minimum, it would look better on the defendant’s public record, because a dismissal would not be an adjudication of the merits of either party claim or defense.

Because the court would not have reached the merits of the plaintiff’s claim, the dismissal would not be with prejudice, and would not entail res judicata or collateral estoppel effect (at least not on any issue other than arbitrability of the claim).

Assuming a dismissal without prejudice suits the defendant better than an abatement (which implies pendency), the Defendant would still have to persuade the judge to sign an order closing the case, rather than merely abating it.

Luckily, there is federal caselaw in support of dismissal being the proper disposition rather than merely abatement, at least under the Federal  Arbitration Act (FAA), to which most credit card agreements, if not all, make express reference.

Federal Arbitration Act (FAA) and credit card debt suits

THE FEDERAL ARBITRATION ACT (FAA) 

Most credit card agreements contain arbitration clauses, which typically provide that any qualifying claim, i.e. one that falls within the scope of the arbitration clause, is governed by the Federal Arbitration Act.

Texas has its own arbitration statute, the Texas Arbitration Act (TAA), sometimes referred to as Texas General Arbitration Act (TGAA). It is a version of the Uniform Arbitration Act and is codified in the Civil Practice and Remedies Code. To the extent there is conflict between the two, the FAA trumps the TAA under the doctrine of federal preemption.

TEXAS ARBITRATION ACT RARELY RELEVANT TO CREDITOR-DEBTOR DISPUTES IN TEXAS

The Texas counterpart to the FAA rarely comes into play, however, because most credit card agreements not only expressly reference the FAA, but additionally have a choice of law provision that specifies that the law of another state as applicable to the agreement to the extent federal law does not control. So, if the arbitration agreement does not expressly invoke the FAA, the arbitration statute of the choice-of-law state would apply instead; and that will rarely be Texas.

That said, the choice of law issue can be waived, just like the right to arbitrate is often waived. If neither party insists on application of the law specified in the choice of law and/or arbitration provision of the card agreement, Texas law may be applied simply by default, or the court will assume that the law of the applicable jurisdiction is no different than Texas law. The courts of appeals bless this approach even if the trial judge is aware of the presence of the choice of law clause in the relevant contract.  See -- > Choice of law; Presumption that other’s state’s law does not differ.

It is the courts that determine whether a claim is subject to arbitration because it is considered a “gateway” issue. When the court answers that question in the affirmative, all other issues are decided by the arbiter or by the arbitration panel, unless the parties agree to have them resolved by litigation, and thus waive the right to arbitrated in lieu of litigating.

SIGNED ARBITRATION AGREEMENT NOT REQUIRED UNDER FAA 

The Federal Arbitration Act does not require that an arbitration agreement be signed, so long as the agreement is written and agreed to by the parties.  Because arbitration agreements governing credit cards are either embedded in the cardmember agreement or incorporated into them by reference, they are subject to the same proof requirements regarding contract-formation without signature.