According to the Seventh Circuit in Smith v. GC Services Limited Partnership, No. 18-1361 (7th Cir. Oct. 22, 2018), a debt collector should bring a possible arbitration agreement to the court’s attention as early as possible or forever hold its peace. This decision seems to imply that it is general knowledge that most credit card agreements have an arbitration clause and the agreements are available online, so the debt collector should bring a potential arbitration agreement to the court's attention even if the debt collector does not yet have the specific consumer's agreement in hand.

Factual and Procedural Background

The underlying Fair Debt Collection Practices Act (FDCPA) lawsuit stems from GC Services’ (the company) attempt to collect on the plaintiff’s Sam’s Club credit card account. The credit agreement between the creditor and the consumer contained an arbitration clause and a class waiver for all disputes that arise from the account.

In July of 2016, plaintiff filed a class action lawsuit alleging FDCPA violations. The following timeline applies to the litigation procedures in this case:

  • August 2016: The company responded by filing a motion to dismiss the suit under several grounds but did not mention an underlying arbitration agreement.
  • In response, plaintiff amended her complaint, to which the company filed a second motion to dismiss that also did not mention the arbitration agreement.
  • March 2017: While some discovery disputes were ongoing, the company notified plaintiff of the arbitration agreement. Plaintiff refused to arbitrate.
  • April 2017: The company filed an answer to the complaint that did not contain any information about an arbitration agreement.
  • June 2017: The court denied the company's motion to dismiss.
  • August 2017: The company filed its motion to compel arbitration.

The district court denied the company's motion to compel arbitration on two grounds. First, as a non-signatory to the contract, the company could not enforce the arbitration agreement. Second, the company waived its right to arbitrate “by not diligently asserting that right.” The company appealed this decision.


The Decision

The Seventh Circuit punted making a decision about whether a debt collector, as a non-signatory to the underlying credit agreement, can compel the arbitration clause within that agreement. The court stated that it does not need to decide this issue if it ends up affirming the district court’s decision that the right to arbitrate was waived. Because of this, the court first analyzed the waiver issue.

In order to determine whether the company waived its right to arbitrate the matter, the Seventh Circuit reviewed whether they “acted inconsistently with the right to arbitrate.” Some factors to determine this include: whether the party did all it reasonably could to “make the earliest feasible determination” whether to proceed with arbitration; whether the request to arbitrate was substantially delayed; and whether the requesting party participated in discovery.

The company's explanation for the delay was that the actual agreement between the creditor and the consumer was in the creditor's possession, which meant that the company was not aware of the existence of the arbitration clause until it received the agreement from the creditor. The court stated:

The initial suggestion that GC Services—a sophisticated debt collection agency—would be unaware that credit card agreements routinely include arbitration agreements is suspect. Such provisions are commonplace, and GC Services should have investigated whether Smith's contract contained one. What's more, federal regulations require credit card issuers to post their credit card agreements online. See 12 C.F.R. § 1026.58(d). Even if Synchrony Bank was nonresponsive to inquiries, GC Services could have found the agreement through a routine internet search.

The court's decision implies that bringing the arbitration agreement to the plaintiff's attention is not enough -- the court needs to be notified. The court stated that even if the company was not aware of the arbitration agreement until March 2017 (when it brought the agreement to plaintiff's attention), the company’s actions in delaying to bring the agreement to the court’s attention resulted in waiver to compel the agreement. Specifically, the court found that after the request to arbitrate was made to the plaintiff, the company answered the complaint without mentioning the agreement. The company also did not request that the pending motions to dismiss be stayed while the court determine whether the matter should be sent to arbitration -- a decision that would moot the motions.

The court also mentioned that the plaintiff would be prejudiced if the case were to go to arbitration after the delay because the company waited to compel arbitration until after the decision on the motion to dismiss was made.

Taking all of this into account, the Seventh Circuit affirmed the district court's decision that the company waived its right to compel arbitration.