Appeals Court Could Overturn Credit Card Dispute Provisions For All Issuers

A case pending in the Fourth Circuit Court of Appeals could upend the enforceability of dispute provisions found in a majority of consumer credit card agreements used by nearly every issuer in the United States today.  The Plaintiff in the Bailey matter asserts that both the arbitration agreement and the class action waiver provisions in her typical credit card contract are not binding agreements because the creditor could modify the terms. The Federal District Court denied the creditor’s motion to arbitrate the case which prompted an interlocutory appeal to the Fourth Circuit Court of Appeals.   

In Bailey, the Plaintiff sued her creditor in Maryland Federal District Court asserting that the creditor should have maintained a Maryland Consumer Lending License.  The creditor filed a motion to compel arbitration in the case and a motion strike Plaintiff’s putative class action allegations, citing the following provision in the credit card agreement with Plaintiff:

"By accepting this Agreement, you agree to this Jury Trial Waiver and Arbitration Clause (“Clause”). This Clause is in question and answer form to make it easier to understand. Even so, this Clause is part of this Agreement and is legally binding. Under this Clause, you waive the right to have any Dispute heard by a judge and jury and you waive the right to participate in a class, representative or private attorney general action regarding any Dispute."

The Plaintiff’s credit card agreement further provided as follows: 

"The rates, fees and terms of this Agreement (including its Jury Trial Waiver and Arbitration Clause), may change and we may add or delete any term. When required by law, we will provide advance written notice of any changes and any right to reject the changes."

The District Court in Bailey summarized the positions of the parties as follows: 

"Plaintiff argues that the Cardholder Agreement’s arbitration provision lacks the consideration necessary to constitute a binding agreement because it is subject to a change-in-terms provision allowing for unilateral modification without advance notice. Defendant argues that the change-in-terms provision does not apply to the arbitration provision because it is located outside the four corners of the arbitration provision."

In denying the Defendant’s request to arbitrate the dispute, the Court in Bailey further wrote:

"According to the Supreme Court of Maryland’s decision in Cheek v. United Healthcare of Mid-Atlantic, Inc., a change-in-terms provision allowing the defendant to modify unilaterally an arbitration provision “[‘]with or without notice’ creates no real promise, and therefore, insufficient consideration to support an enforceable agreement to arbitrate[,]” because it empowers the defendant to revoke the arbitration agreement at any time. Id. at 662. Notice of unilateral changes alone, however, does not constitute adequate consideration without additional limitations." See Bailey v. Mercury Financial

Two Recent Cases Reject Unilateral Attempts to Add Arbitration Clauses in Contrast to Bailey

The District Court’s holding in Bailey that the creditor has the ability to unilaterally change an arbitration clause in a consumer credit card agreement stands in stark contrast to the recent rulings by two other appellate courts striking down attempts by creditors to add an arbitration clause. In Pruett, the Wisconsin Court of Appeals struck down a creditor’s attempt to compel arbitration in the matter premised on an arbitration clause added to the Plaintiff’s credit card agreement after inception, writing:

"As to the first question, we conclude, for the reasons that follow, that WCU's contractual authority to "change the terms of this Agreement" did not authorize it to unilaterally add the Arbitration Clause absent evidence that the Arbitration Clause was the type of change contemplated by the parties at the time of the original Agreement. No evidence has been presented that the Arbitration Clause involved terms that were previously in the Agreement or were contemplated by the parties at its inception. Therefore, WCU did not have the contractual authority under the change-of-terms provision to unilaterally add the Arbitration Clause, and the Arbitration Clause is not a part of WCU's contract with Pruett."  Pruett v. WESTCONSIN CREDIT UNION, Wisconsin Court of Appeals, 3rd Dist. (October 24, 2023)"

Further, the Indiana Supreme Court recently concluded that an arbitration provision added to a consumer credit card contract after inception of the agreement was unenforceable, writing: 

"Here, IUCU explicitly notified Land that the failure to opt out of the arbitration Addendum within 30 days of receiving notice would bind her to the Addendum. But the "mere fact that an offeror states that silence will constitute acceptance does not deprive the offeree of his privilege to remain silent without accepting." Id. § 69 cmt. c. Instead, IUCU must show that Land "in remaining silent and inactive intend[ed] to accept the offer." See id. § 69(1)(b). Under the Restatement, the "case for acceptance is strongest" when the offeree's "reliance is definite and substantial" or when the offeree's "intent to accept is objectively manifested though not communicated to the offeror." Id. § 69 cmt. c. Even assuming Land was aware of the offer to arbitrate (which she disputes), there's no evidence of her "definite and substantial" reliance on the proposed arbitration Addendum. See id. In fact, by filing a class-action complaint with the trial court, Land's actions point in the opposite direction."  Land v. IU Credit Union, No. 23S-CP-115 (Ind. Oct. 24, 2023)

These three recent cases demonstrate that the “change of terms” provisions in consumer credit card contracts remain open to widely varying interpretations by the Courts, especially when read in connection with arbitration provisions and class action waivers.   

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