"Arbitration Coalition" Heads Back to Court

Last Friday, the U.S. Court of Appeals in New York breathed new life into a class action lawsuit that has been languishing since 2005. At issue: alleged anti-competitive practices involving mandatory arbitration clauses in credit card agreements.

The lawsuit claims that banking giants Bank of America Corp. Capital One, Discover, Citigroup and Washington Mutual worked together to draft and institute mandatory arbitration clauses, which would ensure that customers that have a dispute with them could not take them to court to resolve their issues – they would have to file claims with an arbitration board instead.

The suit alleges that this "Arbitration Coalition" successfully eliminated all non-arbitration credit cards from the market, and as a result, hurt consumers by limiting their rights. The plaintiffs tried to show that the banks colluded by sharing tips on how to write enforceable agreements and agreeing to impose the same terms in each of their credit card contracts… all of which deprived "the cardholders of meaningful choice in the area of credit card services, and [diminished] the overall quality of credit services offered to consumers."

The case seemed to die in the U.S. District Court for the Southern District of New York when the court ruled that because the plaintiffs could not prove they had suffered actual harm, there was no case.

But the U.S. Court of Appeals in New York agreed that cardholders could have been harmed through a lack of competition and sent the case back to the lower court. After all, if all credit cards require mandatory arbitration, then consumers do not have a choice of using a credit card that does not mandate it – they only have the choice not to use credit cards at all.

While this matter is likely to be debated for a while, it is just one more credit card-related issue that is raising the ire of consumers and capturing the attention of legislators.