Unconscionability Challenge to Class Action Waiver in Cardmember Agreement Governing Credit Card was Properly Determined by District Court, not Arbitrator, so District Court did not Err in Granting Bank’s Motion in Putative Class Action to Compel Plaintiffs to Arbitrate Individual Claims Third Circuit Holds
Plaintiffs filed a putative class action against Chase Bank alleging that the Bank improperly increased the interest rates on their credit card account balances, and that it did so retroactively. Puleo v. Chase Bank USA, N.A., ___ F.3d ___ (3d Cir. May 10, 2010) [Slip Opn., at 1, 4]. The class action was filed in Pennsylvania state court, but removed to federal court on grounds on diversity. _Id._, at 6-7. According to the allegations underlying the class action complaint, the Bank retroactively increased the interest rate on one plaintiff’s account from 4.99% to 29.99%, and on another plaintiff’s account from 14.74% to 25.99%. _Id._, at 4. Defense attorneys argued that the terms of the Cardmember Agreements permitted the challenged interest rate increases, and that the interest rate increases did not violate state or federal laws. _Id._ However, the propriety of the increases is not relevant to the appeal. Rather, the appeal focused on the arbitration clause in the Cardmember Agreement, which prohibits class actions. _Id._, at 3. Plaintiffs filed the putative class action in state court, and Chase removed the action to federal court and moved the district court to compel plaintiffs to arbitrate their claims on an individual basis because of the class action waiver in the Cardmember Agreement, _id._ Plaintiffs countered that the class action waiver was unconscionable, and that the question of its enforceability should be decided by the arbitrator instead of the court. _Id._ The district court disagreed, “concluding, first, that [plaintiffs’] challenge to the enforceability of the class action waiver was a question of arbitrability for the court to decide, and, second, that the entirety of the Arbitration Agreement was enforceable.” _Id._ On appeal, plaintiffs argued only that the district court erred in ruling on the issue of the unconscionability of the class action waiver, _id._ In a 6-4 decision, the Third Circuit concluded that the district court properly determined the enforceability of the class action arbitration wavier and affirmed. _Id._
The Cardmember Agreement required credit card account customers to arbitrate any disputes with Chase on an individual basis. Puleo, at 5-6 (see NOTE, below). “Despite the express ban on class actions, [plaintiffs] initially brought this case as a putative class action in Pennsylvania state court on behalf of themselves and other similarly situated Chase credit card holders in Pennsylvania.” Id., at 6 (footnote omitted). As noted above, defense attorneys removed the putative class action to federal court, and the district court granted a defense motion to compel plaintiffs to arbitrate their claims on an individual basis, upholding the enforceability of the class action waiver. Id., at 7-8. The Third Circuit began its analysis by noting that “Congress enacted the Federal Arbitration Act (‘FAA’) ‘to reverse the longstanding judicial hostility to arbitration agreements . . . and to place arbitration agreements upon the same footing as other contracts.’” Id., at 9 (citations omitted). And with respect to the specific issue presented by the appeal, the Circuit Court noted that Supreme Court authority holds that “[t]he question whether the parties have submitted a particular dispute to arbitration, i.e., the question of arbitrability, is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise.” Id., at 9-10 (citation omitted).
The Third Circuit had no difficulty in affirming the actions of the district court because “the well-settled general rule is that when a contractual party challenges the validity of an arbitration agreement by contending that one or more of its terms is unconscionable and unenforceable, a question of arbitrability is presented.” Puleo, at 15. The Circuit Court agreed with Chase that “a party’s unconscionability challenge to the enforcement of one or more terms of an arbitration agreement presents a gateway matter for judicial determination.” Id. (citations omitted). Accordingly, the Third Circuit held that plaintiffs’ challenge to the class action waiver “presents a question of arbitrability that the District Court appropriately addressed,” and it therefore affirmed the district court order compelling plaintiffs “to arbitrate their claims on an individual basis.” Id., at 31.
NOTE: In pertinent part, the class action waiver in the Cardmember Agreement provided:
YOU WILL NOT BE ABLE TO BRING A CLASS ACTION OR OTHER REPRESENTATIVE ACTION IN COURT . . . , NOR WILL YOU BE ABLE TO BRING ANY CLAIM IN ARBITRATION AS A CLASS ACTION OR OTHER REPRESENTATIVE ACTION. YOU WILL NOT BE ABLE TO BE PART OF ANY CLASS ACTION OR OTHER REPRESENTATIVE ACTION BROUGHT BY ANYONE ELSE, OR BE REPRESENTED IN A CLASS ACTION OR OTHER REPRESENTATIVE ACTION.
. . .
Neither you nor we agree to any arbitration on a class or representative basis, and the arbitrator shall have no authority to proceed on such basis. This means that even if a class action lawsuit or other representative action, such as that in the form of a private attorney general action, is filed, any Claim between us related to the issues raised in such lawsuits will be subject to an individual arbitration claim if either you or we so elect.
Puleo, at 5-6.
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