Banks Narrowly Defeat Credit Card Arbitration Class Action Lawsuit

American Express Co., Citigroup Inc., Discover Bank and other major banks eked out a legal victory Thursday when a New York federal judge ruled that consumers could not prove that the credit card issuers collusively adopted arbitration clauses barring consumers from filing class action lawsuits in violation of the Sherman Act.

The class action lawsuits, which accused the credit card issuers of conspiring to introduce arbitration clauses that prevent consumers from seeking legal remedies through the courts, were originally filed by plaintiff Robert Ross. They were eventually consolidated for a bench trial.

Ross alleges that legal representatives from AmEx created a team to study the arbitration issue and proposed that the credit card issuer establish a mandatory arbitration clause in its cardmember agreements that would bar consumers from filing class action lawsuits. These arbitration clauses were introduced to AmEx cardholders in 1999.

According to the class action lawsuits, major industries began exploring the prospect of using arbitration as a dispute resolution tool that could avoid the court system beginning in the late 1990s. Industry leaders saw arbitration as a useful tool to avoid “class action mania.”

The class action lawsuits allege that executives from the major credit card companies, including AmEx, Citi and Discover, attended a meeting and discussed the benefits of introducing arbitration clauses that barred class action lawsuits. Eventually, the credit card issuers allegedly developed an “Arbitration Coalition,” which consisted of their in-house counsel. Following the creation of the Arbitration Coalition, other credit card issuers began following AmEx’s lead and began introducing arbitration clauses that prohibited consumers from filing class action lawsuits.

AmEx sought to dismiss the class action lawsuits, arguing that the plaintiffs did not have standing to sue because they were not injured by the alleged arbitration clause conspiracy. U.S. District Judge William H. Pauley III found that the plaintiffs did have standing to file the class action lawsuit and that they had been injured by the alleged conspiracy. However, it was less clear that their injuries were related to the conspiracy allegations.

Judge Pauley referred to the vast amount of evidence presented at trial, finding that the plaintiffs had met their burden to prove they had been injured by the arbitration clauses, as they infringed on their right to take legal action against the card issuers. However, the judge found that the plaintiffs could not meet the burden of proof to show that the implementation and maintenance of arbitration clauses was the product of collusion. Specifically, he found that the plaintiffs failed to meet the burden to show that the banks’ “parallel action” sufficiently demonstrated that they engaged in an illegal conspiracy.

“A motive to conspire, however, does not mean that a conspiracy existed,” Judge Pauley wrote. “While the collusive adoption and maintenance of arbitration clauses would have entrenched arbitration as an industry standard, this Court is convinced that the evidence is just as consistent with legitimate activity in furtherance of the issuing banks’ independent self interests.”

However, Judge Pauley warned that these antitrust class action lawsuits “offer a cautionary lesson to all lawyers who labor under inexorable pressure to generate new business. When outside counsel convene meetings of competitors in the hope of propelling themselves to the forefront of an emerging trend—in this case, class-action-barring consumer arbitration agreements—they do so at their own peril.”

Judge Pauley noted that only two banks had arbitration clauses barring class action lawsuits when the Arbitration Coalition first convened. “By the time the last meeting concluded, all 10 of the issuing banks, accounting for approximately 87 percent of all credit card transactions in the United States, had adopted class-action-barring arbitration clauses in their card member agreements,” he wrote. “It was only by a slender reed that Plaintiffs failed to demonstrate that the lawyers who organized these meetings had spawned a Sherman Act conspiracy among their clients.”

The plaintiffs are represented by Merrill G. Davidoff, Charles P. Goodwin and David A. Langer of Berger & Montague PC and Christopher M. Burke of Scott & Scott LLP.

The Credit Card Arbitration Conspiracy Class Action Lawsuits are Ross, et al. v. Bank of America NA, et al., Case No. 1:05-cv-07116 and Ross, et al. v. American Express Co., et al., Case No. 1:01-md-01409, in the U.S. District Court for the Southern District of New York.