BofA Credit Card Fees Don’t Violate Constiution, Ninth Circuit Says

The Ninth Circuit Court ruled Tuesday that Bank of America’s credit card fees do not violate constitutional limits, agreeing with a lower court’s dismissal of a class action lawsuit alleging that the fees were so high they violated federal law.

In an opinion filed Jan. 21, the Ninth Circuit affirmed the district court’s dismissal of the Bank of America credit card fee class action lawsuit for failure to state a claim under the National Bank Act and the Depository Institutions Deregulation and Monetary Control Act by a class of cardholders who challenged the credit card overlimit fees and late fees on constitutional grounds.

The panel said that because the fees were permissible under the NBA and DIDMCA, the district court “did not err in dismissing the complaint.”

The ruling comes nearly a year after lawyers attempted to revive the class action lawsuit, which argued that credit card fees are analogous to punitive damages and that Bank of America violated constitutional limits set in previous cases that found punitive damage should not exceed four times the actual damages. Bank of America cardholders who make a late payment or exceed their credit card balance are charged $39 per infraction — amounts that “vastly exceed the harm that [Bank of America] actually suffer[s],” the cardholders alleged.

The original class action lawsuit was filed against Bank of America in 2000 by Andrew Pinon, who objected to the bank’s flat fees of $39 which had been added to already existing penalties, which totaled 30% or more of the actual balance due.  These fees significantly increased after annual fees on credit cards had been dropped, and annual percentage rates dropped from 18% to 12%.

Pinon alleged that this decrease in finance had caused BofA and other banks to seek other sources of revenue, which led them to increase their penalties and other fees.  In Pinon’s appeal, he alleged that banks collaborated to set the fee, or some kind of “price floor,” for the penalties they charged to late credit card customers.  Pinon’s complaint was eventually consolidated with three similar class action lawsuits, which a California federal court dismissed without prejudice in November 2007.

The case had been dismissed because the court found the penalties not applicable to be classified as punitive damages, and therefore, did not violate the constitution.  The plaintiffs appealed in early 2008, which eventually led to the decision made on Jan. 21.

The Ninth Circuit panel consisted of Judge Stephen Reinhardt,  Judge Dorothy W. Nelson, Judge Milan D. Smith, and they congruently decided that the bank had ultimately not violated constitutional law.  The judges stated that the punitive damages they had set up were immune to the mentioned acts, because the acts did not apply to contractual agreements.

Additionally, the panel said that constitutional due process does not actually prevent the enforcement of excessive penalty clauses in private contracts, such as from banks.  This includes the fees that would be overseen by the NBA and DIDMCA.  This essentially means that because the cardholders and the banks sign private contracts specific to their own person, the acts cannot interfere unless there excessive proof of deliberate excess charges.

Reinhardt did, however, write a note that the U.S. Supreme Court should apply its substantive due process rule to prevent unreasonable financial penalties from hitting consumers when they breach contract.

“The cardholders allege that the penalty fees in this case are purely punitive — the banks are compensated for the lost time value and collection costs associated with any breach by high-penalty interest rates, making the overage charges a form of double-dipping.  But considering that the penalty clauses at issue originate from the parties’ private, albeit adhesive contracts, they are distinct from the jury-determined punitive damages awards,” Circuit Judge Dorothy W. Nelson wrote in the published opinion.

Plaintiffs are represented by Seana Shiffrin of UCLA School of Law; Patrick J. Coughlin, Frank J. Janecek Jr., Elisabeth A. Bowman and Mary Lynne Calkins of Coughlin Stoia Geller Rudman & Robbins LLP; and Tyler R. Meade and Michael L. Schrag of Meade & Schrag LLP.

This Bank of America Credit Card Fees Class Action Lawsuit is Andrew T. Pinon et al. v. Bank of America NA et al., Case No. 08-15218, in the United States Court of Appeals for the Ninth Circuit.