Ruling Is Blow to Credit Card Holders

In a decision that could hinder class-action cases against credit card companies in California, a state appeals court ruled Tuesday that Discover Bank could put a provision in its cardholder agreements that barred angry customers from filing class-action arbitrations.

“It deprives the consumer of any potential remedy when they have been improperly charged a relatively minor amount,” said Barry L. Kramer, a Los Angeles attorney involved in the case. “It is an incredible encroachment on consumer rights.”

Kramer said he planned to appeal the ruling by the 2nd District Court of Appeal in Los Angeles to the state Supreme Court. Rick Richmond, a partner at Kirkland & Ellis in Los Angeles who represented Discover, declined to comment, saying he couldn’t speak publicly without first conferring with his Chicago-based client.

The case was originally brought by a Los Angeles cardholder named Christopher Boehr, who obtained a credit card from Discover Bank in 1986. In July 1999, Discover Bank added an arbitration clause to its cardholder agreements by sending a change-of-terms flier to all its credit card customers, according to the appellate decision.

The new agreement stipulated that cardholders could pursue complaints against Discover only through individual arbitration cases and specifically prohibited customers from joining a class-action arbitration complaint against the company.

Unlike lawsuits, which are decided by a judge or jury, arbitration cases are submitted to a private arbitrator or panel of arbitrators.

Boehr filed a class-action complaint against Discover in Los Angeles County Superior Court on Aug. 15, 2001, alleging breach of contract and violation of the Delaware Consumer Fraud Act, which governs Discover’s cardholder agreements.

According to Boehr’s suit, Discover’s breach involved not disclosing that cardholders could be charged a $29 late payment fee and interest if their monthly payment came in on the due date but was not processed until after 1 p.m. that day, Kramer said.

For a cardholder to pay arbitration fees to fight such minor charges individually is impractical, he said. “A class action, many times, is the only available remedy,” he added.

The lower court sided with Boehr, ruling that enforcing the class-action waiver would violate fundamental public policy under California law.

However, the appeals court Tuesday reversed that decision and said that California’s public policy regarding class-action waivers is preempted by federal arbitration laws.