Cardholders say companies colluded to require arbitration.

Eight credit and charge card companies conspired to impose mandatory arbitration clauses on cardholders, according to a case filed in federal court in August. The clauses, which also ban class actions, let companies skirt consumer protection and antitrust laws meant to prevent corporate misconduct, and they should be declared void, plaintiffs say. (Ross v. Bank of Am., No.O5 CV7116 (S.D.N.Y. filed Aug. 11, 2005).)

The defendants--Bank of America, J.P. Morgan Chase (including Chase, Bank One, and First USA), Capital One, Citibank/Diners Club, Discover, Household, MBNA, and Providian--control more than 86 percent of the general-purpose card market along with named coconspirators American Express and Wells Fargo, according to the complaint. (Credit cards allow consumers to delay paying for their purchases by paying a finance charge; charge-card purchases must be paid off every month.)

Because arbitration clauses are widespread, consumers have little choice but to use a card with one, say the plaintiffs, seven cardholders from California, Illinois, New Jersey, New York, and Pennsylvania. They seek class action status.

The clauses "deprive cardholders of effective recourse for illegal anti-consumer and anticompetitive activity, secure an unfair advantage for defendants in the dispute resolution process, and immunize defendants from collective action by consumers," the complaint says.

The defendants and their coconspirators allegedly formed the "Arbitration Coalition" or "Arbitration Group" and metin secret several times between 1998 and 2003 about strategies for imposing mandatory arbitration clauses. Before a May 1999 meeting, only First USA and American Express had begun implementing arbitration clauses that included class action bans, according to the complaint. Bank of America used an arbitration clause that did not ban class actions, but none of the other defendants were using arbitration clauses.

In a September 1999 meeting, coalition members "explored the possibility of all members of the coalition adopting set criteria for their arbitration clauses" and discussed the "need to control class action litigation," the complaint says. Without this conspiracy, the defendants would not have imposed materially identical arbitration clauses, the plaintiffs allege.

Ross grew out of In re Currency Conversion Fee Antitrust Litigation (MDL 1409), pending in the Southern District of New York, in which information about the Arbitration Coalition meetings came to light. That litigation alleges a conspiracy to inflate currency conversion fees that companies charge when cardholders make foreign-currency transactions. Merrill Davidoff, a Philadelphia lawyer who represents plaintiffs in both cases, declined to comment due to a protective order.

By forcing arbitration, companies avoid public scrutiny of their business practices and "have succeeded in reducing their legal exposure for widespread patterns of egregious and unlawful conduct" in matters such as late fees, punitive pricing, and collection practices, according to the complaint. Such deceptive conduct "harms individual consumers in small amounts but results in huge aggregate revenue to defendants."

The complaint points out that cardholders do not agree to the clauses in any meaningful way and that many of them are unaware of their implications or even their existence. Companies impose them by amending existing terms or by including them in lengthy cardholder agreements.

But it shouldn't matter whether cardholders sign on to the clauses willingly, said Myriam Gilles, a Cardozo School of Law professor. In contracts with various companies, consumers may be willing to sign such clauses in exchange for a reduced price, for example. "If we accept consumer choice as a sound rationale for enforcing the clauses, then why not allow companies to require all consumers to waive all prospective liability?" she asked.

"Our system doesn't allow this," Gilles said. "Under common law and statutory principles, prospective waivers of substantive rights are disfavored, and courts will generally refuse to enforce contract clauses whose effect is to except a party from liability for its own future statutory violations."

Cardholders in forced arbitration face another problem: They do not get to choose their arbitration administrator. The clauses require cardholders to use a specific one or choose among two or three preselected administrators. The National Arbitration Forum (NAF) is designated as an administrator for nearly every defendant and is the exclusive administrator for some of them, and its record "reveals an inordinate tendency to favor defendants," the complaint says.

A recent Ernst & Young report commissioned by international corporate law firm Wilmer Cutler Pickering Hale & Dorr--based on data from the NAF on lending-related, consumer-initiated cases--concluded that consumers prevailed in arbitration more often than businesses. However, the Center for Responsible Lending, a nonprofit group that opposes abusive financial practices, criticized the report for its limited review of data, and the Ross complaint notes that the law firm was involved in Arbitration Coalition meetings.

Representatives of the firm, and of some defendant companies, have declined to comment on the litigation in the press.

"Many, many consumers will be injured in small yet significant amounts, but none alone will have the incentive to arbitrate the issue individually," Gilles said. "So companies can get away with petty larceny because the regulating and deterrent effects of collective action litigation have been contracted away."

Courts generally have enforced class action waivers that compel arbitration when consumers have challenged them, Gilles said, but the California Supreme Court's recent decision in Discover Bank v. Superior Court,

finding the waivers void as against public policy under certain circumstances, "may foretell a sea change." (113 P.3d 1100 (Cal. 2005).)

Plaintiffs say the companies also use the clauses offensively by fast-tracking disputes over debt into rapid arbitration. Cardholders are then vulnerable to liability for debts that they would not normally be held responsible for--those resulting from identity theft, for example--because they lack knowledge of the arbitration process, the complaint says.

"It is clear that nearly all of the largest credit card issuers have adopted binding mandatory arbitration clauses that are drafted in a way that strips consumers of crucial legal rights," said Paul Bland, a staff attorney for Trial Lawyers for Public Justice in Washington, D.C. "It's as if the industry has decided to deregulate themselves. I hope that the case brings more attention to the conduct of the banks in trying to shield themselves from any accountability when they break the law."