• U.S. Supreme Court Upholds Arbitration Clause in Credit Repair Contracts and Overrules Ninth Circuit
  • January 16, 2012 | Author: William K. Enger
  • Law Firm: Wilson Elser Moskowitz Edelman & Dicker LLP - Los Angeles Office
  • On January 10, 2012, the U.S. Supreme Court ruled in CompuCredit Corp. et al. v. Greenwood et al. (10-948 January 10, 2012) that credit repair companies could enforce arbitration clauses in the contracts with their customers. The 8-1 decision is another in a string of recent Supreme Court decisions upholding arbitration clauses over a customer’s right to file a lawsuit. The decision therefore reinforces the Supreme Court’s view that contractual arbitration does not conflict with the statutory right to file suit.

    The Greenwood case involved three San Francisco Bay Area consumers who received credit cards marketed by CompuCredit Corp. of Atlanta and issued by Columbus Bank & Trust. The CompuCredit Corp. credit card program was marketed to persons with poor credit scores as a way to help them rebuild their credit history. The promotional materials advertised a $300 credit line and required no deposit. However, the plaintiffs argued that a host of fees contained in the form agreement depleted almost all of that credit line. The form agreement also provided that either the customer or the company had the right to take a dispute into binding arbitration.

    The consumers filed a suit seeking damages including attorneys’ fees, alleging that the credit card program violated the Credit Repair Organizations Act (CROA), which prohibits companies from engaging in deceptive practices and requiring advance payments for such services. The complaint also requested class certification. The U.S. District Court for the Northern District of California ruled that the arbitration provision ran contrary to the CROA’s disclosure and non-waiver provisions requiring companies to expressly advise consumers that they had “a right to sue” for violations of CROA. The U.S. Ninth Circuit Court of Appeals in San Francisco upheld that ruling.

    In overturning those decisions, the Supreme Court’s majority opinion written by Justice Scalia relied in part on the Court’s 2011 decision that upheld AT&T Mobility’s binding arbitration clauses that prohibited customers from filing class-action lawsuits. Consistent with a “liberal policy” favoring arbitration, Justice Scalia cited to the Federal Arbitration Act (9 U.S.C. Sect. 1) and multiple prior Supreme Court decisions upholding arbitration as an acceptable forum for claims alleging violations of rights created by federal statute. The majority opinion reasons that if Congress had intended to prohibit binding arbitration in the consumer credit protection law, it would have specifically done so, rather than implying it in a right-to-sue provision. Justice Scalia noted:  “Had Congress meant to prohibit these very common provisions in the CROA, it would have done so in a manner less obtuse than what respondents suggest.”

    Because the law was silent on whether claims could go to arbitration, CompuCredit was allowed to force such claims into arbitration under the Federal Arbitration Act.

    In a concurring opinion joined by Justice Kagan, Justice Sotomayor agreed with the majority that CROA did not demonstrate congressional intent contrary to valid arbitration agreements. Justice Sotomayor, however, found the question much closer than the majority suggested. In light of the policy favoring arbitration, the concurring opinion sided with the majority because the consumers did not carry their burden of showing that Congress intended to disallow arbitration of claims based on CROA.

    Justice Ruth Bader Ginsburg, the only dissenter, criticized the majority for interpreting the Act intended for “vulnerable consumers” in a way that might make sense to someone who was “trained to ‘think like a lawyer.’” She reasoned: “The right to sue, I would hold, means the right to litigate in court.”

    The ruling appears to be another important victory for businesses seeking to avoid class action suits and wishing to use arbitration as a less costly means to resolve disputes.