Credit Card penaltieslike over-limit and late feesare constitutional and do not violate consumers' due process rights, the Ninth Circuit U.S. Court of Appeals recently ruled.
Although the court ruled in favor of the bank defendants, two concurring opinions from the judges' panel created room for future changes to the laws governing card fees.
A class of consumers seized upon a line of U.S. Supreme Court decisions that effectively limited the ratio of punitive awards to compensatory damages in an effort to claim card fees were too high. In a series of decisions, the high court ruled excessive compensatory awards were a form of supercompensation for plaintiffs, and did not further a states legitimate interests in punishing unlawful conduct, and thus did not comport with due process.
Relying upon the same theory, a group of cardholders filed suit against the market's largest consumer credit card issuers, including Bank of America, contending that contractual late fees and over-limit charges are analogous to punitive damages. Fees typically range between $15 and $39, which vastly exceed the harm actually suffered by the issuers, the class alleged.
But the court disagreed.
The National Bank Act and the Depository Institutions Deregulation and Monetary Control Act permit issuers to charge the fees as long as they are legal in the issuers home states, the three-judge panel said.
As for the constitutional challenge, the court said the liquidated damages at issuethe predetermined sum to which cardholders contractually agree towere distinct from punitive damages.
Cardholders allege that the penalty fees in this case are purely punitivethe 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, the panel wrote. But considering that the penalty clauses at issue originate from the parties privatealbeit adhesive--contracts, they are distinct from the jury-determined punitive damages awards at issue in Gore and State Farm [the two previous Supreme Court cases]
Because constitutional due process jurisprudence does not prevent enforcement of excessive penalty clauses in private contracts, and the fees were permissible under the National Bank Act and DIDMCA, the court wrote in dismissing the complaint. While the other two judges on the panel concurred in the result, they filed separate opinions. Judge Stephen Reinhardt said he concurred reluctantly, and wrote that the Supreme Court should consider its due process jurisprudence in the consumer contract context.
[I]f due process is violated when courts award disproportionate punitive damages in the tort context, due process is equally violated when courts enforce the punitive and substantially more disproportionate penalty clauses in contracts of adhesion, he opined, suggesting that the proposition deserves further exploration and analysis. [S]hould the new Supreme Court doctrine continue in effect, the extension of that doctrine as requested by cardholders should eventually become the law under the Due Process Clause.
The Ninth Circuit panel's decision leaves issuers free to charge fees as long as they meet the requirements of the National Bank Act and the Depository Institutions Deregulation and Monetary Control Act. However, the concurring judges encouraged further exploration of the issue, finding that the Supreme Courts line of decisions on fees should be evenly applied to both corporations and consumers. Issuers should keep an eye out for further development of this argument, which, if successful, could have a serious impact on consumer contracts.
John McGuinness is a partner with the litigation division in the Los Angeles office of Manatt Phelps & Phillips.