Chase Rips Up Credit Card Arbitration Clauses To Settle Class Action

 JPMorgan Chase bank, one of the world’s largest issuers of credit cards, has announced that it will abandon the controversial practice of mandatory arbitration of cardholder disputes.  The move is part of a settlement reached between Chase and consumers in an antitrust class action challenging the use of such clauses.

Like many card issuers, Chase includes language in its cardholders’ contracts that requires the parties to use private arbitration, not the courts, to resolve disputes.  That has meant that cardholders with grievances lose benefits that courts offer, including the class action mechanism.  Consumer advocates argue that the inability to bring class actions effectively meant that most cardholders could bring no action at all.  The legal fees for bringing a complaint via arbitration often exceed the total amount that may be at stake.

Chase and other issuers defend the use of arbitration clauses by arguing that they keep the issuers’ legal fees down.  Arbitration is far cheaper than litigation in court, and the less issuers spend on litigation in court, the less they must subsidize those costs by increasing fees or interest rates to cardholders.

In 2005, a putative class of cardholders sued Chase and nine other issuers, alleging that they conspired with each other to use arbitration clauses in their separate agreements with cardholders.  The plaintiffs also alleged that the issuers conspired with the National Arbitration Forum, the country’s largest consumer credit arbitration company, whose awards allegedly showed a strong pro-issuer bias.  The relevant market at issue is allegedly general purpose (i.e., credit and charge) cards issued to consumers in the United States.  The defendants and two other non-defendant issuers allegedly have a combined market share of 86% of that market.

Plaintiffs accuse the defendants of violating Section One of the Sherman Act by conspiring to impose arbitration clauses on their.  Plaintiffs also claim the defendants collectively refuse to deal with potential cardholders who refuse to accept those clauses.

On Friday, Chase and the plaintiffs’ counsel announced that they had settled their dispute.  The suit against Chase will be dropped.  In return, Chase will cease using arbitration clauses for a period of three and a half years, beginning in early 2010.  Chase has also agreed not to discuss arbitration with other issuers and to cover the plaintiffs’ attorneys’ fees.

Chase’s settlement follows that of Bank of America, which said in July that it would stop using arbitration clauses.  Also in July, Minnesota Attorney General Lori Swanson sued the National Arbitration Forum, alleging that it failed to disclose its ties to the debt-collection industry.  As part of a settlement in that case, the Forum agreed to stop handling consumer disputes.