Arbitration Provisions

Arbitration agreements have been typical of brokerage firms for many years, but have been challenged in the case of credit card agreements. The Bank of America imposed an arbitration agreement on its cardholders in 1992 after it had lost a costly class-action suit.  After much litigation, the California Supreme Court upheld a lower court’s decision that the arbitration clause could not be imposed on cardholders that had not signed an agreement containing the clause. The U.S. Supreme Court has ruled that the Federal Arbitration Act can be applied to cardholder agreements, but there are remaining disputes as to how consumers are notified that they are bound to arbitration. 

As with all legal issues, each side marshals some persuasive arguments. Under mandatory arbitration, both sides waive their rights to a jury trial, including the right to file a class-action lawsuit. Arbitration is generally a faster process than litigation and may involve lower total costs for resolving the dispute, although whether it is cheaper for the consumer is subject to some disagreement. Creditors argue that arbitration protects them from frivolous or false litigation. Attorneys for cardholders counter that the high frequency with which some companies win in arbitration, combined with a “loser-pays” provision in arbitration clauses discourages consumers from disputing some issuer practices. Arbitration’s growing popularity with creditors can’t be disputed as some of the largest card issuers in the U.S., including MBNA, First USA and GE Capital have recently added arbitration clauses to their cardholder agreements.