Lawyers Face Uphill Climb in Challenging Payment Protection

Banks have faced successive waves of litigation over the past several years challenging the legality of their credit card payment protection plans. So far, the banks have largely emerged victorious as the suits have either been dismissed outright or resulted in relatively small settlements.

The legal challenges, including dozens of class actions and several suits brought by state attorneys general, have focused mainly on allegedly illegal marketing tactics with a particular emphasis on claims that lenders have enrolled unknowing consumers.

"Discover [Financial Services] often enrolls consumers in these products based on highly deceptive and misleading telemarketing calls, charging some consumers without their meaningful consent or understanding that their credit cards will be charged for these products," alleges a complaint filed by the Minnesota Attorney General in December 2010. Discover representatives declined to discuss litigation.

The West Virginia AG sued nine banks, including Discover, in August 2011 on related allegations. Missouri's attorney general submitted a request for information to Discover that same month, the bank has disclosed in regulatory filings.

Many of the top credit card issuers, including Bank of America Corp., Citigroup Inc., and JPMorgan Chase & Co. have been taken to court to defend their payment protection plans. Bank representatives declined to comment on the litigation.

For plaintiffs, the biggest stumbling block has been the existence of mandatory arbitration clauses in many credit card contracts. Such clauses are often included in credit card and other contracts and require consumers to settle any complaints through mediation instead of in court.

"If they've got … arbitration, there's no reason to ever modify their practices," says David Paris of Paris Ackerman & Schmierer LLP, who has been involved in bringing some of the class actions against the banks.

Numerous class actions, including several against Citigroup, were dismissed last year following the Supreme Court's AT&T Mobility v. Concepcion decision, which upheld the right of companies to use mandatory arbitration.

Use of mandatory arbitration could become a growing trend in coming years. JPMorgan Chase, Capital One Financial Corp., HSBC Holdings PLC and Bank of America agreed as part of an earlier settlement to abstain from using such clauses for three and half years, a period which runs until the end of 2013. (http://www.americanbanker.com/issues/174_225/jpmorgan_chase_to_scrap_arbitration-1004204-1.html)

Meanwhile, the Dodd-Frank Act requires the Consumer Financial Protection Bureau to complete a study and report to Congress on use of mandatory arbitration agreements in connection with consumer financial products.

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The agency also has discretion to "prohibit or impose conditions or limitations on the use of an agreement" in financial services products after the study is completed, "if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers," according to the financial reform law.

Other hurdles remain for those challenging the payment protection business in court.

"If you're not dealing with [mandatory arbitration], then your secondary concern is preemption," says Paris, referring to a legal principle under which federal law preempts state statutes when the two are in conflict.

In this case, the Office of the Comptroller of the Currency's jurisdiction over payment protection plans preempts state laws that seek to govern their use, significantly narrowing the range of violations lawyers can pursue.