Court to consider arbitration agreements under Credit Repair Organizations Act
on Oct 4, 2011 at 11:27 am
The Court will hear arguments this month in the most recent of a long line of cases assessing the efforts of businesses to use pre-dispute arbitration agreements to shift disputes with their customers away from formal litigation. CompuCredit Corporation v. Greenwood involves an obscure statute, the Credit Repair Organizations Act (CROA), but an all-too-familiar product: the so-called “harvester” credit card largely outlawed by Section 105 of the CARD Act of 2009. CompuCredit is best known in consumer credit circles as the target of a 2008 FDIC enforcement action documenting the features of these cards, which typically come with a low credit limit (somewhere between three and five hundred dollars) and high up-front fees (typically more than one hundred dollars). Collectively, those features are likely to push the effective interest rate on purchases with the card far above one hundred percent per year. So CompuCredit is no stranger to dissatisfied customers.
The dispute before the Court arose when creative lawyers representing CompuCredit cardholders focused on claims by CompuCredit marketing materials that the company’s product would help you “rebuild your credit” and “improve your credit rating.” The CROA requires entities that qualify as “credit repair organizations” to include a number of detailed disclosures in contracts with consumers, which understandably were absent from CompuCredit’s cardholder agreement. Accordingly, the cardholders argue, CompuCredit violated the CROA.
Typical of credit card contracts at the time, CompuCredit’s credit card contract included a pre-dispute arbitration agreement. To be sure, arbitration clauses in those agreements have become much less common in recent years. Indeed, there is good reason to expect that they will be absolutely prohibited under specific authority granted to the still-nascent Consumer Financial Protection Bureau by Section 1028 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. When CompuCredit attempted to refer the dispute to arbitration, the district court and the court of appeals refused, concluding that references in the CROA to a non-waivable “right to sue” vitiated the enforceability of the arbitration agreement under the Federal Arbitration Act (FAA).
The string of cases testing the limits of the FAA reminds me of the late 1990s cases under the Eleventh Amendment. The Court for several years held that states were not subject to federal jurisdiction in cases enforcing federal legislation on the theory that Congress had not spoken with sufficient specificity to overcome a “clear statement” rule reflecting the Eleventh Amendment exemption of states from federal jurisdiction. The battle went back and forth, with Congress writing ever clearer statutes and the Court backing farther into a corner before finally acknowledging that Congress had spoken.
The same trend is apparent here. The Court’s recent cases under the FAA have uniformly concluded that arbitration agreements are enforceable, usually in decisions that reverse contrary rulings of state courts. This leaves the cardholders in this case with a difficult briefing task: they can’t argue that the CROA looks like any statute the Court has seen recently – because none of the statutes the Court has examined has been specific enough to overcome the strong presumption in favor of arbitration that the Court has discerned in the FAA. And the task is particularly hard for the cardholders here, when the principal language on which they rely (characterizing the CROA as granting a “right to sue”) appears not in the substantive body of the CROA but rather in a plain-language disclosure to be given to consumers.
For me the most telling point is an ironic one: the Dodd-Frank Act in which Congress granted the CFPB authority to restrict the enforceability of pre-dispute arbitration agreements in the consumer-finance industry (which eventually is likely to prohibit agreements like this one) also includes several provisions that directly bar use of pre-dispute arbitration agreements. The distinction between the language in the CROA and the language in Dodd-Frank – plainly written to bar application of the FAA – is likely to be the strongest point in the opinion the Court is all but sure to write to reverse the Ninth Circuit here.