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A “Small” Exception in Credit Card Arbitration Clauses

posted by Angie Littwin

The other day I took out a store credit card at a department store.  I wasn’t happy about it, but it was one of those stores that does not take Visa or MasterCard, and I had planned on paying for my purchase with a debit card.  I read the contract, even though the sales person rang up my purchase before handing it to me.  (I admit that I take an academic interest in even my own credit transactions.)  I was not surprised to find that the contract featured a binding arbitration clause, but I was impressed to see that this clause included an exception for consumer actions in small claims court.  Specifically, the issuer agreed not to invoke its right to arbitration if the customer sued it in small claims court. 

I did a little research (i.e., I emailed fellow Credit Slips blogger Katie Porter) to see whether I had an anomalous contract or whether small-claims exceptions were common.  It turns out that the inclusion of such an exception is considered a best practice in consumer arbitration clauses.  In a workshop for the Federal Reserve Board, Alan S. Kaplinsky, whom the Fed describes as a “pioneer in the development of consumer arbitration clauses,” listed a small-claims exception as one of five terms necessary for a “fair” arbitration provision.  (The Fed wrote a report about the workshop, available here.)

I agree that a small-claims exception for consumer lawsuits is a positive development, but it is not as consumer-friendly as it looks at first glance.  It may be helpful when the consumer is the plaintiff, but the clause does not appear to apply when the consumer is the defendant.  Issuers regularly bring actions against their customers, usually to collect on unpaid bills, and mandatory arbitration clauses may be particularly problematic in this context.  The current small-claims exception leaves these consumer-defendants with no non-arbitration option.

Before I got my bill or even got my new credit card in the mail, I called up the issuer, paid the balance, and canceled the account.  I am not interested in a new credit card at the moment, particularly one for a store where I rarely shop.  On the other hand, if the contract had excluded the mandatory arbitration clause altogether, then maybe – just maybe – I would have kept the card for sentimental reasons.

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Comments

Angie -- very interesting on the one-way exception for plaintiffs only but not defendants. But I now call Challenge and dare you to defend the decisionmaking process whereby your marginal decision to keep the card was affected by the mechanisms for judicial dispute resolution where you foresee yourself being a litigation defendant. (I'm just teasing; the answer, of course, is that you are a pathological law professor.)

Guilty as charged. Keeping the card would have had nothing to do with envisioning myself as a defendant and everything to do with "supporting" a credit card that didn't include an arbitration clause in its contract. It's the same thing as how I used to avoid shopping at Sears before it spun off its credit operation, even though I knew Sears didn't really need my business.

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