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Press Release

F. Paul Bland, Jr.
Sarah Posner
Victoria S. Nugent
Trial Lawyers for Public Justice
1717 Massachusetts Avenue, Suite 800
Washington, DC 20036
(202) 797-8600
(202) 232-7203 (Facsimile)

John T. Ward
Ward, Kershaw & Minton
113 West Monument Street
Baltimore, MD 21201
(410) 685-6700
(410) 685-6704 (Facsimile)

Michael P. Malakoff
Malakoff, Doyle & Finberg, P.C.
The Frick Building, Suite 203
Pittsburgh, PA 15219
(412) 281-8400
(412) 281-3262 (Facsimile)

INTRODUCTION AND SUMMARY OF ARGUMENT

Defendants Chevy Chase Bank, F.S.B. ("Chevy Chase") and First USA Bank, N.A. ("First USA") ask this Court to deprive hundreds of thousands of their credit cardholders of their constitutional right to trial by jury, and to force those customers into mandatory arbitration. Defendants' Motion to Compel Arbitration and to Stay Judicial Proceedings Pending Arbitration ("Defendants' Motion") must be denied because the plaintiffs never agreed to arbitrate their claims, and because the arbitration clause at issue is unconscionable.

Prior to 1996, Chevy Chase had its headquarters in Maryland, which has a usury statute limiting interest to 24%. Accordingly, in its agreement with its cardholders ("the Maryland Agreement"), 1 Chevy Chase promised that it would "never" raise their interest rates over 24%. Chevy Chase also promised in the Maryland Agreement that it would not change the agreement without giving certain specified notices in a specified form, incorporating a Maryland statute. In January 1996, Chevy Chase announced it was officially changing its headquarters to Virginia, and attempted to replace the Maryland Agreement with a new one ("the Virginia Document"). Under the terms of the Virginia Document, Chevy Chase could raise interest rates well over 24% (and it did raise the interest rates of the class members, breaking its earlier promise to "never" do so), and Chevy Chase also purported to require its cardholders to submit all their claims to mandatory arbitration. In sending out the Virginia Document, Chevy Chase did not provide the notices it had contractually promised it would provide, in the form that it promised it would provide them. The entire thrust and argument of the complaint in this case is that Chevy Chase breached the Maryland Agreement, and that the Virginia Document was never a valid contract.

Defendants' brief begins with the incorrect assumption that plaintiffs cannot assert their claims of breach of the Maryland Agreement because the Virginia Document is the only binding contract governing their relationship with their cardholders. Defendants' assumption is wrong because plaintiffs never agreed to be bound by the Virginia Document or any contract containing an arbitration clause. Nonetheless, defendants contend that arbitration clauses added to credit card agreements through contractual "change-in-terms" provisions should generally be enforced. Defendants contend that because the Maryland Agreement included a change-in-terms provision that defendants had drafted, they could simply add an arbitration clause ("Defendants' Arbitration Clause") where one did not previously exist by mailing the Virginia Document to plaintiffs. Defendants' brief fails to acknowledge, however, that the Maryland Agreement contained a very particular change-in-terms provision which required them to send specific notice of amendments and established the cardholders' right to refuse those amendments. The Maryland Agreement, which is plaintiffs' actual contract with defendants, contained no arbitration clause. Defendants' brief therefore sidesteps the core contentions in plaintiffs' complaint: that defendants failed to comply with their own change-in-terms provision and that plaintiffs never agreed to be bound by the Virginia Document.

The Maryland Agreement dictates that any amendment that breaches the change-in-terms provision is invalid and unenforceable. Because Chevy Chase failed to provide the requisite notice of amendments and the cardholders' right to refuse, the Virginia Document, including Defendants' Arbitration Clause, is invalid and unenforceable.

In light of their failure to comply with their own change-in-terms provision, defendants will likely argue in their Reply that the Virginia Document was a modification or novation to the contract. Defendants failed to comply with the requirements for a novation under Maryland law, however, and the only valid contract in the case remains the Maryland Agreement.
Furthermore, the manner in which defendants communicated their arbitration clause forecloses any conclusion that the plaintiffs agreed to that clause. Defendants' Arbitration Clause would take away plaintiffs' constitutional right to a trial by jury. Maryland's law of contracts provides that one may not be found to have agreed to waive any constitutional right unless the alleged agreement was voluntary, knowing and intelligent. As this brief will show with both fact and expert witness testimony, defendants communicated the arbitration clause to plaintiffs in such a way as to prevent them from noticing or reading it. Since the plaintiffs were unaware of the arbitration clause, they could not have voluntarily, knowingly and intelligently agreed to waive their constitutional rights.

Even assuming that the plaintiffs had agreed to a valid contract containing an arbitration clause, however, Defendants' Arbitration Clause is unconscionable and unenforceable. This clause requires the plaintiffs to pay hefty fees -- a minimum of $1,150 for each plaintiff, and very likely several times that amount -- to arbitrate the claims raised in the complaint in this case. These fees, which were never disclosed to plaintiffs, are far greater than the filing fee to bring this case in court, and will prove to be larger than many if not most of the class members' claims. Accordingly, this Court should join with numerous courts that have refused to enforce arbitration agreements that impose fees that would discourage or prevent a party from bringing a claim.

Defendants' Arbitration Clause would also unconscionably require plaintiffs to arbitrate their claims on an individual basis. Each individual plaintiffs' claims are quite modest, however, and the only way that most (if not all) of the plaintiffs could receive any realistic day in court is through the class action device. As several experts testify in affidavits attached to this brief, a clause that requires individual arbitration is not an alternative remedy for these plaintiffs. It is effectively no remedy at all. This Court should join a host of courts that have refused to enforce arbitration clauses that offered plaintiffs remedies that were inferior to those available in court.

Defendants' Arbitration Clause also would require plaintiffs to pay defendants' attorneys' fees if defendants prevailed before the arbitrator. This requirement reverses the normal American Rule relating to fees and would sharply discourage plaintiffs from bringing their claims. This Court should join a host of other courts that have refused to enforce arbitration clauses that discourage plaintiffs from bringing their claims. In addition, Defendants' Arbitration Clause unconscionably enshrines improper secrecy that harms both plaintiffs and the public in a variety of ways and illegally limits plaintiffs' constitutional right to free speech.

Finally, even if this Court were not to reject Defendants' Motion for any of these listed grounds, it would be premature for this Court to grant Defendants' Motion. In that circumstance, plaintiffs will request discovery from defendants on their unilateral imposition of arbitration, which plaintiffs would have a right to pursue before arbitration could be compelled.2

STATEMENT OF FACTS

The Allegations of the Complaint
In the Maryland Agreement, Chevy Chase contracted to amend the Maryland Agreement "in accordance with applicable law," which it defined as Subtitle 9 of Title 12 of the Maryland Commercial Code ("Subtitle 9"). Subtitle 9 requires, inter alia, notice of amendments to the cardholder with the opportunity to refuse the amendments and terminate the cardholder agreement. Plaintiffs contend that Chevy Chase breached the contract by attempting to replace the Maryland Agreement with the Virginia document, containing highly unfavorable terms to its cardholders, without providing the notice required by the contract it drafted. Plaintiffs further contend that because they did not have the opportunity to have notice and the right to refuse the amendments, no valid amendment took place.

Defendants' Communications to Plaintiffs About the Virginia Document
Plaintiffs' billing statements from Chevy Chase for January and February 1996 included the following notice:
Chevy Chase Bank has moved its home office to Virginia. Effective immediately, the terms and conditions of your credit card account will be subject to Virginia law and applicable federal law. Beginning with your next billing statement, your account will be governed by the enclosed rules and regulations. Amended terms are shown in italics.

It is not clear whether Chevy Chase actually enclosed the Virginia Document in any of its cardholders' statements, however. After some publicity attended the filing of this case, 136 persons contacted counsel for plaintiffs. See Affidavit of Jeffrey Barnett, Exhibit 1 hereto, at ¶ 4. Each of these persons was asked to forward all of their documents to counsel. See Affidavit of Virginia Ripley, Exhibit 2 hereto, at ¶ 3. Out of these 136 persons, only two of them provided a copy of the Virginia Document. Ripley Affidavit, ¶ 6. One of those two persons reported receiving the Virginia Document from Chevy Chase only after he had complained to Chevy Chase about his interest rates having been raised. See Affidavit of Robert Maret, Exhibit 3 hereto, at ¶¶ 2-3. The other person does not recall when or how she received the Virginia Document. See Affidavit of Meredith Norrholm, Exhibit 4 hereto, at ¶ 3.

Thus, it is possible that Chevy Chase never actually enclosed the Virginia Document with the January and February 1996 billing statements, and that plaintiffs never received Defendants' Arbitration Clause. It is also possible, however, that the 136 identified plaintiffs did not notice or discarded the Virginia Documents.3

Defendants' Arbitration Clause
Defendants' Arbitration Clause requires cardholders to first mediate, and then arbitrate, any disputes that they may have with defendants. The mediation and arbitration are to take place under the rules of the American Arbitration Association ("the AAA"). Although Defendants' Arbitration Clause does not specify which set of the AAA's rules should apply (the AAA has a number of different sets of rules), it appears that the AAA's Commercial Dispute Resolution Procedures ("Commercial Rules") apply here. 4

A copy of these rules is attached hereto as Exhibit 6. Among other things, the AAA's Commercial Rules require plaintiffs to pay hefty fees to have their claims mediated and arbitrated.

Defendants' Arbitration Clause states that the arbitration will be "binding and shall not be subject to further review or appeal except as otherwise required by applicable law." It also provides a much narrower scope for discovery ("matters directly relevant to the Claim") than is provided by the Maryland Rules or the Federal Rules of Civil Procedure, and stresses that the arbitrator must "fully enforce" the provision narrowing the scope of discovery.

Defendants' Arbitration Clause includes another significant substantive provision, as well: "The prevailing party in an arbitration shall be entitled to reasonable attorneys' fees (including allocated costs for in-house legal services), costs and necessary disbursements incurred in connection with such action or proceeding, as determined by the arbitrator."

Defendants' Arbitration Clause also provides that "[e]ach party agrees to keep all Claims and arbitration proceedings strictly confidential except for disclosures of information required in the ordinary course of business of the parties or by applicable law or regulation." Finally, it provides that "IF, FOR ANY REASON, THE CLAIM OR THIS AGREEMENT BECOMES THE SUBJECT OF A JUDICIAL ACTION, EACH PARTY HEREBY WAIVES ITS RESPECTIVE RIGHT TO A TRIAL BY JURY." (Capitals in original)

ARGUMENT
I. UNDER THE FEDERAL ARBITRATION ACT, THIS COURT MAY ONLY COMPEL ARBITRATION IF IT FINDS THAT THE PLAINTIFFS AGREED TO THE ARBITRATION CLAUSE, AND IF IT FINDS THAT THERE ARE NOT VALID STATE CONTRACTUAL DEFENSES TO THE ARBITRATION CLAUSE.

Defendants' Brief relies heavily upon the Federal Arbitration Act ("the F.A.A.") to argue that arbitration must be compelled here. The F.A.A. provides that "an agreement in writing to submit to arbitration an existing controversy arising out of [a contract arising from interstate commerce] shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2.

As it happens, however, the F.A.A. has no bearing upon the specific points that plaintiffs raise against this arbitration clause. Plaintiffs here raise two major contentions: (a) they never agreed to any arbitration clause; and (b) even if an agreement to arbitrate could be inferred from the facts of this case, Defendants' Arbitration Clause is unconscionable and invalid. Neither of these issues is resolved by application of the F.A.A. If plaintiffs never agreed to arbitrate, then the F.A.A. never comes into play at all. Further, the F.A.A. permits revocation of an arbitration agreement on generally applicable contract grounds; the question of unconscionability is such a defense and is thus solely governed by Maryland's common law of contracts. Indeed, the contours of state law on unconscionability is a subject on which the F.A.A. is entirely silent.

A. ARBITRATION MAY ONLY BE IMPOSED WHERE BOTH PARTIES HAVE CONSENTED TO IT.

The United States Supreme Court has repeatedly stressed that "arbitration under the [Federal Arbitration Act] is a matter of consent, not coercion." Allied-Bruce Terminex Cos. v. Dobson, 513 U.S. 265, 270 (1995). In First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995), the Supreme Court emphasized that "arbitration is simply a matter of contract between the parties; it is a way to resolve those disputes -- but only those disputes -- that the parties have agreed to submit to arbitration." The Court went on to elaborate in First Options that "the basic objective in this area is not to resolve disputes in the quickest manner possible, no matter what the parties' wishes, but to ensure that commercial arbitration agreements, like other contracts, ‘are enforced according to their terms,' and according to the intentions of the parties." 514 U.S. at 947 (citations omitted). See also Volt Info. Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 479 (1989) ("Arbitration . . . is a matter of consent, not coercion . . ."); AT&T Tech., Inc. v. Communications Workers, 475 U.S. 643, 648-49 (1986) ("[a]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit . . . .[A]rbitrators derive their authority to resolve disputes only because the parties have agreed in advance to submit such grievances to arbitration. ") (citations omitted).

State law governing the formation of contracts, not the F.A.A., determines whether a valid arbitration agreement exists between parties. First Options of Chicago, 514 U.S. at 943. Maryland law also recognizes that arbitration cannot be compelled where parties have not voluntarily and expressly agreed to arbitrate their disputes. See Hartford Accident & Indemnity Co. v. Scarlett Harbor Associates, 346 Md. 122, 127, 695 A.2d 153, 155 (1997) ("A party cannot be required to submit any dispute to arbitration that it has not agreed to submit.") (citation omitted); Curtis G. Testerman Co. v. Buck, 340 Md. 569, 579, 667 A.2d 649, 654 (1995) ("Arbitration is consensual; a creature of contract. As such, only those who consent are bound... In the absence of an express arbitration agreement, no party may be compelled to submit to arbitration in contravention of its right to legal process.") (citations omitted); Stephen L. Messersmith, Inc. v. Barclay Townhouse Associates, 313 Md. 652, 658, 547 A.2d 1048, 1051 (1988) (holding "[n]o one is under a duty to resort to ...[arbitration] tribunals, however helpful their processes, except to the extent that he has signified his willingness" where parties disputed whether an agreement to arbitrate had emerged from their contract negotiations) (citation omitted); Gold Coast Mall v. Larmar Corp., 298 Md. 96, 103, 468 A.2d 91, 95 (1983) ("Arbitration is a process whereby parties voluntarily agree to substitute a private tribunal for the public tribunal otherwise available to them...A party cannot be required to submit any dispute to arbitration that it has not agreed to submit.").

The Maryland Court of Appeals has refused to enforce arbitration agreements after determining – as a matter of contract – that the parties had not agreed to arbitrate their disputes. For instance, in Hartford v. Scarlett Harbor, an insurer provided a performance bond for a real estate project. The bond contract between the surety and the real estate developer incorporated by reference the construction contract between the developer and a construction firm; this construction contract included an arbitration provision. The court held that the incorporated arbitration clause expressed only a commitment between the developer and the construction firm – and not the surety – to arbitrate their disputes and, thus, could not be used by the surety to force the developer into arbitration. Hartford Accident & Indemnity Co., 346 Md. at 131-32, 695 A.2d at 157. The Court of Appeals, therefore, refused to compel arbitration between a real estate developer and the surety.

Because the federal policy favoring arbitration only operates where parties have entered a valid contract for such arbitration, defendants' argument that there is a strong federal policy favoring arbitration here puts the cart before the horse. Defendants cite Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983), which, in contrast to this case, involved a freely negotiated arbitration clause in an agreement between two commercial entities of equal bargaining power. There was no question in that case, as there is here, as to whether a valid contract existed. Thus, this Court should not apply any policy favoring arbitration before determining if the parties here agreed to arbitrate their claims:

Whether there is an agreement to submit disputes to arbitration . . . does not turn on the existence of a public policy favoring ADR . . . . That policy, whose existence we readily acknowledge, does not even come into play until it is first determined that the Bank's customers agreed to use some form of ADR to resolve disputes . . . and that determination, in turn, requires analysis of the account agreements in light of ordinary state law principles that govern the formation and interpretation of contracts.

Badie v. Bank of America, 79 Cal. Rptr. 2d 273, 280 (Cal. Ct. App. 1998), rev. denied, 1999 Cal. LEXIS 1198 (Feb. 24, 1999).

As seen in Curtis G. Testerman Co., the Court of Appeals suggested that general policies favoring arbitration cannot be used to infer an agreement where one does not actually exist. Curtis G. Testerman Co., 340 Md. at 580, 667 A.2d at 654-55 ("an arbitration clause is only ‘liberally read' when an arbitration agreement in fact exists"). There a corporate officer (Curtis G. Testerman, the president of Curtis G. Testerman Co.) signed a contract containing an arbitration clause; when a dispute arose, one party sought to force the officer – as an individual -- into arbitration. The court refused to compel such arbitration, relying on state law of contracts and agency, to find that the officer had not agreed, in his individual capacity, to arbitrate. Curtis G. Testerman Co., 340 Md. at 580-81, 667 A.2d at 654-55.

The law in Maryland is clear that only courts may decide whether an arbitration agreement exists. Under the Maryland Uniform Arbitration Act, where a party denies the existence of an arbitration agreement, the courts – and not arbitrators – must determine whether an agreement exists before a party may be directed to arbitrate. Md. Code Ann., Cts. & Jud. Proc. Art. 3-207(b) (1998) ("If the opposing party denies existence of an arbitration agreement, the court shall proceed expeditiously to determine if the agreement exists."). See also Stephen L. Messersmith, Inc., 313 Md. at 652, 547 A.2d at 1052 ("[t]he final determination of whether a valid contract to arbitrate existed between the parties must be made by a court, not an arbitrator."); Petals Factory Outlet of Delaware, Inc. v. EWH & Associates, 90 Md. App. 312, 317, 600 A.2d 1170, 1173 (1992) (holding that "where the parties are...in disagreement on the very question whether there exists an agreement to arbitrate the subject matter of the dispute, the resolution of that question is for the court" where party contended that contract containing an arbitration provision had been dissolved by a novation) (citation omitted).

B. THE F.A.A. PROVIDES THAT ARBITRATION AGREEMENTS THAT ARE UNCONSCIONABLE UNDER STATE LAW MAY NOT BE ENFORCED.

The F.A.A. provides that arbitration clauses will not be enforceable if there are grounds under a state's common law of contract for invalidating the clause. 9 U.S.C. §2. The purpose of the F.A.A. is to "place arbitration agreements upon the same footing as other contracts." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991). Thus, if Defendants' Arbitration Clause is unconscionable under Maryland's common law of contracts, the F.A.A. raises no bar to this Court applying that law and refusing to enforce the clause. 5

Under Maryland state contract law principles, the validity of a contract may be challenged under several theories, including fraud, duress and unconscionability. Of particular relevance to this case, Maryland courts will not enforce unconscionable contracts. See Williams v. Williams, 306 Md. 332, 508 A.2d 985 (1986) (refusing to enforce a separation agreement where its oppressive terms shocked the conscience of the court); Straus v. Madden, 219 Md.535, 150 A.2d 230 (1959) (rescinding real estate contract that was substantively unfair and resulted from gross bargaining inequality); McCarty v. E.J. Korvette, Inc., 28 Md. App. 421, 431-34, 347 A.2d 253, 260-62 (1975) (finding unconscionable consumer contract provision that limited remedies to exclude consequential damages for personal injury and property damage in conflict with express product warranty). See also Leet v. Totah, 329 Md. 645, 661, 620 A.2d 1372, 1380 (1993) (recognizing unconscionability as grounds for refusing to enforce contract terms); Gladding v. Langrall, Muir & Noppinger, 285 Md. 210, 213, 401 A.2d 662, 664-65 (1978) (recognizing that unconsionability may justify contract rescission).

The Court of Appeals has looked to both procedural and substantive issues in evaluating the unconscionability of a contract. Williams, 306 Md. at 340-41, 508 A.2d at 989-90 (where substantive inequity is accompanied by procedural defects like inequality in bargaining power or oppression, equitable relief is more readily granted), quoting Straus, 219 Md. at 543-44, 150 A.2d at 235. Under § 2-302 of the Commercial Law Article of the Maryland Code, authorizing courts to invalidate unconscionable contract terms for the sale of goods, the Official Comment suggests the applicability of this analysis, stating: "The basic test is whether...the clauses involved are so one-sided as to be unconscionable...The principle is one of the prevention of oppression and unfair surprise." Md. Code Ann., Com. Law I. § 2-302.

The Supreme Court has expressly stated that these defenses are available to a party challenging an arbitration agreement. Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996) ( "generally applicable contract defenses, such as fraud, duress or unconscionability, may be applied to invalidate arbitration agreements without contravening [the Federal Arbitration Act]"); Gilmer, 500 U.S. at 33 ("courts should remain attuned to well-supported claims that the agreement to arbitrate resulted from the sort of fraud or overwhelming economic power that would provide grounds ‘for the revocation of any contract'") (citation omitted).

A host of courts from around the nation have refused to enforce arbitration clauses that were held to be unconscionable. An illustrative list of such cases is attached as Exhibit 7 hereto.

II. THE ARBITRATION CLAUSE INVOKED BY DEFENDANTS CANNOT BE ENFORCED BECAUSE THERE IS NO VALID, EFFECTIVE AGREEMENT CONTAINING THAT CLAUSE.

A. CHEVY CHASE'S PURPORTED MODIFICATION OF THE MARYLAND AGREEMENT IS UNENFORCEABLE.

Chevy Chase failed to comply with its own change-in-terms provision in the Maryland Agreement, which required Chevy Chase to provide notice to its cardholders of the amendments and of their right to refuse them. Because Chevy Chase did not comply with this contractual term, and cardholders were deprived of their contractual right to refuse the amendments, the resulting Virginia Document was an illegal modification of the Maryland Agreement and is therefore unenforceable. Because the Virginia Document is void, and the Maryland Agreement contains no arbitration provision, Chevy Chase's attempt to compel arbitration of plaintiffs' claims must fail.

1. Chevy Chase Failed To Comply With Its Own Change-In-Terms Provision, Which Required It To Give Its Cardholders Notice Of The Amendments And Their Right To Refuse Them.

The governing law provision in the Maryland Agreement provided, in its entirety:
Governing Law - This Agreement is made in Maryland. It is governed by Subtitle 9 of Title 12 of the Commercial Law Article of the Maryland Annotated Code and applicable federal laws.

Subtitle 9 requires credit issuers to provide cardholders very specific notice of amendments to their cardholder agreements, as well as notice to the cardholders of their right to refuse the amendments. Md. Code Ann., Com. Law I, §12-912.
The change-in-terms provision in the Maryland Agreement was entitled "Amendments." That provision provided, in its entirety:
Amendments - We may amend the terms of this Agreement in accordance with applicable law at any time. Also, we may at any time add new credit services, discontinue any credit services, or replace your card with another card.

Ex. 1 to Defendant's Brief., p. 2 (emphasis added). Thus, Chevy Chase incorporated Subtitle 9 as the governing law for the interpretation of the contract, and obligated itself to comply with its substantive requirements regarding amendment of cardholder agreements.

Subtitle 9, which Chevy Chase defined as the "applicable law" with which it would comply in amending the Maryland contract, currently provides and did provide in 1996 that a credit grantor may amend a credit card agreement, but that it must provide notice to the cardholder as follows:

If the amendment has the effect of increasing the interest, finance charges, or other fees and charges to be paid by the borrower, including, but not limited to those enumerated in § 12-905 of this subtitle, or altering the manner of their computation, the credit grantor shall mail or deliver to the borrower, at least 25 days before the effective date of the amendment, a clear and conspicuous written notice which shall describe the amendment, including:

(i) A clear statement comparing the original terms and the terms under the amended agreement; and

(ii) Any other pertinent information required by the provisions of this section.

Md. Code Ann., Com. Law I, §12-912(b)(1).

Chevy Chase was required to provide this notice when it attempted to amend the Maryland Agreement, because the change from the Maryland Agreement to the attempted Virginia Document "ha[d] the effect of increasing the interest, finance charges, or other fees and charges to be paid by the borrower . . . or altering the manner of their computation." This is so because:
(1) the Maryland Agreement stated that "your annual percentage rate will never exceed 24%" and the Virginia Document stated that "your annual percentage rate is not subject to a maximum limit" (Compl. Count I);

(2) the Maryland Agreement provided for calculation of the finance charge using a "monthly periodic rate" and the Virginia Document provided for calculation of the finance charge using a "daily periodic rate" (Compl. Count IV);

(3) the Maryland Agreement required payment of a $15 fee for late payments and the Virginia Document required a $20 fee for late payments (Compl. Count V);

(4) the Maryland Agreement did not contain a provision for an "overlimit" fee and the Virginia Document required payment of $20 if the cardholder exceeded his or her credit limit (Compl. Count V).

By contractually obligating itself to comply with Subtitle 9, Chevy Chase obligated itself to provide this notice of the amendments, along with a statement that a second notice would be sent in the cardholder's next billing statement. Md. Code Ann., Com. Law I, §12-912(b)(7). This first notice was required to be sent in an envelope, bearing on its face, in 10 point type, a statement "that an important notice of an increase in rates or fees" of the credit card was enclosed. Id., §12-912(b)(8). The second notice was required to contain the same substantive information as the first notice and be presented in the same format. Id., §12-912(c)(2). Chevy Chase breached the Maryland Agreement by failing to comply with these notice requirements. Defendants by simply mailing the Virginia Document with their billing statements (assuming without conceding that Chevy Chase did actually so) did not comply with the Maryland Agreement. Compl., Count III.

Chevy Chase further breached its contractual obligation to comply with the requirements of Subtitle 9 by failing to provide cardholders notice of their contractual right to refuse the amendments. Compl., Count III. Subtitle 9 requires that both the first and second notice must contain a statement in 10 point type that:

(i) If a written notice of refusal from the borrower in which the borrower refuses to accept the amendment is not received by the credit grantor within 25 days of the mailing of the second notice of amendment, the amendment will become effective on the first day of the billing cycle during which the effective date of the amendment occurs or at any later date specified in the notice of amendment;

(ii) Enumerates the borrower's rights under . . . this subsection upon timely notice of refusal by the borrower; and

(iii) Includes the address to which the borrower may send a notice of refusal.

Md. Code Ann., Com. Law I §12-912(b)(7). Neither the Virginia Document nor the billing statement allegedly containing it includes any of these required statements.

If Chevy Chase had complied with its contractual obligation to follow the notice requirements of Subtitle 9 and plaintiffs had submitted written refusal of the amendments, plaintiffs could have continued to use the card "pursuant to its original, unamended terms" for the duration of the period for which they had paid an annual fee. Md. Code Ann., Com. Law I ., §12-912(b)(5). At the expiration of this period, plaintiffs could have then paid "any outstanding unpaid indebtedness in the account under the terms of the unamended agreement governing the plan." Id., §12-912(b)(6). Instead, plaintiffs were assessed finance charges and fees in excess of what they legally could have been charged pursuant to the Maryland Agreement. Compl., ¶¶ 21-28.

The Virginia Document was imposed on cardholders without any of the notice required by the Maryland Agreement. In fact, the only notice cardholders received of the change was the paragraph printed on their January or February 1996 billing statements. The Virginia Document contained numerous provisions that were highly unfavorable to the cardholders, including the arbitration clause, and the cardholders were deprived of their contractual right to be notified of the changes and their right to refuse the changes. That right to refuse essentially would have given the cardholders the ability to assent to the change in terms. Such assent "‘is as much a requisite element in effecting a contract modification as it is in the initial creation of the contract.'" L&L Corp. v. Ammendale Normal Institute, 248 Md. 380, 385, 236 A.2d 734, 737 (1968) (quoting Keco Industries v. ACF Industries, 316 F.2d 513 (4th Cir. 1963)). Without that assent, the Virginia Document is void.
2. The Virginia Document Is Unenforceable Because Its Formation Was Illegal.

The statute with which Chevy Chase obligated itself to comply and which it specified as the law governing interpretation of the Maryland Agreement renders agreements that violate the statute are unenforceable. Md. Code, Com. Law. I, § 12-923(b)(4)(i).6

Chevy Chase did not send the required notice and right to refuse in purporting to amend the Maryland Agreement. The terms of the Maryland Agreement, therefore, dictate that Chevy Chase's attempt to amend it by simply mailing the Virginia Document was not valid. Accordingly, the Virginia Document, including its arbitration provision, is unenforceable.

B. THE VIRGINIA DOCUMENT WAS NOT VALIDLY FORMED BECAUSE THERE WAS NO MODIFICATION OR NOVATION.

Even if it concedes in its Reply Brief that it failed to follow its own change-in-terms provision, Chevy Chase may well contend that the Virginia Document is nonetheless a binding contract under one of two contract doctrines: modification or novation. Any such argument must be rejected, however, because Chevy Chase cannot establish that plaintiffs knowingly and voluntarily agreed to the change in terms, as required by Maryland law.

1. The Cardholders Did Not Modify The Maryland Agreement Because They Did Not Knowingly And Voluntarily Assent To The Change In Contract Terms.

Maryland law requires that in order for a contract to be validly amended, both parties must knowingly and voluntarily assent to the modification with full knowledge of their rights. Dominion Nat'l Bank v. Sundown Joint Venture, 50 Md. App. 145, 167, 436 A.2d 501, 513 (1981). In this case, the cardholders could not have knowingly assented to the amendment of the Maryland Agreement because they were not notified, as required by that Agreement, of their right to refuse the amendments. Because they did not know that they could have rejected the Virginia Document, they could not knowingly and voluntarily assent to the addition of any of the terms contained in it, including the arbitration clause. As a result, there was no valid formation of the Virginia Document, and the arbitration provision is unenforceable. 7

Maryland courts have consistently found that if one party to the contract lacks full knowledge of his rights, he cannot knowingly and voluntarily assent to the modification of the contract terms. See Dominion Nat'l Bank, 50 Md. App. 145, 436 A.2d 501. In that case, Sundown Joint Venture ("SJV") was a joint venture to purchase a mobile home park. The joint venture consisted of 21 co-venturers, who all entered into a joint venture agreement that limited the liability of each to "his proportionate interest in the Joint Venture and its assets," rather than the usual joint and several liability found in such agreements. 50 Md. App. at 149-50, 436 A.2d at 503-04. Upon purchasing the property, SJV executed two notes ("the 1973 notes"). It thereafter went into default, and subsequently negotiated a new agreement with its obligees ("the 1974 agreement"), which SJV claimed was a novation. The 1974 agreement stated that it "‘shall be deemed to be the entire agreement of the parties on the subjects covered herein, supplanting upon its execution any and all inconsistent provisions of prior agreements, oral or written.'" 50 Md. App. at 153, 436 A.2d at 505.

SJV then defaulted on the 1974 agreement and, in the obligees' lawsuit against SJV, the question was whether the obligees could be deemed to have consented to the co-venturers' limitation of liability for the notes under the joint venture agreement. 50 Md. App. at 161-62, 436 A.2d at 510. The court held that, in the absence of the creditors' actual knowledge that the co-venturers had actually so limited their liability for the 1973 notes, "we will not infer that assent . . . based on an imputed notice when the facts demonstrate the absence of a real awareness." 50 Md. App. at 164, 436 A.2d at 511 (emphasis added).

The court further found that, even though the creditors were found to be in possession of the joint venture agreement when they executed the 1974 agreement, they would not be found to have assented to its limitation of liability. The court explained:
what evidence is there of a knowing intent on the part of [the obligees] to give up the only real security behind the notes – the joint liability of the partners – and to substitute for that the general credit of a virtually worthless entity and a five percent several liability of the partners? We find none, and will not infer it merely from the fact that they knew or had possession of the joint venture agreement. To do so would require us to make a double-level assumption for which no evidence exists in the record: (1) we would have to assume cognitive notice – actual awareness – of a limited several liability implicit from an eleven-word clause buried in a fifteen-page agreement under the caption "CAPITAL"; and (2) we would then have to infer from that assumptive cognitive notice an actual knowing consent to a most disadvantageous change in the contract that is no way reflected or even hinted at in the new agreement. That, we think, stretches fiction beyond the point of reason.

50 Md. App. at 167, 436 A.2d at 513. Similarly, in this case, even assuming that plaintiffs were in possession of the Virginia Document, it is incredible that they would have actually knowingly consented to the Virginia Document. They had the contractual right to be notified of their right to refuse the amendments; but Chevy Chase breached the contract by failing to notify them of that right. Therefore, they could not have knowingly assented to the changes. Thus, as the obligees were held not to be responsible for finding and understanding an obscure reference in the joint venture agreement in Dominion, the cardholders here should not be deemed to understand that the Maryland Agreement gave them the right to notice and to refuse the amendments. Moreover, in order to find assent, this Court would have to assume, as the Dominion court refused to do, that the cardholders consented to the Virginia Document – which contained extremely disadvantageous terms for them – notwithstanding the law and the fact that they had a right to decline. Dominion therefore fully supports the conclusion that the cardholders did not assent to the modification because such assent did not occur and would not have occurred if the cardholders had possessed full knowledge of their rights.

Maryland courts do find contract modification when the evidence shows that the assenting party did in fact have full knowledge of the his rights and knowingly relinquished them. In Messall v. Merlands Club, Inc., 233 Md. 29, 194 A.2d 793 (1963), a commercial landlord sought ejectment of its tenant for making monthly rent payments that were $100 short of what was owed. (The lease required a complicated calculation to determine the rent). The Court of Appeals held that:
[w]hile the general rule is that there can be no acquiescence unless the person against whom it is claimed had full knowledge of his rights and of facts which would enable him to take effectual action for the enforcement of such rights, Armour Fertlizer Works v. Brown, 185 Md. 273, 44 A.2d 753 (1945), the record indicates that the landlords had knowledge of their rights since they had complained to the tenant concerning the amounts of the rent checks and, instead of doing something about the shortage, they continued accepting the rent in the reduced amount, apparently satisfied that the deficiency should continue. . . . . Although we do not go so far on this occasion as to say that the acceptance by the landlords of the lesser amounts of rent supports an inference of modification of the lease . . . we think it is clear, as the landlords concede may be the case, that their acquiescence in this continued course of conduct constituted a waiver of their right to declare a default under the lease because of the rent deficiency.

233 Md. at 36-37, 194 A.2d at 798. See also Cole v. Wilbanks, 226 Md. 34, 171 A.2d 711 (1961) (holding that by his conduct party assented to modification or novation, manifested by making payments on a contract knowing that it did not provide a term he had originally wanted). These cases are fully distinguishable from this case, because the parties in those cases had full and actual knowledge of their rights but acquiesced to the contract modifications nonetheless.

2. The Cardholders Did Not Modify The Maryland
Agreement By Their Course Of Conduct.

Chevy Chase's suggestion in its brief (p. 3) that plaintiffs' continued use of their card after Chevy Chase purportedly amended the Maryland Agreement constitutes assent to the modification is not supported by Maryland law. Under Maryland law, in order for a party to modify a contract by its course of conduct, the party must know that it is assenting to a change in contract terms. Bank of Southern Maryland v. Robertson's Crab House, 39 Md. App. 707, 389 A.2d 388 (1978); see also Cole, 226 Md. 34, 171 A.2d 711. In this case, plaintiffs could not have knowingly assented to any modified contract terms because they were not given the contractually required notification that they could have refused the amendments and retained the card on the previous terms for the remainder of the period covered by the annual fee.

In Bank of Southern Maryland, a business owner authorized his company's accountant to pick up monthly bank statements and to make deposits into the business's tax and loan bank account for federal withholding and social security taxes. 39 Md. App. at 709, 389 A.2d at 390. The bank and its employees knew that the accountant had no authority to conduct any other transactions. 39 Md. App. at 710, 389 A.2d at 390. Nonetheless, over a 14 month period, the bank permitted the accountant to exceed his authority and deposit a portion of the proceeds designated for the tax and loan account for his own personal use. 39 Md. App. at 710, 359 A.2d at 391. Because the business owner trusted his accountant completely, he never checked the accountant's reconciliations of his accounts. However, about five months after the last embezzlement took place, he noticed that something was amiss. He sued the bank nine months later. 39 Md. App. at 710-711, 389 A.2d at 391.
The bank relied on University Nat'l Bank v. Wolfe, 279 Md. 512, 369 A.2d 570 (1976) for its argument that the business owner's course of conduct demonstrated his assent to the change. The court rejected that argument, stating:

We think [Wolfe] is distinguishable from the instant case because in that case the customer was fully aware of, and thus can be said to have assented to, the bank's conduct in paying the checks on only one signature. In the instant case, it is undisputed that Robertson's was not aware of the Bank of Southern Maryland's conduct in allowing [the accountant] to divert all or part of the proceeds of the eleven checks to his own use. As stated by the Court of Appeals in Maryland Supreme Corp. v. Blake Co., 279 Md. 531, 541, 369 A.2d 1017, 1025 (1977), "The mutual assent which is the essential feature of every contract is crystallized when there is a knowing and sufficient acceptance to a certain and definite offer." (citation omitted). Absent a knowing acceptance on Robertson's part, there could be no subsequent modification (by conduct or otherwise) of the contract implied in the banking relationship. As Robertson's did not know of the Bank's conduct in paying these checks (which at most can be construed as an offer to modify the contract implied in the banking relationship), it cannot be said to have assented to it.

39 Md. App. at 719, 389 A.2d at 395 (emphasis in original). Bank of Southern Maryland therefore compels the conclusion that no modification of the Maryland Agreement took place by plaintiffs' course of conduct because plaintiffs were not fully aware of the amendments and did not consent to the new terms.

3. The Virginia Document Does Not Constitute A Novation.

Similarly, the Virginia Document does not constitute a novation of the Maryland Agreement. A novation is a new contractual relation made with the intent to extinguish a contract already in existence. A novation contains four elements: (1) a previously valid obligation; (2) the agreement of all the parties to the new contract; (3) the validity of such new contract, and (4) the extinguishment of the old contract, by the substitution of the new one. Dahl v. Brunswick Corp., 277 Md. 471, 481, 356 A.2d 221, 277 (1976). In this case, there was no novation because elements (2), (3) and (4) are not present.

As plaintiffs demonstrated, supra, there was no valid agreement to a new contract. Cardholders' assent to the Virginia Document was a legal impossibility because of Chevy Chase's violation of its change-in-terms provision in the Maryland Agreement. Because there was no mutual assent to the Virginia Document, it is not valid. Finally, the Maryland Agreement was not validly extinguished by the substitution of the Virginia Document, because Chevy Chase failed to amend it in accordance with the terms in the Maryland Agreement.

It is clear, therefore, that there is no contract theory or doctrine which supports defendants' contention that the Virginia Document containing the arbitration clause is a binding, enforceable contract.

III. THE ARBITRATION CLAUSE INVOKED BY DEFENDANTS CANNOT BE ENFORCED BECAUSE PLAINTIFFS DID NOT VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY AGREE TO WAIVE THEIR RIGHT TO A JURY TRIAL.

A. A PARTY WILL NOT BE FOUND TO HAVE AGREED TO ARBITRATION UNLESS THAT PARTY VOLUNTARY, KNOWINGLY AND INTELLIGENTLY AGREED TO AN UNAMBIGUOUS AND UNEQUIVOCAL CONTRACTUAL PROVISION WAIVING THEIR RIGHT TO A TRIAL BY JURY.

The well-established law of contract, in Maryland and throughout the United States, is that a party has not agreed to waive a constitutional right unless that party has voluntarily, knowingly and intelligently agreed to an unambiguous contractual provision waiving that right. For contracts not involving a fundamental right, by contrast, a much milder, less restrictive standard is employed – consent may be formal and constructive, and need not be truly voluntary, knowing and intelligent.
1. This Case Poses the Question of Whether the Plaintiffs Have Waived a Fundamental Constitutional Right.

The invocation of the arbitration clause in this case involves the waiver of a fundamental right -- the right to trial by jury. Article 23 of the Maryland Declaration of Rights provides that "[t]he right of trial by Jury of all issues of fact in civil proceedings...shall be inviolably preserved." The Maryland Court of Appeals has explained that this right, like that guaranteed by the Seventh Amendment to the United States Constitution, "requires that ‘enjoyment of the right...be not obstructed, and that the ultimate determination of issues of fact by the jury be not interfered with.'" Attorney General v. Johnson, 282 Md. 168, 274, 291, 385 A.2d 57, 67 (1978), overruled on other grounds, Newell v. Richards, 323 Md. 717, 594 A.2d 1152 (1991).

In this case, the Virginia Document states "EACH PARTY HEREBY WAIVES ITS RESPECTIVE RIGHT TO A TRIAL BY JURY." There can be no dispute, therefore, that Defendants' Arbitration Clause attempts to take away a constitutional right from plaintiffs. The only question is whether defendants succeeded in achieving that end.

2. The General Law of Contracts Provides That No Party May Be Found to Have Waived a Fundamental Right Unless He Or She Voluntarily, Knowingly and Intelligently Agreed to an Unambiguous and Unequivocal Contractual Provision Waiving That Right.

Like that of other states, Maryland's general law of contracts holds that any contract obligating one party to waive a constitutional right is only valid if the waiver is voluntary, knowing and intelligent. See Meyer v. State Farm Fire and Casualty Co., 85 Md. App. 83, 90, 582 A.2d 275, 278 (1990). 8 This principle has been recognized in numerous cases around the United States. See Western Nat'l Mutual Ins. Fund v. Lennes (In re Workers Compensation Refund), 46 F.3d 813, 819 (8th Cir. 1995) ("Contractual clauses purporting to waive constitutional rights must be clear and unambiguous"); Erie Telecommunications, Inc. v. City of Erie, 853 F.2d 1084, 1096 (3rd Cir. 1988) ("constitutional rights, like rights and privileges of lesser importance, may be contractually waived where the facts and circumstances surrounding the waiver make it clear that the party foregoing its rights has done so of its own volition, with full understanding of the consequences of its waiver."); K.M.C. Co. v. Irving Trust Co., 757 F.2d 752, 756 (6th Cir. 1985) ("Those cases in which the validity of a contractual waiver of jury trial has been in issue have overwhelmingly applied the knowing and voluntary standard."); In re Hannie, 476 P.2d 110, 113 (Cal. 1970) ("A trial by jury may be waived . . . . Waivers of constitutional and statutory rights must be voluntary . . ., and ‘knowing, intelligent acts done with sufficient awareness of the relevant circumstances and likely consequences") (citations omitted). See also Finch v. Vaughn, 67 F.3d 909, 914 (11th Cir. 1995) ("Waivers of constitutional rights not only must be voluntary but must be knowing, intelligent acts done with sufficient awareness of the relevant circumstances and likely consequences.") (citations omitted).

This rule is particularly pronounced in all cases involving contracts of adhesion, such as the credit card agreements in this case. The Supreme Court highlighted this factor in D.H. Overmyer Co. v. Frick Co., 405 U.S. 174 (1972). In that case, the Supreme Court held that a company had lost its due process right to a notice and a hearing to dispute a debt by voluntarily, intelligently and knowingly entering into a contract to waive those rights. But the Court went on to distinguish the case from those involving adhesion contracts (such as credit card agreements):

Our holding, of course, is not controlling precedent for other facts of other cases. For example, where the contract is one of adhesion, where there is great disparity in bargaining power, and where the debtor receives nothing for the cognovit provision, other legal consequences may ensue.

Overmyer, 405 U.S. at 188.

3. A Rigorous Showing of Meaningful and Not Merely Formal Consent Is Required to Find a Waiver of the Right to Trial by Jury.

In the recent landmark case of Badie v. Bank of America, the California Court of Appeal noted that "[i]n order to be enforceable, a contractual waiver of the right to a jury trial ‘must be clearly apparent in the contract and its language must be unambiguous and unequivocal, leaving no room for doubt as to the intentions of the parties." 79 Cal. Rptr.2d 273, 289 (Cal. Ct. App. 1998), rev. denied, 1999 Cal. LEXIS 1198 (Feb. 24, 1999). The Court of Appeal went on to hold that "absent a clear agreement to submit disputes to arbitration or some other form of ADR, we cannot infer that the right to a jury trial has been waived." Id. at 290. The Court based its conclusion on the fundamental nature of the right to a jury trial (which is also guaranteed by the Maryland Constitution):

In light of the importance of the jury trial in our system of jurisprudence, any waiver thereof should appear in clear and unmistakable form. Where it is doubtful whether a party has waived his or her constitutionally-protected right to a jury trial, the question should be resolved in favor of preserving that right.

Id. (citation omitted).

While the Badie case is particularly notable because it is recent and factually similar to this case, its holding is consistent with the decisions of a large number of courts around the nation. A list of illustrative decisions requiring voluntary, knowing and intelligent consent as a precondition to enforcement of a mandatory arbitration agreement is attached as Exhibit 8 hereto.

B. CHEVY CHASE TRANSMITTED THE ARBITRATION CLAUSE TO PLAINTIFFS IN A MANNER THAT IT KNEW OR SHOULD HAVE KNOWN WOULD NEVER BE NOTICED OR READ BY THE VAST MAJORITY OF ITS CARDHOLDERS.

In their January or February 1996 bills, each plaintiff received from Chevy Chase a fine print notice indicating that Chevy Chase intended to make some changes to the cardholder agreement, and that a copy of the new agreement was to be enclosed. (The precise language in this notice was set forth in the Statement of Facts above.) Chevy Chase has represented to this Court and to some plaintiffs that the new agreement was the Virginia Document, and that this document included Defendants' Arbitration Clause.9

Indeed, sending the Virginia Document to plaintiffs in the manner claimed by Chevy Chase (but not yet proven) is still entirely inadequate. Plaintiffs rely in part for this conclusion upon the expert testimony of Todd B. Hilsee, attached as Exhibit 9 hereto. Hilsee is a nationally recognized expert on class action notices, and has been found qualified as an expert by courts in a number of enormous and very important cases. Hilsee Affidavit, Exh. 9 at ¶ 1. Hilsee also has extensive experience working for consumer financial services companies in designing communications and marketing campaigns. Hilsee Affidavit, Exh. 9 at ¶ 2.

Hilsee concludes:
[T]he method that Chevy Chase used to inform its cardholders that it was attempting to amend its cardholder agreement to require them to submit to mandatory arbitration was ineffective from a communications standpoint. In other words, the vast majority of Chevy Chase's cardholders were unlikely to notice or become aware of this change to their cardholder agreement.

Hilsee Affidavit, Exh. 9 at ¶ 8.

First, Hilsee examined the notice in the billing statement that mentioned that the Virginia Document would be enclosed (but did not mention the arbitration clause), and found that it was "poorly designed from a communications standpoint," and "highly unlikely to result in widespread consumer awareness of the adoption of a mandatory arbitration clause." Hilsee Affidavit, Exh. 9 at ¶ 9. Next, Hilsee examined the Virginia Document itself, and found that it is similarly deficient from the communications standpoint. Hilsee Affidavit, Exh. 9 at ¶ 11. Hilsee goes on to identify a number of methods by which Chevy Chase could have given its cardholders a better opportunity to make an informed decision about the new arbitration clause. Hilsee Affidavit, Exh. 9 at ¶¶ 23, 30, 31.

Hilsee next examines the approach of including the arbitration clause in the fine print of an enclosure to a bill. He finds that this method is "entirely ineffective" from a communications standpoint, and that the response rate to such enclosures "is extremely low. Sophisticated communications professionals should expect that the overwhelming majority of consumers receiving such enclosures will simply discard these inserts." Hilsee Affidavit, Exh. 9 at ¶ 18. One significant reason why this is so is that "materials inserted in bills are generally regarded as solicitations, advertisements, or promotions." Hilsee Affidavit, Exh. 9 at ¶ 24. Hilsee cites to a body of empirical data that supports his conclusions that bill stuffers are likely to be disregarded.
Hilsee's expert opinion is strongly supported by the testimony of the named plaintiffs in this case. None of the named plaintiffs saw a Virginia Document in one of their bills. See Affidavit of Dale Wells, Exhibit 10 hereto, at ¶ 2; Affidavit of John Dovel, Exhibit 11 hereto, at ¶ 2; and Affidavit of Sharon Goldenberg, Exhibit 12 hereto, at ¶ 2. None of these plaintiffs realized that defendants were taking the position that the plaintiffs would lose their constitutional right to a trial by jury if they retained their Chevy Chase credit card. Wells Affidavit, Exh. 10, at ¶ 5; Dovel Affidavit, Exh. 11, at ¶ 5; Goldenberg Affidavit, Exh. 12, at ¶ 5. They were used to getting numerous solicitations and promotions in their bills, however, Wells Affidavit, Exh. 10, at ¶ 4, which supports Todd Hilsee's conclusions.

One of the named plaintiffs testifies as follows:
5. If I had been aware that Chevy Chase Bank or First USA Bank was attempting to get me to agree to give away my right to go to court and sue them if we had a dispute I would have refused.

6. I do not do business with any company which asks me to give up my constitutional rights in order to do business with them. In fact, I have canceled accounts with Montgomery Wards, AT&T, First Card and Norwest Financial because those entities attempted to get me to agree to forced arbitration in the event of disputes with them.

Wells Affidavit, Exh. 10.

The experience of the named class representatives is hardly unique. The affidavits of Jeffrey Barnett, Exh. 1 hereto, and Virginia Ripley, Exh. 2 hereto, indicate that 136 Chevy Chase cardholders contacted plaintiffs' counsel, and were asked to provide whatever contract documents they had retained in their files. Not one of these persons reported having received the Virginia Document as an enclosure to a billing statement. 10

This empirical survey strongly supports Hilsee's expert opinion that people do not read or retain material squirreled away inside of their billing statements.

In sum, even though Defendants' Arbitration Clause attempts to deprive plaintiffs of their constitutional right to trial by jury, defendants communicated this clause to plaintiffs in a way that Defendants knew or should have known that very few of the plaintiffs would ever notice or read. Todd Hilsee has testified, "it is my opinion that a large and sophisticated credit card issuer such as Chevy Chase knew or should have known that this method of communication was likely to be highly ineffective." Hilsee Affidavit, Exh. 9, at ¶ 28. The law in Maryland is clear that defendants cannot take away their cardholders' constitutional rights by intentionally and successfully sneaking fine print by them in a manner that defendants know or should have known the cardholders will never notice. This Court should apply the standard contract law doctrine that waivers of constitutional rights must be voluntary, knowing and intelligent. To do otherwise would permit waivers of constitutional rights that are involuntary, unknowing, and unintelligent.

IV. DEFENDANTS' ARBITRATION CLAUSE IS UNCONSCIONABLE BECAUSE IT REQUIRES PLAINTIFFS TO PAY EXCESSIVE FEES THAT WOULD PREVENT PLAINTIFFS FROM PURSUING ANY REMEDY.

A. DEFENDANTS' ARBITRATION CLAUSE IMPOSES LARGE FEES UPON PLAINTIFFS.

Defendants' Arbitration Clause requires plaintiffs to jump through two separate hoops. First, each plaintiff must "mediate" his or her claim with the AAA. Second, if the plaintiff is not satisfied with the results of the mediation, he or she must arbitrate his or her claim "under the rules of the AAA." Under the AAA rules, any plaintiff wishing to bring a claim against defendants will be required to pay substantial fees to pursue those claims.

The fees applicable to the mediation and arbitration scheme applying to this case are governed by the AAA's Commercial Dispute Resolution Procedures ("AAA Rules"). See Affidavit of Victoria Nugent, Exhibit 5 hereto, at ¶ 4. A true and accurate copy of these rules is attached hereto as Exhibit 6.

Under the AAA Rules, each party to mediation must pay a $150 filing fee. Nugent Affidavit, Exh. 5, at ¶ 5. In addition, the parties must pay the fee for an arbitrator to facilitate the mediation. Id. In this area, the arbitrator's hourly fees range from $100 to $350. Id. Thus even if the mediation takes only one hour, this initial phase would require a plaintiff to pay fees of $250 to $500.

A plaintiff would then have to initiate an arbitration proceeding. Even if the claim were listed as being for less than $10,000, the plaintiff would then be required to pay an administrative filing fee of $500. Id. at ¶ 6(a). In addition, the following additional fees would be assessed to plaintiffs pursuing arbitration: a daily hearing fee of $150, a daily room rental fee of $150, and hourly fees for the arbitrator of between $100 and $350. Id. at ¶¶ 6(b) and 6(c). 11

Thus, even if the arbitration takes only one hour, the plaintiff would be required to pay fees of $900 to $1,150 in addition to the mediation fees.

Thus, to pursue the claims at issue in this lawsuit, a plaintiff would have to pay fees of at least $1,150 (assuming the shortest possible mediation, the shortest possible arbitration and the cheapest possible arbitrators for both the mediation and the arbitration). If either the mediation or the arbitration took more time than the minimum possible (one hour), and if either the mediator or the arbitrator charged a fee that was higher than the very cheapest possible under the rules, a plaintiff would be required to pay a good deal more. Indeed, plaintiffs could easily be required to pay mediation and arbitration fees of several thousand dollars just to secure a forum for raising their claims. In contrast, the fee for filing this action in this Court was $110.

B. DEFENDANTS DID NOT DISCLOSE THESE EXCESSIVE FEES TO PLAINTIFFS.

As Part III of this brief establishes, defendants' communications with plaintiffs with respect to mandatory arbitration were designed in such a way as to ensure that very few of the plaintiffs would ever notice or read the arbitration clause. Even if a plaintiff had found and read the fine print clause, however, he or she would have found no information about the mediation and arbitration fees that would be imposed upon them. Defendants' Arbitration Clause made no mention of the fact that cardholders would be responsible for substantial fees in the arbitral forum that are significantly larger than the filing fees required to initiate an action in court.

It is not surprising, therefore, that plaintiffs never even contemplated the imposition of such fees. Named plaintiff John Dovel, for example, has testified that he "never understood that [defendants were] proposing to have me . . . pay an arbitrators fee if I brought an arbitration claim. . . ." Dovel Affidavit, Exh. 11, at ¶ 7. Named plaintiff Dale Wells, similarly, testifies that he has "no idea what the cost of arbitration is . . . ." Wells Affidavit, Exh. 10, at ¶ 8.

By failing to disclose that plaintiffs would be required to bear these large fees, defendants effectively concealed the significance of Defendants' Arbitration Clause. This lack of disclosure constitutes an impermissible surprise and thus is unconscionable. See Myers v. Terminex, 697 N.E. 2d 277, 281 (Ohio Ct. Comm. Pleas 1998) ("[Plaintiff] was unaware of the undisclosed arbitration requirements. Such exorbitant filing fees [of $2000], "agreed to" unknowingly, would prevent a consumer of limited resources from having an impartial third party review his or her complaint against a business-savvy commercial entity. Therefore...the undisclosed filing fee requirement . . . is so one-sided as to oppress and unfairly surprise [the plaintiff].").

C. BY REQUIRING PLAINTIFFS TO PAY THESE EXCESSIVE FEES, DEFENDANTS' ARBITRATION CLAUSE IS UNCONSCIONABLE.

1. The Mediation and Arbitration Fees Required by Defendants Will Likely Exceed the Value of Most Class Members' Claims.

The fees discussed above very likely exceed the average class members' claims. In this case, plaintiffs' allege that Chevy Chase charged them excessive interest. Even though the Maryland Agreement – the sole binding and valid agreement governing Chevy Chase's relationship with plaintiffs – stated that Chevy Chase would "never" raise plaintiffs' interest rates over 24%, plaintiffs have been charged interest rates of 26% and 27% on their balances. The damages resulting from these excessive charges are significant to each individual plaintiff, but are hardly enough to make an individual claim (either in court or in arbitration) economically feasible. If a plaintiff were charged an interest rate that was 3% too high under the Maryland Agreement (27% less the 24% allowed under the contract), and he or she had a balance of $1,000 for an entire year, the damages for that plaintiff would be $30. Even if a class member had a $10,000 balance for two years, that class member's damages would only amount to $600.

Plaintiffs also allege that Chevy Chase charged them certain improper fees.12

In light of the modest individual size of class members' claims, it should hardly be surprising that the excessive fees required by Defendants' Arbitration Clause would bar plaintiffs from having any remedy for defendants' breach of contract and deceptive practices. Named plaintiff Dale Wells, for example, testifies as follows:

Had I been required to go to arbitration against Chevy Chase under the terms set out in their proposed agreement, I most likely would not have brought any claim against the bank because the arbitration fee, in all probability, would have been at least as much, if not more, than the value of the claim I have against Chevy Chase Bank.

Wells Affidavit, Exh. 10 at ¶ 9. The testimony of named plaintiff John Dovel is to the same effect. Dovel Affidavit, Exh. 11, at ¶ 9.

In other words, Defendants' Arbitration Clause requires plaintiffs to pay fees to defendants' hand-picked arbitrators that will equal or exceed most of the plaintiffs' claims. These fees do more than give the lie to the oft-heard claim that arbitration is "cheaper" than litigation in court. These excessive fees will prevent plaintiffs from having any meaningful remedy for their claims.

2. A Host of Courts Have Refused to Enforce Arbitration Clauses With Comparable Fees.

In a wave of cases decided during the last two years, federal and state appellate courts have refused to enforce arbitration clauses that required plaintiffs to pay fees that might discourage or prevent a party from bringing a claim. The Eleventh Circuit, for example, found unenforceable an arbitration clause that required claimants to pay a $2000 filing fee and to bear potential responsibility for a portion of the arbitrator's fees. The Eleventh Circuit held that "costs of this magnitude [are] a legitimate basis for a conclusion that the clause does not comport with statutory policy [enabling people subjected to workplace discrimination to vindicate their rights]." Paladino v. Avnet, 134 F.3d 1054, 1062 (11th Cir. 1998) (Cox, J. concurring, for a majority of the court).13

In Shankle v. B-G Maintenance Management of Colorado, 163 F.3d 1230 (10th Cir. 1999), the court examined an arbitration agreement governing an employment relationship. The court refused to compel arbitration where the claimant would be required to pay one-half of the arbitrator's fees -- an amount projected to total between $1875 and $5000 -- to resolve a discrimination claim against his employer. The court found that the agreement was unenforceable, "plac[ing] Mr. Shankle between the proverbial rock and a hard place – it prohibited use of the judicial forum, where a litigant is not required to pay for a judge's services, and the prohibitive cost substantially limited use of the arbitral forum." 163 F.2d at 1235.

These three federal court of appeals decisions are only part of a wave of recent decisions striking down arbitration clauses as unconscionable where those clauses require claimants to pay substantial fees. See Horenstein v. Mortgage Market, Inc., No. 98-1104-AA (D. Or. 1999) (finding unenforceable arbitration agreement that required claimants to pay share of arbitrator's fees, regardless of possibility that cost of fees might be recovered in subsequent award) (a copy is attached as Exhibit 13 hereto); Martens v. Smith Barney, Inc., 181 F.R.D. 243, 255-56 (S.D.N.Y. 1998) (stating "arbitration agreement cannot impose financial burdens on plaintiff access to the arbitral forum" including steep filing fees and arbitrators' fees); Patterson v. ITT Consumer Financial Corp., 18 Cal. Rptr. 2d 563, 566-67 (Cal. App. 1993) (refusing to compel arbitration of modest consumer claims where claimants were required to pay fees on grounds of unconscionability), review denied, 1993 Cal. LEXIS 4322 (Aug. 12, 1993), cert. denied, 510 U.S. 1176 (1994); Spence v. Omnibus Industries, 119 Cal. Rptr. 171, 173-73 (Cal. App. 1975) (refusing to require plaintiff seeking judicial resolution of $37,000 claim against building contractor to pay $720 filing fee to submit claim to arbitration); Brower v. Gateway 2000, 676 N.Y.S.2d 569, 574 (N.Y. App. 1998) (finding that "excessive cost factor [of approximately $5000] that is necessarily entailed" rendered provision requiring arbitration in an International Chamber of Commerce forum unconscionable); In Matter of Arbitration between Teleserve Systems Inc. and MCI Telecommunications Corp., 659 N.Y.S. 2d 659, 660, 664 (N.Y. App. 1997) (finding filing fee calculated on basis of one-half percent of the amount claimed – $204,000 fee in a $40 million anti-trust dispute – patently excessive, oppressive, burdensome and a bar to arbitration and therefore unconscionable in contract between sophisticated telecommunications firms); Myers v. Terminex, 697 N.E.2d at 280-81 (holding unconscionable arbitration clause that would require claimant to pay a filing fee of $2000 to pursue claim worth approximately $120,000).

No Maryland appellate court has addressed the question of excessive arbitration fees in a published opinion. In light of the numerous cases cited above, however, this Court should follow the body of Maryland law establishing that a contract for the sale of goods that bars all remedies and avoids all damages is unconscionable. See Martin Marietta v. Internat'l Telecommunications Satellite Org., 991 F. 2d 94, 100 (4th Cir. 1992) (applying Maryland law, the court concluded that a contract provision waiving claims that might arise under contract, negligence and strict liability theories was against public policy and could not be enforced to block claims for gross negligence) (citing State Highway Admin. v. Greiner Eng'g Sciences, 83 Md. App. 621, 577 A. 2d 363, cert. denied, 321 Md. 163, 582 A.2d 499 (1990) and Boucher v. Riner, 68 Md. App. 539, 514 A. 2d 485 (1986)). Here, the arbitration agreement – by operation – bars all remedies available to Chevy Chase's cardholders, and therefore forces a result that is unconscionable.

V. THE ARBITRATION CLAUSE HERE IS UNCONSCIONABLE AND THUS UNENFORCEABLE BECAUSE, BY PREVENTING PLAINTIFFS FROM PROCEEDING ON A CLASS ACTION BASIS, IT DENIES AN EFFECTIVE REMEDY TO NEARLY ALL THE CLASS MEMBERS.

A number of courts have recognized that arbitration may not be compelled where doing so would deny plaintiffs meaningful relief for their claims. In addition, as is also set forth below, without the ability to proceed on a class action basis, most or all of the class members in this case will have no effective remedy for their claims. Accordingly, the mandatory arbitration clause at issue here is unconscionable. 14

A. ARBITRATION MAY NOT BE REQUIRED WHERE THE ARBITRATOR LACKS THE POWER TO PROVIDE ALL OF THE REMEDIES TO WHICH THE CLAIMANT MAY BE ENTITLED.

The U.S. Supreme Court has conditioned its preference for arbitration on the requirement that arbitration offers remedies that are equal to those available in court. In the leading U.S. Supreme Court case setting forth a preference for arbitration, Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991), the Court made this premise clear: "[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum." Numerous other courts have held that arbitration must offer "all of the types of relief that would otherwise be available in court" before a court will compel arbitration. See Cole v. Burns Int'l Security Services, 105 F.3d 1465, 1482 (D.C. Cir. 1997). See also Martens v. Smith Barney, Inc., 181 F.R.D. 243, 256 (S.D.N.Y. 1998) ("arbitration must allow remedies central to the statutory scheme...[and] sufficient to satisfy statutory purposes"). As this brief will establish, Defendants' Arbitration Clause ensures that few if any plaintiffs will ever have a meaningful opportunity to pursue their claims, thus denying plaintiffs the types of relief that would be available in court or the remedies central to those provided at law for their causes of action.

Two circuits of the federal Court of Appeals have recently refused to enforce arbitration agreements that limited the type of remedies available to claimants and subsequently would not have allowed a vindication of their statutory rights. The Eleventh Circuit refused to compel arbitration of an employment discrimination claim where the arbitration agreement limited remedies to damages for breach of contract and "insulate[d ] [the employer] from Title VII damages and equitable relief." Paladino v. Avnet Computer Tech., Inc., 134 F.3d 1054, 1062 (11th Cir. 1998) (Cox, J. concurring, for a majority of the court). The court reached this result holding that the arbitrability of claims under Title VII "rests on the assumption that the arbitration clause permits relief equivalent to court remedies." Id. The Paladino court continued: "When an arbitration clause has provisions that defeat the remedial purpose of the statute . . . the arbitration clause is not enforceable." 134 F.3d at 1062 (citing Cole).

Similarly, the Ninth Circuit invalidated an arbitration agreement that required a claimant to forfeit rights and benefits guaranteed by statute – recovery of punitive damages and attorneys' fees and a one-year statute of limitations – in arbitrating a claim under the Petroleum Marketing Practices Act. Graham Oil v. ARCO Products Co., 43 F.3d 1244, 1247-48 (9th Cir. 1994) ), cert. denied, 516 U.S. 907 (1995). See also DeGaetano v. Smith Barney, Inc., 983 F. Supp. 459, 469 (S.D.N.Y. 1997) (voiding provision of arbitration agreement that disallowed attorneys' fees to prevailing plaintiff in Title VII claim after concluding that "contractual clauses purporting to mandate arbitration of statutory claims...are enforceable only to the extent that the arbitration preserves the substantive protections and remedies afforded by the statute."); Roby v. Corporation of Lloyd's, 996 F. 2d 1353, 1365-66 (2d Cir. 1993) (compelling arbitration where forum provided remedies adequate to vindicate substantive rights of plaintiffs, as well as protect underlying public policy of securities laws), cert. denied, 510 U.S. 945 (1993); Parrett v. City of Connersville, Ind., 737 F.2d 690, 697 (7th Cir. 1984) (holding that arbitration offended due process where arbitrator could not award full common law damages nor prevent harm to constructively discharged plaintiff before it occurred), cert. dismissed, 469 U.S. 1145 (1985); Coughlin v. Shimizu America Corp., 991 F. Supp. 1226, 1231 (D. Or. 1998) (compelling arbitration of Fair Labor Standards Act claim where agreement provided for an award of attorney fees to the prevailing party, finding that plaintiff would have "all of the remedies available under the FLSA if he prevails in arbitration that he would have if he prevails in...court"); LaChance v. Northeast Publishing, Inc., 965 F. Supp. 177, 185 (D. Mass. 1997) (allowing plaintiff to pursue judicial claim under the Americans with Disabilities Act where arbitration agreement covering employment did not authorize arbitrator to provide remedy of ‘reasonable accommodation' which plaintiff was entitled to pursue under the Act); Broughton v. CIGNA Healthplans, 76 Cal. Rptr. 2d 431, 434 (Cal. Ct. App. 1998), rev. granted, 78 Cal. Rptr.2d 907 (Cal. 1998) (refusing to require plaintiffs to proceed to arbitration where it would prevent the plaintiffs from pursuing their claims for injunctive relief, holding that the party seeking to enforce the arbitration clause had the duty to "establish that all the remedies available under the Act are available in an arbitration in order to demonstrate that it is merely an alternative neutral forum.") (footnotes omitted). Taken together, these cases stand for a simple and powerful proposition: courts should not compel mandatory arbitration unless the arbitrator has the power to provide a claimant with all of the relief to which he or she is entitled.

B. IF PLAINTIFFS ARE COMPELLED TO SUBMIT TO DEFENDANTS' ARBITRATION CLAUSE, THEY WILL BE DENIED ANY EFFECTIVE REMEDY FOR DEFENDANTS' WRONGDOING.

1. Under Defendants' Arbitration Clause, Plaintiffs Would Likely Be Forced to Arbitrate Their Claims on an Individual Basis.

The Arbitration Clause included in the Virginia Document is silent on the subject of whether claims may be pursued on a class action basis in arbitration. The vast majority of courts to consider such a clause have refused to permit individuals to bring their claims in arbitration on a class action basis. See, e.g., Champ v. Siegel Trading Co., Inc. 55 F. 3d 269, 274 (7th Cir. 1995) (refusing to compel class-wide arbitration absent contractual authority, and noting similar position of Second, Fifth, Sixth, Eighth, Ninth and Eleventh Circuits).

2. If Plaintiffs Are Required to Pursue Their Claims on an Individual Basis, Few If Any of Them Will Have Any Chance of Receiving Any Relief for Their Claims.

In this case, as set forth in Part IV above, most plaintiffs' and putative class members' individual claims are worth only a few hundred or a few thousand dollars. For individual arbitration to be "just another forum" that realistically offers the same remedies as are available in court, it must be possible for plaintiffs to pursue their claims against defendants on a class-wide basis. Unfortunately, that may not be possible here because the Virginia Document, if controlling, does not provide for class-wide arbitration. Defendants' brief states that plaintiffs have brought this case "in the wrong forum," brief at 1, but defendants are only kidding this Court. As defendants know well, if plaintiffs are required to pursue individual arbitration (which may be the only type of arbitration available if the Virginia Document controls here), arbitration will not provide "another forum," it will provide no forum at all.

Attached to this brief are affidavits from three experts in consumer litigation: Robert Hobbs of the National Consumer Law Center (affidavit attached as Exhibit 14 hereto); Philip Friedman (affidavit attached as Exhibit 15 hereto); and Mark Steinbach (affidavit attached as Exhibit 16 hereto). Each of these persons has extensive background in and knowledge about the economic realities of individual and class action litigation. See Steinbach affidavit, Exh. 16, at ¶¶ 2-3 ("Between my own practice and my conversations and observations, I have become very familiar with the market for legal services for consumers who wish to litigate disputes with companies."); Friedman Affidavit, Exh. 15, at ¶¶ 2-4. Each of these persons has reviewed the First Amended Complaint in this case, and none of them has any financial interest in this case. Steinbach Affidavit, Exh. 16 at ¶¶ 4-5; Friedman Affidavit, Exh. 15 at ¶ 5. Each of these experts has donated their time in preparing their affidavits on a pro bono basis. Steinbach Affidavit, Exh.16 at ¶ 5; Friedman Affidavit, Exh. 15 at ¶ 5.

Every one of these experts reaches the same conclusion: the claims raised by plaintiffs in this case cannot be realistically brought on an individual basis. Mark Steinbach explains:

If I had been approached by any of the named class representatives in this case and asked to handle their claims on an individual basis, I would not have accepted their cases on a contingency fee basis, and would have strongly discouraged each of them from retaining me to handle such claims on an hourly basis. After reviewing their factual allegations (and even assuming them to be true), my judgment is that their claims are just not large enough to justify the great expense and time that is likely to be required to proceed with litigation against a bank with great resources, where the bank denies the claim. These claims would not be economically feasible on an individual basis, whether they were to be resolved by an arbitrator or a court.

Exh. 16 at ¶ 6. Mr. Steinbach concludes as follows:

[I]f the plaintiffs in this case are required to pursue their claims on an individual basis, even if I assume that their claims are completely valid and that they deserve to prevail under the law governing those claims, it is overwhelmingly likely that few if any of the people in the proposed class would be able to find an attorney to represent them on a contingency basis, and that it would be foolhardy for any consumer to retain counsel to pursue the relatively small amounts on an hourly basis. If those claims can only be pursued on an individual basis, my opinion is that very few – and probably, none – of the people in the proposed class have any realistic chance of obtaining a remedy for the conduct described in the first amended complaint, no matter how strong their claims are.

Steinbach Affidavit, Exh. 16, at ¶ 9. See also Friedman Affidavit, Exh. 15, at ¶ 7 ("Even were I to assume that the plaintiffs' claims are completely valid and they are entitled to prevail under the applicable law, there is no economic rationale in pursuing an individual claim.")

The conclusions of these experts are consistent with the holdings of dozens of courts that have recognized that, without the ability to proceed on a class-wide basis, most consumers with small claims will have no realistic opportunity to receive any justice for their claims. The U.S. Supreme Court recently explained why this is so:

The policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights. A class action solves this problem by aggregating the relatively paltry potential recoveries into something worth someone's (usually an attorney's) labor.

Amchem Products, Inc. v. Windsor, 521 U.S. 591, 617 (1997) (citation omitted). The point is simple and compelling: the only chance for individuals with modest claims to obtain justice is if they are permitted to aggregate their claims in a class action. See also Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 809 (1985) ("Class actions . . . may permit the plaintiffs to pool claims which would be uneconomical to litigate individually. [In such a case,] most of the plaintiffs would have no realistic day in court if a class action were not available."). A list of other cases holding that consumers with small individual claims will receive no relief unless they are permitted to proceed on a class action basis is attached as Exhibit 17 hereto.

In sum, courts have repeatedly declined to compel arbitration where the arbitrator does not have the ability to provide all of the meaningful remedies available to the courts. Where arbitration would bar individual consumers with modest claims from pursuing their claims on a class action basis, then it is not a meaningful remedy. Accordingly, courts should not impose arbitration in those circumstances. 15

C. IN DECISIONS INVOLVING CLASS CERTIFICATION, MANY COURTS HAVE RECOGNIZED THAT CLASS ACTIONS ARE SUPERIOR TO INDIVIDUAL ARBITRATION IN CASES INVOLVING SMALL STAKES.

For a court to certify a case for treatment as a class action under Fed. R. Civ. P. 23(b)(3) or most state class action rules, the court must find "that a class action is superior to other available methods for the fair and efficient adjudication of the controversy." In considering motions for class certification, several courts have compared the merits of handling a case as a class action in court against handling the case on an individual basis through arbitration, and have found the arbitration alternative severely lacking. These decisions lend analogous support to the proposition that arbitration does not offer meaningful relief to consumers in such cases.

In a securities class action, for example, Judge Sweet, in the Southern District of New York, acknowledged the superiority of class actions to arbitration:

If the instant motion for class certification were denied, each individual investor would have to arbitrate the existence, and economic effect, of a massive antitrust conspiracy in proceedings that ordinarily provide only limited discovery ... Moreover, the conspiracy would have to be litigated before securities industry panels that have been widely criticized for their lack of antitrust or legal expertise. Perhaps most significantly, as set forth above, few, if any, individual investors would have the financial means and motivation necessary to prove the conspiracy alleged here.

In re NASDAQ Market-Makers Antitrust Litigation, 169 F.R.D. 493, 529 (S.D.N.Y. 1996). Cf. Dickler v. Shearson Lehman Hutton, Inc., 596 A.2d 860, 867 (Pa. Sup. Ct. 1991), appeal denied, 616 A.2d 984 (Pa. 1992) (giving approval to class arbitration proceedings where economics of individual arbitrations will result in few actions occurring).

VI. THE "LOSER PAYS RULE" CONTAINED IN DEFENDANTS' ARBITRATION CLAUSE IS UNCONSCIONABLE.

Defendants' Arbitration Clause states that "the prevailing party in an arbitration shall be entitled to reasonable attorneys' fees (including allocated costs for in-house legal services), costs and necessary disbursements incurred in connection with such an action or proceeding, as determined by the arbitrator."16

Like the excessive fees and the failure to allow for class actions, this "Loser Pays Rule" will predictably have the effect of discouraging plaintiffs from pursuing any remedies through arbitration. Thus, this rule is also unconscionable and unenforceable.
The normal rule, of course, in the United States and in Maryland, is that "the prevailing party generally does not recover attorneys' fees." Alba Conte, 1 Attorney Fee Awards § 1.03 at 4 (1993) (citing Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240 (1975)). In addition, while a number of statutes provide that plaintiffs may recover attorneys' fees, the general rule in civil rights cases and many other areas of the law pitting individuals against powerful companies and institutions is that defendants may not recover their attorneys' fees, except in unusual circumstances:

Unlike prevailing plaintiffs who are ordinarily entitled to fees in civil rights cases, prevailing defendants may not recover fees unless they can show that the plaintiff's action was frivolous, unreasonable, or without foundation, or when plaintiff continues to litigate a case after the lack of foundation becomes evident. Courts generally have concluded that an award of attorneys' fees against a losing plaintiff is an extreme sanction and must be limited to truly egregious cases of misconduct.

Conte, § 1.05 at 9 (footnotes omitted).

The Supreme Court has enunciated the simple and sensible reason for this rule: requiring individuals to pay a defendant's attorneys' fees merely because they do not prevail would discourage plaintiffs from seeking relief. "To take the further step of assessing attorney's fees against plaintiffs simply because they do not finally prevail would substantially add to the risks inhering in most litigation and would undercut the efforts of Congress to promote the vigorous enforcement of the provisions of Title VII." Christiansburg Garment Co. v. EEOC, 434 U.S. 412, 422 (1978).

This principle is equally true in this case. If plaintiffs could be forced to pay all of defendants' attorneys fees if they did not prevail upon their claims, none of them could afford to take the risk of pursuing their claims. Indeed, just a few hours of defense counsel's time in this case would likely exceed the financial stakes of most class members in this matter.

VII. THE SECRECY PROVISION OF DEFENDANTS' ARBITRATION CLAUSE IS UNCONSCIONABLE.

In addition to imposing excessive fees upon plaintiffs and preventing them from proceeding on a class action basis, Defendants' Arbitration Clause compels plaintiffs to submit to an entirely secretive system of dispute resolution, and deprives plaintiffs of their right to an open, reviewable system of dispute resolution. As noted in the Statement of Facts above, all proceedings in arbitration are "strictly confidential, except for disclosures of information required in the ordinary course of business of the parties or by applicable law or regulation." This provision, if enforced, would sharply limit plaintiffs' right of free speech. Plaintiffs believe that this case is a particularly egregious illustration of corporate abuse of consumers – Chevy Chase promised not to raise its interest rates over 24%, and then did. There has been enormous national press interest in this abuse, as evidenced by articles in publications such as U.S. News and World Report, USA Today, and stories broadcast on both television and radio. Defendants' Arbitration Clause would bar plaintiffs from speaking publicly on these matters, even though the Defendants' Arbitration Clause was communicated to plaintiffs in a manner that ensured that few if any plaintiffs would be aware of it. If defendants are permitted to eliminate plaintiffs' rights to free speech with respect to any claim they might have against defendants through the use of an insert to a credit card bill, banks will gain remarkable powers to limit the speech rights of the vast majority of clients who do not read such inserts. The limits on plaintiffs' free speech rights are substantively unfair, and arise from procedural defects (defendants' predictably ineffective methods of communicating the clause to plaintiffs), and thus these limits are unconscionable under Maryland law. See, e.g., Williams, 306 Md. at 340-341, 508 A.2d at 989-90.

This secrecy also permits defendants to conceal the truth about AAA's performance as the arbitrator of disputes involving defendants. Defendants picked AAA over other arbitration providers, and defendants – not plaintiffs – are knowledgeable about what sorts of persons are chosen by AAA to be arbitrators. AAA could rule for defendants in every single case it arbitrates (and thus give defendants a strong incentive to continue to patronize AAA), and that fact would remain "confidential" and thus be concealed from defendants' cardholders and the public at large. The extraordinary secrecy enshrined in Defendants' Arbitration Clause permits defendants and AAA to exercise unchecked discretion.

The secrecy provision of Defendants' Arbitration Clause also removes the resolution of disputes from the public domain, and deprives consumers of the benefit of discovering precedents in cases decided in their favor. Defendants – who repeatedly come before AAA in disputes with different individual cardholders – will know what facts have been established in arbitrations before AAA, and arguments AAA arbitrators accept and do not accept, for example, but individual plaintiffs will be deprived of this information.

VIII. WHILE DEFENDANTS CITE SEVERAL CASES WHERE COURTS HAVE ENFORCED ARBITRATION CLAUSES PURSUANT TO CHANGE-IN-TERMS PROVISIONS, NONE OF THOSE CASES ARE APPLICABLE HERE.

As set forth above, the plaintiffs in this case never agreed to be bound by Defendants' Arbitration Clause. Plaintiffs rely upon two central arguments, each of which is rooted in the specific facts of this case -- the language of the relevant documents, the testimony relating to method and content of the communications between these defendants and these plaintiffs, the fees required by Defendants' Arbitration Clause, etc. Plaintiffs two contentions (in a nutshell) are (a) that they never agreed to the arbitration clause here, because (among other reasons) defendants did not comply with their own change-in-terms provision requiring that plaintiffs be given notice of the proposed changes and their right to reject those changes, and (b) that Defendants' Arbitration Clause is unconscionable.

Defendants' brief relies upon five cases where arbitration clauses added to credit card contracts pursuant to "change-in-terms" provisions were enforced. 17 All five of these decisions are from trial courts (including three from courts located in Alabama). By contrast, the one appellate court to evaluate an arbitration clause imposed pursuant to a change of terms provision found the clause unenforceable. Badie v. Bank of America, 79 Cal. Rptr. 2d 273. Four of defendants' five cases have not been published in any official reporter. Four of these decisions are also so brief and cryptic as to be completely unhelpful. The Perry, Williams, and Eiland cases, for example, are each less than one page long, and each include only a few sentences relating to the facts. The Ruscio case breaks the one page barrier (barely), but states only that "Respondent has shown by their admissible proof a valid and binding agreement between the parties." Defendants' Brief, Exhibit C, at 2. None of defendants' five cases offers a sufficient discussion to permit useful comparison or instruction in this case.

Defendants apparently cite these cases for the general proposition that arbitration clauses adopted pursuant to a change-in-terms provision are usually enforceable. Defendants' motion cannot be granted or denied based upon a general discussion of the credit card industry as a whole. It must be decided upon the evidence and documents put before the Court in this specific case. Defendants' broad defense of change-in-terms provisions in general has no application in this case, where plaintiffs have set forward a strong factual record against the enforcement of the arbitration clause.

In this case, for example, Chevy Chase did not comply with its own change-in-terms provision. See Part II, supra. The Maryland Agreement plainly provided that it could not be amended unless Chevy Chase provided a detailed notice that complied with subtitle 9, and Chevy Chase did not provide the required notice. Not one of the five cases cited by Chevy Chase has any language to suggest that the court there enforced an arbitration provision imposed pursuant to a change-in-terms provision where the bank itself failed to comply with the change-in- terms provision. Indeed, by contrast, the Perry case's brief recitation of facts does mention that "It is clear that [the bank] followed the procedural terms of the credit card agreement in adding the arbitration provision." In the Stiles case, similarly, the defendant gave the plaintiff an explicit opportunity to reject the attempted amendment of his agreement, 994 F. Supp. at 1413, which is precisely the opportunity that defendants here were contractually bound to provide plaintiffs but failed to provide.

Similarly, there is no indication that any of defendants' five cases involved a factual showing (from both fact and expert witnesses) that the plaintiffs in those cases had not knowingly, voluntarily or intelligently agreed to the arbitration agreement. In the Williams case, by contrast, the court's sketchy opinion does mention in a footnote that "Plaintiff admits to reading, understanding and signing a credit card agreement which provided that the terms of the agreement could be altered upon written, mailed notice unless she objected within thirty days of receipt." 1997 WL 579156 at *1. Thus, all of the evidence compiled in Part III, supra, distinguishes this case from defendants' five cases.

None of defendants' five cases rebuts any of plaintiffs' arguments on unconscionability. None of the cases makes any mention of the fees that the plaintiffs in those cases would have to pay to arbitrate their claims. None of the cases makes any mention of evidence showing that the plaintiffs in those cases would be denied any relief for their claims if they were required to pay such arbitration fees. None of these cases mentions any evidence showing that compelling arbitration in those cases would effectively prevent the plaintiffs from pursuing their claims. Finally, none of defendants' five cases makes any mention of a Loser Pays Rule or of special secrecy provisions, and none of these cases hold that such provisions are conscionable.
No one would expect to win a contract case by citing unpublished cryptic decisions that show that contracts are to be enforced in general. Similarly, defendants' five cases – setting forth the general proposition that change-in-terms provisions may be enforceable in given (though undescribed) factual settings – cannot be used to take away these plaintiffs' constitutional rights under these facts in this case.

CONCLUSION
Defendants' motion to compel arbitration should be denied. Chevy Chase's attempt to add an arbitration clause did not comply with its own contractual obligations for amending the cardholder agreement, and even if it had done so, Defendants' Arbitration Clause is unconscionable for the reasons set forth above.

ENDNOTES
1. The Maryland Agreement is Exhibit A to the complaint, and also to defendants' brief. The Virginia Document was Exhibit B to the complaint and also defendants' brief. While this brief will argue from these documents, we will not reattach them as an exhibit yet again.

2. Attached, as Exhibit 18 hereto, is a list of the types of documents plaintiffs would seek through requests for production and the types of interrogatories plaintiffs would pursue relating to mandatory arbitration if Defendants' Motion is not defeated on the legal grounds set forth above. Several courts have firmly recognized the right of plaintiffs to take discovery under such circumstances. See Berger v. Cantor Fitzgerald Securities, 942 F. Supp. 963 (S.D.N.Y. 1996); Duffield v. Robertson Stephens & Co., 144 F.3d 1182, (9th Cir. 1998), cert. denied, 119 S.Ct. 445 (1998); Hooters of America, Inc. v. Phillips. 39 F. Supp.2d 582, 591 (D.S.C. 1998), aff'd, 1999 U.S. App. LEXIS 6329 (4th Cir. 1999); and Wrightson v. ITT Financial Services, 617 So.2d 334, 336 (Fla. Dist. Ct. App. 1993), rev. denied, 632 So.2d 1026 (Fla. 1994).

3. This brief will argue in Part III below, with support from a well-recognized consumer communications expert, that if Chevy Chase did enclose the Virginia Document in the billing statements as it claims, this method of communication was entirely ineffective precisely because the vast majority of consumers discard such inserts without reading them.

4. See Affidavit of Victoria Nugent, Exhibit 5 hereto, at ¶ 4.

5. Plaintiffs' specific arguments relating to unconscionability are set forth in Parts IV, V and VI below. Part IV argues that Defendants' Arbitration Clause is unconscionable because it imposes excessive fees upon plaintiffs. Part V argues that it is unconscionable because it prevents plaintiffs from proceeding on a class-wide basis, eliminating any realistic remedy for plaintiffs. Part VI argues that Defendants' Arbitration Clause is unconscionable because its secrecy provisions will infringe upon plaintiffs' rights to free speech and open dispute resolution.

6. Any clause or provision in an agreement governing the plan or in any instrument which evidences or secures an extension of credit under a plan that is in violation of this subsection shall be unenforceable. Md. Code Ann., Com. Law I, §12-923(b)(4)(i) (emphasis added). Chevy Chase knew or should have known that it was not bound by Subtitle 9, because it is preempted by the Home Owners Loan Act ("HOLA"), 12 U.S.C. § 1463(g) and its implementing regulations. Nonetheless, Chevy Chase, as the drafter of the Maryland Agreement, elected to bind itself by Subtitle 9's terms by contractually obligating itself to comply with the statute.

7.As plaintiffs will show in Section III, infra, the arbitration clause also is not binding because in order to form a valid agreement to arbitrate, both parties must knowingly, voluntarily and intelligently consent to it.

8. While Meyer recognizes the constitutional principle cited, the court was not required to apply that principle in the facts in that case. In Meyer, an insurance policy required insureds to submit to an appraisal process before they could bring a suit in court. The court found that this policy did not involve a waiver of the right to trial by jury, because the insureds could always sue in court after the appraisal process. If the defendants here succeed in enforcing Defendants' Arbitration Clause, however, plaintiffs will have no day in court whatsoever. Under these circumstances, therefore, Meyer requires that plaintiffs must have knowingly, voluntarily and intelligently agreed to Defendants' Arbitration Clause before that clause may be enforced.

9. As the Statement of Facts above recites, however, there is no evidence that Chevy Chase ever actually sent the Virginia Document to any of the plaintiffs. Indeed, of 136 putative class members who contacted plaintiffs' counsel, not one reported receiving the Virginia Document with their monthly bill. (It is possible that class member Meredith Norrholm received the Virginia Document with her monthly bill, but she does not remember. See Norrholm Affidavit, Exh. 4.) Chevy Chase should at least provide this Court with hard evidence that it actually sent the Virginia Document to all of the plaintiffs before it can be allowed to even argue that its cardholders waived their constitutional rights.

10. Only two of these persons had a copy of the Virginia Document in their file. Ripley Affidavit, Exh. 2, ¶ 6. One of these persons said that he did not receive the Virginia Document until after he complained to Chevy Chase. Maret Affidavit, Exh. 3, at ¶ 3. The other did not know how or when she received the Virginia Document. Norrholm Affidavit, Exh. 4.

11. One court has confirmed these figures, noting that the average AAA arbitrator's daily fee is $700. Cole v. International Security Servs., 105 F.3d 1465, 1480, n.8 (D.C.Cir. 1997).

12. These improper fees include a new over limit fee of $20 or more, and increased late fees of $20 or more (the Maryland Agreement provided for late fees of $15 or 5% of the minimum payment).

13. Paladino followed Cole v. Burns International Security Servs., 105 F.3d 1465, 1484 (D.C.Cir. 1997), where, in a carefully reasoned opinion, Chief Judge Edwards held that an employee could not be required to pay an arbitrator's fee – which the court estimated to range from $500 to $1000 or more, daily – to pursue his discrimination claims, because the fees would discourage such an action and prevent him from vindicating his statutory rights. (Ultimately, the court interpreted an ambiguous provision in the agreement to require the employer to pay all of the arbitrator's fees, and so found the agreement enforceable. Cole, 105 F.3d at 1485.)

14. A handful of courts have compelled arbitration in settings that arguably prevented the named plaintiffs from going forward on a class-wide basis. See, e.g., Champ v. Siegel Trading Co., Inc., 55 F.3d 269, 277 (7th Cir. 1995); Kelly v. UHC Management Co., 967 F. Supp. 1240, 1260 (N.D. Ala. 1997); or Randolph v. Green Tree Financial Corp., 991 F. Supp. 1410, 1423-25 (M.D. Ala. 1997). Not one of these cases, or of the similar cases that might be cited, involved a factual record where the plaintiffs produced admissible evidence that nearly all of the class members would have no remedy but for the class action remedy. None of those cases discussed (much less rejected) the line of cases discussed in Part V-A below, that arbitration may not be required where it cannot provide the same remedies that are available in court, as here.

15. At least one industry self-regulatory body has acknowledged that arbitration should not be compelled for cases that are appropriate for class action treatment. The National Association of Securities Dealer's Code of Arbitration Procedure prohibits NASD members "from compelling arbitration of a claim which is part of a class action." Nielson v. Piper, Jaffray & Hopwood, Inc., 66 F.3d 145, 146 (7th Cir. 1995), cert. denied, 516 U.S. 1116 (1996).

16. As with the other provisions of Defendants' Arbitration Clause, plaintiffs never knew of or agreed to this provision. See Wells Affidavit, Exh. 10 at ¶ 11 ("I neither understood nor agreed that I would pay Chevy Chase's cost of litigation if I brought a claim and lost. I would never have agreed to these terms."); Dovel Affidavit, Exh. 11, at ¶ 8 ("I never understood that Chevy Chase Bank and/or First USA Bank was proposing to have me . . . pay the banks' lawyers as well as my own in the event my claim was not allowed by an arbitrator.")

17. The five cases cited by defendants are Stiles v. Home Cable Concepts, Inc., 994 F. Supp. 1410 (M.D. Ala. 1998); Perry v. Beneficial Nat'l Bank USA, No. CV97-218, 1998 WL 279174 (Macon Co., Ala., May 18, 1998), Williams v. Direct Cable TV, No. CV-97-009, 1997 WL 579156 (Henry Co., Ala., Aug. 13, 1997); Eiland v. First USA Bank, N.A., No. CV-98-22538 (Maricopa Co., Ariz., May 18, 1999); and Ruscio v. First USA, Index No. 3220-98 (Albany Co., N.Y., Oct. 20, 1998).

_____________________________
F. Paul Bland, Jr.
Sarah Posner
Victoria S. Nugent
TRIAL LAWYERS FOR PUBLIC JUSTICE, P.C.
1717 Massachusetts Avenue, N.W.
Suite 800
Washington, D.C. 20036
(202) 797-8600
(202) 232-7203 (Facsimile)

____________________________
John T. Ward
Ward, Kershaw & Minton
113 West Monument Street
Baltimore, MD 21201
(410) 685-6700
(410) 685-6704 (Facsimile)

_____________________________
Michael P. Malakoff
Malakoff, Doyle & Finberg, P.C.
The Frick Building, Suite 203
Pittsburgh, PA 15219
(412) 281-8400
(412) 281-3262 (Facsimile) CERTIFICATE OF SERVICE

I, Paul Bland, hereby certify that I have had served by hand a copy of the Plaintiffs' Opposition to Defendants' Motion to Compel Arbitration and to Stay Judicial Proceedings Pending Arbitration upon David Cynamon, counsel for the defendants on June 22, 1999.

_____________________________
F. Paul Bland, Jr.

EXHIBITS TO PLAINTIFFS' OPPOSITION TO DEFENDANTS'
MOTION TO COMPEL ARBITRATION

1. Affidavit of Jeffrey Barnett

2. Affidavit of Virginia Ripley

3. Affidavit of Robert Maret

4. Affidavit of Meredith Norrholm

5. Affidavit of Victoria S. Nugent

6. Excerpts from American Arbitration Association's Commercial Arbitration Rules (1997)

7. Table of Cases Where Courts Have Refused to Enforce Arbitration Clauses Found to Be Unconscionable

8. Table of Cases Requiring Voluntary, Knowing and Intelligent Consent as a Precondition to Enforcement of Mandatory Arbitration Agreement

9. Affidavit of Todd Hilsee

10. Affidavit of Dale Wells

11. Affidavit of John Dovel

12. Affidavit of Sharon Goldenberg

13. Horenstein v. Mortgage Market, Inc., No. 98-1104-AA
(D. Or. 1999)

14. Affidavit of Robert Hobbs

15. Affidavit of Philip Friedman

16. Affidavit of Mark H. Steinbach

17. Table of Cases Holding that Consumers with Small Individual Claims Will
Receive No Relief Unless They Are Permitted to Proceed On A Class Action
Basis

18. Plaintiffs' Requests for Production and Interrogatories Directed at the Question of Mandatory Arbitration