IN THE CIRCUIT COURT FOR BALTIMORE CITY, MARYLAND
DALE WELLS, et al.
CHEVY CHASE BANK, F.S.B., et al.
Civil No. C-99-000202
PLAINTIFFS' OPPOSITION TO DEFENDANTS'
MOTION TO COMPEL ARBITRATION AND TO
STAY JUDICIAL PROCEEDINGS PENDING ARBITRATION
F. Paul Bland, Jr.
Victoria S. Nugent
Trial Lawyers for Public Justice
1717 Massachusetts Avenue, Suite 800
Washington, DC 20036
(202) 232-7203 (Facsimile)
John T. Ward
Ward, Kershaw & Minton
113 West Monument Street
Baltimore, MD 21201
(410) 685-6704 (Facsimile)
Michael P. Malakoff
Malakoff, Doyle & Finberg, P.C.
The Frick Building, Suite 203
Pittsburgh, PA 15219
(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
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
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.
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)
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
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
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
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. §
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,
(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
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
(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
(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
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
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
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., ¶¶
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
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
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
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
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,
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
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
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
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.")
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
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
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.
[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,
IV. DEFENDANTS' ARBITRATION CLAUSE IS UNCONSCIONABLE BECAUSE IT REQUIRES
PLAINTIFFS TO PAY EXCESSIVE FEES THAT WOULD PREVENT PLAINTIFFS FROM PURSUING
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
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
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
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
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
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
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.
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
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
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,
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.
Victoria S. Nugent
TRIAL LAWYERS FOR PUBLIC JUSTICE, P.C.
1717 Massachusetts Avenue, N.W.
Washington, D.C. 20036
(202) 232-7203 (Facsimile)
John T. Ward
Ward, Kershaw & Minton
113 West Monument Street
Baltimore, MD 21201
(410) 685-6704 (Facsimile)
Michael P. Malakoff
Malakoff, Doyle & Finberg, P.C.
The Frick Building, Suite 203
Pittsburgh, PA 15219
(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
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
Receive No Relief Unless They Are Permitted to Proceed On A Class Action
18. Plaintiffs' Requests for Production and Interrogatories Directed
at the Question of Mandatory Arbitration