Lawyers Face Uphill Climb in Challenging Payment Protection

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Certain lawsuits challenging payment protection practices have not been the subject of legal preemption, and they have become a focal point of effort to challenge the programs, Paris adds. Such cases largely involve lawsuits in which plaintiffs were involuntarily enrolled in protection plans.

"We've figured out which ones aren't preempted, and that's what we go for," says Paris. "There's no preemption of a claim that you were involuntarily enrolled."

Another effort that has been foiled involves plaintiffs' bid to consolidate lawsuits. The U.S. Judicial Panel on Multidistrict Litigation denied plaintiffs' efforts to centralize payment protection litigation in December 2010, determining "each defendant appears to have offered several different products, which were marketed in different ways and subject to different disclosures."

Among the cases in which banks have agreed to financial settlements, they have not been forced to dig too deeply into their coffers.

"The money they have to pay out is insignificant compared to the money they've taken from the product," Paris says.

Banking industry members argue that the relatively low amounts they've paid in settlements speaks to the weakness of claims against their products in light of regulations codifying their existence.

"To read the allegations in the complaints filed in these lawsuits, you'd think it was a product that plaintiffs are saying ought to be banned, that it was a sham," says Greg Dresser, a partner at Morrison & Foerster who has represented banks against payment protection litigation. "There's certainly no settlement that comes anywhere near that view of the product."

Discover proposed in October 2011 to settle a class action for $10.5 million and agreed to adjust its marketing practices. The U.S. District Court for the Northern District of Illinois has preliminarily approved the agreement and is scheduled to hold a fairness hearing in May 2012.

Separately, Discover settled a suit with the Minnesota AG's office in November 2011 for $2 million and similarly agreed to alter its sales tactics. The company will also provide refunds to customers who say they were signed up for payment protection without their consent.

On Jan. 27, plaintiffs' attorneys and HSBC submitted a $23.5 million settlement to the U.S. District Court for the Eastern District of Pennsylvania for preliminary approval.

Some of the settlements appear to have affected banks' appetite for continuing to offer payment protection plans. JPMorgan Chase agreed to pay $20 million to settle litigation against its plan in December 2010 in the U.S. District Court for the Southern District of Florida, a few months after challenges were filed. The company has since "significantly reduced" its marketing of the product, according to Mintel Comperemedia.

Other banks continue to defend their payment protection plans from all critics. Paris points to Bank of America, which faces a consolidated class action in the U.S. District Court for the Northern District of California.

"My team is prepared to take this bank to trial, because in this economic climate, what bank is going to survive being in a trial in front of a jury? I think we can do pretty well," Paris says.

Last month Bank of America submitted a motion to dismiss several claims against it filed with the court and a response to the plaintiffs' complaint that cited 45 affirmative defenses.

Paris notes that B of A doesn't have a mandatory arbitration clause in its contracts and says the bank "shows no signs of wanting to settle."