New Second Circuit decision: Ross v. Bank of America, N.A.

Ross v. Bank of America, N.A., ___ F.3d ___ (2d Cir. Apr. 25, 2008), is technically an antitrust case, but the Second Circuit's opinion is noteworthy for its discussion of arbitration clauses that ban class actions. The plaintiffs alleged that, beginning in late 1998 or early 1999, a group of banks met and agreed to include mandatory arbitration clauses with class action bans in all of their credit card agreements. Slip op. at 4-5. The plaintiffs claimed that the conspiracy violated federal antitrust laws, specifically, Section 1 of the Sherman Act (15 U.S.C. § 1). Id. at 5-6. The district court granted the defendant's motion to dismiss, holding that the plaintiffs lacked Article III standing because no defendant had threatened to enforce a collusively-formed arbitration provision against them. Id. at 6-7. The Second Circuit disagreed, and reversed:

The cardholders have adequately alleged antitrust injuries in fact. The Complaint asserts that, as a result of an illegal conspiracy and group boycott, the cardholders have been subjected to suppressed competition and “deprived of any meaningful choice on a critical term and condition of their general purpose card accounts.” Further, the district court recognized that “reduced choice and diminished quality of credit card services” were among the injuries asserted by the cardholders. In re Currency Conversion, 2006 U.S. Dist. LEXIS 66986, at *9. The Supreme Court has opined that one form of antitrust injury is “[c]oercive activity that prevents its victims from making free choices between market alternatives.” Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 528 (1983); see also Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 127 S.Ct. 2705, 2736 (2007) (Breyer, J., dissenting) (identifying “providing consumers with a free choice” about whether to choose lower prices or more services as “a basic antitrust objective”); FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 459 (1986) (“A refusal to compete with respect to the package of services offered to customers, no less than a refusal to compete with respect to the price term of an agreement, impairs the ability of the market to advance social welfare by ensuring the provision of desired goods and services to consumers at a price approximating the marginal cost of providing them.”). The Complaint alleges that reduced choice and diminished quality in credit services result directly from the banks’ illegal collusion to constrict the options available to cardholders. These harms are sufficiently “actual or imminent,” as well as “distinct and palpable,” to constitute Article III injury in fact. Denney [v. Deutsche Bank AG], 443 F.3d [253,] 264 [(2d Cir. 2006)].

The harms claimed by the cardholders, which lie at the heart of their Complaint, are injuries to the market from the banks’ alleged collusion to impose a mandatory term in cardholder agreements, not injuries to any individual cardholder from the possible invocation of an arbitration clause. The antitrust harms set forth in the Complaint – for example, the reduction in choice for consumers, many of whom might well prefer a credit card that allowed for more methods of dispute resolution – constitute present market effects that stem directly from the alleged collusion and are distinct from the issue of whether any cardholder’s mandatory arbitration clause is ever invoked. The reduction in choice and diminished quality of credit services to which the cardholders claim they have been subjected are present anti-competitive effects that constitute Article III injury in fact.

Id. at 8-9, 10. Interestingly, the Second Circuit accepted the argument that the cards were less valuable to consumers because (among other things) the class action bans meant that the class action bar would not be motivated to police the banks' conduct:

According to the cardholders, the conspiracy among the banks was designed to limit the choice of terms offered to cardholders, resulting in at least two ways in their receiving objectively less valuable cards than would otherwise have been the case. First, because the banks conspired not to offer cards permitting class actions, the cardholders will be forced to expend time and legal fees to monitor the legality of the banks’ behavior, whereas if the cardholders had access to a card that permitted class actions, they would have the option of relying on motivated class action attorneys to perform this function. If the cardholders chose not to monitor the banks – which would perhaps be more likely because, as the Complaint observes, actions that result in significant aggregate revenue to the banks (concerning, e.g., late fees, overlimit fees, foreign transaction fees, APR, etc.) generally harm individual consumers in only small amounts – they would still lose the services of class action attorneys. Either way, the cardholders would have been forced to accept a less valuable card as a result of the banks’ alleged collusion.

Second, the alleged conspiracy to limit the cardholders to cards that require arbitration of disputes also diminished the present value of the cards offered to the cardholders. A card that limits the holder to arbitration is less valuable (all other factors being equal) than a card that offers the holder a choice between court action or arbitration. Even assuming that the cardholders might be able to void that limitation when an actual dispute arises by opposing the banks’ motion to compel arbitration via a claim of antitrust collusion, that possibility is more theoretical than real for two reasons. The cost of litigating the antitrust issue when the particular dispute arises will almost certainly be disproportionate to the dispute. (A plaintiff will not spend a hundred thousand dollars in legal fees to litigate a five thousand dollar dispute.) Furthermore, the cardholders’ ability to prove the illegal collusion may well have evaporated with the passage of time, due to the deaths, retirements, changes of jobs, and fading memories of the participants and observers of the conspiratorial meetings, as well as the loss and destruction of documents.

We believe that at least in these two independent respects the cardholders have alleged an illegal conspiracy that resulted in a present injury by requiring them to accept less valuable cards than would otherwise have been available, but for the illegal collusion.

Id. at 10-12 (emphasis added). [Via Blawgletter]