January 21, 2014

Credit card late fees and over-limit fees are not punitive damages, according to the Ninth Circuit (Pinon v. Bank of America)

This published Ninth Circuit opinion is quite an entertaining read.

The plaintiffs in the case are a class of consumers who hold credit cards with major banks.  They filed a complaint alleging that the defendants charged them fees ranging from $15 to $39 for missing payments and for exceeding their borrowing limits. The plaintiffs conceded that the penalties were authorized by their borrowing agreements, but they alleged that the amount of the fees are unconstitutionally excessive under the due process principles set forth BMW v. Gore and State Farm v. Campbell.  The district court dismissed their complaint for failure to state an actionable claim.

The Ninth Circuit affirmed, agreeing that due process principles do not prevent enforcement of excessive penalty clauses in private contracts. But that's not the entertaining part.  The entertaining part is Judge Reinhardt's concurring opinion.  The concurrence, dripping with sarcasm, explains that the Supreme Court has "recently discovered" constitutional limitations on punitive damages, and should consider extending those limitations for the benefit of not just corporate evildoers, but ordinary consumers as well.  Here's the full introduction to Judge Reinhardt's concurrence: 

I concur, reluctantly. The Supreme Court has recently discovered that the Constitution prevents courts from imposing disproportionate punitive damages in tort cases. If the Court continues to adhere to its newfound view, it would be well advised to apply the same rule to prevent disproportionate penalties from being imposed on consumers when they breach contracts of adhesion. Consumers must frequently enter into such one-sided contracts if they are to obtain many of the practical necessities of modern life, such as credit cards, cellular phones, utilities, and other vital consumer goods. Applied to such contracts, the Court’s most recent substantive due process rule—which has to date served primarily to protect wealthy corporations from liability for repeated wrongdoing—would also protect ordinary consumers from paying excessive court-enforced damages for minimal breaches of contract. These excessive penalties are currently paid to large national business entities which, each year, collect billions of dollars in late fees alone. They reflect a compensatory to penalty damages ratio higher than 1 to 100, which far exceeds the ratio of non-punitive to punitive damages that the Court has held to be prohibited by the Constitution in tort cases. In sum, if due process is violated when courts award disproportionate punitive damages in the tort context, due process is equally violated when courts enforce the punitive and substantially more disproportionate penalty clauses in contracts of adhesion.
I ultimately agree with the opinion of the court, however, that the Constitution has not yet been so interpreted. Thus, I cannot disagree with the ultimate decision. I do believe, however, that the proposition I discuss deserves further exploration and analysis, and  that, should the new Supreme Court doctrine continue in effect, the extension of that doctrine as requested by Cardholders should eventually become the law under the Due Process Clause.
 The full concurring opinion is worth a read and is only about seven pages long.

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