Monday, March 3, 2014
Contracts between credit card holders and card issuers typically provide for late fees and “overlimit fees” (for making purchases in excess of the card limits) ranging from $15 to $40. Since these fees are said to greatly exceed the harm that the issuers suffer when their customers make late payments or exceed their credit limits, do they violate the Due Process Clause of the Constitution?
They do not, according to the United States Court of Appeals for the Ninth Circuit (In re Late Fee & Over-Limit Fee Litig, No. 08-1521 (9th Cir. 2014)). Although such fees may even be purely punitive, the court pointed out that the due process analyses of BMW of North America v. Gore and State Farm Mut. Auto Ins. Co. v. Campbell are not applicable in contractual contexts, but only to jury-awarded fees. In Gore, the Court held that the proper analysis for whether punitive damages are excessive is “whether there is a reasonable relationship between the punitive damages award and the harm likely to result from the defendant's conduct as well as the harm that actually has occurred” and finding the award of punitive damages 500 times greater than the damage caused to “raise a suspicious judicial eyebrow”. 517 U.S. 559, 581, 583 (1996). The State Farm Court held that “few awards exceeding a single-digit ratio between punitive and compensatory damages … will satisfy due process. 538 U.S. 408, 425 (2003).
Contractual penalty clauses are also not a violation of statutory law. Both the National Bank Act of 1864 and the Depository Institutions Deregulation and Monetary Control Act provide that banks may charge their customers “interest at the rate allowed by the laws of the State … where the bank is located.” 12 U.S.C. s 85, 12 U.S.C. S. 1831(d). “Interest” covers more than the annual percentage rates charged to any carried balances, it also covers late fees and overlimit fees. 12 C.F.R. 7.4001(a). Thus, as long as the fees are legal in the banks’ home states, the banks are permitted to charge them.
Freedom of contracting prevailed in this case. But should it? Because the types and sizes of fees charged by credit card issuers are mostly uniform from institution to institution, consumers do not really have a true, free choice in contracting. As J. Reinhardt said in his concurrence, consumers frequently _ have to_ enter into adhesion contracts such as the ones at issue to obtain many of the practical necessities of modern life as, for example, credit cards, cell phones, utilities and regular consumer goods. Because most providers of such goods and services also use very similar, if not identical, contract clauses, there really isn’t much real “freedom of contracting” in these cases. So, should the Due Process clause apply to contractual penalty clauses as well? These clauses often reflect a compensatory to penalty damages ratio higher than 1:100, much higher than the limit set forth by the Supreme Court in the torts context. According to J. Reinhardt, it should: The constitutional principles limiting punishments in civil cases when that punishment vastly exceeds the harm done by the party being punished may well occur even when the penalties imposed are foreseeable, as with contracts. Said Reinhardt: “A grossly disproportionate punishment is a grossly disproportionate punishment, regardless of whether the breaching party has previously ‘acquiesced’ to such punishment.”
Time may soon come for the Supreme Court to address this issue, especially given the ease with which companies can and do find out about each other’s practices and match each other’s terms. Many companies even actively encourage their customers to look for better prices elsewhere via “price guarantees” and promise various incentives or at least matched, lower prices if customers notify the companies. Such competition is arguably good for consumers and allow them at least some bargaining powers. But as shown, in other respects, consumers have very little real choice and no bargaining power. In the credit card context, it may be said that the best course of action would be for consumers to make sure that they do not exceed their credit limits and make their payments on time. However, in a tough economy with high unemployment, there are people for whom that is simply not feasible. As the law currently stands in the Ninth Circuit, that leaves companies free to virtually punish their own customers, a slightly odd result given the fact that contracts law is not meant to be punitive in nature, but rather to be a resource allocation vehicle in cases where financial harm is actually suffered.