Academic journal article Harvard Law Review

Constitutional Law - State Action - Ninth Circuit Rejects Due Process Limit on Credit Card Fees

Academic journal article Harvard Law Review

Constitutional Law - State Action - Ninth Circuit Rejects Due Process Limit on Credit Card Fees

Article excerpt

In recent decades, the Supreme Court has held that excessive punitive damage awards in tort suits violate the Due Process Clause. (1) Consumer advocates have invoked the Court's punitive damages decisions to challenge contractual credit card penalty fees as similarly violative of due process. (2) Recently, in In re Late Fee and Over-Limit Fee Litigation, (3) the Ninth Circuit rejected such a claim as unsupported by precedent, but a majority of the panel encouraged the Supreme Court to extend the tort cases' reasoning to contract cases involving credit card agreements. (4) The state action requirement, however, poses a principal difficulty to this extension. Revitalizing the public function theory of state action, (5) despite its current dormancy, would be one means of protecting consumers in an age in which many traditional contract law protections have been supplanted by boilerplate terms, narrowed by courts, or abrogated by positive law. Public function theory, while absent from both the briefing and opinions, is the only theory of state action that captures an important feature of why punitive credit card fees are objectionable: they entail card issuers exercising state-like power over consumers.

Provisions allowing card issuers to impose penalty fees, including fees for late payments or over-limit use, are included in the contracts necessary for obtaining credit cards. (6) Although recent federal legislation has resulted in limits on the amount of some credit card fees, (7) fees still constitute more than one-third of issuers' annual revenue. (8) A slightly late payment or slightly over-limit use imposes only de minimis marginal costs on issuers, (9) and card issuers recoup any costs through raising cardholders' interest rates. (10) As a result, the fees are best understood not as compensatory, but rather as either driven by profit motives or as "purely punitive." (11) Such fees are forbidden under the common law of contracts, (12) which has traditionally been particularly suspicious of late fees on the grounds that they are often punitive rather than compensatory. (13) Credit card penalty fees have been permitted, however, by positive law abrogating the common law of contracts. (14)

In January 2007, cardholders sued card issuers in the Northern District of California, alleging, inter alia, that contractual penalty fees violate due process limits on punitive damages. (15) In an opinion by Judge Armstrong, the district court dismissed the complaint, (16) rejecting all of the plaintiffs' claims, including their attempt to apply the Due Process Clause to credit card penalty fees. (17) It reasoned that credit card fees are not subject to the Due Process Clause because they are merely "paid by one party to another pursuant to private contract," (18) do not advance "governmental objectives," (19) and do not impose the risks, present in the jury awards context, of "arbitrariness, uncertainty, and lack of notice." (20) Additionally, it found that credit card fees--"even if [they] could be regarded as some kind of private 'punitive damages'"--do not implicate state action and therefore do not violate the Due Process Clause. (21) The Court distinguished fees set by government mandate from those resulting from private contract, and rejected the plaintiffs' argument that contractual penalty fees are state action when affirmatively permitted by a federal regulatory framework. (22)

The Ninth Circuit affirmed. (23) Writing for the panel, Judge Nelson (24) noted that the "similarities and differences between liquidated [compensatory] damages and punitive damages ... govern the outcome of this case," (25) and enumerated the various features of punitive damages, in particular their goals of retribution and deterrence. (26) Yet she decided the case not based on these features, but rather based on the fees' origin: because they originate from private contracts, she concluded, they are distinct from jury-imposed punitive damages and, consequently, the Due Process Clause does not apply. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.