Beneficial National Bank, U.S.A. v. Payton

Brief Fact Summary.

Payton (Defendant) obtained a credit card from Beneficial National Bank, U.S.A. (Beneficial) (Plaintiff). A year later, Beneficial sent all cardholders a notice that it was adding a mandatory arbitration clause to the cardholder agreements that would become effective unless a cardholder rejected the change. Defendant did not take any steps to reject the change. The account was later assigned to Household Bank (SB), N.A. (Household) (Plaintiff). A notification of this assignment was sent to Defendant along with Household’s cardholder agreement, also mandating arbitration. Defendant continued to use the card. A dispute arose and Defendant filed a claim against both Plaintiffs in state court. Plaintiffs brought suit in federal court to compel arbitration as mandated by both cardholder agreements. Defendant sought to dismiss the federal action, arguing that the mandatory arbitration clause had not been made part of his agreement.

Synopsis of Rule of Law.

When a credit cardholder agreement allows the card issuer to change the terms of the agreement; the issuer then notifies the cardholder of the additional arbitration provision and provides the cardholder with the opportunity to opt out of that provision, but the cardholder does not; and the cardholder continues to use the card, the arbitration provision becomes part of the cardholder agreement.

Facts.

Defendant obtained a credit card from Beneficial and signed a cardholder agreement. One of the terms of that agreement allowed Beneficial to change the cardholder agreement with regards to existing balances and future purchases so long as they followed certain notice requirements. The next year, Beneficial sent notice to all cardholders alerting them of a change to the cardholder agreement that would make arbitration mandatory in case of a dispute. The provision would become part of the cardholder agreement unless a cardholder rejected the change within a specified period of time. Defendant did not reject the change. Later, Defendant’s account was transferred to Household. Defendant was notified of the transfer and provided with the Household cardholder agreement, which also contained a mandatory arbitration clause. Defendant continued to use the card. Two years later, Defendant sued Plaintiffs in state court in a fraudulent misrepresentation claim. Plaintiffs then sued in federal district court, seeking to compel arbitration as required by the cardholder agreements under § 4 of the Federal Arbitration Act. Defendant argued that the arbitration provisions had not become part of his cardholder agreement and moved to dismiss the federal claim for lack of subject matter jurisdiction. Plaintiffs argued that Defendant had agreed to allow Beneficial to change the terms of the cardholder agreement and that Defendant’s continued use of the card after the transfer to Household and notification of Households’ arbitration clause meant that the provisions were part of both agreements and Defendant was bound by both. 

Issue.

When a credit cardholder agreement allows the card issuer to change the terms of the agreement; the issuer then notifies the cardholder of the additional arbitration provision and provides the cardholder with the opportunity to opt out of that provision, but the cardholder does not; and the cardholder continues to use the card, does the arbitration provision become part of the cardholder agreement?

Held.

(Lee, C.J.) Yes. When a credit cardholder agreement allows the card issuer to change the terms of the agreement; the issuer then notifies the cardholder of the additional arbitration provision and provides the cardholder with the opportunity to opt out of that provision, but the cardholder does not; and the cardholder continues to use the card, the arbitration provision becomes part of the cardholder agreement. Defendant claims that the original agreement allowed Beneficial to change terms of the agreement, but not to add new terms. This argument fails because Defendant could have anticipated that “changes” to the cardholder agreement could include the addition of an arbitration provision. Defendant also argues that a valid and binding arbitration agreement cannot be based on simply a failure to reject the change, but requires affirmative consent. The precedent underlying this argument has previously been rejected in this jurisdiction, however. Defendant also asserts that even if the arbitration provision did become part of his cardholder agreement, the state court claims do not fall within that provision because they relate to acts committed prior to the addition of the arbitration clause. This argument also fails because when arbitration clauses contain retroactive language, they may be applied retroactively. Although the clause at issue here did not contain retroactive time-specific language, it was broad enough in scope to cover Defendant’s state court claims, especially when analyzed under the principle that ambiguity as to the application of arbitration is to be resolved in favor of arbitration. Last, Defendant claims that the arbitration clause is substantively unconscionable. However, Defendant has not shown that the arbital forum designated by the provision is biased in a way that would dictate the outcome. Motion to compel is granted to Plaintiffs.

Discussion.

The traditional rule of contracts held that consumer silence is not adequate to show acceptance. Otherwise, companies would be free to unilaterally change more significant terms of their consumer contracts, such as interest rates or prices. The court here did not follow this traditional rule, but others have. In Long v. Fidelity Water Systems, Inc., 2000 U.S. Dist. LEXIS 7827 (N.D. Cal. 2000), the trial court ruled for the card holder, finding that the card issuer never obtained affirmative consent from the card holder allowing the addition of the arbitration clause as part of the contract. The court in that case suggested that acceptance of an added arbitration clause cannot be shown with only the card holder’s silence in failing to reject the proffered addition.