Court Oks Excessive Credit Card Fees, Reluctantly

Bad news from the 9^th U.S. Circuit Court of Appeals Tuesday for consumers who endure credit card late fees.

The appeals court rejected a class action lawsuit by cardholders who challenged excessive credit card fees as unconstitutional.  The consumers argued unsuccessfully that the fee are analogous to punitive damages imposed in the tort context and therefore should be subject to due process limits imposed by the U.S. Supreme Court in a 1996 case.

No dice.  The limit on punitive damages in tort cases “does not apply to contractual penalties, such as credit card fees at issue in this case,” wrote Judge Dorothy Nelson.  The panel affirmed the lower court dismissal of the class action.

But they were sympathetic.

Judge Stephen Reinhardt, in a reluctant concurrence wrote, “The Supreme Court 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.”  (an adhesion contract is one in which one side has all the bargaining power, as in credit card contracts, in which consumers must agree to non-negotiable terms in order to acquire credit cards.)

Nelson agreed with Reinhardt in urging the Supreme Court to take up the issue.

The case stems from a group of consumer credit card holders who sued the largest issuers of the card to protest the size of fees imposed for late payment or charges beyond the card limit.

Typically, the charges are between $15 and $39.  The amount may vastly exceed the harm that issuers actually suffer.

Nelson pointed out that a consumer who pays a balance in full every month and pays on time my get dinged for fees in one month if he loses track of how much was spent and goes a few dollars beyond his limit and then pays three days late.  The fee may be a $39 late fee and a $39 fee for exceeding the limit and then instantly doubles if the issuer imposes the “penalty rate” for interest, or as much as $78.

But in the end the panel said its hands are tied.  The National Bank Act of 1864 provides that a national bank may charge its customers interest rate that is allowed by state law.

Judge Milan Smith joined Nelson and Reinhardt.

Case:  In re: Late Fee & Over-Limit Fee Litigation, No. 08-15218