It is not every day that you read a court citing to “the Code of Hammurabi’s goat-stealing regulations” when it discusses the constitutionality of credit card late fees and overlimit fees; however, when it comes to the Wild West’s Ninth Circuit, anything is possible.
On January 21, the Ninth Circuit issued its decision in In re late Fee and Overlimit Fee Litigation, 2014 WL 211729 (9th Cir. Jan. 21, 2014). In this case, credit cardholder plaintiffs alleged that card issuers charged them penalty fees for making purchases in excess of their cards’ credit limits (“overlimit fees”) or for making late payments on monthly balances (“late fees”). The plaintiffs alleged that the late and overlimit fees the card issuers charged exceeded the amounts authorized by the National Bank Act, 12 U.S.C. §§ 85-86 (“NBA”). Specifically, the complaint alleged that the NBA “cannot authorize fees that constitute unconstitutionally excessive punitive damages.” Additionally, the complaint alleged that the fees violated California’s UDAP statute, Cal. Bus. & Prof. Code § 17200. The plaintiffs sought to recover under the remedial provisions of the NBA, which permit a borrower to recover damages if the borrower was charged interest in excess of what the statutes allow. According to the plaintiffs’ theory, because charging interest rates in this case was unconstitutional, they cannot be “authorized” by the state statute or exported to other states by the NBA, and therefore such fees are actionable. The court rejected this argument.
The plaintiff asked the court to apply principles of substantive due process developed by the U.S. Supreme Court in the tort context to liquidated damages clauses in private contracts. The court distinguished liquidated damages provisions, which are enforceable if the damages flowing from the contract breach are likely to be difficult to ascertain or prove at the time of the agreement, and represent a good faith effort by the parties to appraise the benefit of the bargain, and which are generally enforceable, from punitive damages, which are generally not enforceable for breach of contract unless the conduct constituting the breach is also a tort. The court concluded that the late and overlimit fees at issue were “distinct from the jury-determined punitive damages awards at issue” in other cases, and therefore such fees are not unconstitutional punitive damages. Despite noting the “ancient provenance” of punitive damages, including “punitive-damages-like provisions in the Code of Hammurabi,” the court concluded that “the due process analysis developed in the context of jury-awarded punitive damages is not applicable to contractual penalty clauses.”
Because the court found that the fees were not unconstitutional, the plaintiffs’ argument that the fees could not be sustained under the NBA failed. Additionally, because the plaintiffs’ section 17200 claim was tethered to the purported violation of the NBA, the state UDAP claim failed as well. Notwithstanding the creativity of their argument, the plaintiffs were unable to goad the Ninth Circuit into upholding their complaint.
Travis P. Nelson is a member of the firm’s Financial Industry Group and a co-leader of the Financial Institutions Enforcement & Investigations Task force, resident in the Princeton and New York offices. Travis is formerly with the Enforcement Division of the Office of the Comptroller of the Currency, U.S. Treasury Department, and is adjunct faculty at Villanova Law School, where he teaches Regulation of Financial Institutions.