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7th Cir. Holds Non-Cardholder Must ‘Directly Benefit’ to Be Bound by Cardholder Agreement

The U.S. Court of Appeals for the Seventh Circuit recently held that the minor child of a credit card account holder was not bound by the arbitration clause in the cardholder agreement because she did not become an authorized user of the account by using the credit card.

The Seventh Circuit also held that the doctrine of estoppel did not bind the minor to the arbitration clause because the minor did not “directly benefit” from her parent’s use of the credit card.

A copy of the opinion in AD v. Credit One Bank, NA is available at:  Link to Opinion.

In 2003, the cardholder opened a credit card account with the defendant.  In 2010, the cardholder used her minor daughter’s cell phone to call the defendant to access her account. The defendant used caller ID capture software and associated the cell phone number to the cardholder’s account.

The cardholder fell behind on payments and the defendant began calling the cell phone number previously stored with her account in attempt to collect the debt.

The cardholder’s daughter (“plaintiff”) filed a putative class action alleging that the defendant violated the federal Telephone Consumer Protection Act (TCPA), 47 U.S.C. § 227, et seq., by supposedly using an automatic telephone dialing system to call her cell phone without her prior express consent.

The cardholder signed a standard cardholder agreement when she opened the account.  This agreement included, among other things, an arbitration clause and class action waiver, which stated:

Agreement to Arbitrate:

You and we agree that either you or we may, without the other’s consent, require that any controversy or dispute between you and us (all of which are called “Claims”), be submitted to mandatory, binding arbitration. This arbitration provision is made pursuant to a transaction involving interstate commerce, and shall be governed by, and enforceable under, the Federal Arbitration Act (the “FAA”), 9 U.S.C. § 1 et seq., and (to the extent State law is applicable), the State law governing this Agreement.

Claims subject to arbitration include not only Claims made directly by you, but also Claims made by anyone connected with you or claiming through you, such as a co-applicant or authorized user of your account, your agent, representative or heirs, or a trustee in bankruptcy.

If you or we require arbitration of a particular Claim, neither you, we, nor any other person may pursue the Claim in any litigation, whether as a class action, private attorney general action, other representative action or otherwise.

After discovery, the defendant sought to compel arbitration based on the arbitration clause in the cardholder agreement.  The only evidence that the plaintiff ever used the credit card was the cardholder’s deposition testimony that, on at least one occasion, she preordered smoothie drinks for her daughter and herself from the local mall and sent the plaintiff to pick them up.  The plaintiff was 14 years old at the time of this transaction.

The trial court determined that the cardholder authorized the plaintiff to use the account and the plaintiff derived a “direct benefit” under the contract.  Therefore, the trial court held that the plaintiff was bound by the arbitration provision in the cardholder agreement.

The plaintiff filed a motion to reconsider, or, in the alternative, to certify the arbitration question for interlocutory appeal under 28 U.S.C. §  1292(b).  The trial court denied the motion to reconsider but granted the motion to certify the ruling for interlocutory appeal.  The Seventh Circuit granted the petition for certification.

The Seventh Circuit began its analysis by determining whether the plaintiff was bound by the arbitration clause under ordinary principles of contract law.

As you may recall, arbitration agreements generally cannot bind a non-signatory.  Zurich Am. Ins. Co. v. Watts Indus., Inc., 417 F.3d 682, 687 (7th Cir. 2005).  However, arbitration agreements may be enforceable in limited circumstances depending on the applicable state law.  These limited exceptions are: (1) assumption, (2) agency, (3) estoppel, (4) veil piercing, and (5) incorporation by referenced.  Id.

The defendant argued that the plaintiff was bound by the cardholder agreement as an authorized user.  The cardholder agreement states, in relevant part:

  1. AUTHORIZED USER: At your request, we may, at our discretion, issue an additional card in the name of an Authorized User with your credit card account number. If you allow someone to use your Account, that person will be an Authorized User. By designating an Authorized User who is at least fifteen years of age, you understand that: 1) you will be solely responsible for the use of your Account and each card issued on your Account including all charges and transactions made by the Authorized User and any fees resulting from their actions to the extent of the credit limit established for the Account; 2) the Authorized User will have access to certain account information including balance, available credit and payment information; 3) we reserve the right to terminate the Card Account privileges of an Authorized User by closing your Account and issuing you a new account number; 4) the Account may appear on the credit report of the Authorized User ; 5) the Authorized User can make payments, report the card lost or stolen and remove him or herself from the Account; 6) you can request the removal of the Authorized User from your Account via mail or telephone.

The defendant argued that the arbitration clause specifically applied to claims “made by anyone connected with” the account holder, “such as a co-applicant or authorized user” of the account.  As an authorized user of the credit card, the defendant argued that the plaintiff was required to arbitrate her TCPA claims.

However, the Seventh Circuit found that the cardholder agreement established a specific procedure that an account holder must follow to add an authorized user to the account.  Under this provision, the Court held, an individual does not become an authorized user simply by using the credit card as the defendant argued.  Rather, the Court noted, the account holder must notify the defendant that she wishes to add an authorized user to the account.

The Seventh Circuit found that neither the cardholder nor the defendant took any step to add the plaintiff as an authorized user.  For example, the defendant never assessed the annual fee for adding an authorized user and the plaintiff did not have any rights under the cardholder agreement that the contract gave to true authorized users.

Most importantly, the Seventh Circuit explained that the plaintiff was only 14 years old at the time of the smoothie transaction and was not eligible to become an authorized user under the cardholder agreement.

The defendant argued that the authorized user clause created more than one category of authorized users:  those who are authorized users because the account holder allowed them to use the account, and those who were at least 15 years of age and subject to all of the rights and responsibilities identified in the authorized user provision.

However, the Seventh Circuit noted that even if someone can become an authorized user just by using the credit card, “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.”  United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960).  The Seventh Circuit found that the plaintiff, as a minor at the time of the smoothie transaction, did not have legal capacity to enter a contractual relationship with the defendant and never consented to arbitrate her claims.

Therefore, the Seventh Circuit held that the terms of the cardholder agreement did not bind the plaintiff.

Next, the Seventh Circuit turned to the issue of whether principles of equity and fairness required the plaintiff to arbitrate with the defendant.

The cardholder agreement specified that Nevada law applied to disputes arising under the contract.  Under Nevada law, estoppel is an equitable doctrine that prevents a non-signatory “from refusing to comply with an arbitration clause when it receives a ‘direct benefit’ from a contract containing an arbitration clause.”  Truck Ins. Exch. v. Palmer J. Swanson, Inc., 189 P.3d 656, 616 (Nev. 2008).

The defendant argued that the plaintiff directly benefited under the cardholder agreement because the cardholder asked her to make purchases with the card.  According to the defendant, the plaintiff received the same type of contractual benefit as the cardholder did.

However, the Seventh Circuit disagreed, reasoning that any benefit the plaintiff received was limited to following her mother’s instructions to pick up the smoothies that her mother had ordered.  In the Seventh Circuit’s view, this limited direction derived from the mother-daughter relationship, not from a relationship between the plaintiff and the defendant.

The defendant also argued that the TCPA does not apply to autodialed calls that are made with the called party’s prior express consent.  Because under the terms of the cardholder agreement, the authorized user provided her prior express consent by contract, the defendant argued that whether the plaintiff consented to the calls depended on the terms on the cardholder agreement, and thus, she was asserting rights under the contract.

The Seventh Circuit rejected this argument.  According to the Seventh Circuit, the cardholder consented to phone calls from the defendant as a party to the cardholder agreement.  The defendant’s affirmative defense depended on whether the cardholder’s consent under the cardholder agreement can be imputed to the plaintiff.  This does not, as the Seventh Circuit explained, transform the plaintiff’s TCPA claim into one that relied on the cardholder agreement.

Moreover, the Seventh Circuit explained that consent is an affirmative defense under the TCPA that the defendant must establish.  Because consent was not part of the plaintiff’s case, the plaintiff did not have to prove that she did not consent to the calls in order to succeed on her TCPA claim.

Accordingly, the Seventh Circuit reversed the judgment of the trial court and remanded for further proceedings.

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Eric Tsai practices in Maurice Wutscher’s Commercial Litigation and Consumer Credit Litigation groups, and in its Regulatory Compliance group. He concentrates his practice primarily on the defense of consumer and commercial financial services companies, including mortgage lenders and servicers, mortgage loan investors, third party debt collectors, and other financial services providers. He also counsels clients on regulatory compliance, licensing, and other consumer protection matters. Eric earned his undergraduate degree from the University of California, Irvine. Prior to attending law school, he worked as a loan officer for national direct lenders. He earned his Juris Doctor from California Western School of Law and thereafter obtained a Master of Laws (LLM) in Taxation from the University of San Diego School of Law. Eric publishes extensively on various issues affecting consumer lending and litigation, including both federal and California-specific developments. He is licensed to practice law in California, Nevada, and Oregon, and is admitted in all United States District Courts in the State of California, the United States District Court for the District of Oregon, the United States District Court for the District of Nevada, the U.S. Tax Court, and the Ninth Circuit Court of Appeals. He is also a licensed real estate broker in the State of California.

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