A brief note: the credit card practice alleged here is so ridiculous, so obviously out of tune with any rational understanding of the promised card benefits, that one might think that it was the result of incompetence—thoughtless application of a standard sharp-dealing but not ordinarily fraudulent bank-favoring rule to a particular reward that conflicted with that rule. And Occam’s Razor favors incompetence over evil in the regular case. But given (1) the range of ways credit card issuers have found to exploit consumer vulnerabilities and their active adoption of new ones to evade regulations, (2) the fact that the underlying bank-favoring rule (apply your payment in the way that produces the least reduction in indebtedness for you and the most profit for us) is already ethically shaky, and (3)—most of all—the reality that the loss of the promised benefit here would be extremely hard to detect by any consumer who carried a balance, as most do, I simply can’t find it in my heart to offer Chase the benefit of the doubt. Not that incompetent execution of exploitation would be an excuse, but I do wonder: did whoever decided to do this laugh?
So here’s what happened in this potential class action under California law: Chase offered a Circuit City credit card. Among the benefits of the card was an interest- and payment-free period to pay off the balance on certain promotional purchases. “For example, a Circuit City Rewards Card promotional item offered to customers in 2006 states in large writing: ‘No interest! No payments! For six months when you spend $499 or more. For 90 days when you spend $299 or more.’; and ‘It is easy to take advantage of this offer! When you make a purchase with your Circuit City credit card, present this certificate to the store associate to scan.’”
In fact, it was allegedly not so easy as that. “[A]ll payments made by the consumer on his or her regular monthly statement are given priority of payment to the promotional item, even if not yet billed and even if not due for many months.” That is, payments were allocated to purchases not yet due and owing, rather than purchases accruing interest. As a result, rather than having more time to pay off these promotional purchases, customers have less.
Here, the plaintiff bought a TV set in March 2006 for $2000 from Circuit City using his rewards card. Chase treated the item as a promotional purchase, with no interest and minimal payment until January 2008. Before the TV, Chase billed him for purchases made between January 14 and February 13, 2006. Based on his monthly statements, the plaintiff believed that he wouldn’t be assessed a finance charge if he paid his monthly billing in full, or that if he paid in part his finance charge would be based only on the remaining balance. Thus, if he paid the full amount due on March 10 by March 10, he wouldn’t get a finance charge. In fact, he paid his February statement in full.
He was therefore surprised to find that, though he’d paid his statement ahead of time and in full, he was assessed $77.25 in finance charges, because his entire payment was applied against the $2000 promotional purchase, payment for which was not due and which had not yet appeared on his bill. (This is the part that scares me. I autopay, to avoid missing deadlines or changes in deadlines, but that doesn’t keep me safe from this bit of business.) The plaintiff alleged similar charges in at least two other situations.
The terms and conditions did say: “You authorize us to allocate your payments and credits in a way that is most favorable to or convenient for us. For example, you authorize us to apply your payments and credits to balances with lower APRs (such as promotional APRs) before balances with higher APRs.” The plaintiff argued that this language shouldn’t be read to include “interest free” purchases which have no APR and which are not posted to his monthly account balance. (I suppose, because these are banks, we are also going to have to ignore the general rule that fine print can’t take back explicit promises that are the focus of the advertising.) The agreement stated that no payment would be due on promotional purchases until the end of the promotional period, and that finance charges on a promotional purchase wouldn’t be added to the account balance unless and until the promotional purchase wasn’t paid in full by the end of the specified time period.
Chase initially moved to compel arbitration and enforce a class action waiver. This was denied; the arbitration clause was unconscionable under California law.
The plaintiff alleged violations of the CLRA and the unfair competition law, as well as breach of contract and breach of the implied covenant of good faith and fair dealing. Chase argued that the National Bank Act preempted the non-breach of contract claims, while the plaintiff responded that these were laws of general applicability with only an incidental effect on bank operations. I won’t bore you with the details, but the court found that the CLRA claims weren’t preempted, the UCL claims were preempted in part, and the breach of implied covenant claim wasn’t preempted. While state law regulations requiring specific disclosures in credit card ads, for example, would be preempted, the general duty to avoid deception is broader and not preempted.
However, the UCL claims were preempted to the extent they challenged the allocation of payments apart from the way the allocation interacted with deceptive advertising. The court was unclear on exactly what the plaintiff was challenging with respect to allocation alone, but the allocation itself is made sacrosanct by the NBA. To the extent that the plaintiff alleged that the allocation violated the UCL because it contradicted the ads or the contract, though, those claims are not preempted. In those claims, he wasn’t trying to get Chase to abandon specific contract terms, only to get Chase to stick to its promises.
Chase also argued that the complaint failed to state a claim because the plaintiff didn’t allege reliance or harm, and because its ads say nothing about allocation of payments. The court found sufficient allegations of reliance, and a sufficiently well-pled claim. “Although Plaintiff’s allegations preclude him from arguing that he relied on the advertising campaign in purchasing the item that was subject to the promotional purchase (and therefore limit his damages accordingly), the Court finds his allegations regarding his payment choices after Chase treated his purchase as a promotional payment sufficient to state a claim at the pleading stage.”
Chase also argued that the complaint failed to state a claim for breach of contract or breach of the implied covenant of good faith and fair dealing, because the contract didn’t promise to allocate payments in the manner the plaintiff expected. Chase’s promotional offer provided only that the promotional balance would be “interest free,” not that other balances would not be subject to finance charges; further, nothing in the contract said that Chase wouldn’t allocate payments to the promotional purchase first. (So, let’s be completely clear: if you don’t put the card in a block of ice after your promotional purchase, you must pay for your purchase immediately or you get hit with exactly the same finance charges that would have been assessed on a nonpromotional purchase. I suspect many of us would find this relevant information in deciding whether to take advantage of the offer, and also in deciding whether to use the card after--or, as these facts show, before--using the card to make nonpromotional purchases.)
The plaintiff noted that Chase allocated his payment to amounts that were not yet due or owing, and hadn’t appeared on his statement. He also argued that the contract defined “interest free” offers as exempt from Chase’s payment allocation powers. The court found that he’d stated a claim. The contract interpretation issue could not be resolved on the briefs.
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