Rewards card didn't need to disclose annual fee in ads

Davis v. HSBC Bank Nevada, N.A., --- F.3d ----, 2012 WL 3804370 (9^th Cir.)

Davis alleged that defendants HSBC and Best Buy defrauded California customers by offering reward credit cards without adequately disclosing an annual fee. The court of appeals affirmed the dismissal of the complaint.

Defendants advertised their Reward Zone Program MasterCard (RZMC) as providing, among other things, the ability to obtain reward certificates as well as exclusive bonus point offers to earn rewards more rapidly.  Davis applied online for the RZMC after reading a newspaper ad promising a $25 reward certificate for the first purchase with the card.  He read a webpage called “Program Rules—Best Buy Reward Zone” and one called “FAQ's.” Neither mentioned an annual fee.  The application did disclose “Important Account Credit Terms,” though in a scroll-down box; ticking a check-box stating “I agree” was required to continue.  When Davis received his card, he also got seven brochures, one of which disclosed a $59 annual fee for the card.  Turns out, toward the end of the scroll box, that was disclosed.  Davis asked HSBC for a waiver of the annual fee, but HSBC declined.  “Instead of canceling the card, Davis refused to activate it and continued to pay the annual fee for five years.”  He also filed a class action complaint alleging the usual California claims.

Davis argued that the district court erred in taking judicial notice of three disclosure documents not attached to the complaint.  But the complaint alleged their contents—it said that only part of the online terms were visible, that the Cardmember Agreement and Disclosure Statement didn’t mention the annual fee, and that the Additional Disclosure Statement did.  Davis didn’t challenge the authenticity of the documents.  Whether he had access to and reviewed the documents was unrelated to their authenticity. Thus, the district court properly considered them.

The court of appeals then agreed that no reasonable consumer would have been deceived by Best Buy’s ads into thinking that there wouldn’t be an annual fee.  There was no allegation of actual falsity, such as a misrepresentation that the card would be free.  Nor was failure to mention the annual fee enough.  “Given the advertisement's legible disclaimer that [o]ther restrictions may apply,’ no reasonable consumer could have believed that if an annual fee was not mentioned, it must not exist.”  (While I’m with the court on the general conclusion, I don’t think a fee is a “restriction.”) 

Davis argued that the promise of reward certificates beginning with the first purchase implied that no offsetting charges would operate to “nullify” those rewards, making the promised reward misleading.  The court disagreed; many things could offset the cash value of any rewards, such as monthly interest charges and late fees.  “It defies common sense to claim that this tradeoff would lead a rational consumer to conclude that any credit card that offers rewards for spending must therefore not have associated costs of ownership.” 

Davis’s claim for fraudulent concealment likewise failed because he couldn’t show justifiable reliance on the failure to disclose the fee.  Though reliance is generally a factual question, here reasonable minds could come to only one conclusion.  Davis concededly failed to read the terms and conditions before checking the “I agree” box, and that wasn’t reasonable for an arm’s length transaction.  If he had read all the way, he would have learned of the annual fee. His alleged reliance on the purported misrepresentation was manifestly unreasonable.  The court noted that the common law is more rigid than various statutory schemes, such as TILA, which require clear and conspicuous disclosure.

The court similarly rejected UCL claims.  Defendants argued that their annual fee disclosure complied with and was required by TILA and Regulation Z, making their conduct fall within a safe harbor for UCL purposes.  The court agreed that the disclosures in the online application were within the safe harbor, but not the ads.  There’s a safe harbor where the legislature has specifically permitted certain conduct or considered a situation and concluded that no action should lie.  This requires another legislative provision actually barring the action or clearly permitting the conduct.  TILA and Regulation Z’s requirement for certain disclosures in applications for revolving consumer credit constituted such a safe harbor.  Although the rules directly govern only issuers, not retailers like Best Buy, the safe harbor immunizes conduct, not entities, so Best Buy could also rely on the safe harbor.

However, the ads didn’t disclose the annual fee, so they weren’t within the safe harbor unless the omission was permitted by statute or regulation, which it wasn’t.  Davis alleged that the ads were unlawful under the UCL, borrowing an OCC regulation stating that banks were not allowed ot engage in unfair or deceptive practices within the meaning of §5 of the FTCA.  But the court had already found that the ads weren’t deceptive under the FAL; neither were they deceptive under the FTCA.  For the same reason, they weren’t fraudulent under that prong of the UCL.

Likewise, they weren’t unfair under the FTCA.  Unfairness requires “substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”  Davis’s injury was reasonably avoidable. “Other restrictions may apply” should have motivated a reasonable consumer to consult the terms and conditions.  (Again, this seems like the wrong reason—I would understand “other restrictions” to mean “not everyone will be approved for this credit card.”)  The online application “used boldface and oversized font to alert Davis to the Important Terms & Disclosure Statement, instructing him to ‘read the notice below carefully.’” This was enough to allow him to avoid the harm, and he could also avoid it after opening the account by closing it within 90 days.  He didn’t want to do so because of the negative impact on his credit score, but mitigation doesn’t have to be costless to be counted.

Unfairness under the UCL is assessed differently than under the FTCA, and the definition is currently in flux, but it didn’t matter on these facts.  Any harm Davis suffered resulted from his own behavior, and Best Buy had a good justification for publishing the ad: Regulation Z, though it doesn’t expressly permit this type of ad, doesn’t require disclosure where an ad doesn’t include specific terms that trigger additional disclosures.  Thus, Best Buy justifiably relied on federal guidance in creating its ad.