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Seventh Circuit Denies Arbitration of Accountholder Daughter's TCPA Class Action Claims

In  A.D. vs. Credit One Bank, N.A., the U.S. Court of Appeals for the Seventh Circuit reversed a district court order compelling individual arbitration of a putative class action for Credit One's alleged violations of the Telephone Consumer Protection Act (TCPA). The appellate court concluded that the named plaintiff—the minor daughter of a Credit One cardholder—was not bound by her mother's cardholder agreement, rejecting arguments that the plaintiff was an authorized user or otherwise estopped from avoiding the agreement's arbitration provision.

The plaintiff's mother opened a credit card account with Credit One. The mother used her daughter’s cellular phone to call Credit One about the account and Credit One, in turn, attached the daughter’s cell phone number to her mother's account. According to the plaintiff, Credit One purportedly violated the TCPA by calling her phone in an attempt to collect amounts owed on her mother’s account.

The credit card agreement between Credit One and the plaintiff's mother included an arbitration provision that required arbitration of all claims made by "anyone connected with" the accountholder, including an authorized user. The agreement also stated that if the accountholder allowed someone to use the account, "that person will be an Authorized User." The provision went on to explain the process for designating an authorized user, which required a minimum age of 15 and the payment of an annual fee to issue a card in the authorized user's name. The plaintiff's mother never paid the annual fee or obtained a separate credit card for her daughter. However, on one occasion, she allowed her daughter to use her Credit One credit card to pick up and pay for smoothies that she (the mother) had pre-ordered. The plaintiff was 14 years old at the time of the transaction.

Agreeing with Credit One, the district court found that the daughter was an "Authorized User" bound by the cardholder agreement's arbitration provision under the "direct benefits estoppel" theory. Specifically, the lower court appeared to find that the daughter was an authorized user of the account because her mother allowed her to use the credit card to make a purchase. It further found that the plaintiff benefitted from her mother's cardholder agreement because the agreement enabled the daughter to pay for the items ordered by her mother. The district court stayed the case pending arbitration, but certified the question of whether the daughter was bound by the cardholder agreement under 28 U.S.C. §1292(b).

The Seventh Circuit granted permission to appeal and reversed, rejecting Credit One's arguments that the daughter was bound by the arbitration provision in her mother's cardholder agreement. First, the court held that plaintiff was not an authorized user because the agreement's specific process for designating an authorized user "makes it clear that an individual does not become an Authorized User simply by using the credit card to complete the cardholder's transaction." (Emphasis in original.) It was undisputed that the daughter was never designated using the agreement's process. Additionally, because she was only 14 at the time of the smoothie transaction, she lacked legal capacity to enter into any contractual obligation with Credit One as an authorized user.

Second, the Seventh Circuit held that the daughter could not be bound based on principles of estoppel because she neither received a direct benefit under the agreement nor asserted a claim based on any rights under the agreement. Applying state law, the appellate court explained that estoppel "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." (Internal quotations omitted.) It held that any "benefit" the daughter received from using the card at her mother's direction derived from her mother-daughter relationship, not from the cardholder agreement. The court likewise rejected Credit One's argument that the daughter was bound by the arbitration provision because her TCPA claim sought benefits under the cardholder agreement. Although Credit One sought to establish an affirmative defense of consent based on the cardholder agreement, the plaintiff's claim remained premised on the TCPA. And, according to the Seventh Circuit, binding the plaintiff to the terms of the cardholder agreement's arbitration provision simply because of Credit One's potential defense "would threaten to overwhelm the fundamental premise that a party cannot be compelled to arbitrate a matter without its agreement." (Internal quotations omitted.)

Notably, the Seventh Circuit's ruling comes only days after the U.S. Court of Appeals for the D.C. Circuit set aside the Federal Communication Commission's (FCC) interpretation of "called party" in the agency's 2015 Declaratory Ruling and Order implementing the TCPA. Considering the "called party" issue in the context of number reassignments, the D.C. Circuit acknowledged that the FCC could reasonably interpret "called party" to refer to the current subscriber. The court, nevertheless, excised this definition of "called party" as part of its decision to set aside the FCC's "treatment of reassigned numbers as a whole." It remains to be seen how this ruling might affect cases like Credit One that turn on the consent of a "called party" in other contexts.

Copyright © by Ballard Spahr LLPNational Law Review, Volume VIII, Number 86


About this Author

Kaplinksy, partner, New York, finance

Alan S. Kaplinsky is Co-Practice Leader of the firm's Consumer Financial Services Group, which has more than 115 lawyers. Mr. Kaplinsky devotes his practice exclusively to counseling financial institutions on bank regulatory and transactional matters, particularly consumer financial services law, and defending financial institutions that have been sued by consumers in individual and class action lawsuits and by government enforcement agencies. Visit Mr. Kaplinsky's profile in Wikipedia.

Mark Levin, Ballard Spahr Law Firm, Litigation Attorney

Mark J. Levin is known for his work in complex commercial, insurance, and class-action litigation, with particular experience in consumer finance litigation, the structuring and enforcement of consumer arbitration clauses, and the defense of insurance companies in class actions. He testified in 2007 for the lending industry before a subcommittee of the U.S. House Judiciary Committee at an oversight hearing on whether mandatory arbitration in consumer contracts is fair to consumers.

Mr. Levin has represented banks in defending against the first private class-action lawsuits under the Federal Trust Indenture Act, nuclear power plant owners in a year-long arbitration against an international insurance consortium, and school districts in a major funding lawsuit to recover state funds. He is currently involved in defending banks, other lending companies, and insurance companies in a wide variety of consumer class actions, including numerous class actions brought under the Pennsylvania Unfair Trade Practices and Consumer Protection Law.

Joel Tasca financial institutions lawyer,  consumer class action attorney Ballard Spahr

Joel E. Tasca has defended banks and other financial institutions in consumer class and individual actions for over twenty years. These cases have arisen out of residential mortgage loans, credit card accounts, and an array of other consumer financial services.  Many of these suits have been brought under federal consumer protection laws such as the Fair Credit Reporting Act, the Telephone Consumer Protection Act, the Truth in Lending Act, and the Real Estate Settlement Procedures Act, as well as under state unfair, deceptive, or abusive acts and practices statutes....

DeMaree, Associate, BallardSpahr, Litigation, Commercial

Lindsay C. Demaree is an associate in the firm's Litigation Department focusing on consumer financial services litigation and commercial litigation involving real estate, insurance, and product liability claims. She regularly represents financial institutions in actions involving mortgage disputes, lien priority issues, as well as federal and state consumer protection laws such as the Fair Credit Reporting Act. Ms. Demaree also has extensive experience defending negligence and product liability tort claims for a wide array of clients, including tire manufacturers,...