Blog LenderLaw Watch August 17, 2015

Lender’s Allegedly “One-Sided” Gift Card Arbitration Clause Questioned

On August 6, 2015, a California federal judge requested further briefing on whether the arbitration clause in a lender’s Visa gift card user agreement may be unenforceable against a putative class action plaintiff – raising concerns that there may be one-sided terms that make the user agreement “substantively unconscionable.”  Matalas v. Visa USA Inc., No. 10-5171 (C.D. Cal. ECF No. 271) (“Court’s Talking Points Memo” requesting further briefing).

The underlying class action complaint alleges that Wells Fargo falsely advertised that its gift cards were similar to regular debit cards, when in fact the cards could not be used at ATMs, online, or at any other location requiring a PIN.  According to plaintiffs, this allegedly constituted unfair and deceptive business practices in violation of the California Consumer Legal Remedies Act and unfair competition under California Business & Professions Code Sec. 17200 et seq.

In reviewing the lender’s motion to compel arbitration based on the gift card user agreement’s arbitration clause, Judge George Wu cited a Ninth Circuit case as holding that “a contract is substantively unconscionable if one party (but not the other) is allowed to unilaterally make substantial changes in the terms of the agreement.”  See Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1179 (9th Cir. 2003).  He then questioned how the gift card user agreement could be enforceable when it included a clause that gave the lender the right to “change the terms of, or add a new term to, this Agreement or change any feature of, or add a new feature to, the Card” and informed signers that the bank would “give you notice of such change in term or feature…as required by law.”

The district court’s request for further briefing came just three days after the California Supreme Court held that “[n]ot all one-sided contract provisions are unconscionable,” and class action waivers are enforceable despite a state statute indicating otherwise.  See Sanchez v. Valencia Holding Co., No. S199119 (Cal. Sup. Ct. Aug. 3, 2015).  Judge Wu also asked both parties why they assumed California law governs the user agreement, which provides that the law of “South Dakota shall govern this Agreement without regard to that state’s conflict of laws principles.”

The Matalas case shows that courts continue to scrutinize the terms and enforceability of arbitration clauses in customer agreements.  We previously wrote about this issue here.  And it will be an important one to keep an eye on, especially as the CFPB weighs whether to implement rules regulating the use of arbitration clauses in consumer financial contracts.