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Published: August 2008

Court should protect citizens from unfair credit card practices

Coalition: Credit Card

Consumer Action joined in a letter asking the California Supreme Court to grant a review of the decision handed down in Ball v. FleetBoston Financial Corp, which held that the Consumer Legal Remedies Act does not prohibit deceptive and unfair practices by credit or credit card issuers.

California Supreme Court
350 McAllister Street, Room 1295
San Francisco, CA 94102

Re: Letter in Support of Grant of Review of the decision in Ball v. FleetBoston Financial Corp, (2008) 164 Cal. App. 4th 794 - Supreme Court Case No.S165154.

To The Honorable Chief Justice and Associate Justices of the California Supreme Court: In Ball v. FleetBoston Financial Corp, (2008) 164 Cal.App.4th 794, the Fourth District Court of Appeal, Division Three, held that the Consumer Legal Remedies Act, Civil Code sections 1770 et seq. ("CLRA") does not prohibit deceptive and unfair practices engaged in by entities when issuing credit cards or otherwise offering extensions of credit. The court of appeal followed its own earlier decision in Berry v. American Express Publishing, Inc. (2007) 147 Cal.App.4th 224. A petition for review was filed in Ball on August 7,2008 (No. S165154).

The National Association of Consumer Advocates (NACA), the Center for Responsible Lending (CRL) and Consumer Action (CA) respectfully urge this Court to grant review of the decision in Ball. The court of appeal's decision in Ball (and in Berry before it) adopts a narrow view of the scope of the coverage of the CLRA, despite that statutory scheme's express command that its provisions be viewed liberally. At issue is the important question whether California consumers are protected from unfair and deceptive practices by participants in the financial services segment of our economy. As our State and Nation enter the second year of a 'credit crisis"', the significance of this question is beyond dispute.

I. AMICI'S IDENTITIES AND INTERESTS

A. NACA is a nationwide, non-profit corporation with over 1,000 members who are private and public sector attorneys, legal services attorneys, law professors, law students and non-attorney consumer advocates, whose practices or interests primarily involve the protection and representation of consumers. Its mission is to promote justice for all consumers. NACA is dedicated to the furtherance of ethical and professional representation of consumers. Its Standards And Guidelines For Litigating And Settling Consumer Class Actions may be found at 176 F.R.D. 375 (1998).

About 150 of NACA's members are California attorneys or non-attorney advocates who regularly represent or advocate for consumers residing in California. Many of NACA's members have represented California consumers in disputes with financial institutions over those institutions' charges and practices including their credit card practices.

B. CRL is a non-profit, non-partisan research and policy organization dedicated to eliminating abusive financial practices so that low- and moderate-income households can protect their assets and build wealth. CRL has offices in California, North Carolina, and the District of Columbia, and is an affiliate of the Center for Community Self-Help, which includes a credit union that issues credit cards. CRL's affiliation with Self-Help provides it with important insight into the business needs of financial institutions and the responsibilities of such institutions to their customers and to communities.

C. CA is a San Francisco based consumer education and advocacy organization with offices in Los Angeles and Washington, D.C. Founded in 1971, it provides multilingual publications to consumers through a national network of 11,000 community organizations. CA works on a wide range of issues including: banking, credit cards, insurance, telecommunication and privacy. It represents the interests of low income consumers, people of color and limited-English speaking consumers before Congress, federal regulatory agencies and the California Legislature.

II. SUMMARY OF THE DECISION

The plaintiff in Ball challenged allegedly unconscionable or otherwise unenforceable provisions in defendant FleetBoston Financial Corp.'~te rms and conditions which it imposes on its credit card customers. The case was originally filed solely under the Unfair Competition Law, Bus. & Prof. Code $$17200 et seq. The plaintiff thereafter sought leave to amend her complaint to add claims under the CLRA and for declaratory relief. The trial court denied her motion. On appeal, the court of appeal affirmed by decision authored by Justice Fybel and joined by Justices Rylaarsdam and O'Leary.

Regarding the proposed CLRA claim, the court reaffirmed its decision in Berry v.American Express Publishing, supra (a decision authored by Justice Aronson, joined by Justices Fybel and Rylaarsdam) that "the issuance of credit to a consumer was intentionally omitted [by the Legislature] from the scope of the CLRA." Ball, 164 Cal.App.4th at 798. The court summarily rejected plaintiffs assertion that the reasoning of Berry, insofar as that case had held that a credit card agreement pertained only to an extension of credit and not to any covered "service", was inconsistent with the reasoning by the First District Court of Appeal in Hitz v.First Interstate Bank (1995) 38 Cal.App.4th 274.

Hitz involved a challenge to certain credit card agreement provisions, which were alleged to authorize invalid liquidated damages prohibited by Civil Code §1671(d) That statutory subsection applies to consumer contracts involving "personal property or services". Civil Code §1671(c)(l) The defendant in Hitz argued that the credit card agreements provided for extensions of credit which - relying on the legislative history of the CLRA - were contended to be distinct and separate from the "services" covered by subsection 1671(c)(l). 38 Cal.App.4th at 286 and note 7. In a several page analysis, the Hitz court discussed the "dual functions" of credit cards as embracing both a "credit" component and a "convenience" component and concluded that the convenience aspect of credit cards "is surely a 'service' within the meaning of Civil Code section 1671." 38 Cal.App.4th at 287.

In a brief discussion, the Ball court found Hitz to be of no relevance whatsoever because it addressed Civil Code section 1671 rather than the CLRA itself. Ball, 164 Cal.App.4th at 798-799. As to the claim seeking declaratory relief, the Ball court found the claim to be "wholly derivative" of the CLRA claim, and on that basis affirmed the trial court's denial of leave to state the claim.

III. THE DECISION IN BERRY v. AMERICAN EXPRESS PUBLISHING

As noted, the decision of the court of appeal below reaffirmed its own earlier ruling on the scope of the CLRA stated in Berry v. American Express Publishing. We therefore summarize that decision as well.

In Berry, the court of appeal affirmed dismissal of the plaintiffs claim for injunctive relief brought under the CLRA. The claim asserted that the cardholder agreement for the credit card issued by American Express contained an unconscionable arbitration clause which precluded prosecution of cardholders' consumer claims on a class action bases, contrary to this Court's decision in Discover Bank v. Superior Court (2005) 36 Cal.4th 148. Berry alleged a claim under the subsection of the CLRA which explicitly declares unlawful the insertion of "an unconscionable provision in the contract". (Civ. Code §1770(a)(19). The court of appeal did not reach the question whether the challenged class action prohibition was in fact unconscionable. Instead, the court held that American Express' credit card practices can not be challenged under the CLRA because "the extension of credit, such as issuing a credit card, separate and apart from the sale or lease of any specific goods or services, does not fall within the scope of the act." 147 ~ a l . ~ ~ ~at. 2427'." T hus, the court recognized that the extension of credit which is not separate and apart from the sale or lease of specific goods or services would be covered by the CLRA since such extensions would be made in "a transaction intended to result or which results in the sale or lease of goods or services to [a] consumer .... " Id. at 228-229. However, the court held that an extension of credit itself was neither a "good" nor a "service" and fell outside the scope of the CLRA. Id. Thus, 37 years after passage of the CLRA, the Berry court found, for the first time, that that statutory scheme does not apply to extensions of credit.

The Berry court based its conclusion on its reading of the legislative history of the CLRA. Language in early drafts of the legislation referred to "any goods, services, money, or credit". The court of appeal placed heavy reliance on the fact that the words "money, or credit" were omitted by the time the statutory scheme was finally enacted. Id. at 230-232. The court found that the reasoning of California Ass'n ofPsychology Providers v. Rank (1990) 51 Cal.3d 1, 17-1 8 was inapplicable because no general language was added to the legislation at the time that the words "money and credit" were removed. 147 at 231. Instead, the court relied on the maxim that "rejected language" is persuasive evidence of the Legislature's intention in enacting a statute. The court reached this conclusion notwithstanding that no explanation for omission of the cited words appears anywhere in the legislature history of the statute, that the retained terms (i.e. "services") are broad in scope and not otherwise limited by any statutory language, and that no other evidence existed that the Legislature intended to "reject" broad coverage for the CLRA. Id.

IV. REASONS WHY THE PETITION FOR REVIEW SHOULD BE GRANTED

A. Whether the CLRA Covers Credit Card Relationships Is Of Great Importance To California Consumers

The Consumer Legal Remedies Act is one of the principal statutory schemes (along with the Unfair Competition Law ["UCL"], Bus. & Prof. Code sections 17200 et seq.) that offers protection to California consumers victimized by unscrupulous or otherwise unfair business practices. Because damages are not available for violations of the UCL and that statute does not provide for recovery of attorneys' fees, the CLRA is often the only means through which meaningful relief for wrongful practices can be obtained. Credit card usage in the United States is ubiquitous. According to the Federal Reserve, as of 2001,72% of US. households held at least one bank credit card. (Thomas A. Durkin, Consumers and Credit Disclosures: Credit Cards and Credit Insurance, FED. RESERVE BULL., April 2002, at 202 (2002).) Thus, the question whether California's leading consumer protection statute covers the relationship between credit card issuers and California consumers isof widespread and major importance.

Many significant consumer law decisions have arisen in the context of consumer use of credit card services. See. e.g., Discover Bankv. Superior Court (2005) 36 Cal.4th 148; Linder v.Thrifty Oil Co. (2000) 23 Cal.4th 429; Smith v. Wells Fargo Bank, N.A. (2005) 135 Cal.App. 4th1463 (debit cards; includes CLRA claim); Klussman v. Cross Country Bank (2005) 134 Cal.App.4th 1283 (includes CLRA claim); Johnson v. Capital One Bank, 120 Cal.App.4th 942; Jewett v. Capital One Bank (2003) 113 Cal.App.4th 805 (includes CLRA claim); Florez v. Linens 'N Things, Inc. (2003) 108 Cal.App.4th 447; Shea v. Household Bank (SB) (2003) 105

B. Credit Cards Usage Involves Convenience Aspects That Are "Services" Covered Under the CLRA Regardless Whether Pure Extensions of Credit Are So Covered
The court of appeal in Berry assumed that the only possible service at issue in the case was the extension of credit by defendants to Berry. 147 ~ a l . ~ ~at ~22.7.4 T'hi~s n arrow view of the attributes of credit card use failed to recognize the other "services" provided by a credit card: the convenience aspects of credit card use. The ims o rtance of these "convenience services" was extensively discussed in Hitz, supra, 38 CaI.App.4 at 286-287.

Unfortunately, when the plaintiff below in Ball pointed out that Berry failed to address this discrepancy in the characterization of the credit card services at issue, the court of appeal merely shrugged off the Hitz analysis as irrelevant because it addressed "services" under a neighboring statutory scheme. Nowhere, however, did the court of appeal explain why the Hitz court's discussion of the convenience aspect of credit card use was not equally as compelling within the context of the CLRA as under Civil Code section 1671. As Hitz itself expressly held, even if -- arguendo --extensions of credit are not "services", that does not mean that the convenience aspect of credit card usage is not a "service".
In Hitz, the court rejected a challenge by First Interstate Bank of California ("FICAL") to a damage award in a class action brought on behalf of its credit card customers. The damages awarded were a portion of the late and overlimit fees charged by FICAL to customers who failed to make the minimum payment due on their credit cards accounts or exceeded their credit limits. 38 ~ a l . ~ ~at ~27.7. 4T'he~ ca rdholders claimed, and the trial court found, that these fees were prohibited by section 1671(d)'s limitation on liquidated damages in consumer contracts. On appeal, FICAL argued that its credit cards did not fall within the scope of section 167 1(d) because that section applies only to "the purchase or rental, by such person, of personal property or services, primarily for the party's personal, family, or household purposes."

In asserting that section 1671, subdivision (c) does not encompass the extension of credit as a consumer contract, FICAL relies on a comparison of similar language in the definition of "consumer" in the Consumer Legal Remedies Act (Civ. Code, 5 1761, subd. (d)), where the Legislature deleted purchasers of "credit" from the initial proposed definition (Assem.Bill No. 292 (1 970 Reg. Sess. (Jan. 21, 1970, & as amended Aug. 7, 1970)), with the definition of "consumer" in the Consumer Affairs Act (Bus. & Prof. Code, 5 302, subd. (c)), which includes purchasers of "credit." According to FICAL, this indicates the Legislature intended to exclude "credit" contracts from the scope of the Consumer Legal Remedies Act (see, e.g., Wilson v. City of Laguna Beach (1992) 6 Cal.App. 4th 543, 555 [rejection of provision from act as originally introduced is "most persuasive" that act should not be interpreted to include what was left out]), and thus the similar language in subdivision (c) of section 1671 should likewise be construed to exclude credit agreements from the scope of its definition of consumer contracts.

The First Appellate District rejected FICAL's argument because it ignored the fact that credit cards provide services unrelated to the pure grant of credit: This argument overlooks the dual nature of a credit card agreement. We need not decide whether an extension of credit is a consumer contract within the meaning of Civil Code section 1671, subdivision (c)(l), because a credit card agreement is much more than that, encompassing convenience services in addition to extension of credit. A textbook on commercial banking explains these two discrete functions: "The popularity of credit cards is due to the many advantages they offer as a means of payment. These advantages have created two general distinct patterns of credit card use among cardholders convenience and revolving credit. Many cardholders pay their outstanding balances in full each month; consequently, they incur no monthly finance charge. In fact, nearly half of the cardholders can be classified as convenience users. The remaining cardholders use credit cards as a source of credit and infrequently pay their entire outstanding monthly balance. Both of these uses have distinct advantages over cash, checks, and other means of payment. Convenience use minimizes the need to carry cash, allows the user to defer payment for goods and services for a short time, and establishes a favorable payment record that is important in credit evaluations. Revolving credit users realize the same advantagesplus one other, namely, they increase their ability to purchase goods and services and in so doing avoid the red tape involved in obtaining a personal loan. Moreover, the credit card holder has considerable flexibility in the timing and amount of debt repayment. " (Reed & Gill, Commercial Banking,supra, p. 337, italics added.)

An economist whose work is cited by amicus curiae California Bankers Association similarly describes credit cafds as encompassing two features: "payments services" for "convenience users" who wish to make purchases "without paying cash or writing a check, " and "credit features" for those who wish to borrow. (Litan, The Economics of Credit Cards, supra, pp. 2,4.)

The convenience feature of credit cards is surely a "service" within the meaning of Civil Code section 1671, subdivision (c), wholly apart from the credit feature. Observers of the banking industry view the convenience feature as such; the publications quoted above both include references to "credit card services. " (Reed & Gill, Commercial Banking, supra, at pp. 339-340; Litan, The Economics of Credit Cards, supra, at p.2.) A credit card user enjoys various benefits other than borrowing--primarily cashless and checkless purchasing--regardless of whether the credit feature is used. Indeed, convenience use without borrowing is the 'reason that some banks levy a flat charge on the use of the card. " (Reed & Gill, supra, at p. 339.) Thus, some users even pay for these two features separately: their annual charge for the card is attributable to the convenience feature, while they pay for use of the credit feature through finance charges.

For reasons not explained in its decision, the court of appeal below did not address the point that credit cards offer "convenience services" beyond a pure extension of credit. This Court should grant review to clarify the proper interplay between the CLRA and credit card services by adopting the analysis presented in Hitz.

C. The Court of Appeal's Construction of the CLRA Was Too Narrow and Failed To Implement Likely Legislative Intent

While this court need not reach the statutory construction question addressed by the court of appeal if this Court instead upholds the conclusions of Hitz, arnici believe that the courts of appeal in Berry and Ball adopted too narrow a view of the scope of the CLRA for several reasons.

First, the definition of "services" in the CLRA is sufficiently broad and unlimited as to cover credit-related services of all types. Section 1761(b) defines "services" to mean "work, labor, and services for other than a commercial or business use, including services furnished in connection with the sale or repair of goods. " Thus, the formal definition of "services" includes within it a less formal use of the word "services," presumably to cover activities not otherwise falling within the categories of "work" and "labor". Common usage of the word "services" is certainly broad enough to cover credit services, i.e. extensions of credit, particularly where the word is specified to be broader than ordinary "work" or "labor". Extensions of credit are commonly described as a kind of "financial services."

Similarly, credit card activities are often described as a kind of "credit services." Other than an immediate resort to legislative history, the court of appeal in Berry suggested no reason why this broad definition of "services" does not encompass one of the activities commonly referred to as a service, i.e. provision of credit cards to consumers. In reaffirming in Ball, the court did not revisit this issue. Moreover, the Legislature expressly provided that the terms of the CLRA, including its definition of "services," should be interpreted liberally, further indicating that a cramped view of that term is improper. Section 1760 provides: "This title shall be liberally construed and applied to promote its underlying purposes, which are to protect consumers against unfair and deceptive business practices and to provide efficient and economical procedures to secure such protection." Indisputably, practices related to credit card issuance are "business practices" and the Legislature intended by the CLRA to protect consumers where such practices are "unfair or deceptive".

The court of appeal in Berry acknowledged section 1760 (147 C ~ I . A ~a~t 2.3~2") b'u t brushed it aside by way of a circular argument: The court stated that liberal construction cannot be used to rewrite a statute and that it had already determined based on legislative history that the definition of "services" did not encompass extensions of credit. (Id.) But this analysis puts the cart before the horse. The first question is whether the CLRA's definitions should be given broad or narrow scope. Section 1760 answers that question: they are to be construed liberally. This liberal construction, coupled with the unlimited nature of the definition itself, precludes the carving out of one kind of activity commonly thought to be a "service". There is no need to turn to legislative history where no ambiguity exists and certainly not, where as here, the deletion of certain words from an early draft is unexplained and is itselfambiguous as discussed below. And even if legislative history is consulted, it must be considered in light of the express command that terms be liberally construed. Erroneously, the court of appeal ignored section 1760 until the tail end of its analysis, at which point it essentially ruled that the statutory direction of liberal construction is of no effect, since it cannot change a conclusion reached when the direction is ignored.

Second, the scope of the CLRA is not limited to the sale or lease of goods or services, it covers any "transaction intended to result or which results in the sale or lease of goods or services." Civ. Code §1770(a (emphasis added). The court of appeal apparently believed that the issuance of a credit card must itself have been the provision of a good or service at the moment it issued. However, such a reading belies the actual language of section 1770. The statute does not limit its scope to transactions which directly and immediately constitute sale or lease of a good or service. Rather, it uses the broader terms "intended to result or which results "in such sale or lease. This distinction is important within the credit card context because consumers use credit cards almost exclusively for the purchase or lease of goods or services "Analysis of the trends in credit card pricing in this report focuses on credit card interest rates because they are the most important component of the pricing of credit card services"; "Because of the significant changes in the pricing of credit card services,. . .". whenever they make charges on those cards. There can be no credible argument that the principal purpose for which consumers obtain credit cards is other than their intention to use those cards for purchases of goods and services.

The court of appeal in Berry recognized that an extension of credit in connection with a purchase or sale of goods or services would be covered by the Act; it took care repeatedly to qualify its holding as limited to extensions of credit unrelated to such purchase or sale.

But the court took too strict a view of the kinds of transactions which are "intended to result" in the sale or lease of goods or services. In particular, the court focused only on the issuance of the credit card, ignoring the fact that the terms and conditions containing the challenged arbitration clause governed the subsequent use of the card to purchase goods and services. Indeed, no credit is actually extended except and to the extent the consumer subsequently uses the card to make such purchases. Again, the Legislature intended the provisions of the CLRA to be liberally construed; a narrow view of the language of section 1770(a) is neither necessary nor justified.

Finally, the conclusion drawn by the court of appeal from the legislative history is far from obvious. The fact that the words "money and credit" appeared in the original drafts of the legislation as part of the definition of "consumer," but were removed before passage, does not clearly indicate anything. While it ispossible that the Legislature amended the language to "reject" coverage of extensions of credit and to narrow the scope of the Act, it is equally likely that it decided that the broad definition of services already encompassed the other items and that they were superfluous. No legislative history exists explaining the reason for the amendment. Speculation about the Legislature's purposes is treacherous ground upon which to narrow facially broad statutory language, particularly where other express statements exist that the Legislature intended its broad language to be given broad effect.

V. CONCLUSION

NACA, CRL and CA respectfully request that the Court grant the Petition For Review in this case.

Lead Organization

National Association of Consumer Advocates

Other Organizations

Center for Responsible Lending

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