|WILMER, CUTLER & PICKERING
2445 M STREET, N.W.
WASHINGTON, D.C. 20037-1420
ERIC J. MOGILNICKI
March 22, 2000
The Honorable Russell D. Feingold
Dear Senator Feingold:
Thank you for your additional questions regarding my testimony before the Senate Judiciary Subcommittee on Administrative Oversight and the Courts on behalf of the American Bankers Association, Consumers Bankers Association, American Financial Services Association, and National Retail Federation. Each of these organizations looks forward to working with you and the Subcommittee and its Staff to improve the use of arbitration in consumer credit contracts.
Your questions identify important issues regarding choice and consent with regard to arbitration clauses in consumer credit contracts. Fortunately, state law provides tried-and-true standards for the interpretation and enforcement of contracts, and the Federal Arbitration Act ("FAA") makes these standards applicable to arbitration clauses. See Doctors Associates, Inc. v. Casarotto, 517 U.S. 681 (1996). The Supreme Court has found that, under the FAA, "generally applicable contract defenses, such as fraud, duress or unconscionability, may be applied to invalidate arbitration agreements." Id. at 687. However, "[w]hat States may not do is decide that a contract is fair enough to enforce all of its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause." Id. at 686.
These standards recognize that a consumers actions are the best guide to the consumers intentions at the time of the contract. See E. Allan Farnsworth, Contracts § 3.6 (2d ed. 1990). To determine whether a consumer has agreed to the terms of a contract, a court will look for an objective manifestation of assent by the consumer. See id. The use of the credit card provides such objective evidence of assent. See, e.g., S.D. Codified Laws § 54-11-9; Del. Code Ann. tit. 5, § 952; see also Grasso v. First USA Bank, 713 A.2d 304, 308-09 (Del. Super. Ct. 1998) (use of credit card indicates acceptance of credit card agreement). In the face of such evidence, a contract may be invalidated only if a party can show that the agreement (or some portion thereof) was unconscionable. See generally Richard A. Lord, Williston on Contracts § 18.10 (4th ed. 1998).
These standards are essential to modern commerce. The courts have recognized that a more subjective test would be unworkable, as it would allow an individual to disavow a contractual obligation at any time by claiming not to have read or understood the contract at the time he or she agreed to it. See, e.g., Hill v. Gateway 2000, Inc., 105 F.3d 1147, 1148 (7th Cir. 1997); see also Elsken v. Network Multi-Family Security Corp., 49 F.3d 1470, 1474 (10th Cir. 1995).
The rules that apply to contracts generally should (and do) also apply to arbitration clauses. A standard that would make it more difficult to agree to arbitration than to other contractual terms would ignore the many advantages to consumers from arbitration. Furthermore, it would suggest that the choice of a dispute resolution forum is more significant than all other contract terms, including price -- even though all consumers are affected by price, and very few by the availability of litigation.
Congress has long approached the issues of choice and consent in consumer credit by focusing on the need for appropriate disclosures. For example, Congress already requires that credit card issuers highlight certain specific contractual terms, including the annual percentage rate, the grace period, the method of computing balances, annual fees, any minimum finance charge, and transaction fees. See 15 U.S.C. § 1637(c)(1)(A); see also 12 C.F.R. § 226.5a(b). Credit card issuers have already made special efforts to highlight the existence and meaning of arbitration clauses in their contracts. For example, the key provisions of the clause are frequently presented in all capital letters, and describe how agreeing to arbitration means foregoing the opportunity to litigate in court. The American Bankers Association, Consumer Bankers Association, American Financial Services Association and National Retail Federation stand ready to work with this Subcommittee and other relevant Committees to discuss whether disclosures of arbitration clauses require additional prominence or detail. Such an approach would be more closely tailored to concerns regarding consent and choice than simply preventing all consumers from entering into predispute arbitration agreements.