The U.S. District Court for the Northern District of California recently denied a motion to compel arbitration filed by two allegedly affiliated banks that issued department store credit cards, and the one of the issuing banks and another entity that serviced the cards, in a case alleging they violated the federal Telephone Consumer Protection Act by calling the debtor’s cellular phone in an attempt to collect on the credit card debt.

A copy of the opinion is available here.

The plaintiff stopped paying his credit card in July 2013 and sent a letter to the issuing bank advising that he could no longer make payments and requesting the bank stop calling him. The issuing bank and its servicer continued making phone calls to the plaintiff and he sent a second letter in September 2013 requesting that the calls stop.

The plaintiff sued, asserting claims under the TCPA, the California Rosenthal Fair Debt Collection Practices Act, Cal. Civ. Code §§ 1788 et seq., and state common law claims. The defendants filed a motion to compel arbitration based on the arbitration clauses in the cardholder agreements for one of the two credit cards issued by one of the defendant banks that also serviced one of the two cards (“First Card”).  The second credit card agreement issued by the allegedly affiliated bank did not contain an arbitration clause (“Second Card”).

The court began by pointing out that the Federal Arbitration Act, 9 U.S.C. § 1 et seq., governs the enforceability and scope of an arbitration agreement and, under the FAA, a party may petition the court having jurisdiction for an order enforcing the arbitration agreement. Once a petition to compel arbitration is filed, the district court’s inquiry is limited to a two-part test: first, it must determine whether the arbitration agreement is valid; second it must determine whether the agreement encompasses the claims at issue in the lawsuit. Any doubts are to be resolved in favor of arbitration.

The parties did not dispute the validity of the arbitration agreements, only whether they applied to the claims raised in the lawsuit.

The defendants argued that the plaintiff’s claims fell within the broadly-worded terms of the cardholder agreements for the First Card which was governed by South Dakota law.

The arbitration clause provided for binding arbitration concerning: “All claims relating to your account, a prior related account, or our relationship . . . including Claims regarding the application, enforceability, or interpretation of this Agreement and this arbitration provision.”

The arbitration clause also explained whose claims are subject to arbitration: “Not only ours and yours, but also Claims made by or against anyone connected with us or you or claiming through us or you, such as a co-applicant, authorized user of your account, an employee, agent, representative, affiliated company, predecessor or successor, heir assignee, or trustee in bankruptcy.”

Moreover, the arbitration clause provided that it was to be interpreted “in the broadest way the law will allow it to be enforced.”

Accordingly, because the issuing banks were alleged to be affiliates, and the servicing entity an agent, the defendants argues that the arbitration provision from the First Card agreement applied to all of the plaintiff’s allegations against all of the entities.

Interpreting the First Card agreement, the District Court agreed that South Dakota had a substantial relationship to the parties, and that state’s principles of contract interpretation were not contrary to any fundamental California policy.

However, the Court concluded that even under South Dakota law, the defendants’ interpretation of the First Card arbitration language was overly broad.

The District Court reasoned that there was no basis on which to conclude that by accepting the First Card agreement, the plaintiff agreed to arbitrate any and all claims that  could ever arise between himself and the issuing bank. To do so would mean that “one credit card agreement could be used to dictate the parties’ ‘relationship’ ad infinitum, regardless of the subject matter of their future interactions. That is an absurd consequence.”

The Court concluded that the arbitration clause in the First Card agreement must be limited to the relationship created by those agreements—a relationship between plaintiff and the issuing bank, and not as the servicer or debt collector on any other unrelated card agreement.

The District Court found that there was no reason for a consumer like the plaintiff to believe that he had a direct relationship with one of the bank’s seeking to compel arbitration because that bank identified itself during the collection process only as the servicer for the Second Card.

In addition, District Court found no evidence that the two credit cards were related in any way, other than they were issued by the same bank and that its parent was the servicer bank.

Finally, the District Court found there was no evidence that, when the plaintiff agreed to the cardholder agreement for the Second Card card, he knew or received notice that that account might be serviced in the future by the servicer bank.

Relying on another district court’s holding in In re Jiffy Lube Int’l, Inc., Text Spam Litig., 847 F. Supp. 2d 1253 (S.D. Cal. 2012), which rejected an attempt to compel arbitration of TCPA claims based upon similarly broad language, the District Court here concluded that the language of the First Card agreement was limited to the relationship between the plaintiff and the card issuer, not the servicer or debt collector for the card issuer, because the plaintiff’s claims related only to collection calls for his Second Card account, not the First Card account.

In addition, although the plaintiff pled that the defendants were agents of the First Card issuer,  the Court refused to apply the language of the arbitration clause covering “agents” of the issuing bank.

Accordingly, the Court held that the language in the First Card agreement did not encompass or apply to plaintiff’s claims relating to the Second Card, and the Court denied defendants’ motion to compel arbitration.

Maurice Wutscher attorney Patrick Kane also contributed to this article.