The Court of Appeals for the Fourth Circuit has upheld a lower court’s ruling in favor of plaintiffs who sued a lender over the terms of the arbitration clause in a contract because the language was “so one-sided as to deprive the purported contract of any meaningful idea of reciprocity that a contractual bargain is meant to embody.”
The background: The case originated from two plaintiffs who signed up for credit cards from the defendant. They alleged that the defendant’s practices violated Maryland’s usury laws, claiming the company evaded state regulations through a “rent-a-bank” scheme. This arrangement allowed the defendant to charge interest rates higher than those allowed by Maryland law by routing loans through a federally chartered bank.
- The plaintiffs filed class-action lawsuits in Maryland state court, seeking damages and a declaratory judgment that the loans were void. The defendant, in response, invoked an arbitration clause from the cardholder agreements, which it claimed required the plaintiffs to resolve their disputes through arbitration rather than through the court system. The arbitration provision outlined that any disputes arising from the agreement would be subject to binding arbitration unless the plaintiff opted out in a specified manner.
- However, the plaintiffs contested the enforceability of the arbitration clause, arguing that it was illusory. They pointed specifically to a “change-in-terms” clause in the agreement, which allowed the defendant to unilaterally alter any terms of the agreement at its sole discretion. This, the plaintiffs argued, rendered the contract — and specifically the arbitration clause — invalid because it lacked mutuality and reciprocity, key elements of a binding contract.
The ruling: A district court judge sided with the plaintiffs, determining that the change-in-terms clause rendered the arbitration agreement illusory under Maryland law. The clause allowed the lender to modify any term of the agreement, including the arbitration clause, without the plaintiffs’ consent and provided only for notice after the fact. This, the court ruled, created an imbalance in the contract, stripping it of the essential mutual promises that constitute valid contracts.
- On appeal, the Fourth Circuit upheld this decision, stating that the formation of a valid contract, including an enforceable arbitration clause, must be determined by the court — not the arbitrator — especially when the challenge involves the very existence of the contract. Judge J. Harvie Wilkinson III, writing for the majority, emphasized that a valid contract requires reciprocity and mutual obligation, which the unilateral change clause failed to provide.
- In a concurring opinion, Judge James Andrew Wynn reiterated that the arbitration agreement was severable from the rest of the contract, and the lack of consideration for the arbitration clause meant it could not be enforced.
- In a dissenting opinion, Judge Paul V. Niemeyer argued that the contractual structure, including the right to reject changes, was consistent with Maryland law and should have been enforceable.
