The Court of Appeals for the Fourth Circuit has upheld the denial of a defendant’s motion to compel arbitration in a class-action case involving a credit card lender and the debt buyer that acquired the account in question, using a recent precedent that questioned the one-sided nature of the language used in the underlying agreement.
The background: The case stems from a lawsuit filed in Maryland by a consumer who alleged that the credit card lende engaged in illegal lending and collection practices, and the debt buyer that acquired the account was also name as a defendant. Specifically, the plaintiff claimed that the companies acted as unlicensed credit service businesses and loan brokers under Maryland law by originating and collecting on high-interest credit card accounts that were issued by a third-party bank and then quickly transferred to the lender.
- The consumer’s agreement included an arbitration clause that prohibited class actions and required all disputes to be resolved through individual arbitration. However, the same agreement also featured a “change-in-terms” provision that allowed the lender to “change or remove any of the terms and conditions . . . at any time,” raising concerns about whether the arbitration promise was legally binding or merely illusory.
- After the plaintiff filed the class-action complaint in 2023 seeking damages and a declaration that the loans were void, the defendants moved to dismiss the case and compel arbitration. That motion was denied by a district court judge, which the defendants appealed to the Fourth Circuit
The ruling: On appeal, the Fourth Circuit affirmed the district court’s denial of the motion to compel arbitration. The court cited its own recent decision in Johnson v. Continental Finance Co., which held that an arbitration agreement embedded in a contract is not enforceable if it is subject to a change clause that allows one party to unilaterally revoke or amend the arbitration terms at any time, without sufficient limitation.
- The panel rejected the defendants’ argument that their change-in-terms clause was legally constrained by “applicable law,” agreeing with the district court that such a vague phrase provides no meaningful limitation, especially when the clause permits unilateral amendment at any time. The court reiterated that under Maryland law, for an arbitration agreement to be valid, both parties must provide real, mutual consideration. In this case, the defendants’ promise to arbitrate was deemed illusory because they retained the unrestricted ability to modify or revoke it.
- The panel also dismissed a preemption argument raised by the defendants, pointing to the Fourth Circuit’s own prior ruling in Noohi v. Toll Bros., which rejected the notion that the Federal Arbitration Act preempts Maryland’s contract law.
Read the Appeals Court ruling. Read the lower court’s ruling
