Arbitration Clauses in Credit Card Agreements: An Empirical Study

Journal of Empirical Legal Studies

Volumn 9, Issue 3, 2012, Pages 536-566

  Drahozal, Christopher R ^a   Rutledge, Peter B ^b  

^a University of Kansas School of Law   (United States)

^b UNIVERSITY OF GEORGIA   (United States)

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[No Author keywords available]

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EID: 84870339466     PISSN: 17401453     EISSN: 17401461     Source Type: Journal    
DOI: 10.1111/j.1740-1461.2012.01262.x     Document Type: Article

References (115)

1. E.g., Arbitration Fairness Act of, H.R. 1020, 2(3), 110th Cong. (2009) (finding that consumers "must often give up their rights as a condition of. getting a credit card")2009
2. Yuki Noguchi, Credit Card Arbitration Trumps Lawsuits, Court Says, NPR (Jan. 11, 2012http://www.npr.org/2012/01/11/144990644/credit-card-arbitration-trumps-lawsuits-court-says
3. Consumer generally must sign a detailed agreement. In the fine print, almost always, is an arbitration clause that says that if consumers want to dispute fees, they must do so through arbitration, not in court."); Public Citizen, Forced Arbitration: Unfair and Everywhere (Sept. 14, 2009), available at (reporting that "the use of forced arbitration remains rampant," citing credit card agreements as an Alex Raskolnikov, example); ("A binding arbitration clause is a staple of credit card agreements. ").Revealing Choices: Using Taxpayer Choice to Target Tax Enforcement, 109 Colum. L. Rev. 689-747 (2009)
4. See Federal Arbitration Act: Is the Credit Card Industry Using it to Quash Legal Claims: Hearing Before the Subcomm. on Comm'l and Admin. Law of the House Comm. on the Judiciary 1-2, 111th Cong. available at http://judiciary.house.gov/hearings/printers/111th/111-39_49475.PDF2009
5. Samuel Issacharoff & Erin F. Delaney, Credit Card Accountability, 73 U. Chi. L. Rev. 157-158 (2006) (referring to "the few credit card companies that do not compel arbitration"); Memo to Elizabeth Warren: How to Protect Consumers (Sept. 17, 2010), available at (quoting David Arkush, director, Public Citizen's Congress Watch division) ("Nearly every consumer lender puts a clause in the standard-form contract saying that the consumer can never sue the company, for anything.").http://blogs.reuters.com/reuters-wealth/2010/09/17/memo-to-elizabeth-warren-how-to-protect-consumers/
6. Public Citizen, The Arbitration Trap: How Credit Card Companies Ensnare Consumers (Sept ), available at http://www.citizen.org/documents/ArbitrationTrap.pdf2007
7. Arbitration Abuse: An Examination of Claims Files of the National Arbitration Forum, Staff Report of the Domestic Policy Subcommittee Majority Staff, House Oversight and Government Reform Committee 12 & ex. A (July 21), available at http://www.clarksvilleonline.com/wp-content/uploads/2009/07/Report-on-National-Arbitration-Forum.pdf2009
8. Consent Judgment, Minn. v. National Arbitration Forum, Inc., No. 27-CV-09-18550 (Minn. Dist. Ct. July 17), available at http://pubcit.typepad.com/files/nafconsentdecree.pdf2009
9. E.g., Creating a Consumer Financial Protection Agency: A Cornerstone of America's New Economic Foundation: Hearing Before the Senate Comm. on Banking, Housing, and Urban Affairs 79, 88, 111th Cong. (2009) (prepared statement of Travis B. Plunkett, Legislative Director, Consumer Federation of America), available at ; Professors of Consumer Law and Banking Law, Statement in Support of Legislation Creating a Consumer Financial Protection Agency 5-6 (Sept. 29), available at http://digest.stjohns.edu/download.axd/6d40215c03a249ec91f0e455bdd262f2.pdfd=Professors%20of%20Consumer%20Law%2010-05-09_10002009
10. Dodd-Frank Wall Street Reform and Consumer Protection Act 1028(a), Pub. L. 111-203 (directing CFPB to study and report to Congress on the use of predispute arbitration clauses in consumer financial services contracts).2010
11. Christopher R. Drahozal & Keith N. Hylton, The Economics of Litigation and Arbitration: An Application to Franchise Contracts, 32 J. Legal Stud. 549 (2003).
12. Randall Thomas, Erin O'Hara & Kenneth Martin, Arbitration Clauses in CEO Employment Contracts: An Empirical and Theoretical Analysis, 63 Vand. L. Rev. 959 (2010).
13. Theodore Eisenberg & Geoffrey P. Miller, The Flight from Arbitration: An Empirical Study of Ex Ante Arbitration Clauses in the Contracts of Publicly Held Companies, 56 DePaul L. Rev. 335 (2007).
14. Congress also might regulate consumer arbitration, such as by passing the Arbitration Fairness Act of 2011, S. 987, 112th Cong. but that seems unlikely given Republican control of the House of Representatives.2011
15. Ian Millhiser, Supreme Court Nukes Consumers' Rights in Most Pro-Corporate Decision Since Citizens United, ThinkProgress: Justice (Apr. 27, 2011), available athttp://thinkprogress.org/justice/2011/04/27/176997/scotus-nukes-consumers/
16. After Concepcion, it is only a matter of time before nearly every credit card provider, cell phone company, mail-order business or even every potential employer requires anyone who wants to do business with them to first give up their right to file a class action.")
17. Brian T. Fitzpatrick, Supreme Court Case Could End Class-Action Suits, S.F. Chron. (Nov. 7), available athttp://www.sfgate.com/cgi-bin/article.cgif=/c/a/2010/11/06/INA41G6I3I.DTL2010
18. Once given the green light, it is hard to imagine any company would not want its shareholders, consumers and employees to agree to such provisions [arbitration agreements with class action waivers].")
19. Nathan Koppel, Will Federal Consumer Bureau Ride to the Rescue of Class Actions, WSJ Law Blog (Apr. 29, 2011), available at http://blogs.wsj.com/law/2011/04/29/will-federal-consumer-bureau-ride-to-the-rescue-of-class-actions/
20. ("Class-action bans are already pretty common in certain industries, such as consumer credit and cell phones, and they are about to become much more common, lawyers say.").
21. See text accompanying notes 23-49.
22. See text accompanying notes 50-73.
23. See text accompanying notes 74-105.
24. See text accompanying notes 106-120.
25. In addition to analyzing the sample as a whole, we also examine separately the factors that explain why banks and credit unions use arbitration clauses. Given the small number of credit unions that use arbitration clauses, the results for bank issuers track the results for the sample as a whole (because most of the variation in credit card use is among banks), while our results for credit union issuers are largely inconclusive.
26. More precisely, we find that 95.1 percent of credit card loans outstanding as of December 31, were by issuers that included arbitration clauses in their cardholder agreements. See text accompanying note 107.2009
27. The default means of dispute resolution is litigation. Unless parties agree 83 otherwise, any dispute will be resolved in court. E.g., Stephen J. Ware, Employment Arbitration and Voluntary Consent, 25 Hofstra L. Rev., 135 -270 (1996).
28. Our focus is on predispute arbitration agreements (arbitration clauses) because the vast majority of consumer (and employment) arbitration arises out of such agreements. See Christopher R. Drahozal & Samantha Zyontz, Private Regulation of Consumer Arbitration), ("[V]irtually all (290, or 96.3%) of the 301 cases in the case file sample arose out of pre-dispute agreements, while only 11 (or 3.7%) arose out of post-dispute agreements to arbitrate.")79 Tenn. L. Rev. 289-346 2012
29. Lewis L. Maltby, Out of the Frying Pan, Into the Fire: The Feasibility of Post-Dispute Employment Arbitration Agreements, 30 Wm. Mitchell L. Rev. 313-319 (2003) ("AAA found only 6% (69/1148) of their 2001 employment arbitrations were the result of post-dispute agreements. In 2002, the frequency of post-dispute agreements was even lower, 2.6% (29/1124).").
30. Of course, the vast majority of loans are paid without any dispute and, even among those that are not, most collection activity takes place outside of either court or arbitration. The issue we are examining here, however, is the choice of dispute resolution forum in the contract, which is either court or arbitration-hence the comparison in the text.
31. William W. Park, Arbitration in Banking and Finance, 17 Ann. Rev. Banking L. 213, 215-16 (1998)
32. ("A debtor's default usually results from simple inability or unwillingness to pay, rather than any honest divergence in the interpretation of complex or ambiguous contract terms.").
33. Mark Kantor, OTC Derivatives and Arbitration: Should Counterparties Embrace the Alternative, 117 Banking L.J. 408-411 (2000) ("Many such jurisdictions have developed summary procedures for resolving court disputes about promissory notes and other debt instruments and New York and London in particular have developed reputations as experienced, impartial forums for financial disputes."). If, however, legal rules created uncertainty over the enforcement of loan agreements in court, arbitration might be seen as a relatively more attractive forum than court.
34. See David V. Snyder, Private Lawmaking, 64 Ohio St. L.J. 371-448 (2003) ("[T]he private lawmaking that is put in place through contracts involves mass contracting in which uniform rules are incorporated across countless transactions, binding millions of parties. "; citing consumer credit cards as an example).
35. Todd J. Zywicki, The Economics of Credit Cards, 3 Chap. L. Rev. 125 (2000) ("Although there has been some development of secured credit cards in recent years, most credit card debt is unsecured.").
36. Secured credit cards, which are secured by a deposit with the issuer, are a relatively rare exception. See Angela Littwin, Testing the Substitution Hypothesis: Would Credit Card Regulations Force Low-Income Borrowers into Less Desirable Lending Alternatives U. Ill. L. Rev. 403, 448 n249 ("There is a product known as a secured credit card, but it does not actually offer the borrower any credit. The putative borrower must send the issuer a deposit in the amount of the borrower's line of 'credit.' The borrower may then charge up to the amount she has on deposit, as though she had an unbanked debit card.").2009
37. An additional problem is that as of December 31, 2009-when issuers reported the cardholder agreements studied here to the Federal Reserve-neither the National Arbitration Forum (NAF) (formerly the leading provider of debt collection arbitration services for credit card issuers) nor the American Arbitration Association (AAA) (the leading U.S. provider of arbitration services generally) would administer credit card debt collection arbitration. The NAF had agreed to stop administering new consumer arbitrations in settling a consumer fraud suit brought against it by the Minnesota Attorney General. See Consent Judgment, 3, Minnesota v. National Arbitration Forum, Inc., No. 27-CV-09-18559 (Minn. Dist. Ct. July 17, 2009), available at . The AAA had implemented a moratorium on most consumer debt collection arbitration, based on its "experiences administering debt collection arbitrations" and "its consideration of a number of policy concerns that have been raised" about such arbitration. See Arbitration or Arbitrary: The Misuse of Mandatory Arbitration to Collect Consumer Debts: Hearing Before the Subcomm. on Domestic Policy of the H. Comm. on Oversight, 111th Cong. (July 22, 2009) (testimony of Richard W. Naimark on Behalf of the American Arbitration Association), available at http://oversight.house.gov/images/stories/documents/20090722112616.pdf
38. Allied-Bruce Terminix V. Dobson, 513 U.S. 265, 280 (1995) ("[Arbitration] is usually cheaper and faster than litigation. ") (quoting H.R. Rep. No. 97-542, at 13 (1982))
39. Kathryn A. Sabbeth & David C. Vladeck, Contracting (Out) Rights, 36 Fordham Urb. L.J. 803-827 (2009)
40. (Describing "prevailing wisdom" as "that arbitration is faster and cheaper than litigation," although criticizing research on which such view might be based).
41. Christopher R. Drahozal & Samantha Zyontz, Creditor Claims in Arbitration and in Court, 7 Hastings Bus. L.J. 77-96 (2011).
42. Stephanie Francis Ward, They Dun Them Wrong: Suits Challenge Use of Mandatory Arbitration Clauses to Pursue Debtors, ABA J., July, at 16, 18 ("Philadelphia attorney [Alan] Kaplinsky says, 'I think it's a question of cost,' mentioning a credit card client that tried debt collection arbitration and eventually decided the process did not save money. 'The collection costs were just as high if not higher than going through court,' Kaplinsky says."). On the other hand, if arbitration provides more opportunities to negotiate with borrowers before an award is made, it might reduce the need to use the additional step of confirmation and thus avoid the increased process costs that would otherwise result.2008
43. E.g., 15 U.S.C. 1640.
44. Other consumer lenders also engage in mass contracting, and some respond by using arbitration clauses. For example, one study found significant use of arbitration clauses in a sample of private student loan contracts. National Consumer Law Center, Paying the Price: The High Cost of Private Student Loans and the Dangers for Student Borrowers 28 (Mar. 2008), available at ("Sixty-one percent of the loan notes in our survey contained mandatory arbitration clauses."). The same is no longer true (if it ever was) for home mortgages, although not because of actions by individual lenders. See 15 U.S.C. 1639c(e)(1) (enacted in 2010) ("No residential mortgage loan and no extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer may include terms which require arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction."); Fannie Mae, Announcement 04-06, at 4-5 (Sept. 28, 2004), available at ("[M]ortgage loans that are subject to mandatory arbitration are ineligible for sale to, or securitization by, Fannie Mae."); Freddie Mac, Combatting Predatory Lending (last visited May 11, 2011), available at ("Our previously implemented anti-predatory lending practices include. [n]ot investing in mortgages originated on or after August 1, 2004, that contain mandatory arbitration clauses.").http://www.studentloanborrowerassistance.org/blogs/wp-content/www.studentloanborrowerassistance.org/uploads/File/Report_PrivateLoans.pdf,http://www.freddiemac.com/corporate/citizenship/protecting_consumers/predlend.html,http://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2004/04-06.pdf
45. Zawikowski v. Beneficial Nat'l Bank, 1999 WL 35304, at 2 (N.D. Ill. Jan. 11, 1999
46. Hunt v. Up N. Plastics, 980 F. Supp. 1046, 1047 (D. Minn. 1997); Collins v. International Dairy Queen, Inc., 169 F.R.D. 690, 694 (M.D. Ga. 1997); Ex Parte Green Tree Fin. Corp., 723 So. 2d 6, 10 & n3 (Ala. 1998).
47. Alan S. Kaplinsky & Mark J. Levin, Excuse Me, But Who's the Predator Banks Can Use Arbitration Clauses as a Defense, Bus. L. Today 24-24 1998
48. Edward Wood Dunham, The Arbitration Clause as Class Action Shield, 16 Franchise L.J. 141-141 (1997).
49. See text accompanying notes 67-73.
50. Brian T. Fitzpatrick, An Empirical Study of Class Action Settlements and Their Fee Awards, 7 J. Empirical Legal Stud. 811 (2010)
51. Theodore Eisenberg & Geoffrey P. Miller, Attorney Fees in Class Action Settlements: An Empirical Study, 1 J. Empirical Legal Stud. 27 (2004).
52. Moreover, to the extent the arbitration clause contains a carveout for small claims, the carveout may reduce the process costs associated with run-of-the-mill collection cases by preserving for the company the flexibility to choose the most efficient forum for those cases. This possible use of the small claims carveout turns the existing jurisprudence on its head. Most courts consider the small claims carveout in cases in which consumers challenge the enforceability of an arbitration clause used in conjunction with a class arbitration waiver. In such cases, the company cites the small claims carveout in its defense of the clause, noting that the carveout enables the consumer to vindicate his or her individual claim in court without incurring the process costs of arbitration. See, e.g., Cicle v. Chase Bank USA, 583 F.3d 549 (8th Cir. 2009).
53. In this article, we are examining why credit card issuers use arbitration clauses. We are not addressing, and take no position on, the normative implications of permitting credit card issuers (or other businesses) to use arbitration clauses to reduce their susceptibility to class relief. For example, whether class actions result in overdeterrence of beneficial business conduct, or whether reducing the availability of class actions will result in underdeterrence of business wrongdoing, is beyond the scope of this article. The same is true for the question of whether process costs exceed any deterrence benefits of class actions.
54. Alternatively, if credit cards for high-risk customers tend to have lower credit limits (which seems likely), an increase in the proportion of high-risk customers in the issuer's portfolio may make process costs relatively more significant (because the fixed costs of dispute resolution would be a larger percentage of the loan amount), and perhaps make arbitration more attractive even for collection actions. In addition, if high-risk customers have fewer alternative sources for obtaining credit cards, issuers may be more able to choose the means of dispute resolution without risking the loss of customers.
55. Eric Dash, Bank Fees Rise as Lenders Try to Offset Losses, N.Y. Times (July 1, 2009http://www.nytimes.com/2009/07/02/business/02fees.html
56. Marc Anthony Fusaro & Nicholas G. Rupp, It's Not Just How Much You Pay, But Also How You Pay: Empirical Evidence from the Banking Industry 48 (Working paper Sept), . The Credit CARD Act of 2009 may have made this strategy less attractive, see the Pew Health Group, A New Equilibrium: After Passage of Landmark Credit Card Reform, Interest Rates and Fees Have Stabilized 1 (May 2011), available at ("interest rates and fees [on consumer credit cards] have stabilized since the Act's new reforms have taken effect"), but most provisions of the Act did not take effect until after the time period studied here.http://www.ecu.edu/cs-educ/econ/upload/ecu0710.pdf,http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Credit_Cards/Report_Equilibrium_web.pdf2007
57. To some extent, these considerations may overlap with the degree of specialization by the issuer in credit card loans.
58. See 50 Largest Visa & MasterCard Credit Card Issuers, 942 Nilson Rep. 10-11 (2010)
59. Second 50 Largest Visa & MasterCard Credit Card Issuers in the U.S., 943 Nilson Rep. 10 (2010)
60. Adam J. Levitin, The Credit C.A.R.D. Act: Opportunities and Challenges for Credit Unions 6 (2009), available at ("Although 47 of the 100 largest card issuers in the United States are credit unions, they accounted for only 1.76% of outstandings at the end of 2008 and 1.25% of dollars transacted in 2008."). http://www.law.georgetown.edu/faculty/levitin/documents/LevitinCreditCARDActandCreditUnions.pdf
61. 2009 Credit Card Survey Collects Facts on Rates, Fees, Consumer Action News (Summer Reporting that among issuers who responded, 10 banks included arbitration clauses in cardholder agreements while three did not; one credit union included an arbitration clause in its cardholder agreement while four did not). 2009http://www.consumer-action.org/downloads/english/CA_News_CC_09.pdf
62. Note also that there are differences in tax treatment between banks and credit unions.
63. U.S. Dep't of Treasury, Comparing Credit Unions with Other Depositary Institutions 7 (Jan. 2001), available at ; Eric Rasmusen, Mutual Banks and Stock Banks The differences between the contracts of investor-owned firms on the one hand, and mutually owned and nonprofit firms on the other, induce sorting of customers between firm ownership types based on their perceptions of their biases. Customers who believe they are relatively unbiased and therefore can avoid the penalties used by firms, including naïve customers who in fact are vulnerable to these penalties, will be attracted by the low-up-front prices charged by investor-owned firms. In contrast, customers who are aware of their vulnerability to penalties, whom we refer to as sophisticated, will tend to patronize mutual and nonprofit firms in order to avoid paying the penalties that subsidize the low up-front prices charged by investor-owned firms.Cf. Edward L. Glaeser & Andrei Shleifer, Not-for-Profit Entrepreneurs, 81 J. Pub. Econ. 99, 100 (2001) ("Our key point is that such [non-profit] status weakens his incentive to maximize profits. This commitment to weaker incentives is valuable in markets where entrepreneurs might be able to take advantage of their customers, employees, or donors, since it reduces their interest in profiting from such opportunities.")., 31 395-395 (1988).
64. Ryan Bubb & Alex Kaufman, Consumer Biases and Firm Ownership 3 2009http://www.people.fas.harvard.edu/~akaufman/papers/BubbKaufman_ConsumerBiases.pdf
65. On the other hand, if less effective oversight permits credit union managers to benefit personally from cost reduction, they may have at least as strong of an incentive to minimize costs as managers of shareholder-owned banks. The same result may follow to the extent credit union managers receive utility from pursuing the credit union's institutional mission.
66. Moreover, the common bond requirement seems to be increasingly loosely applied, such that "[e]veryone can join a credit union, but not everyone can join any credit union." Ron Lieber, Credit Unions Are Beckoning with Open Arms, N.Y. Times, June 18, 2010 ("In practice, [creation of multiple common bond credit unions] ended up opening credit union membership to anyone in the United States.").
67. Compare Federal Reserve Statistical Release, Charge-Off and Delinquency Rates on Loans and Leases at Commercial Banks, available at (last visited Jan. 12, 2011) (reporting quarterly charge-off rates from the first quarter of 2009 through the first quarter of 2010 ranging from 7.62 percent to 10.12 percent) with David Morrison, CU Card Charge Offs Up, Delinquencies Slightly Down in First Quarter, Credit Union Times (June 17),, available at ("An analysis of NCUA data conducted by Asset Exchange, a leading CU card analysis firm and brokerage, found card charge-offs running at an annualized rate of 4.6%, up from 4.1% in the first quarter of 2009http://www.federalreserve.gov/releases/chargeoff/chgallnsa.htm,http://www.cutimes.com/News/2010/6/Pages/CU-Card-Charge-Offs-Up-Delinquencies-Slightly-Down-In-First-Quarter.aspx2010
68. In addition, the different backgrounds and socialization of bank executives from credit union executives may contribute to or reinforce the differing incentives. See Thomas Joo, A Trip Through the Maze of Shareholder Democracy, 77 St. Johns L. Rev. 742-47 (2003)
69. Gerald F. Davis, Mina Yoo & Wayne E. Baker, The Small World of the American Corporate Elite, 1982-2001, 1 Strategic Org. 301 (2003).
70. Although organizational form likely influences and is correlated to some degree with certain aspects of the issuer's business strategy described in the text accompanying notes 50-52, that correlation does not appear to distort our results.
71. The Supreme Court's decisions in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 and Stolt-Nielsen S.A. v. AnimalFeeds Int'l, Inc., 130 S. Ct. 1758 (2010), alter this description in important ways, but were not decided until after the time period studied here. See also text accompanying note 102.2011
72. E.g., Kaneff v. Delaware Title Loans, Inc., 587 F.3d 616, 624 (3d Cir. ) (holding class arbitration waiver not unconscionable).2009
73. Omstead v. Dell, Inc., 594 F.3d 1081, 1087 (9th Cir. 2010
74. E.g., Muhammad v. County Bank of Rehobeth Beach Del., 912 A.2d 88, 100-01 (N.J. ) (severing invalid class arbitration waiver).2006
75. Christopher R. Drahozal & Quentin R. Wittrock, Franchising, Arbitration, and the Future of the Class Action, 3 Entrepren. Bus. L.J. 275, 294-96 (2009).
76. See The Future of Arbitration: Conference Summary (Mar. 17-18, 2011), available at (citing attorney who represented credit card companies to the effect that credit card companies would not use arbitration clauses unless they could also use class arbitration waivers).2010
77. Credit Card Accountability Responsibility and Disclosure Act of 2009, 204(a), 123 Stat. 1734, 1746-47 (May 22) (codified at 15 U.S.C. 1632(d)(3)); 12 C.F.R. 226.58.2009
78. At the time we collected the data, the credit card agreements were available on a webpage maintained by the Federal Reserve. See Board of Governors, Federal Reserve System, Consumer Credit Card Agreements Search, available at (last visited May 20, 2011). Subsequently, responsibility for making credit card agreements publicly available has shifted to the Consumer Financial Protection Bureau, which now posts the agreements on its webpage. Consumer Financial Protection Bureau, Credit Card Agreement Database, available at http://www.consumerfinance.gov/credit-cards/agreements/2012
79. Although the credit card agreements in our sample were those issuers were using as of Dec. 31, 2009, the issuers did not file those agreements with the Federal Reserve until after (sometimes well after) that date. We limited our sample to issuers that had filed their Dec. 31, 2009 agreements with the Federal Reserve by Aug. 1, As a result, we excluded from the sample two agreements that evidently were submitted to the Federal Reserve (or at least made available by the Federal Reserve) after that date. We also excluded (i.e., they are not included in the 298 issuers studied) the following: 13 finance companies that were not regulated as banks; four credit unions that were not federally insured; two credit unions that merged during 2009; two banks for which call report data were not available; seven issuers that reported zero credit card loans outstanding in their Dec. 31, 2009 call report; and one bank that conducted all credit card operations through a subsidiary that was included in the sample. (For the latter bank, we used call report data from the subsidiary but used data for the parent for other variables.) In addition, several issuers that each shared a common parent company were consolidated, so that five issuers replaced the previous eight. See text accompanying notes. 84-862010
80. It is not clear why the cardholder agreements for the remaining issuers were not available from the Federal Reserve.
81. The issuer, not the credit card network (either Visa or MasterCard), decides whether to include an arbitration clause in its credit card agreements.
82. In the handful of cases in which the issuer submitted agreements with different dispute resolution clauses, we coded the agreement according to which form of dispute resolution the majority of agreements specified. If there was no majority form, we coded the agreement according to what form of dispute resolution was provided in the agreement governing a general, as opposed to specialty, credit card.
83. Ross v. Bank of Am., N.A. (USA), No. 05 CV 7116 (WHP) (THK), Declaration of Andrew T. Semmelman (May 21, 2010) (Chase Card Services), available at ; Ross v. Bank of Am., N.A. (USA), No. 05 CV 7116 (WHP) (THK), Declaration of Caroline P. Hillmar (May 21, 2010http://www.arbitration.ccfsettlement.com/documents/files/Ross%20v%20BOA%20Final%20Approval%20Motion%20Decl%20of%20Caroline%20Hillmar.pdf
84. To identify issuers that were members of the same bank holding company, we used the National Information Center website, available at http://www.ffiec.gov/nicpubweb/nicweb/NicHome.aspx2011
85. For example, American Express Bank and American Express Centurion Bank used identical arbitration clauses in their credit cardholder agreements.
86. We also consolidated the other data for the issuers into a single observation. The only variables for which consolidation proved problematic were the legal environment variables (state class action rank and class arbitration waiver unenforceable). In three of the five cases, the two related issuers both were located in the same state and chose matching state laws to govern the agreement. In one case, however, the two issuers, although located in the same state, chose different state laws, while in another case the two issuers were located in different states and choose different state laws. We coded the variables affected by the conflicting states consistent with the larger of the two issuers.
87. E.g., CUNA Mutual Group, LOANLINER Document Solutions: LOANLINER Consumer Documents, available at http://www.cunamutual.com/portal/server.ptopen=514&objID=429766&mode=2#Article1a2011
88. It may be that other agreements also were based on forms but did not so indicate on the face of the agreement.
89. In most cases, the data collected on credit card loans outstanding were consistent with data reported by the Nilson Report. See 942 Nilson Rep. at 10-11 (2010); 943 Nilson Rep. at 10 (2010). In the cases in which the data were not consistent, we verified the call report data by examining reports shortly before and shortly after the Dec. 31, 2009 report. We do not expect perfect correspondence between call report data and that in the Nilson Reports, at least in part because the Nilson Reports includes commercial credit card loans in its totals and call report data are limited to consumer credit card loans. Jonathan Zinman, Where Is the Missing Credit Card Debt? Clues and Implications, 55 Rev. Income & Wealth 249, 257 (2009).
90. Of the issuers in our sample, 11 reported having securitized credit card loans outstanding as of Dec. 31, Of these issuers, nine used arbitration clauses and two did not.2009
91. Note that the volume of credit card loans outstanding is highly correlated with the number of credit card accounts with the issuer. We use credit card loans outstanding in our analysis because data are more widely available on that measure.
92. FDIC, Institution Directory Help: Frequently Asked Questions (last visited Jan. 10, 2011), available at http://www2.fdic.gov/idasp/definitions.aspSystemForm=ID&HelpItem=inFlags
93. FDIC, Find an Institution (last visited Jan. 10, 2011) (Specialized Categories: Credit Card Institutions), available athttp://www2.fdic.gov/idasp/main.asp
94. The ex post nature of the charge-off data also gives rise to potential concerns about endogeneity. If, for example, the use of arbitration permits issuers to make riskier credit card loans, the presence of an arbitration clause may influence the charge-off rate rather than or in addition to the other way around. (The other variables are all measured for time periods after the date on which the issuer's use of arbitration clauses was determined, so they do not raise the same type of concerns.) As an empirical matter, our data do not provide a readily available instrument that would enable us to use instrumental variables analysis to deal with the endogeneity. But given the theoretical reasons to expect a greater use of arbitration clauses by issuers with riskier credit card portfolios, see note 30 and accompanying text, as well as the clear relationship between organizational form (and its expected relationship with risk taking, see text accompanying notes 57-58) and the use of arbitration clauses, we do not believe that the possible endogeneity undercuts our results.
95. To enhance comparability between data from bank call reports and data from Thrift Financial Reports (TFR), we relied on Office of Thrift Supervision, TFR-to-Call Report Mapping (Feb. 15),, available at We are unaware of any similar reconciliation between bank call reports and credit union call reports.http://www.ots.treas.gov/_files/4830092.pdf2011
96. Compare National Credit Union Administration, Call Report Form and Instructions 35 (2009) (requiring reporting of "[f]ees charged for services (i.e., overdraft fees, ATM fees, credit card fees, etc.)" as "fee income") with FDIC, Line Item Instructions for the Consolidated Report of Income, at RI-4 (2009), available at [hereinafter Call Report Instructions] (requiring reporting of "fee income on credit cards" to be combined with credit card interest, except for annual fees paid by credit cardholders, which are to be reported as noninterest income). Comparable data are not available on the TFR, so we coded this item as missing for the issuers reporting on that form (hence the noticeably smaller number of observations in regressions when we use the service charge ratio variable). See Tables 4 and 6.
97. U.S. Chamber Institute for Legal Reform, 2010 U.S. Chamber of Commerce State Liability Systems Ranking Study 25 tab. 12 (Mar. 9),, available at ("Treatment of Class Action Suits and Mass Consolidation Suits") (results of survey "based on interviews with a nationally representative sample of 1,482 in-house general counsel, senior litigators or attorneys, and other senior executives who are knowledgeable about litigation matters at public and private companies with annual revenues of at least $100 million").http://www.instituteforlegalreform.com/images/stories/documents/pdf/lawsuitclimate2010/2010FullHarrisSurvey.pdf2010
98. Theodore Eisenberg, U.S. Chamber of Commerce Liability Survey: Inaccurate, Unfair, and Bad for Business, 6 J. Empirical Legal Stud. 969 (2009).
99. Alan S. Kaplinsky, Scorecard on Where Federal and State Appellate Courts and Statutes Stand on Enforcing Class Action Waivers in Pre-Dispute Consumer Arbitration Agreements 40-41 (May 17,(final tally of court decisions), available at 2010http://www.ballardspahr.com/alertspublications/legalalerts/~/media/Files/Alerts/2010-05-25_SCGrantsReviewofClassActionWaivers.ashx
100. Another weakness of the data is that this state may be the location of the bank's corporate headquarters rather than its principal place of business.
101. All the cardholder agreements in the sample that used arbitration clauses also included choice-of-law clauses. Of those clauses, 43 of 52 (or 82.7 percent) identified the same state as the Federal Reserve filing. Roughly two-thirds (162 of 247, or 65.6 percent) of the cardholder agreements without arbitration clauses included choice-of-law clauses. Of those clauses, 157 of 162 (or 96.9 percent) identified the same state as the Federal Reserve filing.
102. We also do not know the identity of counsel who prepared the cardholder agreement.
103. The credit card loans outstanding (including securitized credit card loans) as of Dec. 31, for issuers in our sample totaled $664,734,709,600, of which $632,040,637,900 (95.1 percent) were by issuers that included arbitration clauses in their cardholder agreements.2009
104. That percentage has declined significantly since Dec. 31, 2009, due to the partial settlement of the Ross antitrust case. See note 82.
105. The dummy variable controlling for when the issuer used a third-party form was not significant in any of the models. Alternatively, we reestimated the models after dropping the observations for issuers that used a third-party form. The results were the same as those in Table 4 in all material respects.
106. As indicated in the text accompanying note 92, we use alternative measures of the extent an issuer specializes in credit card loans: credit card loans as a percent of total assets, credit card loans as a percent of total loans, and a dummy variable equaling 1 if the issuer is identified as a credit card institution by the FDIC. Of these measures, only credit card loans as a percent of total loans was not statistically significant. As between the other two measures, we prefer the continuous variable (credit card loans as a percent of total assets) to the dichotomous one (whether the issuer is a "credit card institution").
107. To test for a relationship between securitization and the use of arbitration clauses, we included a dummy variable equaling 1 if the issuer securitized some portion of its credit card loans and 0 otherwise. The coefficient on the variable was statistically insignificant in all the models.
108. See text accompanying notes 97-99.
109. See note 104.
110. We restricted the sample to those issuers with choice-of-law clauses and then reestimated the model using the original state specifications (those that were the basis of Table 4). The results were similar to those using the states specified in the choice-of-law clauses, suggesting that it is the change in sample rather than the change in legal environment that is driving the results.
111. For research on consumer preference for choice, see Donna Shestowsky & Jeanne Brett, Disputants' Perceptions of Dispute Resolution Procedures: An Ex Ante and Ex Post Longitudinal Empirical Study, 41 Conn. L. Rev. 101-04 (2008).
112. See text accompanying note 61.
113. See text accompanying note 64.
114. Michael Staten, The Impact of Credit Price and Term Regulation on Credit Supply 1 (Joint Ctr. for Housing Studies, Harvard Univ. Feb. ), available at ("Four decades of empirical research in the United States shows that. rate ceilings are worse than ineffective at protecting consumers. A binding rate ceiling actually reduces the amount of credit available to consumers."); Oren Rigbi, The Effects of Usury Laws: Evidence from the Online Loan Market 29 (June 2010), available at ("[B]orrowers who were restricted under their original [interest rate] cap benefit from the increase in the cap and the marginal borrower benefits the most."). One limitation of these studies, as applied the present context, is that they focus on price regulation rather than regulation of other, less transparent terms of the lending contract.2008http://www.jchs.harvard.edu/publications/finance/understanding_consumer_credit/papers/ucc08-8_staten.pdfhttp://www.aeaweb.org/aea/2011conference/program/retrieve.php?pdfid=425
115. S. Ct. 1740 (2011).