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Refusing to enforce an arbitration clause in a credit card agreement, a federal judge has ruled that a bank cannot rely on its power under a “change-in-terms” clause to unilaterally add an arbitration clause – unless the cardholder accepts the change by continuing to use the card. “The change-in-terms provision is reasonably limited to terms previously contemplated by the original agreement, so long as cardholders do not accept the unilateral change by continuing to use their cards,” U.S. District Judge Berle M. Schiller wrote in his 10-page opinion in Perry v. FleetBoston Financial Corp. “Otherwise, credit cardholders would find themselves in an Orwellian nightmare, trapped in agreements that can be amended unilaterally in ways they never envisioned,” Schiller wrote. Rejecting a defense motion, Schiller refused to compel arbitration of a proposed class action suit alleging violations of the Fair Credit Report Act. The ruling is a victory for plaintiffs’ attorneys James A. Francis, Mark D. Mailman and John Soumilas of Francis & Mailman, and David A. Searles of Donovan Searles. Fleet’s lawyer, Burt M. Rublin of Ballard Spahr Andrews & Ingersoll, said the bank intends to file an immediate appeal. In his brief, Rublin and his partner, Alan S. Kaplinsky, argued that “numerous state and federal courts around the country have . . . enforced arbitration clauses added to credit card agreements pursuant to the same type of ‘change-in-terms’ procedures employed here by Fleet.” Many of those courts, they said, specifically rejected arguments from cardholders who said they had never consented to the addition of the arbitration clause. But Schiller found that none of the three named plaintiffs in the proposed class action had ever accepted the change in their agreements. The first two, a married couple, claim their card had been “canceled” before Fleet notified them of the new arbitration clause, and the third said she had decided herself to stop using the card. According to the suit, all three continue to receive monthly statements of their balances and make occasional payments. But none of the three has made any purchases with the card since the arbitration clause was added. The suit accuses Fleet of violating the Fair Credit Reporting Act by accessing the plaintiffs’ Trans Union credit reports under “false pretenses.” “Plaintiffs each had their credit reports impermissibly accessed, obtained and used by Fleet even after Fleet had closed [their] respective credit accounts and plaintiffs had no business with Fleet,” the plaintiffs’ lawyers argue. After the suit was filed, Fleet’s lawyers moved to compel arbitration, arguing that all three plaintiffs were bound by an arbitration clause that was added to the agreement in February 2001. But the plaintiffs’ lawyers argued that Fleet was asking for too broad a reading of a change-in-terms provision. The addition of the arbitration provision exceeded Fleet’s power under the change-in-terms provision, the plaintiffs said, because the original agreement made no mention of dispute resolution – either in an arbitral or judicial forum. As a result, the plaintiffs argued that they did not reasonably expect Fleet could use its change-in-terms authority to add “wholly new clauses regarding uncontemplated subject-matter to the contract.” Schiller found that the issue was one of state law, and that the agreement specifically called for application of Rhode Island law. The Rhode Island courts, Schiller said, have never directly addressed the question of “whether an arbitration clause may be unilaterally added to a cardholder agreement through change-in-terms authority when the initial agreement does not contain terms regarding dispute resolution.” Other courts “have reached conflicting conclusions,” Schiller found, noting that decisions often seemed to turn on “whether a particular state Legislature has explicitly authorized such conduct.” Courts applying a state law that explicitly authorizes the practice have upheld it, Schiller found, while other courts not bound by such laws “have often struck down attempts to add wholly new provisions to cardholder agreements.” Although Rhode Island’s Legislature passed just such a law in 2004, Schiller found that it should not be applied retroactively, and that the case was therefore governed by “general contract law.” Schiller found that the change-in-terms provision was “ambiguous” because it could be read two ways – either to modify only those terms already contained or contemplated in the original agreement, or to both modify and insert additional, previously uncontemplated, terms to the original agreement. Faced with an ambiguous clause, Schiller said he was forced to construe it in favor of the plaintiffs because Fleet “possessed the stronger bargaining position and drafted this standardized agreement.” As a result, Schiller ruled that the change-in-terms clause “applies only to those terms already contained or contemplated in the original agreement.” In the original agreement, Schiller noted, Fleet “did not include any mention of arbitration or any other forum for dispute resolution. . . . Nothing in these terms would alert a consumer to the fact that Fleet might later impose a term abrogating their rights to pursue disputes in a civil forum, especially when plaintiffs were no longer using their cards.” But in his closing paragraphs, Schiller emphasized that his ruling was a limited one that applies only to cardholders who made no purchases after the arbitration clause was added. “If plaintiffs had used their credit cards, they would have manifested their assent to the new term, and the change would no longer be unilateral,” Schiller wrote. (Copies of the 10-page opinion in Perry v. FleetBoston Financial Corp. , PICS No. 04-1075, are available from The Legal Intelligencer . Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information. Some cases are not available until 1 p.m.)

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