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Utah has passed the first law in the nation validating class action waivers in consumer contracts such as credit card agreements. The new law, passed on March 15, allows credit card issuers to put a provision in contracts by which consumers agree to settle disputes through individual arbitration and waive their rights to file a class action. It also lets companies add such provisions to existing cardholder agreements through a prescribed change-in-terms notice. In addition, the new statute has the potential for broader application beyond Utah’s borders for such state-chartered banks as Merrill Lynch Bank USA, UBS Bank USA and American Express Centurion Bank-all of Salt Lake City. Utah-based financial institutions now can try to enforce their class action waivers in other states based on conflict-of-law or choice-of-law principles, said Alan S. Kaplinsky, who chairs Philadelphia-based Ballard Spahr Andrews & Ingersoll’s consumer finance litigation practice group. He also had a hand in drafting the legislation. State legislators and the credit card industry-both of which express concern over “plaintiffs attorneys’ rampant abuses of class action lawsuits”-say that the new law “sets an important new precedent preventing needless class action suits against industrial banks in favor of quicker, cheaper, more fair arbitration hearings,” said Kaplinsky, who represents consumer financial service companies. “Arbitration is a lot more cost-effective way of resolving disputes with consumers than going to court, because a lot of people besides just a small number of lawyers benefit,” he said. He added that the Utah bill could well “be a model for other states to follow.” But consumer lawyers claim that the industry could not care less about arbitrating single, minuscule claims. They assert that the industry “bought and paid for” a new mechanism to immunize itself from consumer class actions arising from its misconduct. F. Paul Bland Jr., staff attorney for Trial Lawyers for Public Justice, a Washington-based public interest law firm, called the new legislation “an effort to gut California protection laws by Utah legislation.” The California Supreme Court rejected the class action waiver provision in a key 2005 case. Brian R. Strange of Strange & Carpenter, a national plaintiffs’ class action practice based in Los Angeles, called the new Utah law “a prime example of business run amok. “It’s a scary thought that basically the credit card companies have organized and started to go into legislatures to start to ban class actions,” Strange said. Conspiracy allegations Consumer lawyers allege in federal antitrust class action litigation elsewhere that a consortium of the largest credit card issuers has conspired to impose mandatory arbitration clauses in their contracts and not to deal with cardholders who refuse to waive their class action rights. Ross v. Bank of America, No. 05cv7116 (S.D.N.Y.). Class action waivers and companies’ rights to add them to existing contracts have been litigated heavily around the country, perhaps most notably in California. The California Supreme Court held last year that credit card issuers’ arbitration clauses are unconscionable in Discover Bank v. Superior Court (Boehr), 36 Cal. 4th 148 (Calif. 2005). Delaware incorporated the add-on provision into its banking code after the California intermediate appellate court handed the industry an adverse decision in Badie v. Bank of America, 79 Cal. Rptr. 2d 273, 280 (Calif. Ct. App. 1998; rev. denied). “What the California Supreme Court basically said in the Boehr case is that class actions are a disincentive to companies that take small amounts of money from large amounts of people,” said Strange. He and Bland each said that they think the Utah law is the product of an industry going to “states where it has enough pull in the legislature” to get laws passed that it can try to export to jurisdictions that it views as hostile, such as California. But Kaplinsky said that both federal and state courts have dealt with this argument time and time again, noting that though some states’ law may be unsettled on the issue, the U.S. circuit courts of appeal generally have upheld them. Furthermore, “a lot of companies are giving consumers the right to reject arbitration provisions,” he said. “The change-in-terms notice says you’ve got 30 days to reject the arbitration provision. If you don’t want it, you’ll still be able to keep your card. More and more companies are doing this. It’s an industry trend.”

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