Are Your Late Fees Unconstitutional?

January 23, 2014 at 8:51 am Leave a comment

This was the question decided recently by the Court of Appeals for the Ninth Circuit, the federal court that has jurisdiction over much of the West Coast, including California. Although the Court’s answer was a very reluctant no, sometimes in law you can lose the battle but win the war. The rationale laid out by the Court, particularly in a concurring opinion written by Judge Reinhardt, includes a legal road map for courts and legislatures that may want to take a fresh look at limiting what consumers feel, rightly or wrongly, are excessive fees for late payments and other such charges.

In In re: Late Fees and Overlimit Fee Litigation (2014 WL 211729), the Court heard the appeal of plaintiffs representing consumers who had been charged fees for paying their credit card bills late or going over the prescribed limit. They argued that the fees amounted to unjustified punishments that should be outlawed as unconstitutional under the Due Process Clause.

This might sound like West Coast wackiness, but it’s not. I’ll bet you right now that you will see this argument made in other courts. You see, the plaintiffs point out correctly that the Supreme Court has recognized, particularly over the past two decades, that punitive damages imposed in lawsuits can be so excessive that they violate the Due Process Clause. The plaintiffs argued in this case that just as civil damages imposed by juries can be excessive and modified by appellate courts, the same rationale should be applied to the imposition of late fees and overdraft charges which often bear little, if any, relationship to the actual cost incurred by the financial institution imposing the charges in the first place.

Of course there is a key distinction between civil damages in a lawsuit and late fees imposed on tardy bill payers: the latter have been put on notice in their contracts when they signed up for their credit cards that such fees could and would be imposed. In contrast, corporations suddenly having to pay damages so disproportionate to the actual harm caused by their misdeeds can’t be said to have adequate notice of the potential legal consequences, or so the argument goes.

This distinction ultimately won the day with the Ninth Circuit, but only because the judges had to follow the Supreme Court’s rulings. As argued in a concurring opinion, the proposition put forward by the plaintiffs “deserves further exploration and analysis.” If the Supreme Court continues to hold that the Constitution protects companies from excessive punitive damages “the extension of [this] doctrine, as requested by the card holders, should eventually become the law under the Due Process Clause.”

Even if the courts are not willing to go so far as to effectively cap late fees and other charges, the language used in the concurring opinion captures the zeitgeist of a political system increasingly energized over questions of economic inequality. At the very least, the judge provides an awfully good argument for a legislator wishing to pass legislation capping fees when he argues “consumers must frequently enter into. . .one-sided contracts if they are to obtain many of the necessities of modern life such as credit cards, cellular phones, utilities and other vital consumer goods.” The Court’s current interpretation of the law has “served primarily to protect wealthy corporations from liability for repeated wrong-doing.” The same reasoning “would also protect ordinary consumers from paying excessive court enforced damages for minimal breaches of contract.”

Now don’t get me wrong, my point is not that you should agree or disagree with the Court’s logic, but simply to point out that such logic is likely to become more and more prominent in debates about the proper regulation of financial institutions. It is perfectly legitimate to ask whether there is a point at which consumers are penalized too much for the services they receive and if the courts have a proper role in regulating these charges.

Entry filed under: Legal Watch. Tags: , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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