On February 24, 1999, the California Supreme Court denied the Bank of America's petition for review in Badie v. Bank of America. The Supreme Court further denied the request of amici to depublish the decision, a procedure under California law in which
the decision of the lower court is allowed to stand but may not be used as a precedent in any legal proceeding. The decision
of the California Court of Appeal reported at 67 Cal. App. 4th 779 (1998) may be cited in subsequent proceedings challenging
the enforceability of arbitration clauses in customer agreements implemented through a "change in terms" notice.
The Court of Appeal’s decision held that customers who entered into credit account agreements containing a provision that
the bank could change "any term, condition, service, or feature" of a customer’s credit account did not consent to the Bank’s
subsequent incorporation of an alternative dispute resolution ("ADR") clause. The Court concluded that nothing in the original
agreement placed customers on notice that they might someday be deemed to have agreed to surrender their right to a jury trial
or to a judicial forum for settling disputes with the bank.
Plaintiffs, including four individuals, a consumer rights organization (Consumer Action), and the California Trial Lawyers
Association, challenged the validity of the ADR clause which Bank of America sought to add to existing account agreements
by sending customers an insert with their monthly account statements, notifying them of the new term. Plaintiffs sought to
enjoin implementation of the ADR provision on the ground that its addition to the account agreements violated the California
Unfair Competition Act. Two of the plaintiffs further sought to enjoin the provision because it allegedly violated the Consumer
Legal Remedies Act.
The ADR clause was not automatic; instead, it was drafted to come into play only if the customer or the Bank elected ADR.
For disputes involving a single account or multiple accounts held by a single customer, the customer or the Bank could elect
arbitration pursuant to the Commercial Rules of the American Arbitration Association. For all other disputes, either party
could elect judicial reference pursuant to California Code of Civil Procedure section 638 and related sections.
The trial court found for the Bank, ruling that the change of terms provision in the original account agreements permitted
the addition of the ADR clause. The cardmember agreements at issue provided: "Change of Terms: We may change any term, condition, service or feature of your Account at any time. We will provide you with notice of the
change to the extent required by law." The trial court further found that the ADR clause was enforceable because it was not
unfair or unconscionable and did not violate the covenant of good faith and fair dealing. Plaintiffs appealed.
The Court of Appeal limited its review to the request for declaratory relief. The Court concluded that plaintiffs’ failure
to address their statutory causes of action in their appellate briefing waived those claims. The Court further concluded that
none of the individual plaintiffs had standing to challenge the ADR provision as it applied to the Bank’s deposit accounts.
According to the Court of Appeal, the Bank’s adherence to the modification procedures contained in the agreements was insufficient,
and its reliance on the California Supreme Court’s imprimatur on those procedures in Perdue v. Crocker National Bank, 38 Cal. 3d 913 (1985), misplaced. It concluded that, under ordinary principles governing contract formation, the Bank’s
attempted modification of the cardmember agreements was ineffectual because a modification is limited to "the universe of
terms included in the original agreements" and the forum for resolution of disputes was not "integral to the Bank/creditor"
relationship. Accordingly, the Court held that the clause could not be applied to credit card accounts of the four individual
plaintiffs..
The Court’s analysis was influenced by a series of factors including, (1) the Bank’s "change of terms" provision did not include
language that the Bank could "add" new provisions; (2) none of the original cardholder agreements contained any provision
regarding the method or forum for resolving disputes; (3) the scope of the "change of terms" provision was ambiguous and,
given that this was an adhesion contract, must be construed against the drafter; and (4) the wording of the ADR clause was
"far from the direct, clear and unambiguous language required to alert a customer . . . ."
The Badie decision has significant ramifications for the enforceability of arbitration clauses implemented through a change of terms
provision. It may also impact the enforceability of other provisions incorporated through a change of terms provisions that
arguably do not "pertain to matters that are integral to the Bank/creditor relationship.
For further information regarding this decision and its effects, you may contact Mr. Arne Wagner, former Director of Litigation with Bank of America and currently Of Counsel with Morrison & Foerster, or Mr. James Schurz. Both served as counsel for the Bank in the Badie proceeding. They are resident in the San Francisco office, (415) 268-7000.
