American Express Plans Arbitration Rule

American Express Co., one of the nation’s largest credit card issuers, is requiring its cardholders to give up their right to sue the financial giant by inserting mandatory arbitration clauses into its customer contracts.

The move is expected to spur other credit card companies to adopt similar provisions as the industry seeks to rebuff class-action lawsuits arising from disputes over interest rate hikes, cancellation of rebate programs or other changes in terms.

But for now, the new American Express rule will not apply in California because of a recent court ruling that said banks cannot take away a customer’s constitutional right to a jury trial as easily as it can impose a new late-fee charge.

This week, New York-based American Express--which has nearly 28 million cards nationwide--began notifying its customers that, effective June 1, all disputes between cardholders and the company must be settled through binding arbitration.

The provision specifically prohibits cardholders from organizing class-action suits. Even disputes over whether the arbitration clause itself is valid and enforceable must be settled in arbitration, according to the provision.

“We’ve determined that this makes sense for us and our card members,” said American Express spokeswoman Judy Tenzer. Arbitration is “a simpler process that saves time and money.”

American Express’ current California customers are specifically exempted from the new clause because a state appeals court ruled in November that banks do not have “carte blanche” in their ability to amend the terms of an existing credit card contract, particularly when it comes to a fundamental legal right.

The case involved a 1992 attempt by Bank of America to impose mandatory arbitration for its existing credit card customers. The bank claimed its contract enabled the bank to change the terms at any time.

But the court ruled that the bank’s right to alter the contract terms applied to such issues as interest rates and fees, not to constitutionally protected rights. Though the court did not rule that the arbitration clause itself was improper--and in fact, arbitration clauses have generally withstood legal challenges--the judges decided that the bank could not unilaterally impose the new terms on existing customers by simply mailing a blanket written notice.

A Bank of America spokesman said the company is not enforcing the arbitration clause for California customers who had accounts before June 1992. But since 1992, the bank has had arbitration requirements in the contract for all new accounts.

Consumer attorneys blasted the American Express arbitration provision because it would prevent customers from filing class-action lawsuits over legitimate gripes.

“They just don’t want to go in front of juries because juries tend to be less sympathetic to banks,” said Jack Hug, a San Francisco attorney who represented the plaintiff in the Bank of America case.

Though analysts report no rise in the number of class-action lawsuits filed against credit card companies, several high-profile cases have been working through the courts in recent years.

Citibank, which does not have an arbitration clause, is currently battling a suit over the termination of its rebate program with Ford Motor Co. Last year, Advanta Corp.--without admitting wrongdoing--agreed to pay $7.25 million to settle a suit by cardholders alleging the company improperly hiked interest rates.

Edmund Sanders can be reached at [email protected].