In A.D. vs. Credit One Bank, N.A., the U.S. Court of Appeals for the Seventh Circuit reversed a district court order compelling individual arbitration of a putative class action for Credit One's alleged violations of the Telephone Consumer Protection Act (TCPA). The appellate court concluded that the named plaintiff—the minor daughter of a Credit One cardholder—was not bound by her mother's cardholder agreement, rejecting arguments that the plaintiff was an authorized user or otherwise estopped from avoiding the agreement's arbitration provision.

The plaintiff's mother opened a credit card account with Credit One. The mother used her daughter’s cellular phone to call Credit One about the account and Credit One, in turn, attached the daughter’s cell phone number to her mother's account. According to the plaintiff, Credit One purportedly violated the TCPA by calling her phone in an attempt to collect amounts owed on her mother’s account.

The credit card agreement between Credit One and the plaintiff's mother included an arbitration provision that required arbitration of all claims made by "anyone connected with" the accountholder, including an authorized user. The agreement also stated that if the accountholder allowed someone to use the account, "that person will be an Authorized User." The provision went on to explain the process for designating an authorized user, which required a minimum age of 15 and the payment of an annual fee to issue a card in the authorized user's name. The plaintiff's mother never paid the annual fee or obtained a separate credit card for her daughter. However, on one occasion, she allowed her daughter to use her Credit One credit card to pick up and pay for smoothies that she (the mother) had pre-ordered. The plaintiff was 14 years old at the time of the transaction.

Agreeing with Credit One, the district court found that the daughter was an "Authorized User" bound by the cardholder agreement's arbitration provision under the "direct benefits estoppel" theory. Specifically, the lower court appeared to find that the daughter was an authorized user of the account because her mother allowed her to use the credit card to make a purchase. It further found that the plaintiff benefitted from her mother's cardholder agreement because the agreement enabled the daughter to pay for the items ordered by her mother. The district court stayed the case pending arbitration, but certified the question of whether the daughter was bound by the cardholder agreement under 28 U.S.C. §1292(b).

The Seventh Circuit granted permission to appeal and reversed, rejecting Credit One's arguments that the daughter was bound by the arbitration provision in her mother's cardholder agreement. First, the court held that plaintiff was not an authorized user because the agreement's specific process for designating an authorized user "makes it clear that an individual does not become an Authorized User simply by using the credit card to complete the cardholder's transaction." (Emphasis in original.) It was undisputed that the daughter was never designated using the agreement's process. Additionally, because she was only 14 at the time of the smoothie transaction, she lacked legal capacity to enter into any contractual obligation with Credit One as an authorized user.

Second, the Seventh Circuit held that the daughter could not be bound based on principles of estoppel because she neither received a direct benefit under the agreement nor asserted a claim based on any rights under the agreement. Applying state law, the appellate court explained that estoppel "prevents a non-signatory from refusing to comply with an arbitration clause when it receives a 'direct benefit' from a contract containing an arbitration clause." (Internal quotations omitted.) It held that any "benefit" the daughter received from using the card at her mother's direction derived from her mother-daughter relationship, not from the cardholder agreement. The court likewise rejected Credit One's argument that the daughter was bound by the arbitration provision because her TCPA claim sought benefits under the cardholder agreement. Although Credit One sought to establish an affirmative defense of consent based on the cardholder agreement, the plaintiff's claim remained premised on the TCPA. And, according to the Seventh Circuit, binding the plaintiff to the terms of the cardholder agreement's arbitration provision simply because of Credit One's potential defense "would threaten to overwhelm the fundamental premise that a party cannot be compelled to arbitrate a matter without its agreement." (Internal quotations omitted.)

Notably, the Seventh Circuit's ruling comes only days after the U.S. Court of Appeals for the D.C. Circuit set aside the Federal Communication Commission's (FCC) interpretation of "called party" in the agency's 2015 Declaratory Ruling and Order implementing the TCPA. Considering the "called party" issue in the context of number reassignments, the D.C. Circuit acknowledged that the FCC could reasonably interpret "called party" to refer to the current subscriber. The court, nevertheless, excised this definition of "called party" as part of its decision to set aside the FCC's "treatment of reassigned numbers as a whole." It remains to be seen how this ruling might affect cases like Credit One that turn on the consent of a "called party" in other contexts.

Ballard Spahr's TCPA Team assists clients in navigating the complex and challenging issues that arise under the TCPA. The Team, which comprises regulatory attorneys and litigators, defends clients against TCPA class and individual actions, and counsels on TCPA compliance and avoiding liability, including reviewing policies and practices and helping to design text message, prerecorded, and autodialed-call campaigns. It also assists clients in commenting on regulatory proposals and handling scrutiny from regulators, including preparing for examinations, responding to investigations, and defending against enforcement actions.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance, including pioneering work in pre-dispute arbitration programs.


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