Always Apply the Smell Test to Your Business Practices
When will financial institutions get it? We spanked Bank of America for a quarter million dollars after it closed our client’s checking account without notice, causing a dozen checks to bounce. With no consideration of the ethics of such a move, Bank of America simply claimed (unsuccessfully) it had the right to do what it did. Now Chase Bank USA ("Chase") is being sued for doing something equally sleazy, and also claims it has the right to act as it did, customer relations be damned.
Plaintiff Timothy Hauk opened a Chase credit card account and received a Cardmember Agreement ("CMA"). After Hauk had maintained his Chase account for about sixteen months, Chase sent him a balance transfer offer ("BTO") in October. The BTO offered Hauk a promotional fixed annual percentage rate (APR) of 4.99% for any balances he transferred to his Chase account. It also incorporated the terms of the CMA and indicated that Chase could impose an increased rate ("Non-Preferred APR") in lieu of the promotional rate if Hauk made a late payment to Chase or any of his other creditors, the obvious implication being that Hauk would receive the low rate unless and until he made a late payment after accepting the offer. Hauk transferred a $10,200 balance with another creditor to his Chase account, thereby accepting the BTO. When Hauk received his October statement, he found that Chase had applied a Non-Preferred APR of 28.74% on the transferred balance. Why? Because Chase ran a credit check and found that Hauk’s mortgage company reported that a mortgage payment had been one day late three months before Hauk accepted the BTO. Hauk’s attorneys brought a class action for violations of California’s Unfair Competition Law ("UCL") and False Advertising Law ("FAL").
Counsel for Chase argued with a straight face that Chase had the right to do this, because if they had known of the late payment, they would have never extended the BTO to Hauk. Since he was not eligible under Chase’s own rules, Chase was free to stick it to him, Chase argued. Incredibly, the District Court Judge agreed, and granted Chase’s motion for summary judgment, claiming that Chase’s disclosure defeated those claims.
Fortunately, on appeal common sense prevailed. The Ninth Circuit Court of Appeals properly recognized that under the FAL, the standard is simply "whether the public is likely to be deceived." If the FAL was violated, then the UCL would follow. The appellate court reversed the summary judgment as to the FAL and UCL causes of action.
Lessons for all businesses:
Don’t do something just because you are convinced you have the legal right to do so, if it doesn’t pass the smell test. Some day you may find yourself in front of a jury, and jurors have a very keen sense of smell. And as a corollary, always remember that the biggest shortcoming of attorneys is that they think too much like attorneys and often lose sight of common sense. In our prior case against Bank of America and this case against Chase, I have no doubt that the attorneys told the bank officers, from the day they received the demand letter to the day their appeal was denied, that the law was on their side. But they should never have listened, because it was obvious that no jury would tolerate what the bank had done.
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