Credit Agreements Can’t Block Suits, Court Says

Some credit card agreements that prohibit cardholders from filing class-action lawsuits are not enforceable in California, the state Supreme Court ruled Monday in a case involving Morgan Stanley’s Discover Bank unit.

The court said cardholder agreements that barred class actions and required customers to use arbitration panels to settle disputes were banned under California law because they put consumers seeking to recover small improper charges at a disadvantage.

The court didn’t resolve whether companies could bypass the California restriction if their home states allowed such bans.

The ruling kept alive a suit challenging Discover Card late fees that allegedly were charged to customers who paid their bills on time.

“It’s refreshing that they chose to say, ‘Hey, wait a minute. If you let a corporation take a dollar from 30 million customers, that’s $30 million, and who’s going to stop them?’ ” said Brian Strange, an attorney for a Discover Bank customer who filed a nationwide class-action lawsuit on behalf of as many as 25 million customers who were charged $29 late fees.

The ruling doesn’t resolve the Discover case because the company’s cardholder agreement is written under the laws of Delaware, where Discover is headquartered. That state allows class-action waivers. The court sent the case back to a Los Angeles appeals court for a decision about whether Delaware law should apply.