Badie v. Bank of America

Opinion

Plaintiffs, four individuals and two consumer-oriented organizations, Consumer Action and California Trial Lawyers Association, 1 challenge the validity of an alternative dispute resolution (ADR) clause which Bank of America (the Bank) sought to add to existing account agreements between itself and its deposit account, and credit card account customers by sending those customers an insert with their monthly account statements (hereafter, bill staffer), notifying them of the new term. None of the individual plaintiffs had a deposit account with the Bank, but all had the Bank’s credit cards. 2

Plaintiffs filed their complaint shortly after the Bank began sending the bill staffers to its customers. All six plaintiffs, acting as private attorneys *784 general, sought to enjoin implementation of the ADR provision on the ground that its addition to the account agreements violated the Unfair Competition Act, Business and Professions Code section 17200 et seq. The four individual plaintiffs alleged two additional causes of action on their own behalf. In one, they sought to enjoin implementation of the ADR provision on the ground that its addition to the account agreements violated the Consumer Legal Remedies Act, Civil Code section 1750 et seq., and in particular section 1770, former subdivisions (n) and (s).* * 3 In the other, they sought a declaration as to the validity and enforceability of the ADR clause.

After a 17-day nonjury trial, the trial court entered judgment in favor of the Bank, ruling that the change of terms provision in the original account agreements permitted the addition of the ADR clause, and that the new provision was enforceable because it was not unfair or unconscionable and was consistent with the covenant of good faith and fair dealing. The trial court also ruled that plaintiffs had failed to prove their Consumer Legal Remedies Act claim.

Plaintiffs timely appealed. While they make numerous arguments referring to the alleged unfairness, unlawfulness, deceptiveness and unconscionability of the ADR clause and the Bank’s method of adding it to the account agreements, nowhere in either their opening brief or their reply brief do they directly address the statutory causes of action they brought under Business and Professions Code section 17200 et seq. or Civil Code section 1770, subdivision (a)(14) and (19). Indeed, the briefs do not even so much as cite to the Unfair Competition Act or the Consumer Legal Remedies Act, much less discuss their provisions or their application to the evidence presented at trial and to the causes of action framed under them. When an appellant fails to raise a point, or asserts it but fails to support it with reasoned argument and citations to authority, we treat the point as *785 waived. (People v. Stanley (1995) 10 Cal.4th 764, 793 [42 Cal.Rptr.2d 543, 897 P.2d 481]; Tiernan v. Trustees of Cal. State University & Colleges (1982) 33 Cal.3d 211, 216, fn. 4 [188 Cal.Rptr. 115, 655 P.2d 317]; Muega v. Menocal (1996) 50 Cal.App.4th 868, 877 [57 Cal.Rptr.2d 697]; San Mateo County Coastal Landowners’ Assn. v. County of San Mateo (1995) 38 Cal.App.4th 523, 559 [45 Cal.Rptr.2d 117]; Kim v. Sumitomo Bank (1993) 17 Cal.App.4th 974, 979 [21 Cal.Rptr.2d 834].) We therefore limit our review to the trial court’s disposition of the third cause of action for declaratory relief as to the validity and enforceability of the ADR clause brought by the individual plaintiffs.

Background

Starting in June 1992 and for a period of several months thereafter, the Bank mailed half-page bill staffers to its personal credit card and deposit account customers, informing them that, from that time forward, any dispute between a customer and the Bank regarding customer accounts would be resolved either “by arbitration or by reference” if either the Bank or customer so requested. 4 The full text of the bill staffer sent to personal credit account customers reads as follows: “Change of Terms Notice for BankAmericard® Visa,® MasterCard,® Visa Gold, Gold MasterCard, and Apollo® Accounts [^Q Dispute Resolution—If you or we request, any controversy with us will be decided either by arbitration or reference. Controversies involving one account, or two or more accounts with at least one common owner, will be decided by arbitration under the Commercial Arbitration Rules of the American Arbitration Association. All other controversies will be decided by a reference under California Code of Civil Procedure Section 638 and related sections. A referee who is an active attorney or retired judge will be appointed by the court after selection by the American Arbitration Association using its procedures for selecting arbitrators. The arbitration or reference will take the place of a trial before a judge and jury. (This is a new provision for Cardmember and Apollo Account Agreements. If you continue to use your account, this new provision will apply to all past and future transactions.)” (Bold in original.) The Bank’s intention in sending the bill staffer was to add a new provision to the existing account agreements. In attempting to add the ADR clause to the existing agreements, the Bank relied upon the change of terms provision included in the original account agreements, which gave the Bank the *786 unilateral right to modify the agreements after customers entered into them. It is undisputed that the account agreements were contracts of adhesion. 5

The contract documents comprising the original credit account agreements consisted of either an application or, if the account was opened in response to a direct mail solicitation to accept a “pre-approved” credit card, an “Acceptance Certificate,” plus a document referred to as an account agreement and disclosure statement, which was sent to the customer after the account was opened. A change of terms provision was included in each of these documents. The applications and acceptance certificates, which took various forms, set forth the Bank’s annual percentage rate for purchases, its annual membership fee, its transaction fee for cash advances, its late payment fee, its method of computing balances for purchases, and its grace period for repayment of the balance for purchases. All of the exemplars of these forms which were admitted into evidence included a provision stating, “All terms are subject to change.” All of them also stated that the signer agreed to be bound by the “terms and conditions of the agreement and disclosure statement” that would be sent to the signer with his or her cards.

The account agreement and disclosure statement provided a more detailed description of the account features, including fees, the method of calculating balances and finance charges, how payments were applied, the circumstances under which the Bank would close an account, and so forth. Multiple exemplars of the account agreement and disclosure statement were admitted into evidence. Some pertained to Visa accounts, and some pertained to MasterCard accounts. All versions of the agreement presented at trial included a provision labeled “Change of Terms,” which was set forth in a section headed “Other Important Information.” In most versions, which were dated between April 1988 and June 1992, the change of terms provision stated, “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.” In two versions of the agreement, one a December 1989 reprint of an April 1986 version of the document pertaining to both Visa and MasterCard accounts, and the other an August 1988 version pertaining to Visa Gold accounts, the change of terms provision was worded as follows: “We May Change or Terminate Any Terms, Conditions, Services or Features of Your Account (Including Increasing Your Finance Charges) at Any Time. We May Impose Any Change in *787 Terms on Your Outstanding Balance, as Well as on Subsequent Transactions and Balances. We may also add new terms, conditions, services or features to your Account. To the extent required by law, we will notify you in advance of any change in terms by mailing a notice to you at your address as shown on our records.” (Upper case and bold in original.) By mid-1992, the two versions of the account agreement that included this wording of the change of terms provision had been superseded. The language expressly allowing the Bank to add new terms was deleted from the versions of the agreement and disclosure statement that were in effect at the time the ADR bill staffers were mailed to credit account customers. Neither party provided exemplars of cardmember agreements older than the late 1980’s, so it is not entirely certain whether the earlier versions of these documents contained change of terms provisions, or, if they did, whether the language allowing the Bank to add new terms was included in such provisions. The Bank’s expert witness did testify, however, that including a change of terms provision in account agreements had been the standard industry practice since bank credit cards first became available in the 1960’s.

None of the agreements admitted into evidence contained any provision regarding the method or forum for resolving disputes. The only portions of the agreements that touched even obliquely on dispute resolution were general admonitions in the Fair Credit Billing Act notice, which was included in each agreement, regarding the need to notify the Bank promptly of suspected mistakes or questions about the bill; a reference under the heading “Other Bankcard Fees and Charges” to “court costs” a customer would be required to pay in the event the Bank incurred them while enforcing its rights if a customer defaulted; and a reference to the Bank’s ability to collect from “or sue” any one of several cardholders without giving up its rights against the others, which was included in the two superseded versions of the agreement under the heading “Joint and Several Liability."

Discussion

1. California’s Public Policy Favoring ADR Is Not Operative Unless the Parties Have First Entered Into an Enforceable Agreement to Arbitrate.

The initial step in determining whether there is an enforceable ADR agreement between a bank and its customers involves applying ordinary state law principles that govern the formation and interpretation of contracts in order to ascertain whether the parties have agreed to some alternative form of dispute resolution. Under both federal and California state law, arbitration is a matter of contract between the parties. (First Options of Chicago, Inc. v. Kaplan (1995) 514 U.S. 938, 944-945 [115 S.Ct. 1920, *788 1924-1925, 131 L.Ed.2d 985]; see also Mastrobuono v. Shearson Lehman Hutton, Inc. (1995) 514 U.S. 52, 56-57, 62-63 [115 S.Ct. 1212, 1215-1216, 1218-1219, 131 L.Ed.2d 76]; Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 8 [10 Cal.Rptr.2d 183, 832 P.2d 899].) As the United States Supreme Court has stated, “The ‘liberal federal policy favoring arbitration agreements,’ [citation] . . . is at bottom a policy guaranteeing the enforcement of private contractual arrangements.” (Mitsubishi Motors v. Soler Chrysler-Plymouth (1985) 473 U.S. 614, 625 [105 S.Ct. 3346, 3353, 87 L.Ed.2d 444]; see also Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 478 [109 S.Ct. 1248, 1255, 103 L.Ed.2d 488].) Similarly, the California Supreme Court has stated that, “ ‘[T]he policy favoring arbitration cannot displace the necessity for a voluntary agreement to arbitrate.’ ” (Victoria v. Superior Court (1985) 40 Cal.3d 734, 739 [222 Cal.Rptr. 1, 710 P.2d 833], italics in original.) “Although ‘[t]he law favors contracts for arbitration of disputes between parties’ [citation], ‘ “there is no policy compelling persons to accept arbitration of controversies which they have not agreed to arbitrate ....’” [Citations.]” (Id. at pp. 744; see also Arista Films, Inc. v. Gilford Securities, Inc. (1996) 43 Cal.App.4th 495, 501 [51 Cal.Rptr.2d 35]; Chan v. Drexel Burnham Lambert, Inc. (1986) 178 Cal.App.3d 632, 640 [223 Cal.Rptr. 838].)

A judicially ordered reference pursuant to Code of Civil Procedure section 638, the statute invoked in the Bank’s bill stuffers, is also a matter of contract between parties. Section 638 provides for judicial reference only upon “the agreement of the parties filed with the clerk, or judge, or entered in the minutes or in the docket,” or “upon the motion of a party to a written contract or lease which provides that any controversy arising therefrom shall be heard by a reference if the court finds a reference agreement exists between the parties.”

In its statement of decision, the trial court asserted that California public policy favors arbitration and “embraces” judicial reference “since it is a long-standing statutory procedure,” and implied that the need for consent with respect to such ADR procedures has been eroded since the California Supreme Court’s decision in Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699 [131 Cal.Rptr. 882, 552 P.2d 1178]. Thus, the court stated that although it could not conclude from the evidence that, in general, the Bank’s customers had read or understood the ADR clause, they would be bound by it because under Madden, as well as Mormile v. Sinclair (1994) 21 Cal.App.4th 1508 [26 Cal.Rptr.2d 725], Michaelis v. Schori (1993) 20 Cal.App.4th 133 [24 Cal.Rptr.2d 380], Bolanos v. Khalatian (1991) 231 Cal.App.3d 1586 [283 Cal.Rptr. 209], and Hall v. Superior Court (1993) 18 Cal.App.4th 427 [22 Cal.Rptr.2d 376], arbitration provisions have been *789 enforced against persons who have not read or signed them. These cases are inapposite and do not support the proposition that ADR can be imposed on a bank’s customers without their consent.

In Madden, which did not involve a contract of adhesion (17 Cal.3d at pp. 711-712), the California Supreme Court held that the plaintiff, a state employee whose health care was covered by a Kaiser Foundation Health Plan (Kaiser) medical services contract, was bound by an arbitration provision in the contract even though she had not personally negotiated or signed it because the provision had been agreed upon by the Board of Administration of the State Employees Retirement System (the Board), which was authorized by statute to negotiate group medical plans as the agent for all state employees. (Id. at pp. 704-706.) The contract included a provision that allowed amendment by mutual agreement between the Board and Kaiser without the individual consent of the plan members. (Ibid.) Several years after the plaintiff enrolled in the health plan, the Board and Kaiser negotiated an amendment that required arbitration of all medical malpractice claims. Kaiser mailed a brochure describing the terms of the plan, including the new arbitration provision, to all members shortly before the contract was amended. (Ibid.) When the plaintiff was injured during surgery at a Kaiser hospital several months later, she argued that she was not bound by the provision because she had not received the brochure, was not aware of the arbitration amendment, and had no knowledge at the time of her operation that Kaiser required arbitration of malpractice claims. (Id. at pp. 704-705.) The Supreme Court rejected the plaintiff’s argument on the ground that the Board was authorized by statute to act as the agent for all state employees, including the plaintiff, in negotiating group medical plan contracts. Thus, Madden does not stand for the proposition that consent is no longer required in order for an arbitration agreement to be valid. It simply means that one can be bound by consent given by one’s agent, even if one is personally unaware of the provision. Madden is inapposite to the consent and contract formation issues that confront us in this case, since the account agreements here were not negotiated by someone else on behalf of the Bank’s customers.

Mormile v. Sinclair, supra, 21 Cal.App.4th 1508, Michaelis v. Schori, supra, 20 Cal.App.4th 133, and Bolanos v. Khalatian, supra, 231 Cal.App.3d 1586 are similarly inapposite. All three cases involved arbitration agreements that complied with the requirements of the Medical Injury Compensation Reform Act set forth in Code of Civil Procedure section 1295, and in all three cases, the conclusion that a nonsigning third party was bound by the arbitration agreement rested in part on consideration of the public policies that led to enactment of that legislation (see, e.g., Mormile, supra, 21 Cal.App.4th at pp. 1511-1513), and in part on the existence of an agency or *790 quasi-agency relationship between the patient who had signed the agreement and the nonsigning third party—in Mormile and Michaelis, the patient’s spouse, and in Bolanos, the father of the patient’s baby. Moreover, as the Mormile court pointed out, protection of the patient’s right to medical privacy also requires that third parties be bound by the agreement to arbitrate claims arising out of the treatment of the signatory patient. (21 Cal.App.4th at p. 1512.) Thus, the factors that led to the results in Mormile, Michaelis and Bolanos are not present here. These cases are simply not relevant to our consideration of the consent and contract formation issues raised by the Bank’s attempt to add the ADR clause to the existing account agreements by sending its customers a bill stuffer.

Finally, Hall v. Superior Court, supra, 18 Cal.App.4th 427 offers even less support for the proposition that the consent requirement has been eroded since Madden. In Hall, a party who objected to an arbitration award on the ground that he had not signed the agreement had, in fact, stipulated to arbitration in court and participated in the arbitration without objection until he lost. In those circumstances, the court had no difficulty finding that he had, indeed, consented to arbitration even though he had not signed the agreement. (Id. at p. 436.)

When the trial court glossed over the threshold issue of consent and concluded that the validity of the Bank’s modification of its account agreements depends on the manner in which ADR in general, and arbitration in particular, are viewed under California law, it put the cart before the horse. Whether there is an agreement to submit disputes to arbitration or reference does not turn on the existence of a public policy favoring ADR, as the trial court apparently believed. That policy, whose existence we readily acknowledge, does not even come into play unless it is first determined that the Bank’s customers agreed to use some form of ADR to resolve disputes regarding their deposit and credit card accounts, and that determination, in turn, requires analysis of the account agreements in light of ordinary state law principles that govern the formation and interpretation of contracts. (See First Options of Chicago, Inc. v. Kaplan, supra, 514 U.S. at p. 944 [115 S.Ct. at p. 1924]; Chan, Inc. v. Drexel Burnham Lambert, Inc., supra, 178 Cal.App.3d at p. 637.)

2. Whether the ADR Clause Became Part of the Account Agreements Depends Upon the Meaning and Scope of the Change of Terms Provision in the Original Account Agreements.

Although the trial court characterized plaintiffs’ action as a “facial challenge to the ADR Clause,” the action is more appropriately described as a *791 challenge to the Bank’s interpretation of the change of terms provision in the original account agreements. Whether the Bank’s customers can be said to have agreed to allow the Bank to add the ADR clause to those agreements simply by sending them notice of the change depends, as a threshold matter, on the meaning and scope of the change of terms provision itself. Implicit in the Bank’s interpretation of that provision is the assumption that adding the ADR clause is not really a modification at all because, by entering the original account agreements, the customers agreed ahead of time to be bound by any term the Bank might choose to impose in the future. The Bank argues that neither traditional contract offer-and-acceptance principles nor Civil Code section 1698’s requirements of written consent or additional consideration apply if the modification is “in accordance with the terms of the contract.” 6 (See Busch v. Globe Industries (1962) 200 Cal.App.2d 315, 320 [19 Cal.Rptr. 441].) The Bank appears to contend that regardless of the nature of a modification, the new ADR provision is a valid part of the contract as long as the prescribed procedure for making the modification was followed. In this case, the only procedural requirement set forth in the change of terms provision was that the Bank would notify the customer of the change. Thus, the Bank argues, because it sent notice in the form of the bill staffer, it met the sole procedural requirement of the change of terms provision, and the modification was therefore valid because it was made “in accordance with the terms of the contract.” We cannot agree.

The contract modification cases cited by the Bank and relied on by the trial court in its statement of decision do not support the proposition that a party with the unilateral right to modify a contract has carte blanche to make any kind of change whatsoever as long as a specified procedure is followed. In fact, those cases suggest that a modification made “in accordance with the terms of the contract” means, at least in part, a modification whose general subject matter was anticipated when the contract was entered into. For example, in Busch v. Globe Industries, supra, 200 Cal.App.2d 315, Clark Equipment Co. v. Mastelotto, Inc. (1978) 87 Cal.App.3d 88 [150 Cal.Rptr. 797], and Powell v. Central Cal. Fed. Sav. & Loan Assn. (1976) 59 Cal.App.3d 540 [130 Cal.Rptr. 635], the modifications in question were specifically identified in the original contracts as changes that might be made in the future under certain circumstances. (See also Hunt v. Mahoney (1947) 82 Cal.App.2d 540, 546 [187 P.2d 43] [extension of time to perform was not a modification requiring a writing because the possibility of an extension was provided for in original contract].)

*792 Similarly, the two cases cited by the Bank concerning amendment of bank bylaws, Krupp v. Franklin Sav. Bank in City of New York (1938) 255 A.D. 15 [5 N.Y.S.2d 365] and State v. San Francisco Sav. etc. Soc. (1924) 66 Cal.App. 53 [225 P. 309] (San Francisco Sav. etc. Soc.), also involved modifications pertaining to subjects addressed in original account agreements. In Krupp, a depositor agreed to be bound by the bank’s bylaws and any amendments thereto. The bylaws in effect when the account was opened required presentation of the original passbook in order to make a withdrawal from the account. Twelve years later, the bank amended its bylaws to require the posting of an indemnity bond if the depositor requested the issuance of a new savings account passbook in the event the original had been lost or destroyed. The depositor, who wished to make a withdrawal after his passbook had been destroyed, contended that the bond requirement did not apply to him because it was not in the bylaws when he opened his account. The New York court concluded that the amendment was reasonable because a bond might be needed to protect the bank from double payment in the event an account had been assigned. The court also held that the new requirement was enforceable in view of the depositor’s express agreement to be bound by amendments to the bylaws and the fact that the bond amendment had been adopted pursuant to a New York statute that expressly conferred on savings banks the right to establish the conditions upon which payments would be made in the case of lost passbooks. (Krupp, supra, 5 N.Y.S.2d at pp. 367-368.) Unlike the ADR modification here, the bond amendment did not impose a contract term concerning some matter not addressed in any way, shape or form in the original agreement, but was clearly related to a matter addressed in the original contract, namely, the requirement that the passbook be presented before a withdrawal could be made.

In San Francisco Sav. etc. Soc., the State of California successfully challenged the enforceability of an amendment to a bank’s bylaws, even though the original agreements with the bank’s depositors provided that the bylaws could be amended without notice to the depositors or their consent. (66 Cal.App. at p. 56.) The original agreements provided that the bank would pay “dividends” (i.e., interest) on all deposits. (Ibid.) The amended bylaw stopped interest payments after an account had been dormant for 10 years. When certain dormant accounts escheated to the state, the bank refused to pay the interest that would have accrued but for the amendment. The court stated that where a depositor agrees that a bylaw may be amended without notice to him, the amendment is binding “in so far as such amendment may affect only those general rules and regulations, common to all banking and other corporations, which relate to the general administrative policies thereof.” (Id. at p. 61, italics added.) Even a depositor’s agreement *793 that the bylaws may be amended does not permit an amendment that would materially change the depositor’s contract where the amendment is made without further notice to him, “ \ . . and without his consent.’ ” {Ibid., quoting 3 R.C.L. § 339, italics added.) It is notable that the bylaw amendment in the San Francisco Sav. etc. Soc. case, like the modifications in the cases discussed above, pertained to a matter expressly addressed in the original contracts, namely, the payment of interest. Nevertheless, that fact was not sufficient to assure the amendment’s enforceability absent notice to the depositor and his consent, even though the original bylaws agreed to by the depositor expressly stated that no notice or consent were required.

In dictum, the court stated that, although the general rule seems to be that “where a person opens a deposit account with a bank the depositor is to be thereafter governed and bound by the by-laws existing at the time the account is opened,” the rule is subject to the qualification that if, upon notice to the depositor, the bylaws are amended so as to materially change the original contract, deposits made after the amendment are held to be made under the contract so changed. {San Francisco Sav. etc. Soc., supra, 66 Cal.App. at p. 61.) Leaving aside questions about the adequacy of a bill staffer as a notice, this dictum at first blush appears to support the Bank’s contention that the bill staffer was sufficient to bind the Bank’s customers to the ADR requirement, at least with respect to transactions made after the bill staffer was mailed. However, because the bylaw change in that case pertained to a matter that was already addressed in the original contract, i.e., payment of interest, we cannot assume that the court would have concluded that notice alone, without some affirmative evidence of the depositor’s consent, could bind a depositor to a significant change regarding matters that were not addressed in the original contract at all.

The principal authority relied upon by the Bank and the trial court when it rejected plaintiffs’ argument that the change of terms provision authorized only modifications of existing terms was Perdue v. Crocker National Bank (1985) 38 Cal.3d 913 [216 Cal.Rptr. 345, 702 P.2d 503] (Perdue). The Bank contends that Perdue “unanimously approved the Bank’s method for modifying its account agreement terms.” It is mistaken.

In Perdue, the plaintiff filed a class action challenging the validity of charges imposed by Crocker National Bank for processing checks drawn on accounts with insufficient funds. Such checks were referred to as “NSF checks” and the charge for handling them was referred to as an “NSF charge.” (38 Cal.3d at p. 920-923.) Crocker required each customer who opened a checking account to sign a “signature card,” which was used to verify the authenticity of endorsements on checks. (Id. at p. 921.) The *794 signature card also stated that the undersigned depositors “ ‘agree with Crocker National Bank and with each other that . . . this account and all deposits therein shall be . . . subject to all applicable laws, to the Bank’s present and future rules, regulations, practices and charges, and to its right of setoff for the obligations of any of us.’ ” 7 (Ibid.) The plaintiff alleged that the signature card was not a contract, or at least not a contract authorizing the unilateral imposition of NSF charges “ ‘in any particular sum or at all.’ ” (Id. at p. 922.) He argued that even if the signature card was a contract, it was illusory because it permitted