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Third Circuit Upholds Consumer Rights to Class Actions in Homa v. American Express Company

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The US Court of Appeals for the Third Circuit released a decision this week which marks a huge win for consumers, both in New Jersey and nationwide.

In Homa v. American Express Company, the Third Circuit has rejected American Express’s arguments that the company has the right to ban New Jersey consumers from bring class actions against it. It has also dismissed language in a previous Third Circuit decision, Gay v. Creditinform, which caused several New Jersey US district courts to dismiss class actions last year, and which companies all over the country have been citing to argue that because the lower courts disagree on questions of preemption in class action cases, these cases must go to the US Supreme Court.

The primary argument of Homa class action plaintiffs, all New Jersey American Express “Blue Cash” credit card holders, is that American Express violated New Jersey consumer protection laws in using a bait-and-switch scheme to cheat them out of rebates they had earned while holding a Blue Cash credit card.

Though the Blue Cash card agreement contained a provision banning disputes from being arbitrated as class actions, the New Jersey Supreme Court’s decision in Muhammad v. County Bank upheld that class action bans which act as exculpatory clauses, offering immunity to companies who are violating laws, are unconscionable and therefore unenforceable under New Jersey law. However, because the card agreement also contained a choice-of-law provision indicating that any disputes would be governed by Utah state law, New Jersey federal district court moved to uphold American Express’s ban on class actions.

Contemporary with Homa, the Third Circuit decided in said in Gay v. Creditinform that the Federal Arbitration Act (FAA) preempted Pennsylvania law invalidating a class action ban. Citing this decision, several New Jersey federal courts dismissed consumer class actions, arguing that the FAA preempted New Jersey’s state unconscionability as well.

This week’s decision by the Third Circuit:

…holds that New Jersey state unconscionability law—and specifically the Muhammad decision’s rule against exculpatory class action bans—is not preempted by the FAA. It notes that Muhammad did not strike down arbitration clauses, but rather established a "general contract defense, one that applies to all waivers of class-wide actions, not simply those that also compel arbitration." It also notes that the U.S. Supreme Court has specifically held that arbitration clauses are subject to generally applicable state contract law defenses such as unconscionability.

Second, the decision makes clear that the FAA preemption language in Gay is dicta and that it does not apply to New Jersey law (which limits exculpatory class action bans, but not arbitration). Even more importantly, Homa makes clear that there is no division among the federal circuit courts of appeal as to whether the FAA preempts state laws that would limit class action bans.

Third, the decision rejects the district court’s ruling that Utah law should be applied instead of New Jersey law to the claims of New Jersey consumers under the New Jersey Consumer Protection Act. It holds that, assuming the claims of the consumers are individually small (which they are), it would violate a fundamental policy of New Jersey to apply Utah law, based upon the Muhammad case’s strong language about New Jersey public policy. It predicts that the New Jersey Supreme Court would hold that New Jersey has a greater interest in the rights of its consumers under its consumer protection laws than Utah would have in barring class action claims against American Express. –Public Justice.

This decision sets terrific precedents for consumer rights all around the country.