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Credit card agreement unconscionable

What the court held

Case: Coady v. Cross Country Bank, Inc., No. 2005AP2770

Issue: Is a choice of law clause in a credit card agreement requiring application of Delaware law valid?

Is an arbitration clause in a credit card agreement valid?

Holding: No. Wisconsin public policy requires application of Wisconsin law.

No. The clause is procedurally and substantively unconscionable.

Counsel: For Appellant: Anderson, Ross A., Milwaukee; Heiser, Edward J., Jr., Milwaukee; Kaplinsky, Alan S., Philadelphia, PA; Bryce, Martin C., Jr., Philadelphia, PA; Williams, Sally M., Philadelphia, PA; For Respondent: Meili, Stephen E., Madison; Mervine, Sarah N., Madison

A credit card agreement that bars class action relief and contains a foreign choice of law clause is unenforceable, the Wisconsin Court of Appeals held on Jan. 25.

The plaintiffs are sub-prime credit risks who received a credit card and credit card agreement from Cross Country Bank, Inc., after responding to a direct mail or other solicitation from Cross Country. Cross Country subsequently “charged off” all of the plaintiffs’ accounts except for one plaintiff, who has two active accounts.

The contract included a choice of law clause, which states that it is governed by federal law and Delaware law. The contract also contains an arbitration clause, requiring that all disputes be arbitrated if either party elects arbitration and that cardholders waive any rights to proceed on a class action basis if arbitration is elected.

Nevertheless, the plaintiffs sued Cross Country in Dane County Circuit Court, alleging that Cross Country had engaged in illegal debt collection practices in violation of the Wisconsin Consumer Act (WCA), seeking double damages under the WCA for their finance charges.

Cross Country moved to compel arbitration and stay all proceedings, but Judge Robert A. DeChambeau held that the arbitration clause was unconscionable, struck the clause from the contracts, and denied the motion.

Cross County appealed, but the court of appeals affirmed in a decision by Judge Paul Lundsten.

Choice of Law

The court first held that Wisconsin, rather than Delaware, law applies to the dispute.

In Bush v. National School Studios, Inc., 139 Wis. 2d 635, 642, 407 N.W.2d 883 (1987), the Wisconsin Supreme Court held that parties are generally free to contract for choice of law, but not “at the expense of important public policies of a state whose law would be applicable if the parties[’] choice of law provision were disregarded.”

The court concluded that the WCA embodies an important state policy, because it protects weaker parties against those with superior bargaining power, and thus invalidates the choice of law clause.


Applying Wisconsin law, the court next held that the arbitration clause is both procedurally and substantively unconscionable, relying extensively on Wisconsin Auto Title Loans, Inc., v. Jones, 2006 WI 53, 290 Wis.2d 514, 714 N.W.2d 155.

Addressing procedural unconscionability first, the court noted that the arbitration clause was in small print, and that the accounts were opened in response to solicitations from Cross Country. In addition, the contracts containing the clause were not provided to the plaintiffs prior to their agreement, but instead were included along with the plaintiffs’ credit cards.

Also, the plaintiffs are all “low-income or nearly so,” while Cross Country is a multimillion dollar national company.

Finally, Cross County does not negotiate over the terms of the contract, but present them on a “take-it-or-leave-it basis.”


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Case Analysis


Accordingly, the court held that the arbitration clause is procedurally unconscionable.

The court also held the clause substantively unconscionable, because it prohibits class-wide relief, and excludes relief under the WCA.

The court acknowledged that the majority of state and federal courts enforce class action waivers and do not consider them unconscionable. However, the court stated, “We are [] persuaded by what appears to be a growing minority of courts that a waiver of class-wide relief is a significant factor (and in at least one instance a determinative factor) in invalidating an arbitration provision as unconscionable.”

The court noted that class-wide relief is often the only means of vindicating consumer rights, particularly when the damages involved are comparatively small for each individual consumer. In addition, the court found that, without class action relief, many consumers may not realize the defendant’s conduct is illegal.

The court thus held the contract substantively unconscionable for barring all class-wide relief, although it did not decide whether the case was actually appropriate for class certification, leaving the issue for the circuit court on remand.

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David Ziemer can be reached by email.

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