Appeals Court Rules Agency Waived Arbitration Rights By Waiting Too Long

The Seventh Circuit Court of Appeals has upheld a lower court’s ruling denying a collection agency’s attempt to enforce the arbitration clause between the individual and the creditor because of a “gratuitous delay” by the agency in seeking arbitration.

A copy of the ruling in Smith v. GC Services can be accessed by clicking here.

The plaintiff obtained a Sam’s Club branded credit card that was issued by Synchrony Bank. When the plaintiff had an unpaid balance on the card in March 2016, Synchrony placed the account with the defendant, who sent the plaintiff a collection letter. In the letter, the defendant informed the plaintiff that it would commence collection proceedings unless she disputed the debt in writing.

In July 2016, the plaintiff sued the defendant, alleging it violated the Fair Debt Collection Practices Act by requiring the debt to be disputed in writing. A month later, the defendant filed a motion to dismiss, but did not mention the arbitration agreement. The plaintiff moved to file an amended complaint, which was followed by another motion to dismiss from the defendant. Again, the defendant did not mention the arbitration agreement. In March 2017, following a discovery conference, the defendant notified the plaintiff about the arbitration clause and demanded arbitration. The plaintiff refused to proceed to arbitration. In June 2017, the District Court denied the defendant’s motion to dismiss the suit. Two months later, 13 months after the suit began, the defendant filed a motion to compel arbitration. The lower court ruled that the defendant could not compel arbitration because it was not a signatory on the agreement and ruled that because it had never asserted a right to arbitrate, it could not try to do so now.

The defendant argued that it waited so long to compel arbitration because the creditor had the agreement. The Appeals Court was not impressed.

The initial suggestion that GC Services—a sophisticated debt collection agency—would be unaware that credit card agreements routinely include arbitration agreements is suspect. Such provisions are commonplace, and GC Services should have investigated whether Smith’s contract contained one. What’s more, federal regulations require credit card issuers to post their credit card agreements online. Even if Synchrony Bank was nonresponsive to inquiries, GC Services could have found the agreement through a routine internet search.

Why the defendant waited so long, and after filing so many motions, puzzled the Appeals Court.

GC Services has not explained why it never notified the district court that it intended to move to compel arbitration. At the time the company demanded that Smith consent to arbitration, a motion to dismiss and motion for class certification were pending. Arbitration would have mooted both motions before the district court. But GC Services never requested that consideration of the motions be stayed or even mentioned the arbitration agreement in its briefing.