Are Credit Card Late Fees Unconstitutional?

Abstract:     
State Farm Mutual Automobile Insurance Co. v. Campbell articulated serious and specific constitutional constraints upon the imposition of punitive damages. Justice Kennedy's majority opinion announced that, apart from exceptional cases, punitive damages should not exceed nine times the amount of the actual losses sustained by the plaintiff and should usually be far lower. Indeed, the opinion observed, they typically should be much lower, citing double, treble, and quadruple multipliers as instructive examples. Some commentators have worried that the decision could adversely affect consumer interests by offering insulation for tortuous behavior that is difficult to detect or litigate. This Article will explore, however, the decision's unheralded ramifications for contract law, ones that may serve consumer interests.

The constitutional standards articulated in State Farm call into question the constitutionality of those statutes and regulations that authorize credit card issuers to charge legally enforceable late penalties but place no significant limitations on their size. Analyzed through the lens of traditional contract law, these penalties are punitive damages for breach that, as such, would typically be invalidated but for positive legislative efforts to override this traditional treatment. Through federal and state statutes and regulations, credit card companies have gained government authorization to levy enforceable penalties that far exceed what the guidelines identified in State Farm permit. To be precise, disproportionately high credit card late fees themselves are not unconstitutional, but State Farm calls into constitutional question their legal enforcement. It also calls into constitutional question the federal and state statutes that authorize and facilitate the imposition of these high late fees, which override both consumer protection statutes to the contrary and traditional contract doctrines that entirely disallow punitive damages.

Keywords: punitive damages, credit card late fees, State Farm Mutual Automobile Insurance Co. v. Campbell

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