Piñon v. Bank of America, NA

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

IN RE: LATE FEE AND OVER-LIMIT No. 08-15218
FEE LITIGATION,
D.C. No.
CV-07-00634-
ANDREW T. PIÑON; BETTY SIMM; SBA
CATHY SIMM; SARA PRENTISS-
SHAW; AUDREE HALASZ; GWEN
MARTIN; CELESTE BRACKLEY; OPINION
MARILYN FOSTER-NEMEC; AARON
GONZALEZ; ELIZABETH YOUNG, on
behalf of themselves and all others
similarly situated,
Plaintiffs-Appellants,

v.

BANK OF AMERICA, NA; BANK OF
AMERICA CORPORATION; CAPITAL
ONE FINANCIAL CORPORATION;
CHASE BANK USA, N.A.;
JPMORGAN CHASE & CO.;
CITIBANK, NA; CITIGROUP, INC.;
HSBC NORTH AMERICA HOLDINGS,
INC.; HSBC FINANCE CORP.; WELLS
FARGO & COMPANY LONG TERM
DISABILITY PLAN; JPMORGAN
CHASE BANK NA; CHASE BANK
USA, N.A.; FEDERAL DEPOSIT
INSURANCE CORPORATION,
Defendants-Appellees.
2 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION

Appeal from the United States District Court
for the Northern District of California
Saundra B. Armstrong, District Judge, Presiding

Argued and Submitted
February 11, 2013—San Francisco, California

Filed January 21, 2014

Before: Dorothy W. Nelson, Stephen Reinhardt,
and Milan D. Smith, Jr., Circuit Judges.

Opinion by Judge D.W. Nelson;
Concurrence by Judge Reinhardt;
Concurrence by Judge D.W. Nelson

SUMMARY*

National Bank Act

The panel affirmed the district court’s dismissal for
failure to state a claim of an action brought under the
National Bank Act and the Depository Institutions
Deregulation and Monetary Control Act by a class of
cardholders who challenged credit card overlimit fees and late
fees on constitutional grounds.

The panel held that the substantive due process
jurisprudence developed to limit punitive damages in the tort

*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION 3

context does not apply to contractual penalties such as credit
card penalty fees. The panel held that because the fees were
permissible under the NBA and the DIDMCA, the district
court did not err in dismissing the complaint.

Concurring in the judgment, Judge Reinhardt wrote that
the Supreme Court would be well advised to apply its
substantive due process rule to prevent disproportionate
penalties from being imposed on consumers when they
breach contracts of adhesion.

Concurring, Judge Nelson wrote separately to join Judge
Reinhardt’s concurrence.

COUNSEL

Seana Shiffrin (argued), UCLA School of Law, Los Angeles,
California; Patrick J. Coughlin, Frank J. Janecek, Jr.,
Elisabeth A. Bowman, and Mary Lynne Calkins, Coughlin
Stoia Geller Rudman & Robbins LLP, San Diego, California;
and Tyler R. Meade and Michael L. Schrag, Meade & Schrag
LLP, Berkeley, California, for Plaintiffs-Appellants.

Rebecca J.K. Gelfond, Wilmer Cutler Pickering Hale and
Dorr LLP, Washington, D.C.; and Christopher R. Lipsett and
Noah Adam Levine (argued), Wilmer Cutler Pickering Hale
and Dorr LLP, New York, New York, for Defendants-
Appellees.
4 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION

OPINION

D.W. NELSON, Senior Circuit Judge:

Suppose you have an ordinary consumer credit card. You
are committed to fiscal rectitude, so you pay your balance in
full on the due date each month and never exceed your credit
limit. One particularly busy month, though, you lose track of
how much you have spent and you charge a purchase that
pushes your balance a few dollars beyond your credit limit.
You compound the problem when you make your monthly
payment three days late.

The result is unpleasant. The card issuer charges you a
$39 fee for the late payment and another $39 fee for
exceeding the credit limit. Worse, the interest rate on the late
balance instantly doubles as the issuer imposes the “penalty
rate.” Your small mistakes prove very costly.

Most Americans will find this scenario familiar. Credit
card penalty fees have provoked intense consumer agita and,
increasingly of late, substantial legislative interest.1 With
certain exceptions, such fees are generally authorized by
federal statute.

In this appeal, a class of cardholders who paid credit card
fees challenge those fees on constitutional grounds. They
contend that the fees are analogous to punitive damages

1
See, e.g., the Credit Card Accountability Responsibility and
Disclosure Act (Credit CARD Act), Pub. L. No. 111-24, § 102(a), 123
Stat. 1734, 1739 (2009) (codified at 15 U.S.C. § 1637(k)(7)) (banning card
issuers from charging more than one overlimit fee in a single billing
cycle).
 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION 5

imposed in the tort context, and that they are therefore subject
to the substantive due process limits described in BMW of
North America, Inc. v. Gore, 517 U.S. 559 (1996), and
subsequent cases. We must decide whether substantive due
process so constrains credit card fees.

The jurisprudence developed to limit punitive damages in
the tort context does not apply to contractual penalties, such
as the credit card fees at issue in this case. We therefore
affirm the district court’s dismissal of the complaint.

I. Facts and Procedural History

The Appellants (the “Cardholders”) are a class of
consumers who hold credit cards with one or more of the
Appellees, which are all among the largest issuers of
consumer credit cards in the United States. The contracts
between card issuers and cardholders require customers to
make payments on or before a predetermined date each
month. The contracts also limit the total credit available to a
cardholder.

The Cardholders alleged that the card issuers charged
them penalty fees for making purchases in excess of their
cards’ credit limits (“overlimit fees”) or for making late
payments on monthly balances (“late fees”). These fees,
which are disclosed in the contracts between card issuers and
their customers, are mostly uniform from issuer to issuer and
are typically between $15 and $39. These amounts, the
Cardholders alleged, vastly exceed the harm that issuers
actually suffer when their customers exceed their credit limits
or make late payments.
6 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION

The complaint raised ten causes of action, five of which
are now before us on appeal. Counts I–IV alleged that the
late and overlimit fees the Appellees charged exceeded the
amounts authorized by the National Bank Act, 12 U.S.C.
§§ 85–86, and the Depository Institutions Deregulation and
Monetary Control Act (“DIDMCA”), 12 U.S.C. § 1831d(a).
Specifically, the complaint alleged that the National Bank Act
and DIDMCA cannot authorize fees that constitute
unconstitutionally excessive punitive damages. Count VI
alleged that the fees violated California’s Unfair Competition
Law, Cal. Bus. & Prof. Code § 17200 et seq.

The Appellees moved to dismiss the complaint under
Federal Rule of Civil Procedure 12(b)(6). The district court
granted the motion and dismissed the complaint in its
entirety. This appeal followed.

II. Standard of Review

We review de novo the dismissal of a complaint under
Federal Rule of Civil Procedure 12(b)(6) for failure to state
a claim. Starr v. Baca, 652 F.3d 1202, 1205 (9th Cir. 2011).

III. Statutory Framework

The National Bank Act of 18642 provides that a national
bank may charge its customers “interest at the rate allowed by
the laws of the State . . . where the bank is located.”
12 U.S.C. § 85. This provision permits a national bank to
charge out-of-state cardholders any interest rate allowed by

2
All of the Appellees are governed by the National Bank Act with the
exception of Washington Mutual Bank, which is instead subject to the
DIDMCA.
 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION 7

the bank’s home state. See Marquette Nat’l Bank of
Minneapolis v. First of Omaha Serv. Corp., 439 U.S. 299,
313–14 (1978). That is, national banks may “export” the
regulatory regime of the state in which they are located and
impose it on customers residing in states with more
consumer-friendly regulations. The DIDMCA has a parallel
provision. See 12 U.S.C. § 1831d(a) (permitting FDIC-
insured state banks to charge interest “at the rate allowed by
the laws of the State . . . where the bank is located”).

Federal regulations make clear that “interest,” at least as
the term is used in 12 U.S.C. §§ 85 and 1831d, encompasses
more than just the annual percentage rate charged on
cardholders’ carried balances. It also includes “any payment
compensating a creditor or prospective creditor for an
extension of credit, making available of a line of credit, or
any default or breach by a borrower of a condition upon
which credit was extended,” including “late fees” and
“overlimit fees.” 12 C.F.R. § 7.4001(a); see also Smiley v.
Citibank (S.D.), N.A., 517 U.S. 735, 747 (1996) (deferring to
this interpretation of “interest”). Hence, federal law permits
card issuers to charge late and overlimit fees to all of their
customers as long as the fees are legal in the issuers’ home
states.

The Cardholders seek to recover under the remedial
provisions of the National Bank Act and the DIDMCA, which
permit a borrower to recover damages if she was charged
interest in excess of what the statutes allow. See 12 U.S.C.
§ 86 (National Bank Act); id. § 1831d(b) (DIDMCA). The
cardholders argue that the fees violate their constitutional due
process rights because, like unconstitutional punitive
damages awards made in tort lawsuits, the fees greatly exceed
the actual economic harm caused by a late payment or
8 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION

overlimit charge. See Gore, 517 U.S. at 583 (noting that an
award of punitive damages many times greater than the
compensatory damage award will “raise a suspicious judicial
eyebrow”) (internal quotation marks and citation omitted).
Thus, if the fees are unconstitutional, they cannot be
authorized by state statute or exported to other states by the
National Bank Act.

IV. Analysis

A. Due Process Claim

Plaintiffs are forthright in their argument: they seek to
apply principles of substantive due process developed by the
Supreme Court in the tort context to liquidated damages
clauses in private contracts. Liquidated damages are
customarily unenforceable as penalties when they are in
excess of actual damage caused by a contractual breach. The
similarities and differences between liquidated damages and
punitive damages therefore govern the outcome of this case.

Since early in the development of the common law of
contract, courts have endeavored to distinguish between
enforceable “liquidated damages” clauses and unenforceable
“penalty” clauses. See Sun Printing & Publ’g Ass’n v.
Moore, 183 U.S. 642, 660–74 (1902) (describing the history
of the doctrine). Liquidated damages are a predetermined
sum which a party to a contract agrees to pay in the event of
his breach. See Williston on Contracts § 65:1 (4th ed. 2013).
A liquidated damages provision in a contract is enforceable
if the damages flowing from the breach are likely to be
difficult to ascertain or prove at the time of the agreement,
and the liquidated sum represents a good faith effort by the
 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION 9

parties to appraise the benefit of the bargain. Id.; see also,
e.g., U.C.C. § 2-718(1).

A penalty, on the other hand, is a contract provision
wherein a party agrees to pay a sum in the event of a breach,
but which is designed not to estimate probable actual
damages but to punish the breaching party or coerce his
performance. See Williston on Contracts § 65:1 (4th ed.
2013). Such clauses are generally not enforceable. See, e.g.,
Interstate Markings, Inc. v. Mingus Constructors, Inc.,
941 F.2d 1010, 1014 (9th Cir. 1991) (applying Arizona law).

Like the common-law rule against contractual penalty
clauses, punitive damages have an ancient provenance: the
Supreme Court noted punitive-damages-like provisions in the
Code of Hammurabi. See Exxon Shipping Co. v. Baker,
554 U.S. 471, 491 (2008) (quoting the Code of Hammurabi’s
goat-stealing regulations at § 8, p. 13 (R. Harper ed. 1904)).
Punitive damages are most familiar in tort. See Day v.
Woodworth, 54 U.S. (13 How.) 363, 371 (1851) (“It is a
well-established principle of the common law, that in actions
of trespass and all actions on the case for torts, a jury may
inflict what are called exemplary, punitive, or vindictive
damages upon a defendant . . . .”). Indeed, punitive damages
are generally not recoverable for breach of contract unless the
conduct constituting the breach is also a tort. See
Restatement (Second) of Contracts § 355.3

3
Some jurisdictions permit an award of punitive damages for
nontortious breach of contract in certain limited circumstances, such as
when the breach involves a wanton or malicious violation of a fiduciary
duty. See, e.g., Brown v. Coates, 253 F.2d 36, 40–41 (D.C. Cir. 1958)
(holding punitive damages to be appropriate in a case involving a
malevolent real-estate agent).
10 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION

While practice varies from jurisdiction to jurisdiction,
punitive damages have some universal characteristics. They
are “aimed not at compensation but principally at retribution
and deterring harmful conduct.” Exxon Shipping, 554 U.S. at
492. Consequently, they are “awarded in addition to actual
damages when the defendant acted with recklessness, malice,
or deceit.” Black’s Law Dictionary 448 (9th ed. 2009); see
also Day, 54 U.S. (13 How.) at 371 (noting that punitive
damages are designed to reflect “the enormity of [an]
offence” and to censure the “atrocity of the defendant’s
conduct”). For that reason, many jurisdictions disallow an
award of punitive damages without an award of actual
damages. See, e.g., Bldg. Structures, Inc. v. Young, 968 P.2d
1287, 1289 (Or. 1998) (“[A] jury may not award punitive
damages in the absence of an award of actual damages to the
plaintiff.”); see also Orange Blossom Ltd. P’ship v. S. Cal.
Sunbelt Developers, Inc. (In re S. Cal. Sunbelt Developers,
Inc.), 608 F.3d 456, 465 (9th Cir. 2010) (noting that under the
federal common law, punitive damages are recoverable in the
absence of actual damages only where authorized by statute).
They are awarded at the discretion of the trier of fact, whether
judge or jury. See Restatement (Second) of Torts § 908
cmt. d. Finally, punitive damages are not designed to be a
form of supercompensation for plaintiffs. Rather, punitive
damages “further a State’s legitimate interests in punishing
unlawful conduct and deterring its repetition.” Gore, 517 U.S.
at 568. The Supreme Court has characterized this state
interest as “quasi-criminal.” Cooper Indus., Inc. v.
Leatherman Tool Grp., Inc., 532 U.S. 424, 432 (2001).

There is little reason to doubt that, “[t]o the extent
punitive damages are permitted in contract actions, such an
award is subject to the limitations of the federal
Constitution.” 11 Corbin on Contracts § 59.2 (2013). The
 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION 11

Cardholders allege that the penalty fees in this case are purely
punitive—the banks are compensated for the lost time value
and collection costs associated with any breach by high
penalty interest rates, making the overage charges a form of
double-dipping. But considering that the penalty clauses at
issue originate from the parties’ private—albeit
adhesive—contracts, they are distinct from the jury-
determined punitive damages awards at issue in Gore and
State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408
(2003).

We therefore conclude that the due process analysis
developed in the context of jury-awarded punitive damages
is not applicable to contractual penalty clauses. See, e.g.,
Priebe & Sons, Inc. v. United States, 332 U.S. 407, 413
(1947) (describing contractual penalties as oppressive and
unjust based on common law of contracts, not constitutional
principles).

B. Unfair Competition Law Claim

California’s Unfair Competition Law, Cal. Bus. & Prof.
Code § 17200 et seq., makes violations of other state and
federal laws “independently actionable as unfair competitive
practices.” CRST Van Expedited, Inc. v. Werner Enters., Inc.,
479 F.3d 1099, 1107 (9th Cir. 2007) (citation omitted).
Because we conclude that the issuers’ conduct did not violate
the National Bank Act or the DIDMCA, there is no derivative
liability under the Unfair Competition Law.

V. Conclusion

Because constitutional due process jurisprudence does not
prevent enforcement of excessive penalty clauses in private
12 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION

contracts, and the fees were permissible under the National
Bank Act and the DIDMCA, the district court did not err in
dismissing the complaint.

AFFIRMED.

REINHARDT, Circuit Judge, concurring in the judgment:

I concur, reluctantly. The Supreme Court has recently
discovered that the Constitution prevents courts from
imposing disproportionate punitive damages in tort cases. If
the Court continues to adhere to its newfound view, it would
be well advised to apply the same rule to prevent
disproportionate penalties from being imposed on consumers
when they breach contracts of adhesion.1 Consumers must
frequently enter into such one-sided contracts if they are to
obtain many of the practical necessities of modern life, such
as credit cards, cellular phones, utilities, and other vital
consumer goods. Applied to such contracts, the Court’s most
recent substantive due process rule—which has to date served
primarily to protect wealthy corporations from liability for
repeated wrongdoing—would also protect ordinary
consumers from paying excessive court-enforced damages for

1
Punitive damages are not awarded in contract actions, except insofar
as contract actions “contain elements that enable the court to regard them
as falling within the field of tort.” 11 Corbin on Contracts § 59.2 (2013).
When punitive damages are awarded in hybrid contract-tort actions, they
are subject to the constitutional limitations imposed on punitive damages
in tort cases. Id. Applying the Court’s new constitutional rule to contracts
of adhesion would expand the scope of punitive damages limitation.
 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION 13

minimal breaches of contract.2 These excessive penalties are
currently paid to large national business entities which, each
year, collect billions of dollars in late fees alone. They reflect
a compensatory to penalty damages ratio higher than 1 to
100,3 which far exceeds the ratio of non-punitive to punitive
damages that the Court has held to be prohibited by the
Constitution in tort cases. In sum, if due process is violated
when courts award disproportionate punitive damages in the
tort context, due process is equally violated when courts
enforce the punitive and substantially more disproportionate
penalty clauses in contracts of adhesion.

I ultimately agree with the opinion of the court, however,
that the Constitution has not yet been so interpreted. Thus, I
cannot disagree with the ultimate decision. I do believe,
however, that the proposition I discuss deserves further
exploration and analysis, and that, should the new Supreme
Court doctrine continue in effect, the extension of that
doctrine as requested by Cardholders should eventually
become the law under the Due Process Clause.

*

Constitutional interpretation is an evolutionary process.
“[T]hat our understanding of the Constitution does change
from time to time has been settled since John Marshall
breathed life into its text.” Roper v. Simmons, 543 U.S. 551,
587 (2005) (Stevens, J., concurring). Otherwise, the
Constitution’s “general principles would have little value, and

2
See Seana Valentine Shiffrin, Are Credit Card Late Fees
Unconstitutional?, 15 Wm. & Mary Bill Rts. J. 457, 460 (2006).
3
See id. at 477–80.
14 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION

be converted by precedent into impotent and lifeless
formulas.” Weems v. United States, 217 U.S. 349, 373
(1910). Many, if not most, of the Supreme Court’s greatest
decisions are those in which the Court has interpreted the
Constitution as a living document, capable of adapting to
changing times. See, e.g., United States v. Windsor,
133 S. Ct. 2675 (2013); Gideon v. Wainwright, 372 U.S. 335
(1963); Brown v. Bd. of Educ., 347 U.S. 483 (1954); West
Virginia Bd. of Educ. v. Barnette, 319 U.S. 624 (1943).

This is a constitutional case of first impression. It is an
attempt by a group of cardholders to have a new
constitutional doctrine applied even-handedly. Their
proposed rule would protect consumers from excessive
penalties just as the current rule protects corporate and
business entities from excessive punitive damages.
Constitutional evolution requires continuous evaluation of
newly established principles to ensure that changes occur
within the framework of fairness and equality. Such must be
the case here.

Until recently, no one other than a few law professors
would have thought that substantive due process significantly
limited punitive damages awards or determined which
punitive verdicts against corporate tort-feasors were too large.
See BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 602 (1996)
(Scalia, J., dissenting) (describing “federal punitive damages
law” as a “new field created by today’s decision”). Indeed,
the Court declared decades ago its “abandonment of the use
of the ‘vague contours’ of the Due Process Clause to nullify
laws which a majority of the Court believed to be
economically unwise.” Ferguson v. Skrupa, 372 U.S. 726,
731 (1963). See also Lochner v. New York, 198 U.S. 45, 75
(1905) (Holmes, J., dissenting) (“[A] Constitution is not
 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION 15

intended to embody a particular economic theory, whether of
paternalism and the organic relation of the citizen to the state
or of laissez faire.”). Nor did it appear until very recently
that the “vague contours” of the Due Process Clause served
to measure the constitutionality of particular punitive
damages awards.

Beginning in the mid-1980s, however, a smattering of
Supreme Court dicta began to suggest that one or more
Justices believed that such limitations might be necessary as
a constitutional response to a growing trend of punitive
damages “run wild.” See Pac. Mut. Life Ins. Co. v. Haslip,
499 U.S. 1, 9–12 (1991) (collecting dicta from “recent years”
in which “[the] Court and individual Justices” “expressed
doubts about the constitutionality of certain punitive damages
awards”). In Haslip, the Court began developing a new and
(now) robust jurisprudence in which awards of punitive
damages in the tort context are examined to determine
whether they comport with due process. See Haslip, 499 U.S.
at 18 (suggesting the possibility that punitive damage awards
in which jurors are given unlimited discretion “jar one’s
constitutional sensibilities,” but finding no constitutional flaw
with a punitive damages award 200 times greater than the
compensatory damages awarded); TXO Prod. Corp. v.
Alliance Res. Corp., 509 U.S. 443 (1993) (plurality opinion)
(citing Haslip for the proposition that due process might
constrain the size of some punitive damages awards, but
upholding an award 500 times in excess of actual damages);
BMW, 517 U.S. at 585–86 (holding, for the first time, that a
punitive damages award was “grossly excessive” and
therefore violated due process where the award was 200 times
greater than the actual damages); State Farm Mut. Auto. Ins.
Co. v. Campbell, 538 U.S. 408, 425 (2003) (concluding,
somewhat surprisingly, that “[o]ur jurisprudence and the
16 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION

principles it has now established demonstrate . . . that, in
practice, few [punitive] awards exceeding a single-digit ratio
between punitive and compensatory damages . . . will satisfy
due process,” and citing a one-to-four ratio between
compensatory and punitive damages as a non-binding but
“instructive” constitutional line). Regardless of the impulses
that motivated the Court to adopt its new constitutional
doctrine, to date that doctrine has served primarily to protect
large corporations from liability in cases in which they have
repeatedly engaged in patterns of misconduct against
vulnerable individuals.4

Whether or not the Court’s discovery that the Constitution
limits punitive damages is well founded, it is unlikely that the
Due Process Clause was intended to operate as inequitably as
it does at present. Big businesses are protected against
“excessive” punitive damages awards for their willful
misconduct, even as consumers are afforded no constitutional
protection against disproportionate damages for breaches of
contracts of adhesion—contracts that are not voluntary in any
worthwhile sense of the term. Although the ultimate cost to
each consumer may be relatively small, the benefits to credit
card companies of such excessive punishment for minor
breaches of contract are significant: in 2002, for example,
credit card companies collected $7.3 billion in late fees. See
Shiffrin, Are Credit Card Law Fees Unconstitutional?, 15
Wm. & Mary Bill Rts. J. at 460.

The Court’s punitive damages doctrine has both
procedural and substantive aspects. See, e.g., State Farm,

4
See, e.g., Philip Morris USA v. Williams, 549 U.S. 346 (2007). See
also Martha T. McCluskey, Constitutionalizing Class Inequality: Due
Process in State Farm, 56 Buff. L. Rev. 1035 (2008).
 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION 17

538 U.S. at 416 (“[T]here are procedural and substantive
constitutional limitations on [punitive damage] awards.”).
The procedural aspect—which principally involves fair notice
of the extent of the penalty that the state may impose—is not
at issue here.5 The substantive aspect, in contrast, is directly
implicated. This critical part of the Court’s new
jurisprudence provides that punitive damages may not be
“grossly excessive” with respect to the actual harm caused by
the tortfeasor because such disproportionate awards “further[]
no legitimate purpose and constitute[] an arbitrary deprivation
of property.” State Farm, 538 U.S. at 416; see Gore,
517 U.S. at 596 (Breyer, J., concurring) (“The severe lack of
proportionality between the size of the award and the
underlying punitive damages objectives shows that the award
falls into the category of ‘gross excessiveness’ . . . .”). The
Court has explained that there is something “jar[ring]” to
one’s “constitutional sensibilities” about a court sanctioning
any sort of punishment in a civil case when that punishment
vastly exceeds the harm done by the party being punished.
Haslip, 499 U.S. at 18. Such a jarring of constitutional
sensibilities may occur even when the penalties imposed are
foreseeable. See St. Louis, I. M. & S. Ry. Co. v. Williams,
251 U.S. 63, 67 (1919).

These principles, if indeed embodied in the Constitution,
should also limit courts’ ability to enforce grossly excessive
liquidated damages provisions that inflict punishment upon
consumers far in excess of any damage that they have caused

5
As the Cardholders concede, the penalties imposed in contracts of
adhesion, even if disproportionate, are known in advance.
18 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION

by minimally breaching their contracts of adhesion.6 A
grossly disproportionate punishment is a grossly
disproportionate punishment, regardless of whether the
breaching party has previously “acquiesced” to such
punishment—to the extent, that is, that a signatory to a
contract of adhesion can ever be said to have “acquiesced” to
all of its terms.7 Substantive due process should, at the very
least, bar judicial enforcement of contractual penalty clauses
when such clauses are so disproportionate to the damage
caused by the breach that the damages would be
impermissible as civil penalties in the tort context.8 This
would hardly be the first time that courts refused to enforce
private contracts because such enforcement would constitute

6
In cases where payments are an hour to a few days late, the only actual
damage to a credit card company would be the lost time-value of money,
since it typically would not issue collection letters or phone calls on such
a brief time frame and would thus incur no expense, however minimal, as
a result. But the lost time-value of the money is usually already
compensated for by the interest on the balance, which is often increased
when late fees are imposed. In such cases, the compensatory-punitive
damages ratio often lands far above ratios that would undoubtedly be
deemed invalid in the tort context. See Shiffrin, Are Credit Card Late
Fees Unconstitutional?, 15 Wm. & Mary Bill Rts. J. at 477–80.
7
Consumers presented with these contracts must either “agree” to their
harsh terms or lives without necessities of modern life, including access
to credit, utilities, and the principal means of communication.
8
The fact that the contract terms at issue are often labeled liquidated
damages provisions is irrelevant. When provisions of contracts of
adhesion require the imposition of monetary punishment that is punitive
in character and grossly disproportionate, they may not be enforced.
 IN RE: LATE FEE & OVER-LIMIT FEE LITIGATION 19

unconstitutional state action. Cf. Shelley v. Kraemer,
334 U.S. 1, 20 (1948).9

The judiciary is just beginning to explore the principles
that the Court has offered in justification of its new
constitutional rule and the time for an expansion of its
punitive damages jurisprudence may not yet have arrived. I
believe, however, that in the end the principles of fairness and
equality will dictate that consumers are entitled to (at least)
the same constitutional rights as corporations.

D.W. NELSON, Senior Circuit Judge, concurring:

I write separately to join Judge Reinhardt’s concurrence,
although I agree that the district court reached the correct
result under currently applicable law and should be affirmed.

9
Cardholders also offer an alternative theory of state action. They
argue that state statutes abrogating the common law prohibition on penalty
clauses, taken in conjunction with regulations promulgated pursuant to the
National Bank Act which allow credit card companies to export the law
of their home states, permit the imposition of the disproportionate
penalties in violation of the Constitution. Under common law, they argue,
this problem would not arise because such fees would constitute an
unlawful penalty clause. See Shiffrin, Are Credit Card Late Fees
Unconstitutional?, 15 Wm. & Mary Bill Rts. J. at 487–91.