Sheppard Mullin Financial Institutions Law Blog

Is a $150 termination fee in a merchant's credit card agreement with a bank an unlawful liquidated damage provision?

No, according to the Fourth District Court of Appeal in Morris v. Redwood Empire Bankcorp, 05 C.D.O.S. 3671 (April 29, 2005).

In this case, a merchant sued a credit card issuer, claiming that a provision in its credit card agreement permitting the bank to charge a $150 termination fee was both an impermissible liquidated damage and unconscionable. The trial court dismissed the case.

On appeal, the court agreed the termination fee was not an unlawful liquidated damage, noting that where a contract for a specific period permits a party to terminate an agreement before its expiration in exchange for paying a lump-sum, the payment is not considered a penalty. And, although the agreement at issue was of indefinite duration, and thus made payment of the termination fee inevitable if the merchant terminated, the court reasoned this same inevitability took the provision out of the realm of liquidated damages, which by definition are assessed only upon a breach.

The court also held that the merchant's complaint had failed to allege the termination fee was unconscionable, either procedurally or substantively. In rejecting procedural unconscionability, the court placed great significance on the fact that the case involved a bank contract with merchants, not consumers. In rejecting substantive unconscionability, it noted the merchant made no allegation, for example, that the termination fee was "grossly out of line with fees charged by other banks," or that the California banking industry is oligopolistic, or represented a "one-sided" reallocation of risks found by courts to "shock the conscience."

Click here to view the opinion