Christopher Leonard May 18, 2011

An Arbitration Agnostic Sees the Light

I’ll admit it: in law school, I thought arbitration was b-o-r-i-n-g. And while in private law practice, I thought arbitration was generally worthless; I usually only added arbitration provisions to a contract when the other party asked. After all, in the experience of the litigators in our firm, arbitration rarely was less expensive than litigation, and you could foreclose the possibility of a jury trial and judicial appeal if the arbitrator(s) got it wrong.

So why has this arbitration agnostic now seen the light?

Easy. After a recent Supreme Court case, we’ve decided that adding arbitration provisions to deposit agreements and other contracts is now one of the top ways our financial services clients can protect themselves, particularly if they run into trouble in regard to overdraft fees.

Why? The answer lies in the world of class action lawsuits, which almost always benefit the plaintiff’s lawyers far more than the consumers who have been harmed. Without arbitration language, the consumer is free to sue you and, if he can meet the requirements for certification of a class action, add others to the lawsuit who are similarly situated. On the other hand, in theory, if you include an arbitration provision with a class action waiver, the consumer has to initiate an arbitration proceeding with you, individually, in lieu of ganging up on you in court with other plaintiffs.

Supremes Prefer Arbitration

So, you’d think that everyone would use these arbitration provisions and therefore there should be no more class action lawsuits anymore, right? Well, unfortunately it didn’t work that way. States enacted laws or judicially created “public policy” pronouncements that arbitration provisions in some cases are “unconscionable,” meaning that they would not be enforced even though they were clearly contained in the applicable agreement.

A recent Supreme Court case (AT&T Mobility LLC v. Concepcion) changed that. In a 5-4 decision, the high court clearly expressed its preference for arbitration, saying that “the informality of arbitral proceedings is itself desirable, reducing the cost and increasing the speed of dispute resolution.” The court also held that arbitration provisions can include a waiver of the ability to form a class with others.

In my opinion, one of the reasons the Supremes came out in favor of arbitration is that AT&T’s arbitration provision was unusually pro-consumer. For example, customers could initiate a dispute through a simple form available on AT&T’s website and have the possibility of a settlement without having to go to arbitration. If the dispute was not resolved within 30 days, the customer could start arbitration by filing another form available on AT&T’s website.

If the case went to arbitration, AT&T’s agreement specified, among other things, that arbitration must take place on the customer’s home turf and that “the arbitrator may award any form of individual relief, including injunctions and presumably punitive damages. The agreement, moreover, denies AT&T any ability to seek reimbursement of its attorney’s fees, and, in the event that a customer receives an arbitration award greater than AT&T’s last written settlement offer, requires AT&T to pay a $7,500 minimum recovery and twice the amount of the claimant’s attorney’s fees.”

It is not a requirement that provisions as pro-consumer as these must be in the arbitration provision for it to be effective, but in this case, it appears to have helped.

The practical application to our clients could be, for example, avoiding getting dragged into class action litigation concerning overdraft fees. If your deposit agreement specifies arbitration and waives class action rights, these complaints of individual account holders could be handled through arbitration instead of in a massive class action lawsuit in federal court.

While this appears to be good only for businesses, this also can be good for consumers. The lower court in the AT&T case found that consumers participating in this dispute through a class action lawsuit likely would be worse off than those who went through arbitration. My guess is the same thing could be said for overdraft litigation – even those consumers who really were subject to abusive practices will get pennies on the dollar in the class action litigation in their best case scenario, while they could have received substantially more in an arbitration proceeding.

This also makes it possible for the financial institution to better manage claims of concerned account holders directly, instead of diverting the substantial time and financial resources necessary to respond to a class action lawsuit. Handling claims in this way lowers the cost of delivering financial services to all consumers.

In my opinion, adding arbitration provisions with class action waivers now should be on the top of every financial institution’s to-do list in 2011.

Mr. Leonard is chief operating officer and general counsel for Wilmington, N.C.-based Velocity Solutions, Inc., a provider of fee income enhancement strategies to community and regional banks and credit unions. He can be reached at christopher@myvelocity.com.

 

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