Why Banks Should Consider Mandatory Arbitration Provisions

In the wake of AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2010), banks are taking another look at mandatory arbitration clauses and the possible benefits of such language in customer agreements. Concepcion effectively closed a possible state-law loophole to the enforceability of arbitration provisions for class claims. This potential loophole frustrated banks' purpose for the mandatory provision (lowered litigation costs) where they might need it the most, class litigation. As a consequence, a bank now has more incentive than ever to consider whether it would be beneficial for the bank to require that its customers agree to arbitrate disputes in lieu of going to court.

The issue before the Court in Concepcion was whether a state rule requiring the availability of classwide arbitration in order enforce an arbitration agreement comported with the Federal Arbitration Act ("FAA"), 9 U.S.C. § 2. Recognizing the importance of this issue and the ramifications of a decision by the Court, banking groups¹ jointly filed a brief with the Court in support of the enforcement of arbitration provisions against class actions under the FAA. The theme of the banking groups' brief was that arbitration benefits all parties, even customers, by lowering costs and allowing businesses to pass along cost savings. The banking groups also presented evidence demonstrating that bank customers were not unfairly disadvantaged in the arbitration forum versus the court forum.

The Concepcion Court held, with a 5-4 majority, that the FAA prevents states from imposing rules that condition the enforceability of arbitration agreements on the availability of classwide arbitration, such as California's Discover Bank rule.² Justice Scalia wrote for the majority that "[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA." ³ Following the Supreme Court's lead, on August 11, 2011, the Eleventh Circuit⁴ held that, "in light of Concepcion, [a] class action waiver in . . . arbitration agreements is enforceable under the FAA." Thus, Concepcion means that banks may enforce mandatory arbitration provisions against class claims, and this benefit to banks, coupled with the other benefits of arbitration, could mean big savings for banks' litigation budgets.

Other commonly-known benefits of arbitration provisions for businesses include:

• Arbitration allows a business to get out of the court system, which can be especially helpful in certain circumstances;
• Sometimes it is helpful to compel arbitration in order to have the dispute resolved in a more convenient locale;
• Arbitration may allow a business to avoid certain judges that it perceives as undesirable;
• Sometimes, arbitration is more efficient than the court system;
• Arbitration avoids the uncertainty associated with jury trials;
• Arbitration is typically less expensive, less formal, more streamlined, and often has less restrictive evidentiary and procedural rules;
• There is increased flexibility with scheduling between the parties, due to a lack of dependence on court schedules;
• The results of arbitration are often less public and, as a consequence, often lead to a lesser ripple effect from a result;
• The increased confidentiality that is often associated with arbitration promotes the maintenance of a business relationship between opposing parties; and
• The case or controversy is sometimes decided by a decision-maker with knowledge and expertise in the banking industry.

Some of the potential disadvantages of arbitration include:

These benefits encourage banks and businesses in general to require arbitration agreements with their customers.

The enforcement of arbitration provisions also typically eliminates incentive for frivolous or small suits. This might be because arbitration imposes higher upfront costs on claimants than public courts. Potential claimants often must pay at least portions of arbitrator fees and other administrative costs, depending on the governing rules and agreement between the parties. When compared to providing an inexpensive filing fee with a court, these upfront arbitration costs can act as a deterrent to pursuing unworthy claims against banks.

There are also some lesser-known benefits. For example, courts may be more willing to enforce a contractual provision compelling arbitration than to enforce a contractual provision waiving a right to jury trial—even though both provisions effectively deny a claimant access to a public jury proceeding. In Georgia, a pre-litigation contractual jury trial waiver is void under state law.⁶ California has the same policy.⁷ Whether such pre-dispute waiver provisions are valid is a matter of substantive law for these states. A federal court sitting in diversity and applying Georgia or California law is compelled to apply the appropriate state's substantive law and, accordingly, must construe pre-trial contractual jury trial waivers as unenforceable.⁸ Yet the FAA would require the same court to enforce a valid arbitration provision.

This disparity might be explained by courts' initial presumption against jury trial waiver because of the Seventh Amendment and their presumption in favor of enforcing arbitration provisions because of the FAA. The right to a jury trial is a constitutional right created by the U.S. Constitution and waiver of such a right requires "intentional relinquishment or abandonment . . . ."⁹ The Supreme Court considers "the right of jury trial [as] fundamental," and consequently "courts indulge every reasonable presumption against waiver."¹⁰ Meanwhile, those same courts must come to a dispute involving an applicable arbitration agreement with a presumption in favor of arbitration. The FAA requires all courts within the United States to resolve any doubts about whether arbitration is appropriate in favor of arbitration, because the FAA clearly delineates a national policy favoring arbitration.¹¹ The test for determining whether the FAA applies and compels arbitration simply requires: (1) existence of a written arbitration agreement between the parties; and (2) that the underlying transaction involves interstate commerce. This showing for a party seeking to compel arbitration is far less stringent than the showing required of a party seeking to enforce waiver of a jury trial.

• Appeal of a bad result is not allowed;
• Arbitration does not allow for the disposal of a controversy on summary judgment, so the arbitration process often goes all the way to a trial-like proceeding;
• The quality of the result of arbitration is often heavily dependent on the quality of the arbitrator;
• Fees for arbitration are higher than court fees; and
• At times, the arbitration forum may be less convenient.

The balance of pros and cons with respect to arbitration will be different for each bank, and possibly for each particular case. The inclusion of arbitration provisions in customer agreements, though, will often give the bank the choice of whether arbitration is appropriate on a case-by-case basis. This is because customers often file suit in court, and it is up to the bank to decide whether or not to enforce the arbitration agreement.¹²

Banks now have more incentive than ever to consider arbitration. A bank should assess its confidence in its court system, the goals of the bank, and litigation costs to determine whether arbitration might be an effective tool for the bank.

Footnotes

1. On August 9, 2010, the American Bankers Association, the American Financial Services Association, the Consumer Bankers Association, the Financial Services Roundtable and the
California Bankers Association jointly filed a brief in support of AT&T Mobility LLC with the Supreme Court, as friends of the Court.

2. Discover Bank v. Superior Ct., 113 P. 3d 1100 (Cal. 2005), the California Supreme Court, based on general state-law principles disfavoring exculpatory contracts and demanding that
unconscionable contract clauses be limited so as to avoid an "unconscionable result," ruled that class action waivers in some consumer contracts are unconscionable, and, thus,
unenforceable (the "Discover Bank rule").

3. Concepcion, 131 S. Ct. at 1748.

4. Cruz v. Cingular Wireless, LLC, No. 08–16080, 2011 WL 3505016648 F.3d 1205, at *1 (11th Cir. Aug. 11, 2011).

5. As of September 15, 2011, the U.S. Court of Appeals for the Sixth Circuit has not applied the Concepcion holding.

6. Bank S., N.A. v. Howard, 444 S.E. 2d 799, 800 (Ga. 1994).

7. See Grafton Partners, L.P. v. Superior Court, 116 P.3d 479, 492 (Cal. 2005) (deeming pre-dispute contractual jury trial waivers unenforceable as a matter of state law).

8. See, e.g., GE Comm. Fin. Bus. Prop. Corp. v. Heard, 621 F. Supp. 2d 1305, 1308 (M.D. Ga. 2009).

9. College Sav. Bank v. Fla. Prepaid Postsecondary Educ. Expense Bd., 527 U.S. 666, 682 (1999) (quoting Johnson v. Zerbst, 304 U.S. 458, 464 (1938)).

10. Aetna Ins. Co. v. Kennedy to Use of Bogash, 301 U.S. 389, 393 (1937)

11. See, e.g., Granite Rock Co. v. Int'l Broth. of Teamsters, 130 S. Ct. 2847, 2856-57 (2010) (citations omitted).

12. All parties may enforce arbitration agreements against all other parties to the agreement, but, as a practical matter, customers typically prefer the court system for reasons of familiarity and lower upfront costs.

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