WASHINGTON - In a decision that will help banks pare their legal expenses, the U.S. Supreme Court has ruled that states cannot invalidate arbitration clauses included in contracts between businesses and consumers.
"This is a really good decision," said Michael Crotty, deputy general counsel for the American Bankers Association. "If anyone was contemplating putting arbitration in their contracts, this should relieve any concerns they had about the enforceability of the things."
While Mr. Crotty said the industry has not collected statistics on arbitration use, a 1993 study by the Center for Public Resources found that companies saved an average of $1 million per case by using arbitration in multimillion-dollar disputes.
Justice Stephen J. Breyer, writing for the majority in Allied-Bruce Terminix v. Dobson, said states must treat arbitration clauses just like they would treat any other section of a contract.
"What states may not do is decide that a contract is fair enough to enforce all its basic terms - price, services, credit - but not fair enough to enforce its arbitration clauses," Justice Breyer wrote. The Federal Arbitration Act "makes any such state policy unlawful, for that kind of policy would place arbitration clauses on an unequal foot."
In the ruling, released Wednesday, the court reversed a 1993 Alabama Supreme Court decision, which said a state law made an arbitration agreement between a consumer and a pest-control company unenforceable.
Arthur E. Otten, a partner at Denver's Otten, Johnson, Robinson, Neff & Ragonetti, said bankers are turning to arbitration - a private process in which both sides present their case to a neutral party, who then makes an unappealable ruling - because it is quicker, cheaper, and confidential.
"They have been a little late coming to the table," Mr. Otten said of banks. "But a number of banks, particularly in California, have been very strong supporters of arbitration."
Peter Magnani, a spokesman for Bank of America, said his bank includes mandatory arbitration clauses in all deposit and credit card contracts.
"It does two things from the bank's point of view," Mr. Magnani said. "It cuts down costs and it mitigates the uncertainty that you have of these potentially huge punitive damage awards."
Laura Effel, vice president and senior counsel at Chase Manhattan Bank, cautioned that the entire industry is not ready to accept arbitration.
"You risk having a bad decision that you can't appeal," Ms. Effel said. "And one thing banks like more than anything is knowing what the rules are. They like predictability."
