WASHINGTON -- In a sign of potential trouble for the banking industry, members of the U.S. Supreme Court expressed concem Tuesday at the carte blanche some companies have to put mandatory arbitration clauses in their contracts.
The case being argued, AlliedBruce Terminex v. Dobson, could prevent financial institutions from relying on the Federal Arbitration Act, which encourages arbitration over lawsuits. Instead, the justices said, state laws limiting the use of arbitration may come into play.
Justice Sandra Day O'Connor, for example, said she is worried that the court may apply the act too broadly, possibly overturning numerous laws in the states to ensure consumer access to the courts. "Your view would sweep all that away," she said of Terminex's position.
The American Bankers Association, which filed a brief in the case, said banks are interested in the dispute because more and more financial institutions are using arbitration to contain the cost of litigation.
The arguments before the high court focused extensively on jurisdictional issues, especially on what constitutes interstate commerce.
Justice John Paul Stevens focused on a corporate ownership issue, asking Terminex lawyer H. Bartow Farr 3d whether interstate commerce comes into play when the parent company is located in another state.
"If they are guaranteeing the contract, then federal law should apply," Mr. Farr responded.
If the justices adopt that view, bank holding companies could rely on the act to govern contracts affiliates in other states make with customers.
Justice Antonin Scalia said his biggest worry is that consumers cannot look at their contracts and know whether they are engaging in interstate commerce. The company may have connections to companies in other states of which the consumer is unaware, he said. "One side could be rolling the dice," Mr. Scalia said. "That sounds like a very strange test."
Mr. Farr argued on behalf of Terminex that Congress passed the act nearly 70 years ago expressly to combat anti-arbitration sentiment in the lower courts and in the states.
He urged the justices to overturn an Alabama Supreme Court decision that voided a mandatory arbitration clause Terminex had with a customer. "It embodied precisely the type of hostility that garnered the federal law in the first place," Mr. Farr said.
Allan R. Chason, the attorney representing Alabama, tried to exploit the jurisdictional question, saying Congress knew it could go further in the act to assert its power but chose not to.
Mr. Chason said the case boils down to the "reasonable expectations" of the parties to engage in interstate commerce. If they expected to engage in interstate commerce, the act applies. If not, it doesn't, he said.
That set off Mr. Scalia. "You [deprive] arbitration arguments of all their value if you have to litigate what was reasonably expected," he said.