WASHINGTON -- The U.S. Supreme Court today hears a controversial Case that will determine whether banks can include mandatory arbitration clauses in contracts with customers. The high court will hear the dispute on the second day of a fall term that features a variety of cases that can affect the banking industry.
The arbitration case, Allied-Bruce Terminex vs. Dobson, could dictate the future of mandatory arbitration clauses that banks have started using, said Michael F. Crotty, general counsel to the American Bankers Association. "The question is whether the federal arbitration act overrides any state anti-arbitration laws,"' Mr. Crotty said.
If the court sides with the state, it would make many arbitration clauses unenforceable, according to briefs filed in the case.
The contracts, used mainly by West Coast banks including Bank of America, require that all disputes go to arbitration, a quasi-judicial proceeding where experts rather than judges issue decisions.
Businesses are increasingly looking at mandatory arbitration as one way to reduce legal expenses because these sessions are considerably less costly to litigate than suits tried in court.
The ABA, in a friend of the court brief, argues that Alabama cannot be allowed to scuttle the clear intent of Congress.
"Alabama's policy against arbitration must not be allowed to tramp federal policy in favor of arbitration," Mr. Crotty wrote in the brief.
Also scheduled for oral argument today is a case pitting a mortgage company against a bankrupt development company.
U.S. Bancorp Mortgage Co. vs. Bonner Mall Partnership could have determined how likely bankers would be to recoup money from bankrupt estates.
The 9th Circuit had ruled that debtors should be allowed to retain their equity stakes if they bring new money to the deal. But before the Supreme Court could hear the dispute, the parties settled.
Now, the court must decide if a lower court decision should stand or be vacated because of the settlement. Bankers want the court to vacate the 9th Circuit decision, which would remain as precedent in the circuit unless the high court acts.
An employment discrimination case tops the court's agenda on Nov. 2 when it hears McKennon vs. Nashville Banner Publishing Co. The case, of apparent interest to most corporate personnel departments, questions whether a company can avoid an age discrimination suit if during the course of litigation it finds a legitimate reason to terminate the individual.
Later that day, the Supreme Court addresses a securities case that might make it easier for people to sue the brokerage affiliates of financial institutions.
The court, in Gustafson vs. Alloyd Co., will decide if people can sue brokers that use false or misleading information to sell stocks.
"If there is a private course of action, then it just opens the way for more law suits," said Sarah Miller, the ABA's senior government relations counsel. That means banks will find themselves in court more frequently, she said.
Bank examiners and other federal employees get their day in court on Nov. 8 when the high court hears in U.S. vs. National Treasury Employees Union whether federal workers can accept payment for speeches and articles not related to their work.
Finally, the Supreme Court will hear NationsBank v. Variable Annuity Life Insurance Co., a dispute questioning whether national banks can sell annuities. The court should hear the case in late November or early DeCember, although no date has yet been set. (For more on VALIC, see related story on page 4.)