In a narrow vote last December, the Supreme Court dealt banks and other lenders an important victory in their battle against consumer class action suits.
It ruled against an Opelika, AL, consumer who complained that she should not be forced to go the arbitration route, although the loan agreement she originally signed obliged her to do so. A circuit court of appeals had ruled in her favor.
Larketta Randolph, the plaintiff, argued that the clause should be waived because she couldn't afford the cost of arbitration. The arbitration clause effectively precluded her from joining any class action suit to seek relief.
Randolph charged that the lender, Green Tree Financial Corp., had violated the Federal Truth in Lending Act by failing to properly disclose the $15-per-year cost of default insurance when it financed her purchase of a mobile home.
The Supreme Court decision was close. Five justices, including Chief Justice Rehnquist, voted for Green Tree, and four said the case should be sent back to the lower court.
In contrast to the Supreme Court, the Eleventh Circuit Court of Appeals had invalidated the arbitration clause because the judges said it failed to address the prohibitively expensive costs the consumer might incur in pursuing arbitration, improperly depriving Randolph to her right to pursue her claims.
A key issue: the cost of pursuing arbitration. Justice Rehnquist, writing for a majority, concluded that "the 'risk' that Randolph will be saddled with prohibitive costs is too speculative to justify the invalidation of the arbitration agreement."
Although conceding that "large arbitration costs could preclude a litigant such as Randolph from effectively vindicating her federal statutory rights," Chief Justice Rehnquist concluded that "the Court need not discuss how detailed such a showing would have to be."
Justices Ginsburg, Stevens, Souter and Breyer issued dissents on various grounds involving the arbitration clause. All argued that, instead of rejecting the consumer's case entirely, the High Court should have sent the case back to the trial court to consider fully whether the costs of going to arbitration would in fact have been prohibitive.
All the dissenters also said that it would be unfair to expect Randolph to bear the burden of demonstrating how much arbitration would cost or to "be required to submit to arbitration without knowing how much it will cost her."
Justice Ginsburg wrote, "As I see it, the Court has reached out prematurely to resolve the matter in the lender's favor."
For some years, financial institutions have been trying to lessen their exposure to expensive consumer class actions in the courts by requiring customers to sign agreements agreeing to arbitrate their disputes. If consumers can be compelled to arbitrate, they typically would forfeit the right to become plaintiffs in class action litigation involving the same issues. In some states, plaintiffs also are not permitted to recover punitive damages in arbitrations.
Arbitration also can be attractive for defendants because the parties' rights to "discover" relevant information before an arbitration hearing tend to be much more limited than their pretrial discovery rights in the courts.
Business interests maintain that arbitration is an efficient alternative to costly litigation. But some consumer advocates characterize mandatory arbitration in the consumer context--where the consumer usually does not have the ability to reject the arbitration clause--as a ruse to eviscerate consumer class actions.