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Day in court with bank elusive?

By Claes Bell · Bankrate.com
Friday, March 1, 2013
Posted: 5 pm ET

The Supreme Court is considering a case that could reduce consumers' access to the court system to resolve disputes with financial services providers.

Many checking account agreements have what's called a mandatory arbitration clause. While that sounds complicated, all it says is that by signing up for your checking account, you agree to take disputes with your bank to an arbitrator rather than a U.S. court.

Banks love arbitration clauses because it shields them from account holders banding together in a class-action suit over some questionable fee or other practice, and it reduces the costs they bear for frivolous lawsuits.

But consumer advocates say it allows banks to mistreat customers without fear of being held accountable by the court system. After all, it's unlikely one individual customer would take a bank to arbitration over being unfairly charged a few extra bucks in bank fees. Usually it takes a class action to make such a suit worthwhile.

Mandatory arbitration clauses are already fairly ironclad, thanks to the 2010 Supreme Court ruling in AT&T v. Concepcion. In that case, the court concluded that companies were within their rights to require customers to agree to arbitration and hold them to those agreements, even if state law prohibits it.

The case the court is currently considering takes that a step further, asking the court to decide whether merchants can sue American Express under federal law for overcharging them to process debit card and credit card payments, even though a binding arbitration clause prohibits them from doing so. The merchants are arguing that a class-action lawsuit is the only way to enforce their legal rights under federal law, and so they should be able to proceed with one despite it being prohibited by the arbitration clause in their contract with American Express.

Seeing as the composition of the high court is nearly the same as it was when it decided AT&T vs. Concepcion, there's a good chance it will side with American Express in the case. But if that happens, it would be a big change from a current court precedent, called the "effective vindication doctrine." It holds that an arbitration clause can be sidestepped if it's effectively impossible to pursue your rights under the law in arbitration, says Paul Bland, a senior attorney with Public Justice, a public interest law firm in Washington, D.C.

"The real disaster scenario here will be that the court will give lip service to the effective vindication doctrine," Bland says.

In that case, the court would affirm that plaintiffs need to be able to fight for their rights effectively for an arbitration clause to be enforced. But in reality the court would be rubber-stamping companies' methods to comply with that standard, even if those methods are unproven or unworkable, Bland says.

"If that's what happens, it will be terrible for consumers," Bland says.

What do you think? Should bank account holders be able to band together to sue banks in court? Or is arbitration on a case-by-case basis better?

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