An End Run Around Class-Action Lawsuits
Alan Kaplinsky is one proud man. For years, the Philadelphia lawyer has been advising financial institutions, leading their defense in class-action lawsuits brought by consumers -- and, more importantly, designing ways to limit such suits by writing arbitration clauses into many credit-card agreements and banking contracts.
These clauses, often found in the fine print, have met with mixed results in court, with some judges upholding them, some not. Now, Kaplinsky has found a way to one-up the courts, at least in Utah, where a new law specifically allows these clauses in all consumer loan contracts, including credit-card agreements.
Over the past decade, the arbitration clause has become increasingly common in almost every consumer contract, whether it's for a credit card, telephone service, pesticide treatment or home construction. The clause is also in many employee contracts. The clause says all disputes must be automatically resolved through binding arbitration, in which a designated third-party (often selected by the company) will review the dispute and resolve it. There will be no judge, no jury, no mediation for a compromise, no right of appeal and usually no public record. These clauses also say the consumer agrees to not be part of any class-action lawsuit.
Businesses say arbitration is a faster and far more efficient way to resolve disputes than court suits. But consumer advocates say arbitration is often stacked against the individual, in favor of the large firm that is automatically protected from large jury verdicts by the ban on class-action lawsuits.
While a number of judges have upheld these clauses, several state judges, particularly in California, have ruled that the class-action bans are unconscionable, unfairly restricting a consumer's right to sue. Ironically, Kaplinsky notes, there haven't been any class-action cases in Utah. But because the state deregulated its usury ceilings several years ago, the state has dozens of financial institutions that have interstate consumer lending programs. And now, under the new law, these banks can do business with consumers in California and other states, with fewer judicial worries about imposing the class-action restriction.
"It's a preemptive strike" so the clause can't be fought in court, said Paul Bland, a staff attorney with the Trial Lawyers for Public Justice, a public-interest group that has aggressively fought the arbitration clauses.
"It's pretty clever...better than case law," Kaplinsky said recently in a telephone interview. And he signaled it could be just the beginning of a new push for arbitration. "It's a good model for other states to emulate."
The law may also have implications in the bitter fight over Wal-Mart's current bid to enter the banking business since Wal-Mart is proposing do so through owning a Utah-state bank. Kaplinsky said he did not represent Wal-Mart and believes there is "zero relationship" between the two because Wal-Mart has said it intends to use the bank as a back-office center to process its stores' electronic payments and not make loans to consumers.
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