The Checkout

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.

By  |  April 17, 2006; 7:00 AM ET Consumer News
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Thanks for writing about this! This is a huge consumer protection issue. If a company illegally charges one million customers a $20 fee, it can make huge profits and avoid accountability completely if it requires arbitration (and bars class action arbitration). While in theory the federal and state governments might take action, they don't have the resources to go after every abusive process.

Posted by: Rob | April 17, 2006 11:45 AM

If I could just get everyone to give me a penny I'd be rich.

This approach makes the rich and powerful unaccountable for their little misdeads.

Ya, I said mis-deads, like rollover suv's and flaming pinto's and pick-up trucks.

Posted by: Anonymous | April 17, 2006 3:27 PM


My experience with credit unions has been far better than with commercial banks. Even the "community banks" use arbitration clauses and other devices to deprive customers of their rights. No wonder the commercial bankers so hate credit unions.

Posted by: Nick | April 17, 2006 4:30 PM

It is a sad day when an attorney, corporation,or any type of business,etc. makes citizens sign contracts with binding arbitration. Usually unknowingly. The cost financially to the citizen is as much as going to trial. What has happen to citizens rights?, they have gone by the way side while Corporate America rules how govenment can screw us. Question, these people who run the corporations who run our govenment are they not citizens too? If they did their jobs right there wouldn't be a problem and we wouldn't have to be discussing this issue.

Posted by: Paula Schulman | April 17, 2006 5:38 PM

I attribute my success in settling a construction defect case with getting OUT of an arbitration clause in the 3rd party warranty that I never even agreed to myself. Builders buy these policies and consumers don't realize what junk they are until it's too late. BTW, the way I got out of it was there is a federal law that says if you have a govt insured mortgage you are not bound by a warranty co's arbitration clause: 24 CFR 203.204(g) CFR is the Code of Federal Regulations. The warranty co knew this but did not abide by it. I had to force them to. Their arbitration would have been performed by a specific company owned by a disbarred lawyer. How much chance do you think consumers have with that?

Posted by: Cindy | April 17, 2006 5:42 PM

For anyone interested in reading more on the topic of arbitration clauses in credit card agreements, I recommend a piece called Credit Card Accountability in the current issue of The University of Chicago Law Review ( The entire Consumer Choice symposium ( is also very interesting.

Posted by: nlw | April 17, 2006 5:51 PM

Most people who work in business are FOR arbitration UNTIL something happens to them or their family. Then they can't understand why they can't go to court, get a jury, appeal their case AND it cost way more $$. Think about it, large companies do lots of arbitrations and repeatedly pay the same arbitrators. Especially since its a secret process without appeal, who do you think arbitrators favor???? Its good for everybody else but not for me and mine.

Posted by: Bob | April 17, 2006 6:29 PM

Arbitration is the biggest scam since the solar powered flashlight. It sounds like a good idea until you really need it.

Posted by: John Cobarruvias | April 17, 2006 8:59 PM

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