In Green Tree Financial Corp. v. Randolph, the Court upheld the validity of an arbitration clause contained in a consumer finance contract. The decision was a victory for both lenders and consumers and a defeat for class action plaintiffs’ lawyer.
On Monday, the Supreme Court took a breather from the presidential election dispute and found time to issue an opinion in a case of considerable importance to the lending industry. In Green Tree Financial Corp. v. Randolph, the Court upheld the validity of an arbitration clause contained in a consumer finance contract. The decision was a victory for both lenders and consumers and a defeat for class action plaintiffs’ lawyers.
The case began when Larketta Randolph financed the purchase of a mobile home through Green Tree Financial Corp. In the finance contract, she agreed that all disputes arising out of the transaction would be resolved by arbitration. She later sued Green Tree in court claiming that it had violated the Truth in Lending Act. She also claimed that Green Tree had violated the Equal Credit Opportunity Act by requiring her to agree to arbitration. Ms. Randolph’s lawyers sought to bring the case as a class action. As with many purported class actions, Ms. Randolph had suffered little actual damages.
The damages in a case like this may not be worth the time it takes to bring an action in court. But to a class action plaintiffs’ lawyer, if the damages can be bundled together with the damages sustained by numerous other similarly situated persons, the case may have an enormous value just waiting to be unlocked. The problem is that too often the case has value only to the lawyer and does not provide any substantial benefit to the class members.
Green Tree responded to Ms. Randolph’s lawsuit by pointing out that she had agreed to arbitrate any disputes and that it was therefore improper for the case to proceed in court. Green Tree, like other lenders, uses arbitration clauses as a tool to limit litigation costs and to provide relatively speedy resolution of customer claims.
Although consumers may give little thought to the matter when signing finance contracts, arbitration is a two-way street that provides real benefits to consumers. For those consumers with real (or even merely perceived) grievances against lenders, arbitration provides a forum in which they can litigate their claims much more quickly and cheaply than in court. Arbitrators, like judges, are required to be disinterested and have no reason to be biased against consumers, and all of the relief available in court is available in arbitration. In short, for the consumer, arbitration has all of the advantages and none of the disadvantages of court, and it has the added advantage of being quicker and cheaper overall.
But for class action plaintiffs’ lawyers, arbitration offers no advantages. Absent highly unusual circumstances, it is not possible to bring a class action in arbitration, so the existence of an arbitration clause in a consumer finance contract generally precludes a class action and the potential for a large fee award. As a result, class action plaintiffs’ lawyers have good reason to be unhappy with arbitration clauses.
In Ms. Randolph’s case, her lawyers challenged the arbitration clause on the grounds that the agreement to arbitrate did not limit the costs that Ms. Randolph might have to pay in arbitration and that it was possible that she might incur excessive arbitration costs. Since arbitration is a private proceeding, the parties have to pay the cost of that proceeding, including the arbitrator’s fees.
The Supreme Court took the case chiefly to decide a technical question about when a party can bring an appeal, and it decided that issue in Ms. Randolph’s favor. But it also ruled that the agreement to arbitrate was valid and that the mere possibility that Ms. Randolph might incur excessive arbitration costs was not a good reason to invalidate the clause. The Court recognized that "[t]o invalidate the agreement on that basis would undermine the ‘liberal federal policy favoring arbitration agreements,’" established by Congress in the Federal Arbitration Act.
Although the Court’s ruling upheld the use of arbitration clauses in consumer finance contracts, it should not be read as a signal that the Court will permit arbitration agreements that foist excessive arbitration costs on consumers. The Court held only that the mere possibility of excessive costs was insufficient to invalidate an agreement to arbitrate. It recognized that an arbitration clause might be invalid if arbitration would be so costly to the consumer that it would be impossible, as a practical matter, for the consumer to enforce her rights. This will not be a serious issue in most cases, however, because the national arbitration organizations, such as the American Arbitration Association, have rules that place reasonable limitations on consumer costs.
The Supreme Court’s decision this week is a solid endorsement of arbitration clauses in consumer finance contracts. But there are other issues that class action plaintiffs’ lawyers are raising in other cases to challenge arbitration clauses in consumer finance contracts, and the battle is not yet over. Still, common sense and the congressional mandate in favor of arbitration, reaffirmed by the Supreme Court this week, strongly support the validity of arbitration clauses.
Stephen G. Harvey © Copyright 2000
