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Banks and financial services companies have increased their use of arbitration clauses in consumer contracts as courts around the country reach different conclusions about their legality. Plaintiffs’ lawyers say that state courts in particular do not like clauses precluding class actions in consumer contracts because they violate state consumer protection laws and unfairly keep small-dollar, high-volume class actions out of court. But defense lawyers contend that while some states’ laws may be unsettled on the issue, eight of 12 federal circuit courts and many state courts have found arbitration clauses banning class actions to be legal, striking them down only when they contain onerous terms. F. Paul Bland Jr., staff attorney for Trial Lawyers for Public Justice, a Washington-based public interest law firm, said he thinks “banks and credit card companies are heading for a tremendous backlash” in trying to limit consumers’ rights. “Consumers are not really aware yet about what’s going on,” Bland said. He said “about 99 percent of his clients” have “no idea they’ve given up their core constitutional legal rights when they signed these contracts.” Bland said he thinks consumers stand a fair chance of success with cases pending in Washington state and North Carolina. “It could be a huge year for the plaintiffs’ bar,” he said. But New York Supreme Court Justice Thomas A. Dickerson, author of “Class Actions: The Law of 50 States” (Law Journal Press, 2005), said that the trend is going against consumer class actions. “Arbitration clauses are being used with greater frequency by businesses,” Dickerson said, “and enforced with greater frequency by courts . . . particularly mandatory arbitration clauses that prohibit class action lawsuits.” Dickerson said that a conservative trend over the last several years has culminated in the Class Action Fairness Act of 2005. Alan Kaplinsky, who chairs Philadelphia-based Ballard Spahr Andrews & Ingersoll’s consumer finance litigation practice group and opposes Bland in court, also disputes Bland’s view. “Very few courts have come out saying class action waivers are invalid,” Kaplinsky said, adding that though some states’ law is unsettled on the issue, “a whole body of law” from the Second through to the Eighth Circuit U.S. Court of Appeals, as well as the Eleventh Circuit, have upheld them. But Wilson Green, an Alabama class action defense lawyer, said his experience in the Alabama and California courts suggests that the current difference between state and federal courts on this issue comes down to a consumer’s ability to recover attorney fees. Federal courts tend to allow bans on class actions because fees are recoverable in federal statutory causes of action, said Green, a lawyer at Battle Fleenor Green Winn & Clemmer in Birmingham, Ala., who teaches at the University of Alabama School of Law. However, small-dollar causes of action in state court for which attorney fees are not recoverable give consumers no incentive to pursue those claims on an individual basis, thus courts have held bans on class actions in state court to be “unconscionable” because they effectively bar a remedy, he said. Brian Strange, a plaintiffs’ lawyer at Strange & Carpenter in Los Angeles, said companies that put arbitration clauses precluding class actions in standard-form consumer contracts give themselves a “get-out-of-jail-free card.” If a bank overcharged its 25 million cardholders $1 apiece, Strange said, it would make $25 million — and no individual customer is going to sue for the $1. Strange and Bland argued Discover Bank v. Superior Court, S113725, last month in California Supreme Court. They won at the trial level and expect the court to issue a decision by early July. Big business has been successful in focusing public attention on plaintiffs’ lawyers and their fees, and away from the deterrent effect class actions have on corporate misconduct, Strange said. Illinois’ intermediate appellate court endorsed this view earlier this month when it remanded a case dismissed by Madison County Circuit Court — tort reformers’ poster child for “judicial hellhole.” The Illinois Appellate Court found that an arbitration clause is enforceable in Kinkel v. Cingular Wireless, 5-03-0774, but that “its limitation on class arbitration is unconscionable and thus unenforceable.” Courts have ruled differently on arbitration clauses not only from state to state, but within federal circuits, Bland noted. “The Fourth Circuit said it’s OK to have a contract provision that bans class actions,” he said, in Snowden v. CheckPoint Check Cashing, 01-2149. But the West Virginia Supreme Court of Appeals decided “just the opposite” he said, in Dunlap v. Friedman’s, 02-30035. And while the Eleventh Circuit reversed a Georgia federal district court ruling that arbitration agreements are “unconscionable,” Jenkins v. First American, 03-16329, state courts in Alabama ( Leonard v. Terminix, 02/03-1010555 (Ala.)) and Florida ( Powertel v. Bexley, 98-3357 (Fla. 1st Dist. Ct. App.)) have decided otherwise, he said. Kaplinsky said courts that have struck arbitration clauses with provisions precluding class actions have done so because those clauses were burdened with additional features, such as limits on state law remedies like punitive damages and making consumers pay arbitration costs. According to Kaplinsky, 11 state courts upheld the class action waivers in addition to the eight federal appeals courts: Colorado, Delaware, D.C., Hawaii, Maryland, New Jersey, New York, North Dakota, Tennessee, Texas and Washington. State courts have come to different conclusions within four states: California, Florida, Illinois and Washington. Five states have struck arbitration clauses that include other unfair features in addition to class action waivers: Alabama, Ohio, Pennsylvania, West Virginia and Wisconsin. The issue also is pending in five different North Carolina trial courts, Bland said. The uncertain legal environment prompted JAMS, a national alternative dispute resolution services provider, to reverse a new policy of not honoring contract clauses prohibiting class actions. Peter Geier is a reporter with The National Law Journal, a Recorder affiliate based in New York City.

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