Why Banks Should Consider Mandatory Arbitration Provisions

In the wake of AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2010), banks are taking another look at mandatory arbitration clauses and the possible benefits of such language in customer agreements. Concepcion effectively closed a possible state-law loophole to the enforceability of arbitration provisions for class claims. This potential loophole frustrated banks' purpose for the mandatory provision (lowered litigation costs) where they might need it the most, class litigation. As a consequence, a bank now has more incentive than ever to consider whether it would be beneficial for the bank to require that its customers agree to arbitrate disputes in lieu of going to court. The issue before the Court in Concepcion was whether a state rule requiring the availability of classwide arbitration in order enforce an arbitration agreement comported with the Federal Arbitration Act ("FAA"), 9 U.S.C. § 2. Recognizing the importance of this issue and the ramifications of a decision by the Court, banking groups1 jointly filed a brief with the Court in support of the enforcement of arbitration provisions against class actions under the FAA. The theme of the banking groups' brief was that arbitration benefits all parties, even customers, by lowering costs and allowing businesses to pass along cost savings. The banking groups also presented evidence demonstrating that bank customers were not unfairly disadvantaged in the arbitration forum versus the court forum. The Concepcion Court held, with a 5-4 majority, that the FAA prevents states from imposing rules that condition the enforceability of arbitration agreements on the availability of classwide arbitration, such as California's Discover Bank rule.2 Justice Scalia wrote for the majority that "[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA." 3 Following the Supreme Court's lead, on August 11, 2011, the Eleventh Circuit4 held that, "in light of Concepcion, [a] class action waiver in . . . arbitration agreements is enforceable under the FAA." Thus, Concepcion means that banks may enforce mandatory arbitration provisions against class claims, and this benefit to banks, coupled with the other benefits of arbitration, could mean big savings for banks' litigation budgets. Other commonly-known benefits of arbitration provisions for businesses include:

Arbitration allows a business to get out of the...