How To Protect Clients from The Class Action Quagmire

Saturday, October 1, 2005 - 00:00

Editor: Please tell us about your background and your current practice area.

Kaplinsky: I am Chair of the Consumer Financial Services Group at Ballard Spahr where I lead a group of about twenty-five lawyers in our Philadelphia, Baltimore, Vorhees, NJ, Wilmington, DE, Salt Lake City and Denver offices who specialize in counseling banks and other consumer financial service providers on regulatory matters and then defending them in class actions and other government agency litigation. Our practice is unique in that our counselors are also litigators so that it is unnecessary to bring separate litigators up to speed regarding the substantive law applicable to a case. At most large law firms the lawyers that provide bank regulatory advice are kept separate from the lawyers who litigate banking and consumer financial services litigation.

I have about thirty-five years of experience in the consumer financial services area. I was formerly Chair of the Committee on Consumer Financial Services of the American Bar Association Business Law Section and also the first president of the American College of Consumer Financial Services Lawyers. I have taught banking law at Penn and Temple Law Schools.

I am a strong advocate of companies using arbitration in consumer and employment contracts and have been very successful in getting courts to enforce arbitration agreements. This has resulted in the elimination of untold numbers of abusive class actions. I pioneered this area about 10 years ago and have counseled dozens of companies, including some of the largest banks in the country, about implementing pre-dispute arbitration programs for their consumer and employment agreements. In addition to banks and other consumer financial services providers, phone, cable, computer, HMOs, insurers, doctors and all types of retailers are now using pre-dispute arbitration agreements for their customers and employees.

Editor: Why have banks and other financial institutions implemented arbitration programs?

Kaplinsky: It is for a variety of reasons, but the most important reason is that clients wish to avoid abusive class action litigation. About 10 years ago I discovered that although the Federal Arbitration Act had been enacted in 1925 and was a well recognized way of resolving commercial disputes, it had rarely been utilized as a way of resolving disputes with consumers and employees. I did not see any reason why the same favorable case law upholding the use of arbitration agreements in the commercial context could not also be used in the consumer and employment areas. I also discovered that there was some case law suggesting that if you had a binding arbitration agreement between a company and a consumer, or an employer and an employee, the parties could not participate in a class action in a court or in an arbitration. A light bulb immediately went off - maybe this is one possible way of reducing the scourge of abusive class action litigation!

I saw pre-dispute arbitration agreements as a way of reducing the costs of resolving complex litigation and a way of leveling the playing field. I felt that the court system, particularly the state court system in a number of jurisdictions, was clearly skewed in favor of consumers and plaintiffs' attorneys, allowing them free reign to take advantage of my clients. I drew upon my experience in trying to help my clients in problematic jurisdictions like Alabama, Mississippi, Madison County, IL, Jefferson County, TX, Palm Beach County, FL and a lot of places in California where I felt the state courts were not giving a fair shake to companies. I felt that arbitration was a way of restoring some balance.

Editor: Perhaps you would like to elaborate on how some class action suits in certain jurisdictions do find their way into arbitration proceedings today.

Kaplinsky: Fortunately, because of the tremendous success that I and certain other members of the defense bar have had in compelling arbitration of individual disputes brought by plaintiffs in class actions, there are very few class actions that end up in arbitration. There is a very well known Supreme Court case in which our firm was involved called Green Tree v. Bazzle where the U.S. Supreme Court, in a plurality opinion, held that it was for the arbitrator, not the court, to decide whether or not a class-wide arbitration should be entertained where the arbitration agreement was silent as to whether class-wide arbitration would be allowed.

Even before the Bazzle opinion, I strongly encouraged my clients to include in their agreements a "class action waiver" provision - language that simply says that by agreeing to arbitration both parties agree that they cannot participate in a class action in court or in arbitration. Practically every federal circuit and federal district court has routinely upheld the validity of class action waivers, the most notable exception being the 9th Circuit Court of Appeals.

The record is not quite as uniform in the state courts in favor of enforcing class action waivers, but even there most states have enforced the waivers, including Delaware, Illinois, Texas, Maryland, New Jersey, New York, Colorado, Washington, Tennessee, North Dakota, Hawaii and the District of Columbia. The most notable exception to the rule is California where the California courts have been quite hostile to the question of whether a class action waiver can be upheld. However, even in hostile states, like California, I think that the courts will enforce choice-of-law clauses calling for the application of another state's law which honors class action waivers.

Editor: Why do federal and state regulatory agencies do a better job of regulating abuses in terms of defective products or unfair practices?

Kaplinsky: My view has always been that government agencies are better suited to redress consumer injury than class action suits. First, they do not have the same conflict of interest with the consumer. In class action litigation, plaintiffs' attorneys only get paid out of a fund they create for consumers. Often, in negotiating a settlement, their interests diverge from their clients' interests. With respect to government agencies, they do not take money off the top; whatever money they obtain goes to the consumers who were injured rather than the government. They are better positioned to prioritize investigations and prosecutions. They are also better equipped to recover money sooner than class action lawyers because companies do not like to litigate with the government. There is a presumption that if the government is suing you, you must have done something wrong. The government does not have to go to the same lengths as do plaintiffs' attorneys to get a class certified. The federal banking agencies have discovered that they have the tools under Section 5 of the Federal Trade Commission Act to get restitution for consumers and penalize banks that are committing unfair or deceptive practices with respect to consumers. The government (both state and federal) has the tools to deal with the few companies that try to take advantage of consumers. The "bottom line" is that there is no need for the class action device.

Editor: In which categories of banking activities are these agreements widely used?

Kaplinsky: They are used by practically all major credit card issuers and mortgage lenders except for loans that are sold to Fannie Mae and Freddie Mac. The reason why they are not used for those loans is that those agencies have determined politically that they do not want arbitration agreements included in their uniform mortgage instruments. Practically all major auto lenders and lessors use arbitration agreements. They are also used in other types of loan agreements and deposit contracts.

Many banking and non-banking companies are requiring their employees to enter into arbitration agreements. The use of arbitration is not limited to banks. Practically every retailer who enters into contracts with consumers to sell goods or services may use pre-dispute arbitration agreements.

Editor: What lessons should financial institution clients keep in mind in drafting arbitration clauses?

Kaplinsky: The main lesson is that the agreement is going to be reviewed under a microscope because plaintiffs' counsel will want to find ways to attack it on fairness grounds. The most important principle to keep in mind is that the arbitration agreement should be drafted in a mutual way so you do not say that the consumer must arbitrate while the company retains the right to go to court. Another important point is to create a carve-out for claims brought by the consumer or employee in small claims court. Any in-person hearing should be held in close proximity to where the consumer or employee resides. Another thing to keep in mind is that the company should agree to pay all arbitration fees other than what the consumer would pay as a filing fee in court and other than what might be waived by the arbitration administrator. If you try to saddle the consumer with high arbitration fees, the likelihood is that the agreement will not be enforced. The Company should also not limit the remedies the consumer or employee may recover if the company is found liable by the arbitrator. You should also give consumers and employees the right to opt out of arbitration early in the relationship. Finally, it is important to have a well drafted class action waiver in the arbitration agreement.

Editor: How can a reader get more information about consumer and employee arbitration?

Kaplinsky: I have several outlines and checklists which I will provide to any reader who calls me at (215) 864-8544 or sends me an e-mail message at

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