A dispute between a fish meal maker and a shipping company would not seem likely to affect retail financial services.
But the Supreme Court's ruling this week in Stolt-Nielsen SA et al. v. Animalfeeds International Corp. may help banks fight a rash of consumer class-actions over overdraft fees and a host of other practices.
In a 5-3 decision handed down Tuesday (Justice Sonia Sotomayor abstained), the court found that the shipping firm's individual arbitration agreements with commercial customers did not oblige it to face a class arbitration with a group of them. Though the parallels are imperfect, banks and other businesses could argue that the decision upholds the legitimacy of class-action waivers embedded in arbitration contracts with consumers.
Many banks' retail finance agreements include clauses in which customers agree to give up the right to pursue class actions. For years, a legal debate has raged about whether these prohibitions stack the deck against consumers so much that they are "unconscionable" and, therefore, unenforceable.
If lower courts now apply the ruling in consumer litigation — and attorneys on both sides say that at least some judges probably will — the implications for current litigation could be profound.
"I think the Supreme Court went further than everybody thought they would," said Ballard Spahr LLP's Alan Kaplinsky, an early architect of class-action waivers who is defending numerous financial companies from class-action challenges.
Past judicial decisions on class-action waivers have been so divergent that Kaplinsky began keeping a "scorecard" of them.
But the Stolt-Nielsen decision could turn the tide in favor of companies looking to head off mass litigation.
"If you've got a clause waiving class actions, then I think you're good to go," he said.
"This opinion settles a highly controversial issue that has been percolating in the courts now for a decade."
The raft of pending overdraft-fee litigation supplies a good example of the effect the Supreme Court's decision could have on the banking industry.
In dozens of suits from Miami to San Francisco, the plaintiffs' bar has organized classes of banking customers who allege that they were involuntarily enrolled in predatory overdraft-protection plans.
Though they do not speak to the legal merits of such claims, stories about $40 overdraft fees on $4 lattes prodded the Federal Reserve Board to ban customers' nonconsensual enrollments in such programs — and even persuaded some banks to cancel the practice before the Fed ban took effect.
"What our customers kept telling me is, 'Just don't let me spend money that I don't have,' " a Bank of America Corp. executive told reporters in March when the company decided to block debit card purchases that would overdraw accounts.
Losing some debit card overdraft revenue — estimated by Moebs Services to have totaled $20 billion industrywide last year — would be painful even without having to surrender past profits to an onslaught from the plaintiffs' bar.
But the Stolt-Nielsen case may make it less likely they will have to pay up. If banks persuade the courts that the waivers in customers' contracts are valid, overdraft claims could only be pursued by individuals. In many cases, the bank must pay for arbitration — though the small dollar amounts per person make it unlikely that many people would pursue arbitration in the first place.
Moreover, even the most aggrieved overdrawn customers would be unable to conduct the sort of meticulous, crusading investigation of banks' intentions and practices that a class-action attorney dreaming of an eight-figure settlement — and a big contingency fee — could finance.
As Justice Ruth Bader Ginsburg wrote in a dissenting opinion on Stolt-Nielsen, low-dollar plaintiffs stripped of class status would "have little, if any, incentive to seek vindication of their rights."
This prospect is leaving consumer advocates aghast and appeared to have caught some by surprise.
Jon Sheldon, a staff lawyer for the National Consumer Law Center, suggested that the ruling could be construed as giving financial institutions with class-action waivers carte blanche to abuse their customers or even "steal" small amounts from large numbers of people with impunity. "I would hope that federal and state legislators would look at this," he said.
On Tuesday, consumer legal email address lists were humming all afternoon with discussions of the ruling's implications, said Paul Bland, a staff lawyer at Public Justice, which advocates litigation on consumer and social issues and filed a friend-of-the-court brief in the Stolt-Nielsen case.
"The people working on this issue for civil rights and consumer groups are seeing this as a real call to action," he said.
"I understand where their fear comes from."
Though there is no doubt that the court's ruling strengthened businesses' hand in defending class-action waivers, plaintiffs still have room to argue over its relevance to consumer cases.
"Generally speaking, there will be quite a bit of fighting over the extent to which Stolt-Nielsen applies to more standardized-form contracts," said Mayer Brown LLP partner Archis Parasharami, who defends the enforceability of such contracts and lauded the decision as "restoring balance" to arbitration law.
A key sticking point is likely to be whether the Supreme Court majority's interpretation of the Federal Arbitration Act preempts state consumer protection laws.
One way to settle that question would be for the court to expand on Stolt-Nielsen by addressing the issue of federal preemption in another case.
Keeping Justice Clarence Thomas, an intense supporter of states' rights, on board for another five-vote majority on such a case would be difficult, though business advocates like the U.S. Chamber of Commerce are certain to try.
"This is a two-hurdle race where the first hurdle is two feet tall and the other hurdle is six feet tall," Bland said.
"I'm not pleased they made it over the first one, though."
