How to stay out of court! The US Supreme Court’s recent decisions can help banks stay out of court

Lawsuits are expensive. State and federal courts have long recognized that businesses of all kinds want a faster and more efficient mechanism for dealing with legal disputes. That’s why federal courts have long been strong proponents of enforcing the Federal Arbitration Act (“FAA”).

The FAA is a statute that promotes the use of arbitration as an alternative means for resolving legal disputes. Rather than filing a lawsuit, or at the preliminary stage of a lawsuit, parties can agree to submit their case to a neutral third-party arbitrator. Frequently the arbitrator is someone who has expertise with a particular subject matter or legal issue. The arbitrator will then hear the evidence and issue a decision. In many cases, this can all be accomplished more quickly and at a lower cost than in court.

Parties to a lawsuit can mutually agree either before or during the lawsuit to take a case to arbitration. Much more commonly, however, parties will write arbitration clauses into contracts. These clauses typically provide that arbitration is the exclusive means of resolving disputes regarding a contract. For example, banks can provide in depositor agreements that all disputes between the bank and the depositor will be governed by binding arbitration. By writing arbitration into a contract, parties can ensure that any dispute will be resolved in a faster and more efficient manner.

Congress and the courts have taken steps to ensure parties who build arbitration clauses into contracts will see those clauses enforced in court. Congress enacted the FAA in 1925, and the United States Supreme Court has spent the more than 85 years since the FAA’s enactment bolstering the law’s scope and impact. Perhaps recognizing that arbitration is an effective means of clearing away excess cases from court dockets, the Supreme Court has gone out of its way to enforce provisions in contracts that require disputes to be settled via arbitration.

The Supreme Court continued this trend during its October 2011 and October 2012 terms. In November 2012, the Supreme Court issued a decision in Nitro-Lift Technologies, L.L.C. v. Howard that summarily reversed the Oklahoma Supreme Court’s decision not to enforce an arbitration clause in an employee non-compete agreement. During its October 2011 term, the Supreme Court decided a case that further strengthens the FAA in the financial services sector. In CompuCredit v. Greenwood, the Supreme Court enforced an arbitration clause in spite of a consumer protection statute that guaranteed consumers a right to bring lawsuits in court.

Banks should take note of the Supreme Court’s continued position on arbitration. It means that banks can build arbitration clauses into a variety of agreements between itself and other banks and with consumers. By adding these clauses, banks can bypass costly litigation in favor of an efficient hearing before people with expertise in banking. Banks can do this secure in the knowledge that courts will very likely require parties to arbitrate, rather than litigate in court.