Consumer advocates have long maintained that it's a lousy idea — unwise as well as unfair — to allow businesses to impose arbitration clauses barring class actions in their ordinary dealings with customers. It's one thing, they say, for two companies to agree to arbitrate commercial disputes. It's something else entirely to bar the courthouse door to aggrieved consumers who had no real reason to anticipate a dispute and who aren't routinely represented by lawyers.
Since the U.S. Supreme Court ruled against them a year ago when it upheld AT&T Mobility's right to block customers from joining class actions, the advocates have warned that injustice will result from a playing field increasingly tilted in favor of businesses. And a court case in Pennsylvania involving a South Carolina payday-loan company recently bought by a Mexican billionaire goes a long way toward proving their point.
Thankfully, most of us never have to worry much about the complexities of dispute-resolution rules. The merits of arbitration versus a lawsuit? That's probably the last thing on your mind as you choose a phone company, sign up for a credit card, or buy other goods and services online or off. Frankly, if you consistently read all the terms of service before you click "I agree" or sign on the dotted line, you're a more diligent consumer than I am.
All in all, though, that's actually a good sign for the marketplace, because it means most of us are reasonably confident that nothing will go seriously awry in most transactions with honorable businesses. The trouble is, there are exceptions — even the occasional company willing to thumb its nose at consumer-protection rules.
Which brings us to Advance America, Cash Advance Centers Inc., and a Pennsylvania story that began long before the payday lender's purchase last month for $780 million by Grupo Elektra,led by billionaire Ricardo Salinas Pliego.
Although the state's stance may soon change if legislation approved last week by a state House committee becomes law, Pennsylvania has never actually allowed the controversial product pitched by payday lenders: short-term, high-interest loans secured by a postdated check or preauthorized debit. Small loans here are limited by usury rules to an annual percentage rate of about 24 percent.
The payday-loan industry says that's far too little to cover the costs of short-term loans of a few hundred dollars. Its critics counter that payday loans with APRs of 400 percent or more are debt traps for financially stressed consumers, and that the industry's profits rely on customers who repeatedly roll over loans and dig themselves further and further into holes.
The two sides fought to a standoff for years in Pennsylvania while the industry gained a foothold here anyway, through a loophole in banking rules. Until federal regulators finally closed the loophole in 2006, lenders such as Advance America made loans while claiming to be agents for banks in states such as Delaware that permit the high-interest loans.
But according to papers filed in a federal lawsuit brought by Philadelphia lawyers Ned Diver and Irv Ackelsberg, Advance America didn't back off when the federal banking agencies closed the so-called rent-a-bank loophole that had enabled it to open about 100 stores in Pennsylvania. Instead, the company came up with another scheme to get around Pennsylvania's law: charging customers 5.98 percent annual interest, plus a $149.95 "monthly participation fee" for the privilege of borrowing.
A lawyer who represents Advance America declined to comment on the case, but it's important to note that Diver and Ackelsberg weren't alone in alleging that Advance America openly flouted state law.
In court papers, the lawyers wrote that state officials had said "they told Advance America not to go forward with the Choice Line of Credit Program because it was clearly illegal." And when the company proceeded anyway, making tens of millions of dollars in illegal loans, the state went to court to block them.
About 14 months after Advance America began offering its Choice Line of Credit Program, the Banking Department won an injunction shutting the business down. In 2008, the state Supreme Court upheld the order.
State officials have also tried, so far unsuccessfully, to seek restitution for borrowers harmed by Advance America's illegal fees, such as the plaintiffs in the suit that Diver and Ackelsberg are seeking to pursue as a class action despite last year's AT&T ruling. They say the company collected about $45 million from the fees, and could owe as much as $135 million under a provision in Pennsylvania's usury law that subjects violators to triple damages for overcharges.
So why would a company like Advance America take such a risk?
You guessed it. That pesky arbitration clause — this time in its role as a shield for corporate wrongdoing.
Diver says the clause had an unusual provision that in theory enabled borrowers to reject its terms by filling out a special form. But he dismisses it as a gimmick to create the impression that people have choice. "There's no evidence anyone opted out," he says.
As a tool for getting restitution for consumers, class actions have genuine flaws, especially in the hands of unscrupulous lawyers. But corporate lawyers pushing companies to bar them aren't concerned about protecting consumers. If they were — if they truly believed arbitration was better for consumers — they'd tout it as an alternative, not impose it as customers' lone option.
When large numbers of consumers each suffer a small amount of harm and government won't or can't act, joining a class action is often the only way they can attempt to right a wrong.
And sometimes, Diver says, a class-action prohibition can serve as the shield that enables an unscrupulous business to act with impunity.
"The whole point here is that it was a legal trick — both the arbitration clause and the attempt to circumvent the law," he says. "You can't bring a usury case if you don't have a lawyer."