High Court Asks: When Are Arbitration Clauses Voided?

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WASHINGTON -- A Supreme Court hearing Tuesday was dominated by questions about whether a ruling in favor of a payday lender's former customer could invalidate millions of arbitration clauses used by banks and other companies.

Christopher Landau, a partner at the law firm Kirkland & Ellis LLP, who represents Buckeye Check Cashing Inc. of Dublin, Ohio, said such a ruling "would cause an earthquake in the law in terms of arbitration." Bankers, who have supported the payday lender's appeal, say the Florida Supreme Court's decision in the case called into question clauses routinely used by banks and credit card companies.

The prospect of invalidating arbitration clauses appeared to concern the justices during the hearing. Justice Stephen Breyer noted that such clauses are widely used in contracts between businesses.

"It would make a significant difference to the gross domestic product of the United States" if those clauses were suddenly nullified, he said.

But an attorney for John A. Cardegna, a former Buckeye customer, said a ruling in the customers' favor would apply only to exploitative payday lenders and others unscrupulous businesses "on the edge of legality."

At the heart of the case is the question of whether an arbitration clause should remain valid in the eyes of the law if the underlying contract has been deemed void.

Mr. Cardegna sued Buckeye in a Florida court in 2001 after discovering that a loan the company had issued him violated a state cap on interest rates.

Buckeye cited an arbitration clause in the original loan contract and argued that Mr. Cardegna would have to seek recourse through a third-party arbitrator, not the court system. Mr. Cardegna argued that since the contract's terms were illegal, the clause was not binding. In January, the Florida Supreme Court sided with Mr. Cardegna. Buckeye appealed to the U.S. Supreme Court.

In written and oral arguments, Mr. Landau said a 1967 high court ruling explicitly supported his client's position that arbitration agreements remain intact even when their underlying contracts are called into question.

But Mr. Bland noted that Buckeye's agreement with Mr. Cardegna had violated Florida law. The high court had intended the 1967 ruling to apply only to federal law, he said.

He also argued the earlier decision was not directly applicable, because it had addressed only contracts that had the potential to be voided. …