John Cardegna was a 911 operator for Palm Beach County Fire Rescue in 1999 when he got into big trouble himself. With bills mounting, the Florida man did what millions of Americans do -- he borrowed from a so-called payday lender.
Unable to repay that $337.50 cash advance, Cardegna renewed the loan repeatedly over the next year, forking over nearly $1,000 in fees to Buckeye Check Cashing Inc.
To get out of the contract, Cardegna sued, alleging that Buckeye was engaged in loan sharking. The fees he paid for the cash advance and a second loan for $150 were really interest payments in disguise, he argued -- at effective rates topping 1,300%. Under Florida law, it is a felony to lend money at rates above 45%.
That case evolved into a class action that this week reached the U.S. Supreme Court. The justices agreed Monday to decide whether Cardegna must abide by a clause in his loan contract that requires him to arbitrate his claim that the deal was illegal.
Their decision could refine the rules for arbitration clauses, determining whether companies that operate in legal gray zones can keep disgruntled customers out of court, said Jean R. Sternlight, a law professor at the University of Nevada, Las Vegas, who studies the issue.
"One of the really controversial issues is: Who decides whether arbitration itself is unconscionable -- should it be a court or an arbitrator who might be biased?" she said.
The case, an appeal of a ruling in Cardegna's favor by the Florida Supreme Court, highlights two developments that have spawned an explosion of consumer litigation in recent years: the burgeoning payday loan business and the mandatory arbitration clauses that are now commonplace features of contracts for goods, services and employment.
Payday lenders such as Buckeye account for roughly $25 billion annually in loans, according to a recent study by the Center for Responsible Lending, a North Carolina-based advocacy group. They cater to low-income workers, essentially floating advances to tide borrowers over until their next paycheck. The loan typically carries a 15% fee, but borrowers who can't repay on time often renew their loans repeatedly, with increasing fees.
The Center for Responsible Lending found that effective interest rates on typical payday loans range from 391% to 443%. Lenders get around state usury laws by characterizing that cost as a fee rather than as interest.
In response to Cardegna's lawsuit, Buckeye asked a West Palm Beach trial judge to compel Cardegna to arbitrate his claim that the 1,300% interest rate rendered the contract void. The lender argued that the agreement barred Cardegna from going to court.
The judge rejected Buckeye's motion and refused to compel arbitration, but a Florida appellate court sided with Buckeye. In January, the Florida Supreme Court reinstated the trial judge's ruling that allowed Cardegna to proceed in court. Buckeye then asked the U.S. Supreme Court to weigh in. The high court probably will hear arguments in Buckeye Check Cashing vs. Cardegna this fall.
"The right thing for the high court to do," said Sternlight, the law professor, "would be to affirm the Florida Supreme Court's decision. We've given up far too much of our public power to private arbitrators with no appeal."
But she concedes that the justices probably will do the opposite. "The mere fact that they took this case means they aren't that comfortable with the Florida decision."
Until the mid-1980s, mandatory arbitration clauses were largely limited to union collective bargaining agreements and contracts between businesses. Many corporations believed that a mutually agreed-upon arbitrator from their own industry would settle disputes faster and more cheaply than would a protracted courtroom battle.
In recent decades, arbitration has become ubiquitous. Many credit card companies, physicians, long-distance carriers, employers and even nursing homes insist that customers, patients or prospective employees agree to the process in advance.
Supporters insist that the process is faster than a typical courtroom battle because the parties hire their own arbitrator and don't have to wait for a judge.
Many companies also prefer arbitration because the proceedings are private and involve more flexible rules of evidence and procedure than formal litigation. Depending on the type of dispute, arbitration also can be cheaper.
But consumer advocates such as Dory Rand of the Sargent Shriver National Center on Poverty Law say these requirements "put consumers in an unfair position because they create an imbalance of negotiating power."
Critics also worry that arbitrators may become biased in favor of companies that provide them with repeat business.
Corporations argue that arbitrators are independent. And guidelines enforced by the American Arbitration Assn., the nation's largest provider of arbitration services, "make it fair for all the parties involved," spokeswoman Kersten Norlin said.