Court Upholds BofA’s Use of Arbitration to Settle Disputes : Finance: Bank’s 1992 policy denies customers the option of a court trial, a move taken to cut rising legal costs. Ruling is called a serious setback to consumers.

Calling it a serious blow for consumers, trial lawyer and consumer groups said Friday that they were stunned that a state court upheld a Bank of America policy that forces customers to settle disputes through binding arbitration instead of a court trial.

San Francisco County Superior Court judge Thomas J. Mellon on Thursday rejected a lawsuit that sought to overturn BofA’s 1992 decision that imposed binding arbitration on customers with checking, savings and credit card accounts.

“We saw this as an opportunity to try to take on financial institutions and mandatory binding arbitration plans in hopes that a victory would deter other institutions,” said Ken McEldowney, executive director of San Francisco-based Consumer Action, one of the plaintiffs in the suit against California’s largest bank. “This is such a serious setback for consumers that the need to appeal becomes even more important.”

After San Francisco-based BofA adopted the arbitration policy two years ago, rival Wells Fargo followed suit. Both banks said they adopted the arrangement, which also applies to class-action lawsuits filed by customers, to reduce rising legal bills.

Thursday’s ruling may spur other banks to adopt arbitration to resolve disputes with customers.

Under the BofA policy, either the bank or a customer can force a dispute into arbitration when a lawsuit is filed. The arbitrator, usually a practicing attorney, is appointed by the American Arbitration Assn. with the consent of both the bank and customer. BofA said it has required its commercial customers to submit to arbitration for several years.

“It saves tremendous amounts of legal costs” for both parties, BofA spokesman Peter Magnani said.

Since the arbitration policy was applied to consumer accounts, only five disputes have gone toward arbitration at the customer’s request, Magnani said. But all those disputes were resolved before arbitration began, he said.

Arbitration is routinely used by stock brokerage houses to resolve disputes with retail customers. However, some consumer advocates have contended that the arbitration panels used in resolving brokerage disputes were biased in favor of the industry.

In their suit filed in 1992, Consumer Action, the California Trial Lawyers Assn. and four BofA clients claimed that BofA’s policy violated the state’s Consumer Legal Remedies Act and the Unfair Business Practices Act. While not opposed to arbitration in general, the groups claimed, among other things, that BofA had failed to provide sufficient notice and information to customers about binding arbitration. The bank notified customers of the change in a card inserted into monthly banking and credit card statements.

But in a hearing Thursday, Judge Mellon said BofA customers received sufficient notification.

Patricia Sturdevant, a member of the California Trial Lawyers Assn. who led the case against BofA, said a decision to appeal will be made after a written version of Mellon’s ruling can be reviewed.