Mandatory Binding Arbitration: Unfair & Everywhere

HOT summarizes key points about Forced Arbitration, using information from Public Citizen, Wikipedia and other articles below.

• Fairness – Arbitration is Justice for Hire fueled by the fine print in contracts. This privatized adjudication process gives consumers no choice and businesses a “home court” advantage. It provides few, if any, deterrents against negligence or foul play. Arbitration firms are biased in favor of the companies they rely on for repeat business, including homebuilders. They have every incentive to keep these clients happy. 
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• Ubiquity – The use of mandatory binding arbitration is widespread in the new home industry. At least 90% of the nation’s top builders require mandatory binding arbitration in their contracts and/or warranty agreements and ban class actions. We believe this industry-wide practice is a restraint of trade when buyers have no choice, such as in The Woodlands, a Houston suburb where all 10 builders include binding arbitration in their non-negotiable contracts. 
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• Costs – Businesses tout arbitration as being a faster and cheaper form of dispute resolution than a civil suit – cheaper for them maybe, but not for consumers. The cost of initiating an arbitration case far exceeds that of filing a civil suit. Beyond that, arbitrators’ fees can easily run into five figures, and arbitration companies often impose extra fees on an ala carte basis as the case proceeds. In contrast, court filing fees are modest, judges’ salaries are paid by the public, and courts don’t deter inquiry through added costs every step of the way. 
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• Risks – Arbitration poses additional risks to consumers. Arbitration awards themselves are not directly enforceable, and parties must seek judicial remedies to "confirm" an award. Consumers may be charged tens of thousands of dollars to pay for the other side’s lawyers with no opportunity to recover their own attorney fees. And arbitration clauses can threaten retribution, impose gag orders and enable builders to sue buyers for breach of contract – in courts no less. 
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• Rights – Mandatory binding arbitration clauses strip consumers of their right to go to court over disputes when they apply for a job, open a bank or credit card account, obtain cell phone service, get healthcare, hire a stockbroker, or buy a house. Gifted home warranties can indemnify builders and force buyers into arbitration even if they opt out of arbitration clauses in sales contracts. 
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• Competence – The arbitration tribunal can decide on its own jurisdiction, and arbiters often have technical expertise in the industries they serve. Arbiters aren’t required to have the legal training of a judge or attorney, and discovery may be more limited in arbitration. Still, their decisions are legally binding with little opportunity for meaningful appeal (even when a ruling ignores the law). 
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• Oversight – Arbitration occurs in secret with little meaningful oversight. These secretive arbitration tribunals provide scant data for empirical study, don’t contribute to the evolution of common law, and are subject to very few checks against misconduct, conflicts of interest, ignorance of the law, or even deliberate disregard for the law. 
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• Victory? – Arbitration awards are often hollow victories for consumers. Proponents of arbitration often cite “win” rates to argue that the process is fair, but homebuyers who “win” in arbitration typically have little to show for their victories. Meager awards help pump-up arbitration statistics without actually providing consumers relief. 

Solutions (summarized from Home Court Advantage):

• Congress – Pass the Arbitration Fairness Act, which makes forced predispute arbitration clauses unenforceable in consumer and employment contracts. 
• States – Pass laws that ban the use of mandatory binding arbitration in insurance contracts and clarify that home warranties qualify as insurance products. The insurance context gets around the 1945 McCarran-Ferguson Act that blocks states from curbing forced arbitration but that does not preempt state law on insurance matters. At least 17 states already have laws preventing builders from requiring arbitration of insurance disputes. Texas does not. 
• Consumers – Consult an attorney if considering the purchase of a newly built home. Reject any clause requiring disputes be settled in arbitration. Require the builder to sign a document stating that the buyer retains the right to settle all disputes concerning the house in a court of law. And reject warranties that builders offer as a "benefit" of buying from them. These warranties tend to do far more to reduce builders' liability than to protect buyers. 

See also:

• HOT summary of 1/27/10 Arbitration hearings on our blog
• Who's side is the arbitrator on?
• Forced Arbitration: Unfair and Everywhere 
• Home Court Advantage: How the Building Industry Uses Forced Arbitration to Evade Accountability 
• Arbitration debate highlighted by rape case 
• Senator Al Franken takes on KBR arbitration attorney (10:01 min) 
• Jon Stewart (The Daily Show host) ridicules Republicans who favor rape over arbitration (4:42 min) 
• Arbitration Fairness Act (House Bill HR-1020 and Senate Bill S-931) 

The following articles summarize recent pressures on binding arbitration and pending federal legislation.

• Binding Arbitration: Consumers find frustration fighting financial fine print 
• It May be Bedtime for Mandatory Binding Arbitration - Thanks to Lawsuits! 
• VIDEO: U.S. Senator Russ Feingold on protecting the right of Americans to have their day in court 
• Arbitration Abuses ‘Deeply Disturbing,’ Kucinich Says 
• Big Arbitration Firm Pulls Out of Credit Card Business 
• Mandatory Consumer Arbitration - analysis by an arbitration attorney 
• VIDEO: TX House Committee on Judicial & Civil Jurisprudence hears testimony on an Arbitration bill 

Binding Arbitration: Consumers find frustration fighting financial fine print

By Richard Burnett (rburnett@orlandosentinel.com or 407-420-5256), Orlando Sentinel, 10/06/2009
http://www.orlandosentinel.com/business/orl-asecarbitration-under-fire-10060100609oct06,0,1925758.story

A parallel universe of justice for hire has existed in the world of consumer finance for some years now, fueled by the fine print of credit-card applications and other financial-service agreements.

The practice known as "mandatory binding arbitration" was created by a lawsuit-weary corporate America to bypass the costly courtroom. It diverts unhappy customers into a process in which they settle their disputes through an arbitrator paid for, and often chosen by, the company they're at odds with.

But mandatory arbitration is now under fire, as evidence mounts that it favors corporate interests and leaves many consumers out in the cold.

Critics argue that it's wrong to force people to give up their right to sue as a pre-condition for buying a product or service — before they even know what the dispute might involve. Consumers must agree to the company's terms or forget about getting that [new home,] credit card, cell phone, car loan, bank account, brokerage fund, insurance policy or — in some cases — even medical care.

Companies argue that it's quicker, cheaper and fairer than having businesses and customers suing each other in court.

Among the reasons the practice is a hot-button issue this year:

• The Arbitration Fairness Act of 2009, which would bar companies from forcing prospective customers to waive their legal rights and submit to arbitration first, is gaining momentum in Congress. Companion bills are moving forward in both the House of Representatives and Senate. 
• A big industry player, the National Arbitration Forum, stopped doing consumer debt-collection arbitration in July after Minnesota authorities accused it of deceptive business practices and serving as a pawn for debt-collection companies. The NAF ruled for companies in 94 percent of its cases during a four-year period, according to a 2007 study by Public Citizen, a Washington, D.C.-based consumer-advocacy group. 
• Bank of America and JPMorgan Chase say they will eliminate mandatory arbitration from their credit-card agreements. And the American Arbitration Association has dropped its debt-collection-resolution practice, citing the issues raised in the Minnesota case. 

"For the most part, it's a kangaroo court," said Steven Fahlgren, a former Orlando consumer lawyer who now practices in the Jacksonville area. "In any case where we have had no say in choosing the arbitrator, the decisions have been totally unfair and biased. It's just been a lot of rubber-stamping for the companies."

Not everyone agrees. Stephen Ware, a University of Kansas law professor, testified before a congressional subcommittee last month that arbitration is an important means of redress for consumers who can't afford lawsuits.

[HOT: Not necessarily! Arbitration is almost always cheaper for businesses but rarely for consumers. In fact evidence shows that it can cost far more than a civil suit. Keep this in mind as you read further.]

Citing several studies based on cases heard earlier this decade, Ware said consumers received at least some relief from arbitration more than half the time. And on many occasions, courts have subsequently thrown out "unconscionable" arbitration awards against consumers, he said.

[HOT: Stephen Ware seems to be misrepresenting the issue just like the arbitration firms that give meager awards to consumers but rarely make them whole or even cover their legal expenses. Maybe things are different in the industary that he's familiar with, but his comments don't represent homebuilding. And about courts overturning arbitration awards, it almost never happens even when the decision clearly goes against what the law says. In contrast, consumers that do get an award often have to then go to court to force payment since arbitors don't have that authority.]

"Current law is generally very good at ensuring that binding arbitration is fair and voluntary," he said. "Therefore, I am very concerned about bills in Congress that would, in my view, worsen arbitration law and harm the very people they are designed to help."

But there are legitimate concerns about whether the current system is giving people a fair shake, said George Dawson, a law professor at the University of Florida. Even though business-vs.-business arbitration has worked well through the years, the process is different when it comes to business-vs.-customer disputes, he said.

"Some of the research does suggest there may be bias against consumers," Dawson said. "And though the courts have been favorable to arbitration, even when it is imposed, I think you're seeing some pushback against that now. People feel that since the courts have backed it, then you're just going to have to change the law."

Critics of arbitration acknowledge that it can work well if it is truly voluntary and conducted by an arbitrator chosen by both sides. But they say one-sided, forced arbitration is so pervasive that consumers have no real say in the matter. More than 75 percent of the companies in eight major industries require customers to agree to use arbitration, according to a survey by Public Citizen.

Clay Singleton had always thought arbitration sounded like a good way to settle financial disputes, rather than resort to potentially costly litigation.

But then the Rollins College professor went through the process, and it was a big eye-opener. The arbitrator dismissed Singleton's case outright, without much explanation, he said. Singleton wound up suing, anyway, to challenge the arbitrator's decision.

"We won, finally," he said, "but it took a couple of years and a lot of headaches."

Consumer advocates have long fought for a ban on mandatory arbitration, which became pervasive in the late '90s and was seen as a way to defuse a boom in class-action lawsuits. So far, their efforts have been unsuccessful.

"I would say this is the best chance we've had yet to get it passed," said David Arkus, director of Congress Watch, a unit of Public Citizen. "Support for it is growing. It is a fairly arcane issue, but the more the word gets out, the more people understand it affects everybody. This issue appeals across all demographics and party lines."

How to fend off 'mandatory binding arbitration'

Everyone from banks and credit-card companies to phone-service and health-care providers [and homebuilders] requires prospective customers to agree beforehand to use a company-paid arbitrator to settle any disputes. There are steps you can take to try fending off this requirement, though.

• Mark through the arbitration clause and indicate you don't agree to it. If the company insists you must sign, try to use that as leverage to negotiate a better price for the product. If you do sign anyway, consider sending the company an amended agreement later that deletes the offending clause. 
• Shop in "arbitration-free zones" — that is, with companies that don't require you to sign such agreements. Many credit unions and community banks, for example, don't require arbitration. 
• Some companies allow you to forgo the arbitration requirement. Read paperwork closely for such "opt-out" provisions. 
• If you have already signed an agreement, consider writing the company to say that you withdraw your consent. It may do no immediate good but could be useful later if you end up in litigation. Keep copies of everything. 
• If you find yourself headed for arbitration, try to negotiate beforehand to have a hand in choosing the arbitrator. Public Citizen offers information: Call 202-546-4996. 

It May be Bedtime for Mandatory Binding Arbitration - Thanks to Lawsuits!

From ThePopTort.com, 07/27/2009
Source: http://www.thepoptort.com/2009/07/bedtime-for-arbitration.html

There are more incredible developments on the mandatory binding arbitration front. A consumer protection lawsuit by Minnesota Attorney General Lori Swanson has resulted in arbitration behemoth, the National Arbitration Forum (NAF), pulling out of “the business of arbitrating credit card debts and other consumer collection disputes nationwide." According to the Wall Street Journal blog, NAF says that they took this step because it was “being hit with a wave of lawsuits.”

Meanwhile, another arbitration giant, the American Arbitration Association (AAA), recently announced that it too would stop taking part in debt-collection disputes “until some standards or safeguards are established.”

We might also mention that several bills currently making their way through Congress are aimed at doing just that, not the least of which is one we’ve already talked about, the Arbitration Fairness Act of 2009. And oh yeah-it is also being reported that arbitration industry indiscretions may ultimately lead to “hundreds of thousands” of past awards being set aside.

So eat a cookie, civil justice fans, because mandatory arbitration as we know it may soon be put to bed. Here’s hoping anyway.

Arbitration Abuses ‘Deeply Disturbing,’ Kucinich Says

By Bob Van Voris (rvanvoris@bloomberg.net ) and Holly Rosenkrantz (hrosenkrantz@bloomberg.net), Bloomberg, 07/22/2009
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aeSRAtP1lRrE

A congressional staff investigation into the biggest U.S. consumer debt-collection arbitrator found “deeply disturbing” abuses, U.S. Representative Dennis Kucinich said today.

A report on the investigation, released yesterday, claims that the National Arbitration Forum, a Minnesota company that handled most consumer debt-collection arbitrations in the U.S., misled consumers and hid ties to debt-collection firms.

Kucinich, an Ohio Democrat, summarized the findings today at a hearing into the use of mandatory arbitration clauses by credit-card, mobile-phone and other companies to collect consumer debts from customers.

“The debt collection industry and the alternative legal system that has been created around it can no longer be ignored by the federal government,” Kucinich said.

Bills to crack down on abuses of mandatory arbitration are being considered by the U.S. Congress. Hearings before a House subcommittee chaired by Kucinich began this afternoon.

The National Arbitration Forum, or NAF, agreed July 17 to settle a suit filed by Minnesota Attorney General Lori Swanson that bars the firm from taking on any new consumer debt- collection disputes. In prepared testimony today, Swanson asked Congress to add new consumer protections to federal law governing arbitrations.

Debt-Collection Conglomerate

NAF was “part of one big debt-collection conglomerate,” Swanson told the committee.

Michael Kelly, chief operating officer of the National Arbitration Forum, blamed the costs of defending against suits and investigations, uncertainty about possible legislation and a difficult economic environment for the company’s decision to drop debt-collection arbitrations. Kelly denied that NAF was biased in favor of its corporate clients.

“Arbitration is a simple, fair and cost-effective way for consumers and businesses to resolve disputes outside of the traditional litigation system,” he said.

The American Arbitration Association, the world’s biggest provider of out-of-court dispute resolution services, said it has decided to stop taking debt-collection cases until new standards for resolving the disputes are established.

“A series of important fairness and due process concerns must be addressed and resolved before we will proceed with the administration of any future debt collection arbitrations,” AAA Vice President Richard Naimark said in prepared testimony.

Companies Win

Naimark said one of the most difficult issues surrounding the consumer debt arbitration caseload is that consumers rarely appear or participate in the process. As a result, the companies win almost all the time.

[HOT: Why don't consumers appear at arbitration hearings? Could it be that it's because the hearings are held in the company's home state and NOT that of the consumer? Could it be that it's because there's almost never a chance of winning enough of an award to cover the travel expenses?]

Naimark said AAA has been cooperating for months with the subcommittee investigating the industry. AAA, which hasn’t had any consumer debt-collection cases since a client withdrew a group of collection matters filed against Verizon Communications Inc. customers in June, originally had planned to announce the move at the hearing today, Naimark said.

Some companies that use arbitration services said they will simply shift to different firms to resolve disputes with consumers.

“We’ll work with another vendor to do that,” said Sprint spokesman John Taylor today. “Our view of this is that consumers are well served by the arbitration process, and it’s cheaper and it’s quicker for all parties concerned.”

Cents on the Dollar

Often, the companies that include mandatory arbitration clauses in their contracts with consumers sell their delinquent accounts to debt-collection firm for cents on the dollar, Public Justice staff attorney Paul Bland testified. The debt collectors then file arbitrations to recover the money.

JPMorgan Chase & Co. spokesman Paul Hartwick said today that Chase is no longer filing new consumer credit arbitration claims. Less than 1.5 percent of accounts in default are arbitrated, Hartwick said.

“Millions of arbitration agreements between businesses and consumers have designated the NAF to serve as an arbitration provider,” the Chicago law firm Mayer Brown LLP told clients in a July 20 alert. “Businesses that are parties to these agreements should consider revising their consumer contracts to designate a different arbitration provider.”

Kucinich said there are several bills in Congress that would impose limits on the applicability of mandatory, pre- dispute arbitration agreements. Congressman Barney Frank, chairman of the Financial Services Committee, has introduced a bill to establish a new consumer protection agency that would have the power to limit or ban the agreements. The Federal Trade Commission is evaluating the entire system of debt collection, including arbitration practices. 

Big Arbitration Firm Pulls Out of Credit Card Business 

By Robert Berner, Business Week, posted by Dan Beucke on 07/19/2009
http://www.businessweek.com/investing/wall_street_news_blog/archives/2009/07/big_arbitration.html 

After coming under increasing fire for bias towards major credit-card companies, the nation’s largest arbitration firm involved in adjudicating delinquent credit-card debt has agreed to pull out of the business, Minnesota Attorney General Lori Swanson disclosed on Sunday, July 19.

The settlement with the National Arbitration Forum comes after the Minnesota AG sued the firm on July 14 for consumer fraud, deceptive trade practices, and false advertising. The civil suit, filed in state district court in Minneapolis, alleged conflicting ties between the NAF and debt-collection law firms that represented major credit-card companies. The suit also alleged that New York hedge fund Accretive LLC owned stakes in such collection law firms and the NAF, sending arbitration business between the two.

Under the terms of the consent decree, dated July 17 and signed by the AG and NAF officials, the arbitration firm by the end of this week will stop accepting new consumer arbitrations of any sort. These include arbitrations over disputed credit-card debt as well as new lines of business the NAF has moved into, such as arbitrating consumer debts in healthcare, telecommunications, utilities, mortgages, and consumer leases. The only business NAF can now be involved with is in arbitrating Internet domain disputes, a business it has long been in.

The settlement throws in turmoil an increasingly favored venue for credit-card companies to collect disputed debts from card holders. Since the beginning of the decade, most card companies have included mandatory arbitration clauses in credit-card contracts, forcing consumers to arbitrate rather than use the courts.

The Minnesota suit said that Bank of America, JP Morgan Chase, Citigroup, Discover Card, and American Express use NAF, which is based in St. Louis Park, Minn.

In a prepared statement, NAF acknowledged that it is exiting the consumer arbitration business. “The National Arbitration Forum remains committed to consumer arbitration as the best and most affordable option for consumers to resolve disputes quickly and efficiently,” said Michael Kelly, CEO of Forthright, an NAF affiliate. “However, the Forum lacks the necessary resources to defend against increasing challenges to arbitration on all fronts, including from state Attorneys General and the class action trial bar.”

Arbitration is a private judicial process that is supposed to be fair, more efficient, and less costly than using the courts. But NAF, which had cornered the market in credit-card arbitrations, had been facing increasing complaints that it was biased towards the card industry. Last year, the San Francisco city attorney sued NAF in California state court, charging bias. That suit showed that only a fraction of California credit-card debtors win cases against creditors through the NAF. That case is still pending.

BusinessWeek made many of these assertions of bias in a story on the NAF last year. The story showed how NAF worked closely with debt-collection firms to develop business with credit card companies and buyers of delinquent credit-card debt. The story revealed a system where NAF arbiters – lawyers and former judges hired on a contract basis – had incentives to rule in the creditor’s favor.

In an interview with BusinessWeek, Swanson says that showing the alleged cross ownership between the collection law firms, the NAF, and Accretive gave her the leverage to force NAF out of consumer arbitration. The AG says she uncovered such additional allegations as that the NAF would help creditors write cases. Swanson says she and her staff negotiated with NAF founder Edward Anderson and Forthright’s Kelly and NAF’s lawyers late into Friday night over the terms of the consent decree.

Swanson says she is also sending a letter to the American Arbitration Association, an NAF competitor that has been trying to build its credit-card arbitration business. The letter, which makes no allegations of bias, asks the AAA to exit the business because most consumers don’t realize they must use arbitration, rather than going through the courts, as part of credit-card contracts, the AG says. “I am asking the AAA to show some leadership,” Swanson says. AAA General Counsel Eric Tuchmann says he wasn't prepared to comment on the AG's proposal until he saw a copy of the letter.

READER COMMENTS:

John Coby (edited)

The end is near, and the abuse of arbitration is going to stop in the near future. The NAF was already under fire from a Public Citizen report, "The Arbitration Trap: How Credit Card Companies Ensnare Consumers." The report portrayed the arbitration industry as having bias in favor of the credit card industry. Then within 5 days of the suit the NAF just rolled over and gave up a lucrative arbitration scam.

If you have a credit card, a new home, a new car, an insurance policy, a cell phone, cable or telephone service, or have a job, you most probably have a mandatory binding arbitration clause which prohibits you from joining a class action suit, or trying to find justice in the court house, a court house paid with your taxes. You have no choice on whether to accept or negotiate for this service. It is a take it or leave it contract.

The Arbitration Fairness Act filed in Congress will protect your rights to the courtroom as well as encourage the use of arbitration, which could be a good alternative. (It could, but not in the case of NAF it seems.) The Act will make the mandatory clauses unenforceable. Look for its passage in the next few years.

About Time

The National Arbitration Forum had better brace for some huge consumer group lawsuits. I can't believe how long it has taken for someone to finally catch up with the NAF. Love to see them go up in a cloud of smoke. Hopefully some of the liability will reflect directly on Bank of America, JP Morgan Chase, Citigroup, Discover Card, and American Express if it can be proven they had any part of this consumer fraud, deceptive trade practices, and false advertising.

NLS 

NAF knew that Swanson had the goods on them since they caved this quickly. Asking AAA to get out of the business regarding credit card arbitration is great, but the truth is, ALL forced arbitration clauses should be banned from ALL consumer contracts. AAA, CAS, and DeMar arbitration in home builder contracts and the illusory warranties that builders "give" buyers is exposed in “Home Court Advantage: How the Building Industry Uses Forced Arbitration to Evade Accountability,” a recent report by Public Citizen.

The only way to hold corporations accountable is through the civil justice system where there is an unbiased Judge and jury and a public record available for consumers to research. Clearly, it is urgent that the Arbitration Fairness Act of 2009 be passed by the House and Senate and signed into law by the President.

Terence 

Great news for consumer. This arbitration firm and process was a huge scam. The hedge fund owns not only the NAF, but has interests in the largest law firms that send them cases. The consumer rarely won. I hired an attorney and beat them, but my case is rare because most people ignore the notices and end up getting a judgment against them. Congrats to a fellow named Bud Hibs in Texas who has been a consumer advocate on these issues and also thanks to the States that investigated here and called BS.

Cindy 

July 19, 2009 05:05 PM

NLS, is right that they probably knew settling this case was the wiser choice because the MN AG 'had the goods on them!' Corporations 'settle' even criminal complaints this way on a regular basis, and then often keep doing the same things!

I am thrilled to see NAF exiting the credit card market but this is just one small step in the huge battle ahead. There is no way that an arbitration industry that does repeat business with corporations can be neutral. Consumers do not have the repeat business for them, the inside knowledge, the experience w/the process or good lawyers. Corporations have the upper hand and they have legal departments with many lawyers at their disposal. Many times these cases are not worth enough to trial interest lawyers, so the consumer can't even get one. They may even be told they "don't need a lawyer," only to go to arbitration unarmed while the corporation has lawyers. At least in court, it's public record, and jurors and judges are not picked from a pool that relies on corporations for future income.

The scam that is arbitration needs to be put to an end by passing the Arbitration Fairness Act in congress now. Otherwise some equally biased company will just keep filling the hole left by the NAF's of the world, perhaps even by NAF's principals starting up another company.

The next one that needs to go is Construction Arbitration Services (CAS)! Just one reason is that it was partly owned by a disbarred lawyer. I believe one of the co's under CAS's umbrella also does most of the car warranty arbitrations, and frighteningly also owns a company that makes voting machines, Elections Unlimited. YIKES! Put an end to this sham now.

Tiffany 

This is excellent news and good work from the AG's office in MINN. It also came to my attention that the BBB also uses MBA to settle disputes. Consumers should be very aware of MBA. Let's hope AAA stops their practices in all consumer contracts. Arbitration should be a choice and not binding. I have heard horror stories from people who had no choice but to go through it.

Rosemary Shahan 

Attorney General Swanson deserves tremendous credit for standing up for consumers and helping restore vital consumer protections. If more politicians had her backbone, our economy would be in much better shape.

I'm president of a consumer group who hears regularly about auto arbitrations that are obviously rigged. For example, one car owner in San Diego has been forced to wait for more than 2 years just to get a hearing at an arbitration company picked by the dealership that sold him a cleverly-disguised unsafe junker. No date for a hearing has even been set. Meanwhile, he has to keep making payments on the car, while it sits in his driveway -- or his credit would be ruined.

If he were able to go to court, chances are the dealer would not have cheated him in the first place.

Please, Congress, pass the Arbitration Fairness Act NOW.

Rosemary Shahan

President

Consumers for Auto Reliability and Safety

Sacramento, CA

Strategery 

Maybe now that these issuers will have to face REAL courts, they will stop engaging in illegal business practices. I don't have much faith in our "justice" system either, but at least the CC companies will have less influence. Just the threat of a liability is often enough for a big corporation to change business practices and cross their t's and dot their i's. I agree with the first poster, I think the lawsuits are just beginning. One after another, lawyers will see just how much these issuers are liable, basically for fraud (including credit scores, higher interest rates, etc.). After these lawsuits and the Obama administration, for better or worse, this will be a niche industry that caters to businesses and the rich.

Ima American 

It's about time!! MAJOR KUDOS to Attorney General Lori Swanson and her team for the phenomenal investigative and legal work that brought down the utter MOCKERY of justice known as the National Arbitration Forum or NAF (aka Not About Fairness.) I've had the opportunity to interact with many consumers who had to deal with these ARBI-TRAITORS and saw with my own eyes how BAD the NAF has been. We're better off in a REAL court, thank you very much. Again, many thanks to the MN AG office and to the many hardworking people out there who took the time to learn their rights, file complaints, and help put a stop to this bought and paid for "private justice" scam.

Snoz 

Big Banks and their affiliates have the gall to accept trillion dollars of bailout money and at the same time abuse the taxpayers-consumer. All the while, our fearless and morally upright politicians do nothing but sell out the American people for their re-election. Mortgaging the future of our children for the benefit of the Big Bankers, our government, which is supposed to represent and protect the interest of the American people, has joined ranks of the Big Banks in robbing the people for the benefit of the wealthy Bankers. Permitting mandatory arbitration in credit card contract clause to bypass the legal system; allowing exorbitant interest rate; tolerating excessive users' fees as well as other credit card abuses, our government has joined the Big Banks in their crime spree. All these evils and more are evidence that the prolific bank lobbyists and their political contribution are corrupting the morals of our politicians, assuming they have any. Mean while, the wealthy Bankers are laughing as they create more bogus arbitration firms to rope-in the American people for more money. By comparison, Roman had collapsed on lesser sins of its Senators.

Michelle 

Forced arbitration is not good for ANY consumer. The sooner we get rid of it the better off the country and the consumer will be. Getting rid of forced arbitration will also weed out the fraudulent businesses. Good bye forced arbitration; hooray for consumers rights!!!

Jordan Fogal 

This is the first fair step for consumers in a long time. Please see my web site (www.jordan-fogal.com). It is about NAF's sibling AAA. The atrocious American Arbitration Association. See proof of how they have been ripping homeowners and consumers off for years. AAA along with brother NAF has contributed mightily to the housing debacle.

truth in lending 

This scam that developed with NAF just shows how bad things can get when you force people into a private "justice" system to bypass our public justice system. Remember why we have a Bill of Rights and tell the people representing you in Congress to sign onto the Arbitration Fairness Act.

Sonya Smith-Valentine 

Having represented consumers in arbitrations, I am happy to see NAF exit the consumer arbitration business. The process clearly favored the credit card and debt collection companies. I will not miss NAF arbitrations.

Sonya Smith-Valentine

Identity Theft & Credit Expert

Sonya Smith-Valentine International

www.sonyasmithvalentine.com

Richard 

NAF and the AAA have always been bordellos for "repeat player" major customers. The AAA should also get out of arbitration of "big business" vs. small businesses. AAA has rigged its Rules to favor the large businesses that pay it millions every year. It arbitrarily removes arbitrators appointed by small business (who can act as watchdogs on the case), demands huge fees on short notice and does everything it can behind the scenes to help its' "repeat player" large customers. When caught it yells that it is a "non-profit", ($105,000,000 annually) as though that excuses and immunizes its corrupt behavior. The truth is that AAA arbitration is far more expensive and much slower than the courts. There is also no right of appeal and the AAA can be wrong on the law without the award being vacated.

Of course, the one question the AAA won't really answer is, "If AAA arbitration is so wonderful, why not allow arbitration clauses to only be effective if agreed AFTER the dispute arises?" Requiring full disclosure of all of the fees, costs and expenses before AAA arbitration is agreed should be mandatory. The improper relationship between the credit card industry and NAF and the AAA is merely the tip of the iceberg. Congress should subpoena the AAA and the NAF to expose their operations.

Consumers, small business, franchisees and employees need help now. The proposed Fairness in Arbitration Act is a good first step, but needs to explicitly protect small businesses from being forced into arbitrations they cannot afford.

Hudson Henley 

Good riddance to NAF and its credit card Kangaroo Courts. Part of their system was to send lengthy, arcane notices to cardholders around the country which called upon the cardholder to either request arbitration (with the cardholder paying possibly several hundred dollars in fees) in his home state or waive that right. Naturally, it was cost-prohibitive to travel to Minnesota, and too late by the time the NAF had entered a binding award "by submission" (i.e., without a hearing of any kind). It was a complete rig job. I am an attorney in Dallas who had seen a few of these ripoffs, and they were disgraceful.

JohnMD 

The problem is that the NAF was obviously involved in a level of fraud that was criminal in nature. Without charging them, and many of the executives in the banks they conspired with, with criminal violations, they will just move on to create other fraudulent enterprises. The Attorney General should have used the fact that she had the goods on them, to put them in jail. Indeed, I suspect that a criminal prosecution is still possible. Let's hope they do it!

Rick 

Now perhaps all AG of each and every state can use this as a precedent to go after all arbitration companies who force each and every one of us who have some type of arbitration clause, back to the courts, far too long have these companies been in bed so to speak with the companies they represent, how can any arbitration organization be fair and impartial when it continues to do business, with these same organizations? How can arbitration be fair and impartial especially when the arbitration fees are never disclosed in any consumer contract? Please keep up the good work and lets expose the arbitration firms for what they represent- any organization that is willing to represent a business who promotes fraudulent business practices, and who is willing to take away the consumer's right needs to be abolished, I know this from personal experience. One crooked organization exposed and many more to follow!

Edward Cherry 

This is excellent news. The banks relied upon this corrupt forum to obtain illegal awards against consumers who could not fight back. I bet that they quit because the investigation was leading into the boardrooms of the banks who probably funded the firm through their securities divisions.

COURT RULES 

Absolutely ALL forced arbitration clauses should be banned from ALL consumer contracts! This "private justice" system is a breeding ground for rampant corruption, bought and paid for by big businesses that run over consumer rights with impunity knowing their hired gun arbitrators will issue whatever awards they're paid to issue. Furthermore by using the "private arbitration system" they can HIDE from judicial review and even public review of the cases and decisions.

Then there's the REPEAT PLAYER BIAS - the businesses/clients know which arbitrators will play the game they want played and select them while the consumer has no way of knowing who's affiliated with whom, what the arbitrator's previous rulings have been, etc. I'D RATHER BE IN COURT ANY DAY!!!

John 

It's about time. I am a veteran of the collections and debt resolution industries. NAF's complicity with the credit card industry completely shut out the court system and an individual's right to their day in court. Once NAF had their award against the debtor, it was simply a case of transferring the file to the debtor's state of residence and filing the award with the court as an automatic judgment. The final nail in the coffin was the local law firm recording a copy of said judgment through the county recorder's office.

Another scam I recently ran into was a company doing business (cannot remember the name) that stated in their agreements that their contract could not be recorded with the county because it would render the agreement null and void. I think it was some kind of sales scam.

Pat 

Arbitration isn't necessarily gone or a bad thing--it's bad when it is FORCED upon you and that arbitration decisions are forced upon you. If the consumer wants arbitration and gets the pick the arbitrator it might be more fair if the costs are shared. Mediation is better because, if you don't like the outcome you can still sue and the costs are usually fair.

Mandatory Consumer Arbitration - analysis by an arbitration attorney

by Kevin R. Casey, Stradley Ronon Stevens & Young, LLP, 08/05/2009

http://www.metrocorpcounsel.com/current.php?artType=view&artMonth=August&artYear=2009&EntryNo=10019

The inclusion of mandatory arbitration clauses in an increasingly large number of consumer contracts has caught the attention of many academics and legislators. In the academic arena, consumer arbitration has been both deeply criticized and adamantly defended. Critics of consumer arbitration point out its many problems for consumers and society, such as unequal bargaining power and a potential usurpation of the role of the judiciary. Conversely, defenders of mandatory arbitration argue that it is an efficient way to resolve disputes, and that the cost savings it generates ultimately benefit consumers.

[HOT: Mandatory Consumer Arbitration almost never benefits homeowners. Arbitration is a secretive, kangaroo court style adjudication proceeding that often costs far more than a civil suit, carries more risk due to bias of arbitrators beholden to the industry(ies) they support, is subject to minimal oversight or judicial review, prevents class actions, and is often held in the builder's home town, forcing homeowners to travel.]

The controversy has also prompted legislators to consider the effects of consumer arbitration. These legislators, led by Representative Hank Johnson, introduced the Arbitration Fairness Act of 2009 (AFA), H.R. 1020, 111th Cong. (2009), to address some of the issues regarding mandatory consumer arbitration. If passed, the AFA would render inoperative the arbitration clauses that suffuse consumer contracts in an attempt to protect consumers from the problems associated with mandatory arbitration.

I. The Background Of Consumer Arbitration

The rise of mandatory binding arbitration in the consumer context is a relatively recent phenomenon. Although Congress enacted the Federal Arbitration Act (FAA) in 1925, 9 U.S.C. §§ 1-16 (2006), it was not until significantly later in the century that a line of cases began to interpret the FAA in a way that made mandatory binding arbitration enforceable. These cases broadly favored arbitration as a national policy and served a critical role in interpreting the boundaries of the FAA.

In Southland Corporation v. Keating , 465 U.S. 1 (1984), the U.S. Supreme Court issued a landmark decision when it held that "Congress intended to foreclose state legislative attempts to undercut the enforceability of arbitration agreements." Id. at 16. Ten years later, the Court was presented with an opportunity to overrule Southland in Allied-Bruce Terminix Companies, Inc. v. Dobson , 513 U.S. 265 (1995). The Court declined this opportunity, and instead gave the FAA preemptive force over state contract law. Id . at 272-73. The Court continued to expand the scope of arbitration provisions in Buckeye Check Cashing, Inc. v. Cardegna , 546 U.S. 440 (2006), where it held that arbitration provisions are severable from the remainder of the contract. Id. at 447. This means that when a party challenges the validity of a contract including an arbitration provision, the enforceability of the contract will be determined by arbitration as opposed to a judicial proceeding. The principles derived from these three cases demonstrate that courts should be extremely deferential toward arbitration rulings.

The FAA's expansive interpretation in Southland and its progeny led to an increase in the number of contracts that include binding arbitration provisions. In particular, arbitration became prevalent in consumer contracts because it could be of great advantage to manufacturers, distributors, and other businesses that face the potential for burdensome, costly litigation arising out of disputes with the consumers to whom they sell. During the 1980s, businesses and financial service providers began including arbitration provisions in their standard contracts as an alternative to defending lawsuits in court. The general use of arbitration clauses grew through the 1990s, and in 2004 a survey found that 69.2 percent of respondent businesses included arbitration clauses in their consumer contracts.

The increasing use of mandatory arbitration provisions in consumer contracts has also led to an ongoing debate about consumer rights. Although in theory the potentially short process, low costs and party control over the choice of the decisionmaker suggest that consumer arbitration should benefit both businesses and consumers, many consumer advocates argue that the benefits are one-sided. The debate persists because there are plausible arguments on both sides.

II. Assessing The Fairness Of Consumer Arbitration

Representative Hank Johnson and the other Congressmen who introduced the AFA noted that mandatory arbitration undermines consumer rights and the development of public law. Although a number of academics share this sentiment, it remains debatable whether a condemnation of consumer arbitration is warranted. The proponents of mandatory arbitration explain that this type of dispute resolution became favored by the courts and private parties because of the shortcomings of other alternatives, such as litigation.

A. The Benefits of Consumer Arbitration

Although corporations can use mandatory arbitration to take advantage of unsuspecting consumers, the procedure can also provide an advantageous system for the adjudication of claims. Consumer arbitration supporters explain that arbitration does not include extensive discovery or the numerous stages that are inherent in litigation, thereby affording both consumers and businesses a low-cost method to resolve their disputes. The cost savings render arbitration more accessible to lower-income claimants, allowing them actually to resolve their issues through arbitration. In many cases, arbitration is the only dispute resolution alternative to expensive lawsuits. Therefore, for many claimants it is arbitration or nothing.

[HOT: We dispute this claim, especially for disputes between homeowners and builders.]

Businesses and creditors with low-value claims face a similar situation. Consumer arbitration gives these companies a low-cost method to collect payments from debtors, which may not be possible through litigation. Arbitration benefits these companies because most debt cases are for fairly insignificant amounts; therefore, the companies will not undergo the expense of litigation to recover these small debts. If pre-dispute arbitration agreements are banned from consumer contracts, then many creditors will face difficulties collecting the debts that their customers have accumulated.

Another argument in favor of mandatory arbitration is that companies are able to reduce their own dispute resolution costs, which allows the firms to pass on the savings to their customers in the form of lower prices. This process works to lower prices because investors and entrepreneurs begin to notice above-normal profits, even though it is the arbitration clauses which cause those profits. The above-normal profits lead to an increase in output, which accordingly leads to lower prices. Although it is somewhat ironic, the arbitration clauses that restrict consumer rights can simultaneously provide consumers with less costly merchandise.

[HOT: What a lame argument! It's like saying that violating building codes, using substandard materials and illegal workers with no supervision, and taking other steps to cut corners results in lower costs for people who otherwise couldn't afford a home. Those shoddy homes too often lose value even in a stable economy, making them hard to sell and trapping their occupants in a long-term mortgage.]

Still another benefit of consumer arbitration is the age-old principle that parties should be able to contract freely. This "laissez-faire" approach to consumer arbitration has some merit if the two parties are on equal footing. If corporations have included a burdensome and one-sided arbitration clause into a consumer contract though, this principle alone may not justify enforcement of the arbitration clause.

B. The Problems with Consumer Arbitration

While the proponents of consumer arbitration note the benefits the system provides, many critics cite the inherent problems in contracts with binding pre-dispute arbitration clauses. Consumer advocates claim that mandatory arbitration allows corporations to benefit at the expense of consumers and society in general. According to these advocates, the limited and unfamiliar procedures involved in arbitration impose a disadvantage on the less sophisticated party, namely the consumer. A business that has thousands of arbitrations a year will be familiar with the process. Most consumers have no experience with arbitration, however, and will not know when they have been deprived of their rights. This potential harm is exacerbated by the minimal role of judicial oversight over arbitration in practice.

In addition, consumer arbitration clauses further hinder the rights of consumer plaintiffs by imposing costs and prohibiting class actions. Companies may include one-sided provisions that impose costs on consumers and thereby discourage them from bringing claims against the company, such as selecting an arbitrator with high fees or locating the arbitration in a distant forum. Another method companies may use to increase consumers' costs is to bar them from proceeding jointly with others in a class action. Consumer plaintiffs may not have the resources to individually bring suit if they have only been harmed by a small amount, but a group of plaintiffs could consolidate their claims to reduce the expenses that each individual plaintiff would have to pay. Given these benefits of class actions, it is clear that by eliminating the class action option, companies increase the costs and burdens on a consumer plaintiff.

Critics of mandatory arbitration also discuss its negative effect on society as a whole. Specifically, these critics state that the overwhelming use of arbitration proceedings to resolve disputes between consumers and businesses will prevent consumer law from adapting to changes in the country. The widespread use of consumer arbitration threatens the role and the efficacy of the common law in the American legal system. The prevalence of arbitration could "freeze" the common law, precluding courts from appropriately resolving consumer disputes and allowing businesses to manipulate the common law by litigating hand-picked cases that will set pro-business precedents. In addition, mandatory arbitration threatens the role of the jury trial.

III. The Potential Effectiveness Of The Arbitration Fairness Act Of 2009

Although there are some benefits to mandatory arbitration, a number of legislators have concluded that the positive attributes of consumer arbitration are outweighed by its potential for abuse. These legislators introduced the AFA to protect consumer rights. If passed, the AFA would ban pre-dispute arbitration agreements in consumer contracts and allow parties to enter into arbitration agreements only after a dispute arises. It would appear, however, that the proposed AFA would only address some, and certainly not all, of the problems associated with consumer arbitration.

The AFA would likely curb several potential abusive uses of mandatory arbitration, such as the use of arbitration as an efficient debt-collection and enforcement tool at the expense of the consumer. Instead of consumers unknowingly subjecting themselves to unfamiliar, one-sided arbitration proceedings, the AFA ensures that consumers would have a more involved role in deciding how to resolve their disputes. The AFA would also alleviate the concern about prohibitions on class action lawsuits. Because arbitration would be a post-dispute agreement, a consumer would not have signed a clause that prohibits class actions. In addition, the AFA would solve some of the larger problems for society that the widespread use of consumer arbitration creates. For example, because not every consumer dispute would be automatically funneled into arbitration, the common law would have the opportunity to continue to develop.

But the proposed AFA is not a panacea; there are several problems with mandatory arbitration that the AFA simply fails to address. One of these problems is the potential cost of arbitration. Even though a consumer must agree to arbitration, there is no requirement in the AFA that a post-dispute agreement will cost less than a pre-dispute agreement or that the consumer will receive any information about the cost of arbitration. Another issue is that the AFA does not devise a mechanism to help consumers understand arbitration clauses, which may lead to unsuspecting consumers entering into post-dispute arbitration agreements. If a consumer does not understand the arbitration clause, the consumer is not able to ferret out provisions designed to benefit the party that drafted the clause.

The AFA would significantly reduce the potential for businesses to take advantage of consumers in arbitration proceedings, but the AFA would not entirely eliminate this threat. Even though the AFA prevents businesses from forcing consumers into pre-dispute arbitration agreements, the AFA still does not provide enough assistance to consumers who may enter into post-dispute arbitration agreements.

IV. Conclusion

Today many standard consumer contracts contain arbitration clauses. In some instances, these clauses allow businesses and consumers to efficiently resolve disputes. Low-income consumers are able to bring claims that may have been too costly to litigate and businesses can reduce their own dispute resolution costs and pass those savings to consumers. The effects of consumer arbitration, however, are not always positive. Businesses can use arbitration clauses to deprive consumers of procedural safeguards and hinder the development of consumer law. Whether legislation such as the proposed AFA can enhance the benefits of mandatory consumer arbitration, without exacerbating the drawbacks or creating new problems, remains to be seen.

VIDEO: TX House Committee on Judicial & Civil Jurisprudence 

This video from the 81st legislative session is 7 hours and 28 minutes (7:28) long, so here are the most interesting clips related to Forced Arbitration:

• 5:43-5:49 - Rep. Dan Gattis introduces HB 2696 re. forced arbitration clauses in "take it or leave it" contracts, providing stronger disclosure and an opt-out option. [HOT: Why do you suppose a bill with such broad support never made it out of committee?]
  
• 5:57-6:05 - HOT President Tom Archer testifies that ALL 13 homebuilders in The Woodlands include binding arbitration contracts without the ability to opt-out, suggesting a Restraint of Trade problem and violation of U.S. Constitutional rights.
  
• 7:01-7:12 - Dan Worthington of TADC (Texas Association of Defense Counsel) who typically represents businesses, often with arbitration. His powerful testimony supported the bill and voiced a concern that the Arbitration industry is at risk due to blatant abuses. He described forced consumer arbitration as privitizing the functions of judge, jury and appeals court into the hands of an individual that has no required qualifications.