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News & trends
December 2007 | Volume 43, Issue 12

Mandatory arbitration report reveals skewed system

Allison Torres Burtka, Associate Editor

Companies in many industries include binding mandatory arbitration clauses in their contracts with consumers, but little information is available on the outcomes of such arbitrations. California is the only state that requires arbitration companies to provide any data.

In September, the Washington, D.C.-based public-interest group Public Citizen released a report analyzing some of that data. The results revealed a system that strongly favors the corporations that hire the arbitrators.

In the report, The Arbitration Trap: How Credit Card Companies Ensnare Consumers, Public Citizen looked at nearly 34,000 cases involving credit card companies in binding mandatory arbitration that one arbitration provider—the National Arbitration Forum (NAF)—handled in California between 2003 and 2007. The findings describe how the companies use NAF as a debt-collection tool.

“Credit card and other companies drive millions of dollars in business to arbitration firms, which in turn hire arbitrators to rubber-stamp rulings that favor business and then pass many of the costs onto the consumer,” the report notes. “These clear commercial ties between arbitration providers and corporate interests produce a ‘repeat player’ bias that leaves consumers out in the cold.”

In non-credit-card disputes that end up in arbitration—such as those with nursing homes, car dealerships, cell phone providers, employers, and HMOs—the consumer may find out he or she is bound by mandatory arbitration (often by a clause in a contract’s fine print) when something goes wrong and he or she tries to sue the company.

But with credit card firms, the company frequently sues the consumer to collect debt. Of the 34,000 cases examined, all but 118 were filed by credit card companies against consumers.

About 14,700 of the arbitrations were not completed; most were settled or dismissed without an award to the claimant. In the 19,300 cases in which NAF appointed an arbitrator, he or she ruled for the company 93.8 percent of the time.

Although the report focuses only on credit card cases, it provides a window into how the mandatory arbitration process operates.

Mandatory arbitration lacks safeguards that are built into the court system, the report says. Arbitrations are not open to the public, and arbitrators generally do not issue a written decision unless a party requests one and pays for it in advance. In one case, a three-page decision cost $1,500.

The report also notes that NAF rules give staff members authority that would be reserved for judges in the court system, such as the power to rule on motions. In some cases, NAF did not follow its own rules. For example, one arbitrator failed to send the consumer’s lawyer documents that would be used at the hearing, and an NAF program administrator refused to consider motions, the report says.

Another problem is that “arbitrators are spending almost no time on each case,” said Paul Bland, staff attorney at Public Justice in Washington, D.C. “They are funneling the vast majority of cases to a small number of arbitrators.”

According to the report, 90 percent of the cases were handled by only 28 arbitrators. One arbitrator handled 68 cases in one day and decided against consumers every time, giving the credit card companies and debt buyers the full amounts they demanded. Unlike judges, arbitrators are paid according to the number of cases they handle.

NAF says on its Web site that arbitration is “significantly less expensive than court.” But the Public Citizen report shows that arbitration often costs consumers more than court proceedings. NAF also employs a “loser pays” rule—allowing the arbitrator to assess all costs against the losing party—and advertises this fact to its corporate clients.

Consumers lack a meaningful appeal process in arbitration. “[V]ictorious credit card companies and debt collectors usually wait until the 90-day [appeal] deadline has passed before they go to court seeking confirmation of the award,” says the report. “By then, consumers’ appeal options are over.”

When arbitrators do rule in the consumer’s favor, they may face consequences, the report says, noting that one arbitrator was blackballed after awarding $48,000 to a consumer.

Mark Englehart, an attorney in Montgomery, Alabama, said the report confirmed his experience with NAF arbitrations. “All the information I’ve seen about NAF is that its corporate culture is skewed in favor of financial services clients and any other client that they solicit and use frequently,” Englehart said.

In debt-collection cases, Bland explained, arbitrators make decisions based on documents provided by the company, sometimes without the consumer’s knowledge. “There’s no check against identity theft,” he said. The report describes the cases of four people who were victims of identity theft or did not have accounts with the credit card company, but the company pursued debt-collection proceedings against them anyway.

Bland noted that Public Justice lawyers have spoken with several dozen people with similar experiences. “The person is found guilty as long as his or her name is in the documents,” regardless of whether the person actually opened the account, he noted.

The arbitration process also gives debt collectors the opportunity to inflate debt amounts by suing the consumer for debt incurred earlier than the statute of limitations allows and adding hidden fees, Bland noted.

Bland said he hopes the report will help raise public awareness of the issue. He noted that several other states are likely to adopt disclosure statutes like California’s—and some may make theirs more consumer-friendly. He said the California data would be difficult for a consumer to figure out without the Public Citizen report.

“The report shows the importance of having a disclosure law like California has,” Englehart said. However, he added, “the only way to address the problem on a global level is in Congress.”

In July, Sen. Russ Feingold (D-Wis.) and Rep. Hank Johnson (D-Ga.) introduced the Arbitration Fairness Act of 2007, which would amend the Federal Arbitration Act to prevent the use of predispute binding mandatory arbitration clauses in consumer, employment, and franchise agreements.

The report is available on the Internet at www.citizen.org/documents/Final_wcover.pdf.

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