By Jon Hood
ConsumerAffairs.com
August 2, 2009
Arbitration clauses -- those mandating dispute resolutions other than litigation -- became quite common in consumer contracts in recent years, especially for credit cards and cell phones. The clauses are greatly advantageous for corporations, as they are spared the expense and hours needed to effectively defend against a consumer or class action lawsuit.
Sometimes, however, corporations benefit in less obvious -- and more nefarious -- ways. A number of suspicions were reinforced this week when three separate class action lawsuits were filed against the National Arbitration Forum (NAF), one of the country's largest arbitration providers. The suits allege that NAF enjoys cozy relationships with credit card providers, leading it to issue rulings that are less than impartial.
The plaintiffs in the suits, filed in federal court in Minnesota, claim that NAF ruled unfairly in their respective credit card actions, damaging them financially. The plaintiffs' claims are similar to those made in a suit filed last month by Minnesota Attorney General Lori Swanson.
That action, settled last week, accused NAF of concealing its close ties to the credit card industry. Specifically, Swanson's suit alleged that NAF wrongfully described itself as independent and neutral, solicited credit card companies to use the Forum's services, and in some cases actually helped draft the language of contracts that force consumers to use arbitration instead of litigation.
This is a classic case of the little guy getting stepped on by fine print contracts, said Swanson.
In its settlement with the Attorney General, NAF was careful to deny any wrongdoing, but agreed to cease all consumer credit arbitrations by July 24. NAF claims that decision was based on its legal costs and the "legislative atmosphere" currently surrounding arbitration agreements.
Indeed, Congress has been keeping a closer eye on arbitration companies recently. The House Oversight and Government Reform's Domestic Subcommittee recently held a hearing considering the impartiality of mandatory arbitration clauses in consumer contracts. Rep. Dennis Kucinich, the Subcommittee's chairman, voiced concern about the debt collection industry and the alternative legal system that has been created around it.
Swanson, the Minnesota Attorney General, told the Subcommittee that NAF was part of one big debt-collection conglomerate.
NAF maintains a panel of over 1,600 arbitrators and mediators who hear cases referred to the Forum. The panel of neutrals, as NAF calls it, is made up of attorneys and former judges in 50 states and 35 countries worldwide. NAF is owned by a New York hedge fund that also operates a debt-collection agency.
The American Arbitration Association has also said it will stop participating in consumer debt-collection disputes.
Arbitration clauses, which have typically enjoyed wide support by the federal government, have recently come under greater scrutiny, in part because of the unsavory business practices that have come to light in the recent credit crisis. The Federal Arbitration Act permits both compulsory and binding arbitration clauses, on the ground that they reduce the burden on the court system by removing thousands of often low-stakes consumer cases.
Courts have been less accommodating of arbitration clauses than they once were, however. In March, the Supreme Court ruled that, in some situations, consumers can fight mandatory arbitration clauses in credit card contracts. Further, in 2008, the Ninth Circuit Court of Appeals held that a mandatory arbitration clause contained in a T-Mobile cell phone contract was unenforceable under Washington state law.
Arbitration clauses are often joined with forum-selection clauses, which mandate that a dispute be heard in a given jurisdiction. This can serve to discourage consumers from even bringing their claims in the first place, since it is often cost-prohibitive for, say, a consumer in New York to travel to California to arbitrate a $200 credit card bill.
A 2007 report by Public Citizen found that 94 percent of credit card arbitration cases were decided against consumers, further casting doubt on arbitrators' claims of neutrality.
