07.23.07
Why arbitration is bad for consumers
It’s likely that your credit card agreement specifies that arbitration will be used to settle disputes. This is not so good for you:
Despite advocates’ concerns, it’s unclear whether consumers who go through arbitration are any more likely to get a judgment against them than those who go to court. The National Arbitration Forum (NAF), one of the nation’s largest private arbitration firms, is commonly used by creditors and secondary debt buyers. A Monitor analysis of the last year of available data from NAF found that arbitrators awarded in favor of creditors and debt buyers in more than 96 percent of the cases. … It also found that the 10 most frequently used arbitrators – who decided almost 60 percent of the cases heard – decided in favor of the consumer only 1.6 percent of the time, while arbitrators who decided three or fewer cases decided for the consumer 38 percent of the time.
NAF would not comment on the findings because it had not participated in the analysis, but maintains that its arbitrators are neutral. Edward Anderson, managing director of NAF, says that caseloads of arbitrators probably reflect types of cases. “Undoubtedly, the more complex the disputes, the more arbitrator time would be involved and the fewer cases an arbitrator would be able to handle,” he writes in an e-mail, noting that cases where one party does not respond are less complex than those where there is a controversy. Indeed, arbitrators who heard few cases were far more likely to hear contested cases than other arbitrators.
But consumer advocates say arbitrators have strong incentives to rule in favor of business. One commonly applied rule allows either party to reject an arbitrator for any reason. Businesses can use this “one strike” rule to their advantage, say consumer advocates, since they may have more information on an arbitrators’ prior rulings than consumers do. And the knowledge that rulings bring repeat business may create financial pressures for arbitrators.
“Arbitration work is often very lucrative, and arbitrators know that if they rule against a corporate defendant too frequently or too generously (from the standpoint of that corporation), they will lose the work,” wrote F. Paul Bland, staff attorney at Public Justice, a Washington, D.C.-based nonprofit legal services group that opposes mandatory binding arbitration agreements in consumer contracts, in comments for the Congressional hearing.
… Two former NAF arbitrators say banks took them off of cases after they issued rulings unfavorable to the institution. Richard Neely, a retired chief justice of the West Virginia Supreme Court, says he received two cases from the NAF in which he wouldn’t charge consumers for the creditor’s litigation-related fees. He never received another case.
After she decided against a credit-card company, awarding a consumer damages, Elizabeth Bartholet, a former NAF arbitrator and Harvard law professor, said in a 2006 deposition that she was repeatedly removed from cases by the credit-card company. Rather than telling alleged debtors that the creditors removed her, she said, at times NAF mailed letters saying she had a scheduling conflict and had withdrawn.
More at the link. There’s a Senate bill to fix this (proposed by Democrats, of course, not by the GOP, which is pro-business, anti-consumer, and thinks the free market will fix the problem).
Complaints have recently caught the attention of Congress. On Thursday, Sen. Russ Feingold (D) of Wisconsin and Rep. Hank Johnson (D) of Georgia unveiled legislation that would prohibit predispute mandatory arbitration clauses in consumer agreements, letting consumers choose whether to go to arbitration or court if a dispute arose.
“Arbitration can be a fair and efficient way to handle disputes, but only when it is entered into knowingly and voluntarily by both parties,” Senator Feingold said in a release. “People from all walks of life … often find themselves strong-armed into mandatory arbitration agreements. We need to make sure that all Americans can still have their day in court.”
Regina Mullen said,
23 July 2007 at 3:09 pm
I strongly disagree.
The aggregate statistics are not important. The proper question is “Does the person owe the debt”?
If the debt is valid, there is absolutely nothing to be gained by going to court (can we say “personal time” lost??) and incurring additional fees and costs. Arbitration through NAF is largely done through the mail, and every creditor I’ve ever encountered is more than happy to try a workout first.
My disclaimer is that I am an NAF arbitrator (and take my obligation to be impartial VERY seriously) and strongly urge people to learn about the arbitration system and use it.
Consumers lose when they buy into scams that give them documents to file that have nothing to do with their case or try to debate the arbitrator’s authority, when that authority is clear by looking at state and federal court opinions.
NAF has a wealth of information freely available that consumers can use to see what COURTS have done in the realm of supporting arbitration. All consumers have to do is look.
They can even hire an attorney to spend an hour walking them through the process,–it’s still a lot cheaper than paying that attorney to go to court, just to “lose” because of a valid debt!
It makes no sense to challenge an arbitrator’s authority when the courts in your state support that authority. If you’re not claiming that a class action is appropriate, then usually the arbitration clause will be upheld. In the case of simple debt, consumers CAN challenge nearly anything having to do with the contract in arbitration,–provided they do it in good faith.
The important thing to note here is that arbitrators, like judges, don’t require fancy legalese to get the point. All you have to do is arbitrate in good faith, present your case and the facts that relate to the dispute, and you’ll get a fair shake.
Most cases go to the creditor because they would in ANY forum. It’s not helping consumers to tell them that arbitration is bad, when the reality is that in the vast majority of cases, the court ruling would probably be exactly the same,–with the additional tack on of skyrocketing legal fees.
Finally, a consumer has the right to challenge an arbitration award. But, taking that issue to court when you haven’t done your homework, defended your case or gotten help when out of your depth is foolishly throwing good money after bad.
LeisureGuy said,
23 July 2007 at 4:38 pm
The thing that worries me is contained in the article quoted:
By carefully selecting out arbitrators who are open to a decision against the business and for the consumer, the businesses can heavily stack the deck. It’s not a question of arbitrators acting in bad faith—the recent abrupt change in US Supreme Court decisions came about not because the two most recent appointments (justice and chief justice) made decisions that President Bush and the GOP favor—not because they’re trying to please Bush and the GOP, but because Bush selected and the GOP majority confirmed candidates whose views and philosophy coincide with his own. Thus decisions are going in a very different direction, and even counter to the Supreme Court’s own precedents.
So in this case, with businesses actively blackballing arbitrators who are willing to decide against the business, it’s unlikely the consumer will get a fair shake. At least, that’s the way that I view it.
LeisureGuy said,
23 July 2007 at 5:45 pm
One additional thought. Businesses are very eager to have these cases go to arbitration, not to the courts. Businesses in general are eager for things that benefit themselves, not the consumers. (Cf. telecoms) So I presume that businesses strongly believe that arbitration will favor them. It could just be a matter of costs, of course, but I have regretfully learned to be quite cynical about the motives and actions of large businesses.