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More on arbitration

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Businesses and professional arbitraters like it, but no one else does. David Arkush, Taylor Lincoln, and Peter Gosselar on The Watchdog Blog:

Last November, Public Citizen released “The Arbitration Trap,” a scathing report exposing the one-sided nature of “justice” for consumers trapped by the National Arbitration Forum. The report inspired a lawsuit against the NAF by the city of San Francisco (WSJ[$], Watchdog Blog) and an in-depth examination of the practice by BusinessWeek (previous Watchdog Blog coverage here, Watchdog Blog’s analysis of NAF’s response to the article here).

“The Arbitration Trap” also prompted the Chamber of Commerce to commission a Catholic University law professor, Peter B. Rutledge, to write an official response. The Chamber also gave Rutledge financial support for a law review article in which he reviews empirical evidence on arbitration. These papers claimed that the broad sweep of serious academic research shows that our report was just plain wrong – “both on the facts and in its ultimate conclusions.”

We decided to check up on these academic papers. And – guess what? – it turns out that Rutledge and Co. don’t quite have the goods to back up their talk. In fact, their own sources don’t support their claims. Not a single comparative study Rutledge cites showed that individuals received larger average awards in arbitration than court. On other measures, the studies favored court overwhelmingly.

On alleged arbitrator bias, secrecy, confidentiality, appeal mechanisms, arbitrators’ adherence to the law and their own rules, and the ability of claimants to research arbitrators’ backgrounds, Rutledge offered assurances that our complaints were conjured out of thin air.

We decided to check up on Rutledge’s claims – starting with a thorough reading of Rutledge’s own past scholarship. And behold. On alleged arbitrator bias, secrecy, confidentiality, appeal mechanisms, arbitrators’ adherence to the law, arbitrators’ adherence to their own rules, and the ability of claimants to research arbitrators’ backgrounds, we found a new star witness: Rutledge himself voiced many of our concerns in his previous writings.

Yes, Rutledge recently said it was a myth that arbitrators have incentives to favor businesses. But before conceding the argument, we opened up a paper Rutledge wrote in 2004. The words poured out, “[arbitrators] who may seek to develop reputations for being friendly to particular parties or particular industries may actually have incentives that cut against independence.”

Continue reading.

Written by Leisureguy

29 July 2008 at 3:13 pm

Posted in Business, Daily life

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Arbitration

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Remember the Business Week article on arbitration about which I blogged recently (“Arbitration: The Unfair Game“)? Watchdog Blog’s Graham Steele & David Arkush comment on the arbitration association’s reply:

The National Arbitration Forum (NAF) has responded to Business Week‘s investigation of NAF’s shady, for-profit arbitration practices. The rebuttal is full of irrelevancies, inaccuracies, and misrepresentations:

  • NAF argues that “arbitration outcomes are the same as court outcomes for similar types of cases,” citing a Chamber of Commerce-funded report by Catholic University law professor Peter Rutledge. But the Business Week story explains that NAF markets itself by saying the opposite — that arbitration provides a “marked increase in recovery rates over existing collections methods.” (Not to mention that companies can “control the [arbitration] process and timeline,” and that “93.7% [of arbitrations] are decided without consumers ever responding.”)  Who do you think NAF is lying to — the public or its clients?
  • NAF cites court decisions as evidence that it is impartial. But a closer looks reveals some serious problems with NAF’s citations:
    • NAF cites a discussion of its arbitrators (who seem to be independent contractors) in Marsh v. First USA Bank, 103 F. Supp. 2d 909, 925 (N.D. Tex. 2000). This case is a distraction because the Marsh court explicitly refused to consider the real issue — whether NAF itself creates biased practices, procedures, and incentives for arbitrators. See id. (“[T]he Court concludes that Plaintiffs’ concerns are merely illusory. Plaintiffs’ accusations of bias are directed toward NAF, not the independent arbitrators who actually conduct the arbitration.”) . The court focused solely on individual arbitrators — and these very people “say that . . . NAF’s procedures tend to favor creditors.” Just in case having biased procedures isn’t enough, NAF also teaches big corporations how to manipulate the procedures so that they can “control [the] process and timeline.” In fact, NAF markets itself to big companies behind closed doors as offering a better way to squeeze money out of people. So the story here is not about individual arbitrators. It’s about NAF, which operates a system so biased against consumers that the City of San Francisco is suing NAF.
    • NAF also cites Green Tree Financial as saying NAF’s cost and fee schedules are fair and reasonable.  531 U.S. 79, 95 n.2 (2000). The Court endorsed a fee schedule in NAF’s procedural rules that “that limit small-claims consumer costs to between $49 and $175.” Id. But NAF neglects to mention that it later revised those fees upward (good luck navigating NAF’s convoluted fee chart and explanations, but there they are). And NAF neglects to mention the biggest risk for consumers — that they could get stuck paying for the other side’s expenses, including its lawyers, which could cost hundreds of thousands of dollars.
  • NAF cites a fine 2006 series in the Boston Globe on debt collection abuses in Massachusetts, arguing that courts, not arbitration, are the problem.  (See also this post from CL&P blog on courts in Chicago.)  The answer to this problem is reform to the small claims civil justice system, not NAF’s arbitration system.  Substituting one problematic forum for another does not protect consumers from abuse.
  • Minor bonus point:  NAF hilariously claims it won’t “attack[] critics of arbitration,” then devotes a substantial portion of its rebuttal to — you guessed it — attacking the credibility of two experts cited by Business Week.  Reminds us of the way the American Enterprise Institute and the Manhattan Institute just can’t get enough of attacking us.

Noticeably lacking in NAF’s rebuttal to the Business Week article is any denial of the damning evidence of NAF’s internal business practices.  Reporters Brian Grow and Robert Berner did an outstanding job.

Written by Leisureguy

12 June 2008 at 6:13 pm

Posted in Business, Daily life

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Arbitration: the unfair game

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BusinessWeek has a good article by Robert Berner and Brian Grow on compulsory arbitration, a big business these days (and a topic on which I’ve blogged before: search “arbitration”). Consumers in California, for example, win in arbitration just 0.002% of the time—that is, two-thousandths of 1%. Not very often, eh? The article begins:

What if a judge solicited cases from big corporations by offering them a business-friendly venue in which to pursue consumers who are behind on their bills? What if the judge tried to make this pitch more appealing by teaming up with the corporations’ outside lawyers? And what if the same corporations helped pay the judge’s salary?

It would, of course, amount to a conflict of interest and cast doubt on the fairness of proceedings before the judge.

Yet that’s essentially how one of the country’s largest private arbitration firms operates. The National Arbitration Forum (NAF), a for-profit company based in Minneapolis, specializes in resolving claims by banks, credit-card companies, and major retailers that contend consumers owe them money. Often without knowing it, individuals agree in the fine print of their credit-card applications to arbitrate any disputes over bills rather than have the cases go to court. What consumers also don’t know is that NAF, which dominates credit-card arbitration, operates a system in which it is exceedingly difficult for individuals to prevail.

Some current and former NAF arbitrators say they make decisions in haste—sometimes in just a few minutes—based on scant information and rarely with debtor participation. Consumers who have been through the process complain that NAF spews baffling paperwork and fails to provide the hearings that it promises. Corporations seldom lose. In California, the one state where arbitration results are made public, creditors win 99.998% of the time in NAF cases that are decided by arbitrators on the merits, according to a lawsuit filed by the San Francisco city attorney against NAF.

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Written by Leisureguy

7 June 2008 at 2:16 pm

Posted in Business, Daily life

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Mandatory arbitration = raw deal

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Kevin Drum again, and on a problem that the free market will not solve. It will take government regulation to make businesses (and industries) drop the “mandatory arbitration” requirements. I can’t see individual consumers being able to force the issue. Do you?

Over at Mother Jones, Stephanie Mencimer writes about the increasing number of businesses that won’t do business with you unless you sign away your right to a trial in case of dispute. In fact, there are now entire industries that refuse to deal with anyone who won’t agree in advance that all disputes be resolved by a private arbitration firm:

All of this is especially nefarious given that the vast majority of consumers who attempt to seek justice in mandatory arbitration lose. The nonprofit consumer group Public Citizen recently analyzed data the NAF provided to the state of California, one of the few states that actually requires arbitration firms to disclose information about their results. Public Citizen found that in 94 percent of 19,000 cases, NAF arbitrators ruled in favor of the businesses that hired them.

….One reason businesses often come out on top in arbitration is that arbitrators who rule for consumers have a tendency to find themselves out of work. Such was the case with Richard Neely, a former chief justice of West Virginia’s Supreme Court, who worked briefly as an arbitrator for the NAF. In an article called “Arbitration and the Godless Bloodsuckers,” Neely reported that he had refused to award a bank arbitration-related fees that he judged to be far in excess of what a court would have charged. He never got another case. Neely is not alone. A 2000 study of forced arbitration in HMO contracts found that on the rare occasion that an arbitrator made a significant award for a patient, the HMO never hired that person to arbitrate a case again.

Fun fact: when car manufacturers tried to insist on arbitration clauses in their contracts with car dealers, the dealers fought back furiously, saying that it would allow big corporations to “unilaterally deny small business automobile and truck dealers rights under state laws that are designed to bring equity to the relationship between manufacturers and dealers.” The dealers lobbied Congress to prohibit this and Congress agreed.

But guess which industry is one of the worst abusers of arbitration clauses when it comes to selling their product to consumers? Yep. Auto dealers. Read the whole thing.

Written by Leisureguy

28 November 2007 at 9:34 am

Good letter to the WSJ on mandatory arbitration

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This letter spells it out so that even the WSJ should understand:

“Party at Joan’s”
Wall Street Journal, November 17, 2007; Page A9

Your Nov. 7, broadside (“Party at Ralph’s”) on arbitration was baseless. We oppose mandatory not voluntary arbitration requirements buried in the fine print of consumer contracts  because they shred consumers’ legal rights in favor of a secret,  expensive, business-dominated system.

The consumer attorneys attending a reception at Public Citizen’s office are legal aid and private attorneys who toil in some of the least glamorous corners of the law. They see firsthand the unfairness of this industry-created system to avoid accountability. They work for consumers harmed by home foreclosures, truth-in-lending violations, unfair debt collection practices, predatory lending, auto dealer fraud and other marketplace abuses.

To acquire a credit card, buy a home or car, open a bank account, use a cell phone or get cable television, consumers usually must sign a contract mandating arbitration to settle disputes. A mere signature effectively eliminates their constitutional right to the public courts, extinguishes the right to appeal, favors corporate repeat offenders whom arbitrators want to please and imposes substantial upfront costs.

“Studies” to justify mandatory arbitration, often cited by industry, misleadingly lump together people who voluntarily enter arbitration with those given no choice. In contrast, Public Citizen’s recent report evaluated 34,000 consumer mandatory arbitration cases in California. The results: Consumers lost 94% of the time.

No wonder the Journal editorial page and the paper’s business advertisers love this stacked deck. Your justification for it rests on the deeply flawed Tillinghast Tower Perrin report on the cost of litigation. Yet Tillinghast admits its numbers are not actual costs: Almost a quarter are for insurance industry administrative costs, and most are associated with auto insurance. Conservative jurist Richard Posner challenges Tillinghast estimates as “fictitious.”

Amazingly, the Journal, which lauds a free market, opposes the Arbitration Fairness Act, even though it would allow consumers to freely choose or reject arbitration and not be coerced into it. Congress should move quickly to enact the bill.

Finally, please note that Ralph Nader left Public Citizen more than 25 years ago, during which time I have led the organization, which has grown into a potent force for consumer good. Thus, in the future, please reference our events as a “Party at Joan’s.”

Joan Claybrook
President
Public Citizen
Washington, D.C.

Written by Leisureguy

21 November 2007 at 6:16 pm

Posted in Business, Daily life, Media

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