Credit card arbitration: What it is, how it works

If you have a credit card, you've likely given up rights to sue

By Amy Buttell Crane

If you're like most American consumers, you've given up the right to sue in the event of a dispute with your credit card company. Most credit card agreements force consumers into a process known as binding mandatory arbitration, a quasi-legal system outside the rule of law, where the loser is unable to appeal.

Consumers who stay current on their credit card bills are unlikely to end up in arbitration. Credit card companies -- and companies that buy credit card companies' bad debt -- generally enforce arbitration against consumers whose balances have been unpaid for months or years. Victims of identity theft are also likely to end up in arbitration over fraudulently incurred debt.

A study by Public Citizen, a consumer rights organization, on the effect of credit card arbitration on consumers, contends that "binding mandatory arbitration is a rigged game in which justice is dealt from a deck stacked against consumers." Focusing on data obtained from California cases brought by credit card company MBNA -- now owned by Bank of America -- and administered by the National Arbitration Forum (NAF), the study found that 94 percent of the cases brought were decided against consumers.

The customer is almost never right
If anything, those numbers understate the actual results, says Paul Bland, a staff attorney with Public Justice, a consumer rights organization. California is the only state that requires arbitration companies to publish results, and the data are frequently incomplete, but what is there shows that according to the arbitrators, the customer is almost never right.

In March, the San Francisco city attorney's office filed a lawsuit against the NAF, alleging that the company approved specific inflated arbitration awards, awarded poorly documented legal fees and didn't respond to a consumer's stated request to hold an in-person arbitration hearing. The NAF, a private company based in Minnesota, contends that arbitration is fair, speedy and inexpensive and that consumers prevail in arbitration at a rate comparable to how they fare in court against business.

In its defense, the NAF cites a report entitled, "Arbitration: A Good Deal for Consumers," that disputes the conclusions reached by Public Citizen. The report attacks the Public Citizen report on several fronts, including ignoring research which supports the contention that consumers prevail in arbitration at a rate superior to court, that arbitration holds down costs by limiting discovery, appeals and excessive legal fees and that parties in an arbitration case can agree to waive the confidentiality of the proceedings. Sponsored by the U.S. Chamber of Commerce, a pro-business trade group, the report notes that most consumer debt cases never reach a jury when they are brought to court and that many consumers are denied justice because they can't afford attorneys to represent them in court. In contrast, consumers can represent themselves in arbitration. 

Are you covered by arbitration?
You are most likely covered by a binding mandatory arbitration provision if you hold a credit card issued by a major bank. The major exception to this rule is AARP member affinity cards, issued by Chase, which do not include an arbitration provision. Some credit cards issued by credit unions and community banks also don't force consumers to arbitrate.

To find out if you are covered by an arbitration clause, call your credit card company and request a copy of your current credit card agreement. Once you've got the agreement in front of you, scan it for the arbitration clause, which generally is contained in the dispute resolution part of the agreement.

Arbitration differs from court
Arbitration differs from court in a number of significant ways. In court, the losing party has the right to appeal to a higher court, in many cases multiple times. But arbitration is final -- few courts are willing to overturn an arbitration verdict unless you can prove fraud or a significant conflict of interest on the part of an arbitrator.

Judges must obey the rule of law. However, arbitrators are not required to follow the rule of law. Arbitration decisions are secret, although they may be made public if both parties agree, which rarely happens.

Filing fees in court are usually relatively low, because the courts are subsidized by tax dollars. Fees in arbitration cases vary depending on what set of rules are used, but can run into thousands of dollars for the consumer.

Defendants in arbitration have very limited rights of discovery, whereas rights of discovery in court are broad. Discovery is the process by which attorneys gather evidence in the form of documents, testimony and computer files to support their cases.

While arbitrators are required to disclose conflicts of interest that may bias them in favor of a business or a particular party in case, the entire structure of the private arbitration system favors parties who repeatedly bring cases, says Bland. Arbitration companies get millions of dollars in repeat business from credit card companies, while they are unlikely to see the same consumer ever again in a case.

Related story: 'Six tips for dealing with binding credit card arbitration'

Published: April 21, 2008

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