Card issuers soften mandatory arbitration rules
Regulators examine contracts that block disputes from court
arbitration against a credit card company is a David-versus-Goliath mismatch.
But new terms are popping up in card agreements that might at least give the little guy
One big credit
card issuer has softened its arbitration rules, which generally stop you from banding
together with other angry customers and taking your beef to court. And more cards may follow its lead, as
mandatory arbitration comes under increasing scrutiny.
advice we're giving to clients is to make arbitration consumer-friendly,"
said Alan Kaplinsky, partner at the corporate law firm Ballard Spahr and an
architect of arbitration clauses. "You want to make sure the agreements
get enforced in court."
credit card arena, American Express built an exit door into its previously
mandatory arbitration requirement in the first quarter of 2013, according to card
agreements filed with the U.S. Consumer Financial Protection Bureau. The new
language lets you opt out of arbitration, within certain deadlines. It also
helps cover filing fees and lawyers' bills in some circumstances and bumps up
your award to $5,000 if you win. And instead of arbitration or court, the new
language allows third-party mediation as another way to settle conflicts.
these are the early days (we only started doing this nine months ago), we are
seeing consumers use these new channels so we know that they're finding them
valuable additions," AmEx Vice President for Public Affairs Marina
Norville said in an emailed response to questions.
advocates are skeptical. They say wording changes -- short of dropping mandatory
arbitration completely -- are an empty gesture designed to fool courts and regulators.
They deride pre-dispute arbitration as a
kangaroo court where big companies hold all the cards and -- as a 2007 study found -- win practically all the cases.
helped prompt Congress to target arbitration for special scrutiny when it passed the Dodd-Frank Act. The law requires the
CFPB to study pre-dispute arbitration clauses in financial products and impose
new regulations if necessary to protect consumers. The agency -- which has already
outlawed mandatory arbitration by mortgage lenders -- is expected to announce the
study's phase-one results this month, with possible new rules to follow sometime
in 2014. The CFPB has scheduled a hearing on arbitration in Dallas on Dec. 12, which may provide the occasion for releasing study results.
comes to arbitration, "what makes it fair is for the consumer to have a choice
after the dispute arises," said Christine Hines, consumer and civil
justice counsel at Public Citizen. "Putting that language into the fine
print of these contracts is not fair."
Giving up your day in court
Signing away your right to go to court probably isn't your first concern when choosing a credit card. Who wants to sue a big bank? But consumer
advocates say that locking the courthouse door to cardholders removes an
important check on corporate behavior. Shielded from having their laundry aired
in open court -- and insulated from multi-million dollar class-action awards --
card issuers can indulge in tricks to boost revenue, critics say.
A class-action lawsuit against Chase Bank --
which doesn't require arbitration for credit cards -- for interest hikes on balance transfers in 2012 resulted in a $100
million settlement. The beef in
the Chase Check Loan litigation was an example of "small-dollar"
disputes that would be too costly for a single cardholder to pursue, but which can
add up to millions of dollars in refunds when consumers band together. The base
payment that cardholders will receive is $25, with additional awards based on
the size of their costs resulting from Chase's change in loan terms.
don't sign up for financial services with the expectation they're going to sue
the company," said Hines. "But they're surprised if a dispute arises that
they don't have this right."
Court disagrees, or at least five-ninths of it does. Two of the top court's
decisions rebuffed challenges to corporate arbitration requirements. In 2011, Vincent
and Liza Concepcion sued AT&T Mobility over a $30.22 sales tax on phones
advertised as "free." The court found that the company's mandatory arbitration rule barred the couple's
lawsuit. The arbitration rule contained numerous protections and benefits for customers
that helped offset the ban on class actions, including coverage of many customers' legal costs and a minimum $7,500 award, or
bump-up, for customers who win their dispute. In 2012, the court reinforced its ruling in Concepcion with a decision involving American Express that butressed the arbitration clause's ban on class-action lawsuits.
Can't get no litigation
Although some big card
issuers dropped their arbitration requirements in 2009, it is still common to steer
disputes away from the legal system. In
a 2012 analysis, researchers found that 95 percent of card balances were
subject to arbitration agreements. Similarly, arbitration is common for bank account
customers at large banks, a study by Pew found.
differ in how tough they are in their arbitration language. For example,
Discover allows new cardholders to reject the mandatory arbitration clause if
they send a letter within 30 days of receiving the card. Many cards allow a
review of decisions and offer help with filing fees and lawyer costs. So far,
AmEx's is the only major card agreement with a bump-up clause that provides a
bounty for cardholders who win their argument.
CREDIT CARD ARBITRATION POLICIES
Bank of America
|Source: U.S. Consumer Financial Protection Bureau; CreditCards.com
of two minds about arbitration versus court. While half in Pew's survey support
the goals of arbitration, such as avoiding costly and sometimes frivolous
lawsuits, 68 percent say they want the option to go to court in a dispute.
overwhelmingly wanted a choice, but they were very conflicted," said Susan
Weinstock of Pew Trusts. Proponents argue that an independent arbitrator can deliver
justice faster and cheaper than court.
CFPB looks at the clauses
The CFPB's study
will provide a rare look inside arbitration. Only one state, California,
requires arbitrators to report the won-lost record for companies versus
consumers, and even there the reports are criticized as opaque and incomplete. Bob
Wieckowski, the head of the state legislature's judiciary committee, introduced
a reform bill in April to tighten the reporting requirements on arbitration
When it announced
the launch of its study, the CFPB said people may not understand they are
giving up their access to court when they sign a financial agreement. But reading
the arbitration clause in your card agreement does not mean you're necessarily protected
if consumers understand arbitration clauses, these clauses may still have
significant impacts that warrant study by the CFPB," the agency said as it
announced the launch of its analysis in 2012. Critics say the clauses can have a chilling
effect, especially when they require that customers pay their own legal bills, even
if they win. A court lawsuit typically makes the loser pay, and lawyers may
work on contingency. But in pay-your-own-way arbitration, where damages are
limited, it may not be worth it to bring a gripe even when your case is a
A fighting chance?
Those are the sorts
of imbalances that the new arbitration terms are aimed at correcting.
In its template
agreement filed with the CFPB as of March 31, American Express' Gold Card now
has, instead of a standard pre-dispute arbitration clause, an expanded
"Claims Resolution" section. It takes up one-and-a-half pages of the agreement's
seven-and-a-half page total. Other AmEx consumer credit cards have nearly
identical language. The new section says that new cardholders can reject the
pre-dispute arbitration requirement by sending a written notice within 45 days
of making their first purchase.
If you don't
opt out by the deadline, the language contains the common arbitration clause
barrier against taking a gripe to court, with the exception of small claims court.
And it forbids joining forces with other consumers in a class action, either in
court or in arbitration proceedings.
On the plus
side, AmEx will pay your fees to bring a dispute against it, if fees exceed the
amount you would pay to file in court, the agreement says. The company will consider whether to
temporarily cover your costs for expert witnesses, if you ask in writing. And if you win an amount greater than the
company's settlement offer, the award will be bumped up to a minimum of $5,000,
plus reasonable attorney fees and costs for experts.
have a vested interest in ensuring we handle these issues early and in a way
that satisfies customers because we want them to continue doing business with
us," AmEx's Norville said.
How well the
new consumer-friendly clauses actually level the playing field remains to be seen
-- and the CFPB's analysis will provide an important look. Consumer advocates
suspect that big banks are willing to write clauses that sound fair, but have
little chance of being used, in return for barring the door against class
really don't read those things," said Brad Reid, business professor and
senior scholar at the Dean Institute for Corporate Governance and Integrity at
Lipscomb University in Nashville, Tenn. "While the 45-day opt-out is good,
they're probably counting on very few people ever triggering it."
proponents say that a look at the results of class-action lawsuits won't be
entirely rosy for consumers. Corporate targets of class actions often say they settle
only to avoid the costs of court, and a big slice of the award frequently goes
to lawyers rather than consumers.
individual arbitration cases, "I think the outcomes will be similar to how
consumers are doing in court," Kaplinsky said. Since 2007, card issuers
have largely stopped using arbitration for debt collection cases, which
inflated their winning record, he said. And while the new arbitration language
keeps its ban on class actions, that doesn't mean gotcha practices by a bank
can be kept quiet by keeping angry consumers out of court.
very easy for people to find out if a bank or a credit card issuer is not
treating a customer right," he said, including regulators and state
attorneys general. In an Internet-enabled world, "It's very easy for the
word to get out."
See earlier stories: Card issuers ditch mandatory binding arbitration, Arbitration clauses rebound
Published: December 4, 2013