A lawsuit by Minnesota’s attorney general caused a quick retreat by the leading firm that provides binding arbitration services to millions of credit cardholders.
Well, that didn’t take long.
Less than a week after being targeted by a sharply worded lawsuit, the nation’s largest credit-card arbitration firm staged a full retreat this past weekend, agreeing not to accept new cases related to credit card and other consumer debts.
Consumer advocates Monday applauded Minnesota Attorney General Lori Swanson for achieving the swift and near-total capitulation of the National Arbitration Forum, which she accused of customarily deceiving consumers as it handled more than 200,000 collection cases a year.
“Attorney General Swanson obviously did a good job of nailing a long-criticized arbitration mill for its seamy ties to lenders and debt collectors,” said Ed Mierzwinski, consumer program director of the U.S. Public Interest Research Group, a federation of consumer interest organizations around the nation.
Now, he and other consumer advocates said, Congress must take wider action to prohibit other abuses related to the growing phenomenon of compulsory and binding arbitration — a process that does an end-run around the court system and has been slipped into tens of millions of consumer contracts.
In the lawsuit, filed just last Tuesday, Swanson accused NAF of taking advantage of consumers by claiming that its arbitration procedures were independent and neutral — even though the firm is affiliated with a company that owns one of the nation’s largest debt collection agencies and NAF maintains close links to the credit card operations that file claims against consumers
In essence, the suit claimed, that stacked the deck against consumers.
A 2007 study by Public Citizen, a consumer rights organization, found that consumers lost 94 percent of the cases filed by MBNA (now owned by Bank of America) and arbitrated by NAF. The arbitration firm also serves Chase, Citi, Discover, American Express and other credit card issuers, according to Swanson’s office. The NAF pointed to another study, funded by the U.S. Chamber of Commerce, that found binding arbitration was fair.
Sharp language in lawsuit
“Just about every American has a credit card,” said her lawsuit (read the suit), filed in Minnesota district court. “The credit card companies often require — deep in the fine print of the consumer agreement — that the consumer forfeit his or her right to have any dispute resolved by a judge or jury.”
On Monday, Swanson said “I am very pleased with the settlement. To consumers, the company said it was impartial, but behind the scenes, it worked alongside credit card companies to get them to put unfair arbitration clauses in the fine print of their contracts and to appoint the Forum as the arbitrator. Now, the company is out of this business.”
In a prepared statement, a representative of NAF confirmed that the Minnesota-based company “will voluntarily cease to administer consumer arbitration disputes as of Friday” under the agreement reached with Swanson’s office.
The settlement requires NAF to stop accepting new consumer arbitration cases nationwide — including cases filed by credit card companies, banks, utilities, health care operations, cell phone companies and other firms. It can continue to handle cases involving Internet domain names and personal injury claims.
Arbitration’s defenders say it’s fair
Michael Kelly, chief executive officer of Forthright, an affiliated firm, said that NAF maintains that its arbitrators were neutral, conducted fair proceedings and issued proper rulings. But, he said, the company no longer can afford to defend itself against a variety of challenges.
The City of San Francisco sued NAF in California state court and several bills pending in Congress would restrict or regulate the use of binding arbitration.
Without access to arbitration, consumer disputes will now be forced into an overcrowded and underfunded legal system, where many consumers who cannot afford attorneys will have to navigate complex court procedures.
|— Michael Kelly|
“Mounting legal costs, a challenging economic climate and increased legislative uncertainty surrounding the future of arbitration have prompted the Forum to exit the consumer arbitration arena …,” Kelly said.
“Without access to arbitration, consumer disputes will now be forced into an overcrowded and underfunded legal system, where many consumers who cannot afford attorneys will have to navigate complex court procedures,” he said. “The consequence to American consumers is that there will be no meaningful alternative to costly and unpredictable litigation.”
Maybe that’s true, critics said Monday, but consumers are better off in the crowded courts that in arbitration proceedings that are forced on them and are not entirely neutral.
“The next step is to pass legislation banning forced arbitration in consumer contracts,” Mierzwinski said. “Until then, consumers still face barriers to justice that allow companies to perpetuate unfair practices.”
Swanson is expected to testify before a congressional committee this week. She said she will support a ban on mandatory arbitration clauses in credit-card and other consumer contracts.
“The playing field is tilted against the ordinary consumer when credit card companies bury unfair terms like forced arbitration clauses in fine print contacts,” she said. “Congress should change that.”
See related: Minnesota attorney general files lawsuit over binding arbitration, Study says binding arbitration is fair, Credit card arbitration: What it is, how it works, 6 tips for dealing with binding arbitration