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Legal, Regulatory, and Privacy Issues

FAIR bill aims to eliminate forced arbitration for credit card disputes

Activists see an uphill battle for the legislation, particularly in the Senate

Summary

Many cardholders today are tied down to arbitration, and forced arbitration denies consumers the ability to band together in class-action lawsuits.  

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In a bid to give consumers more choice when it comes to credit card and other disputes with corporations, two Democratic lawmakers are pursuing the Forced Arbitration Injustice Repeal Act.

The bill would do away with forced arbitration clauses relating to credit card disputes. This means consumers would have the choice of opting for arbitration after a dispute erupts, instead of being forced into arbitration.

Introducing the so-called FAIR bill earlier this year, Rep. Hank Johnson (D-GA) and Sen. Richard Blumenthal (D-CT) noted that the bill would enable Americans to seek justice through the court system, rather than be tied down to arbitration.

Rep. Johnson observed, “Forced arbitration agreements undermine our indelible constitutional right to trial by jury, benefiting powerful businesses at the expense of American consumers and workers.”

And Sen. Blumenthal noted, “Forced arbitration is unfair, unjust and un-American. One of the fundamental principles of our American democracy is that everyone gets their day in court. Forced arbitration deprives Americans of that basic right.”

See related:  Mandatory arbitration: Most credit cards allow a way out

Small businesses, public interest groups decry forced arbitration

Testifying in a Congressional hearing on arbitration, Alan Carlson, owner of an Italian restaurant in Oakland, Calif., recounted how he can’t go to court to combat American Express’ rules for small businesses that accept consumer payments using Amex cards.

For instance, he has to accept all sorts of Amex cards, even those that carry higher fees and rates that cut into his profit margins.

“Because forced arbitration makes it impossible for small businesses to hold large corporations publicly accountable, those companies are able to continue their unfair business practices and small firms like mine continue to be harmed with no recourse,” Carlson said.

Amex declined to comment on this matter.

A variety of public interest groups are supporting the FAIR legislation, including the Center for Responsible Lending, the Alaska Public Interest Research Group and the National Consumer Law Center.

Lack of choice not ideal for consumers

A 2017 review by CreditCards.com found that two-thirds of 30 large card issuers studied locked consumers into arbitration, based on their contractual terms, even before a dispute arises. And more recently, JP Morgan Chase added back a forced arbitration clause to at least one credit card, its Slate card, even though it had dropped the measure in 2009.

In order to not be tied to arbitration, and retain the option of going to court, consumers have to actively find a card issuer whose contractual agreements do not require mandatory arbitration. They could also choose a card issuer that allows them to opt out of mandatory arbitration soon after they had opened their accounts.

Most card issuers also permit consumers to go to small claims court in the case of individual claims, if they prefer that to arbitration.

In emailed comments, Melissa Stegman, senior policy counsel for the Center for Responsible Lending, said, “It is twisted logic that the onus is on the individual consumer to opt-out. Just as food inspectors evaluate meat to make sure it won’t poison American consumers and the responsibility is on the company with its information advantage to produce safe products, responsible regulation is needed to protect consumers from financial companies that use legalese and fine-print contracts to trap them.”

The CRL sees forced arbitration clauses as preventing consumers from participating in class action lawsuits against lenders. Consumers then have to take on a lender individually.

According to Stegman, “This often gives the company a ‘get out of jail free’ card since it can often surreptitiously pilfer $30 or so from thousands or millions of customers without having to face the consequence of a class action suit.”

Other drawbacks the CRL cites are that the arbitration is typically secretive (without the legal safeguards that a court hearing provides), occurs in a state that’s convenient for the company and could also entail “significant fees” for the consumer.

And although some have argued that doing away with mandatory arbitration would hike up lenders’ costs and consumers would have to pay more for credit, this assertion was not borne out by a 2015 CFPB study on pre-dispute arbitration clauses.

See related:  Why I opted out of credit card arbitration – and you should too

Arbitrators may not be impartial

Lauren Saunders, associate director at the National Consumer Law Center, sees forced arbitration as reducing accountability for corporations.

She noted in emailed comments that credit card holders are at a disadvantage in these situations considering that, among other aspects, “They will have to pursue the dispute alone before a private arbitrator who probably has an incentive to rule for the credit card company in order to get repeat business.”

Ed Mierzwinski, senior director at the U.S. Public Interest Research Group, also pointed to a potential lack of arbitrator impartiality, among other issues. He advises that consumers who open new credit card accounts could have greater legal rights by opting out of arbitration clauses.

Mierzwinski said in an email, “Credit card holders have been deeply harmed [by forced arbitration clauses], except for a short grace period 10 years ago, after the Minnesota attorney general caught the big credit card banks in a skeevy scheme where they were all using an arbitration company owned by a hedge fund affiliated with a debt collector.”

However, according to the American Arbitration Association, a nonprofit arbitration company that has provided arbitration services in a number of cases, “consumers and businesses have a right to an independent and impartial arbitrator and independent administration of their dispute.”

The AAA also says “due process” protocol calls for disclosure about any conflicts of interest on the part of the arbitrator.

Michael Clark, an AAA vice president, said arbitration is more of a “change in venue” rather than a “change in [consumer] rights.” According to him, there are a number of “misperceptions” out there related to mandatory arbitration. Among the advantages the AAA sees to arbitration are that it takes a shorter time than going through the lengthier judicial process.

And an American Bankers Association representative asserted that arbitration is a faster and more efficient way of resolving disputes that keeps costs down for consumers.

“On the other hand, class action cases take years, result in most consumers receiving nothing and are always most profitable for the attorneys who handle the dispute,” the ABA representative said. “Consumers with unique circumstances are unable to join class actions, but can get timely and effective results through arbitration.”

See related:  Limiting mandatory arbitration will benefit consumers

Previous effort to curtail forced arbitration thwarted

At least one previous attempt to tackle mandatory arbitration has not prevailed. There was a CFPB effort in 2017 to do away with forced arbitration, which President Donald Trump and Congress had overturned, using the Congressional Review Act. (The Consumer First Act that’s going through Congress, which has been passed by the House, aims to preserve the authority of the CFPB, and seeks to reinstate the CFPB arbitration provision.)

According to PIRG’s Mierzwinski, “[The FAIR legislation] faces an uphill fight in a divided Congress with a conservative president.” CRL’s Stegman is more optimistic about the bill’s prospects, noting, “There is growing recognition in our society of the injustice of forced arbitration, so we are hopeful that the Fair Act will move forward in the near future. Furthermore, the bill is popular: there is overwhelming support among voters of all political stripes to end the injustice of forced arbitration.”

NCLC’s Saunders sees the bill as having a good chance of getting through the House, but expects it will have a harder time in the Senate “unless people are able to persuade Republicans that it is important to restore our constitutional right to access the courts.”

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Published: June 3, 2019

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