The War of Words over Consumer Arbitration Heats Up

In the fight over the Arbitration Fairness Act of 2007, H.B. 3010, opposing interest groups are waging an interesting propaganda war behind the scenes. “The Arbitration Trap: How Credit Card Companies Ensnare Consumers” contains the findings of Public Citizen, a non-profit organization representing consumer interests, after an eight-month examination of the use of binding mandatory arbitration by the credit card industry. In its report, Public Citizen primarily focused on credit card giant MBNA and its reliance on the National Arbitration Forum (NAF) as arbitration administrator. As a result of this study, Public Citizen claims that “binding mandatory arbitration is a rigged game in which justice is dealt from a deck stacked against consumers.” (page 1). Below is just a highlight of some of the allegations resulting from an analysis of nearly 34,000 cases in National Arbitration Forum’s California caseload:

1. Substantial Use of Binding Mandatory Arbitration by the Credit Card Industry
2. Corporations, Not Consumers, Choose Binding Mandatory Arbitration
3. Stunning Results that Disfavor Consumers
4. Biased Decision-makers
5. A Process Shrouded in Secrecy
6. A Lack of Due Process Safeguards
7. Strong Incentives to Establish Anti-consumer Rules

Also included in the report were the experiences of Harvard Law Professor Elizabeth Bartholet, who arbitrated approximately 19 cases with NAF, all involving debtor claims with a particular credit card company. In a deposition taken on September 26, 2006 in the case of William Carr v. Gateway Inc., Bartholet claims that after awarding a debtor about $48,000, NAF subsequently removed her from seven credit card cases she was scheduled to handle, sending a notice to the debtors that Bartholet had a scheduling conflict, and that credit card companies voluntarily dismissed her in four cases. After a series of events that led Bartholet “to believe that NAF was supervising and implementing an arbitration process that was systematically unfair,” Bartholet resigned. (Depo. 14). In particular, the fairness concern “was that the repeat player credit card company was allowed to eliminate an arbitrator that they found coming out against them.” If this was allowed to continue, Bartholet expressed the concern that what would be left is a panel of arbitrators that would be systematically biased. (Depo. 47)

In a separate 2006 article in the West Virginia Lawyer by former West Virginia Chief Justice Richard Neely entitled “Arbitration and the Godless Bloodsuckers,” Neely makes similar allegations while reflecting on his experience as a NAF arbitrator. Through his experience as an NAF arbitrator, Neely says he learned how “Godless bloodsucking banks have converted apparently neutral arbitration forums into collection agencies to exact the last drop of blood from desperate debtors.” (page 1). According to Neely, debtors largely ignore the arbitration paperwork and default judgments are entered without any involvement by the debtor. What really upset Neely, however, was the fact that banks also often ask for the substantial costs related to the arbitration, a situation he likens to the award of legal fees since the arbitration organization is doing all the work of collection. Neely further alleges that it was his refusal to award such litigation-related fees during an arbitration that got him black-balled from further cases. Like Bartholet, Neely argues that the banks get a list of arbitrators and are able to strike, without cause, those who they fear won’t provide favorable judgments. What results, he claims, is a problematic system where arbitrators depend upon favorable verdicts for their income.

In response, the National Arbitration Forum labeled these allegations of bias in favor of lenders, as “irresponsible and unsupported,” and maintained instead that their efforts have helped make arbitration available to consumers and businesses alike. In fact, NAF claimed that allegations by former NAF arbitrators Richard Neely and Elizabeth Bartholet, that they were “blackballed” through the use of repeated Rule 21 removals, were inconsistent with the facts and noted that Rule 21 of the National Arbitration Forum Code of Procedure, permitting a party to request removal of an arbitrator without cause, was a common arbitration procedure which did not allow any party a systematic advantage. Instead, NAF claims that the percentage of Rule 21 removal requests is “infinitesimally small,” and that there is no evidence that it is being misused. Additionally, NAF claims that Neely’s and Bartholet’s work with NAF illustrates the fairness provided parties and the integrity of NAF procedures. With respect to Bartholet, NAF claims that all her allegations show is that she was removed pursuant to Rule 21 three times and that an incorrect notice document was sent to the responding parties by accident. According to NAF, this sort of removal is a far cry from the systematic manipulation they have been accused of but, rather, exactly the sort of procedural maneuvering also practiced in the courts. Additionally, while conceding that an incorrect notice document was sent which stated that Bartholet had a scheduling conflict, NAF chalks it up the error to a clerical mistake and points out that the proper documents were also mailed. In their defense, NAF also points to Professor Bartholet’s deposition where she stated that she issued decisions based on merits of the case by applying NAF rules and the law and noted that she was never pressured by NAF in any way regarding her decisions. As for Neely, NAF claims he was never removed by any party from an NAF arbitration case and that his report illustrates “an arbitration system operating as it should, with impartial arbitrators deciding cases under the appropriate legal and ethical standards.”

The Chamber of Commerce has also weighed in. In an article for the U.S. Chamber’s Institute for Legal Reform, Professor Peter Rutledge responds to each point of the Public Citizen report. See Report

In light of these allegations, members of the ADR community are understandably concerned, especially considering that NAF has been a prominent sponsor of the ABA Dispute Resolution Section's Annual Meeting. There has been a significant exchange of views on some listserves. Unfortunately, the war of words is creating much heat while shedding little light on the situation. Public Citizen and the Chamber of Commerce are not exactly unbiased observers. In addition, even if these damning allegations against NAF are true, are the conditions the same at the AAA and other administrative agencies? What is the best way to fix the potential for abuses without throwing out the baby with the bathwater? Unfortunately, H.B. 3010 overreaches and threatens to undermine the entire arbitration system in pursuit of a fix to these problems. As a result, the bill will probably languish and no useful reforms will be legislated.

An interesting alternative can be found in D.C. where a consumer-friendly version of the Revised Uniform Arbitration Act, B17-0050, was unanimously approved by the D.C. Council Oct. 2, 2007, and transmitted to Congress Dec. 31. If Congress takes no action by Jan. 31, 2008, the bill will become law. It has an effective date of July 1, 2009. The DC-RUAA contains a number of provisions not found in the RUAA adopted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) that specifically relates to consumer arbitration. For example, the D.C.'s enrolled bill will require arbitration service providers that conduct over 50 consumer arbitrations per year to make quarterly disclosures on the Internet about their consumer caseloads. According to ADR World: “The disclosures that will be required of arbitration providers that administer more than 50 consumer arbitrations annually include the names of the non-consumer party, the type of dispute, the winning party, the number of arbitrations filed involving the non-consumer party, whether the party was legally represented, the disposition of the dispute, the amount of the claim and the award, the name of the arbitrator, and the arbitrator's fee and how it was allocated among the parties. The D.C. RUAA will immunize arbitration providers from liability for publishing this information. It also targets "loser pays" provision in consumer arbitration agreements, prohibiting arbitration providers from administering consumer arbitrations where the agreement requires the losing party to pay all fees and costs related to the proceeding. In addition, the D.C. RUAA will adversely affect arbitration providers that have a financial interest in any party or attorney to an arbitration proceeding. The relevant provision will prohibit providers from administering arbitrations if within the preceding year they had such an interest. Drafters of arbitration agreements affecting consumers will have to provide in those agreements detailed information on filing fees, the average daily costs of arbitration, costs associated with in-person hearings, and how the costs will be apportioned between the parties. A failure to make these disclosures will not make the arbitration agreement unenforceable, but the failure could be considered an unlawful trade practice under the D.C. Code. Moreover, the disclosed information could be considered in determining whether a consumer arbitration agreement is unconscionable or unenforceable under other laws. Another consumer-oriented provision in the enrolled bill will make pre-dispute arbitration agreements in consumer agreements unenforceable "except to the extent federal law provides for its enforceability." Yet another will render pre-dispute arbitration agreements in insurance contract void and unenforceable. However, these agreements may be permitted if the decision to use arbitration is made at the time of the dispute and that decision is not a condition for continued policy coverage under the same terms that otherwise would apply.”

Although many of the DC-RUAA provisions are bound to create havoc, portions of it seem to adequately address the problem of repeat players having more information than the consumers.