Mandatory binding arbitration sucks, but most of us have agreed to it in numerous consumer contracts, especially with banks, credit card companies, payday lenders, etc. What mandatory binding arbitration means is that if you try to sue your credit card company for, say, reordering transactions to maximize overdraft fees, the company can pull you out of court and force you into private arbitration with no option to certify a class action.
The Servicemembers Civil Relief Act suspends judicial and administrative actions against service members while they are in active service so they can devote their attention to their duties. But there is a big, gaping loophole: mandatory binding arbitration.1
The new bill requires the CFPB to study arbitration in financial products and services, and report back to Congress. Based on the findings of its report, the CFPB may restrict the use of arbitration or ban it outright in financial products and services. We’ll hope for the latter.
If you take a bad thing—debt collection—and subtract fairness, it gets worse. The FTC sounded off on the problems with combining debt collection and forced arbitration. In fact, the FTC recommending banning arbitration on the mandatory binding arbitration of debt collection disputes:
Such a ban should remain in place until the arbitration process can be shown to be fair, transparent, and as affordable as traditional litigation, and until consumers have a meaningful opportunity to opt out of pre-dispute arbitration without losing access to the credit services they seek. Once these conditions have been met, Congress could lift the ban itself, or it could delegate that authority to the Federal Trade Commission or another appropriate consumer financial protection agency or bureau established in the future.
Arbitration is unfair to consumers. This is manifestly obvious to nearly everyone but the arbitration industry and the U.S. Supreme Court.
In Rent-A-Center v. Jackson, The U.S. Supreme Court just ruled that arbitrators have the right to decide whether arbitration is fair or not. That is like asking a bully whether you deserve to get your ass kicked.
Justice Stevens, as the voice of reason for the minority, wondered why the arbitration clause in a contract would remain valid even when the rest of the agreement is not.
The ball is now in Congress’s court. The Federal Arbitration Act is flawed, and the U.S. Supreme Court just made it worse.
National Arbitration Forum’s recent withdrawal from consumer arbitrations has cast a dark shadow on the use of arbitration as an alternative dispute resolution process and created ripples throughout the system.
For example, Bank of America has dropped its arbitration requirement for all consumer transactions. Undoubtedly, this was a reactionary move to NAF’s withdrawal—Bank of America realized that when one of the largest arbitration providers in the country gets sued for bias, something is amiss.
Bank of America just announced that it will no longer require consumers to arbitrate disputes concerning credit cards and other consumer accounts. Great news! The collapse of pre-dispute, mandatory binding arbitration continues. Hopefully other credit grantors will follow suit.
Dennis Kucinich and his House Domestic Policy Subcommittee just released a report on arbitration abuse in the National Arbitration Forum (PDF). In the report, the subcommittee stated that “[c]onsumer arbitration lacks the safeguards that have been designed into our judicial system by our Constitution, by state and federal statutes, and by centuries of judicial decisions” and provided a chart purporting to show those safeguards.
But the chart is almost completely wrong.
While NAF’s exit from consumer arbitration is welcome, and I am thrilled that pre-dispute, mandatory arbitration in consumer contracts may be facing extinction, Kucinich is fooling himself if he thinks consumers will get a fairer hearing in the courts. In part, court rules ensure consumers will not get that hearing in the first place. Also, most state courts are simply too under-funded, under-staffed, and overworked to do anything but rubber stamp collection lawsuits.
Here is what consumers can expect to find in the court system, contrary to what the report states:
Following on the heels of National Arbitration Forum’s agreement to stop handling consumer debt arbitrations, AAA said they will also bow out “until new guidelines are established” (possibly an allusion to the industry’s call for minimum standards in lieu of banning mandatory, pre-dispute, binding arbitration). Now that the two biggest players in consumer debt arbitration are out of the picture, it very well may be the case that most mandatory arbitration clauses in consumer contracts are effectively unenforceable, since many will have specified either NAF or AAA as the forum of choice.
With NAF and AAA out of the way, the only nationwide arbitration forum left is JAMS. Let’s hope they follow suit.
The Minnesota Attorney General’s lawsuit against National Arbitration forum alleges that NAF is “in cahoots” with one of the largest debt collection law firms in the United States, Mann Bracken. Mann Bracken, un-coincidentally, is also one of NAF’s best clients.
Arbitration awards are routinely confirmed by state district courts, as they must be under the Federal Arbitration Act as currently written. After confirmation, the creditor may use garnishment, levy, and other collection tools to collect the award—now a judgment. But the FAA provides for several reasons why state courts should not enforce arbitration awards; one reason is partiality or corruption.
The Minnesota Attorney General’s lawsuit calls into serious question NAF’s impartiality. And although NAF agreed to stop handling consumer arbitrations, there are thousands of arbitration awards floating around that remain potential enforceable.
Consumers facing motions to confirm arbitration awards in district court should bring up the allegations in the lawsuit and question NAF’s impartiality. If NAF is basically working for creditors and debt collectors, their impartiality is merely an illusion, and the arbitration awards should be vacated.