The End Of Consumer Arbitration

By Lisa Smith | September 09, 2009 AAA
The End Of Consumer Arbitration

The American Arbitration Association and the National Arbitration Forum have both exited the business of mediating consumer disputes. The downstream implications of two of the biggest arbitration firms getting out of the business could end forced arbitration at every level from brokerage firm disputes to credit card billing issues and banking problems.

The impact is already being felt, as Bank of America announced that it is dropping the mandatory arbitration clause from its credit card contracts with consumers. Other entities, including cell phone providers, home builders, nursing homes and employers are likely to follow suit if for no other reason than that lack of firms willing to handle the business.

Why Is it Happening?
What's behind this change in the way business gets done? A successful lawsuit in Minnesota appears to be the catalyst.

The attorney general filed suit against the National Arbitration forum, the country's largest provider of dispute services in consumer credit card cases, alleging that the firm "misrepresented its independence and hid from consumers and the public its extensive ties to the collection industry."

The lawsuit revealed a web of interconnected companies that own both the arbitration firm and the law firms that represent credit card companies in disputes with consumers. While the little guy has always felt that the deck was stacked against him when going to arbitration, the Minnesota lawsuit confirmed it and the truth is even uglier than expected. (Find out how to file a claim with your broker and what you can expect throughout the process. Read So, You Want To Take Your Broker To Court.)

The Process
The consumer, already hamstrung by forced arbitration clauses in the fine print of most contracts, is forced to go before an arbitration panel where the attorney for the credit card company and the supposedly neutral mediator both ultimately report to and generate profits for the same owner.

Of course, nobody mentions this connection to the consumer, who is led to believe that the arbitration process in neutral. When the case is found in favor of the creditor, as most cases are, the consumer must pay the bill.

How badly are the tables tilted? Of the 214,000 arbitration claims handled by the National Arbitration Forum in 2006, the attorney general noted that 125,000 (nearly 60%) were handled by attorneys that were connected to the Forum. (Find out what to do if you have a dispute with your broker. Check out Get A Hold On Mishandled Accounts.)

The resulting settlement from the Minnesota suit forced the National Arbitration Forum out of the business. Shortly thereafter, the American Arbitration Association announced that it would end its participation in consumer disputes until new guidelines for the process were established.

Change In The Works
These developments are probably just the tip of the iceberg. The Arbitration Fairness Act (H.R. 1020) is being advocated at a national level. Consumers, franchise owners, lawyers and consumer groups are all seeking to level the playing field.

The Obama administration's proposed creation of a Consumer Financial Protection Agency suggests political support for the changes exists at the highest level.

So what happens if forced arbitration disappears? Disputes will likely take longer to settle, the lawyers will make a bundle of money, and the little guy just may get treated fairly if he can afford to press his case. (Don't want to involve lawyers? Read Broker Gone Bad? What To Do If You Have A Complaint to find out how to resolve a problem without them.)

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