U.S. PIRG Consumer Blog: Binding mandatory arbitration under scrutiny

Most Americans think that everyone with a dispute has the right to a day in court. Wrong. On Tuesday, I am speaking on a panel in Philadelphia, at a conference of the National Association of Consumer Agency Administrators. The topic: Binding mandatory arbitration. It's an important access to justice issue that may finally be receiving serious legislative scrutiny, with hearings and bills to protect consumers, employees and farmers under consideration in both the House and the Senate. And, investor arbitration is the topic of Washington Post syndicated columnist Michelle Singletary's column today: If you take on your broker, you're likely to lose.

Who is being forced into arbitration? Pretty much everyone, including identity theft victims of MBNA credit card bank. Identity theft victims? They never had an account! Yet, as described in recent testimony by Paul Bland of Public Justice, MBNA routinely files arbitration claims seeking "unpaid" debts from the victims, and gets its favorite arbitration company to "blackball" arbitrators that rule for the consumer, even once.

Did I say "pretty much everyone?" Wrong. Car dealers convinced Congress to pass a law a few years ago protecting them, as "small" guys, from mandatory arbitration in disputes with car manufacturers (big guys). What about car buyers? Arbitration. Must be as big and powerful as car dealers. However, at the end of the last Congress, the Sens. Jim Talent-R-MO and Bill Nelson (D-FL) amendment banning mandatory arbitration as an unfair practice in predatory loans to military personnel became law as part of S. 2766, the 2007 Defense Appropriations bill. That was an important step.

Over the last 15-20 years, a concerted effort by corporations and their law firms has resulted in the insertion of binding mandatory arbitration clauses into virtually all consumer, employee, investor, small farmer and other small business contracts. In many cases, the consumer never even signed that contract (and most are one-sided standard form contracts, anyway, not negotiable contracts); rather, it was amended with a "blow-in insert" to a monthly credit card or other bill, sometimes with a "right" to opt-out or decline the change. Employees have no real choice, either, of course, other than quitting. As for the farmers, when the agribusiness truck full of baby chicks arrives, they don't get the truckload unless they sign the receipt that includes an "I agree to arbitration" line.

In his recent detailed testimony at a hearing (all testimony) of the House Judiciary Committee, consumer lawyer Paul Bland of Public Justice explained that private arbitration firms are using practices that make arbitration even more unfair:

Private arbitration companies are under great pressure to devise systems that favor the corporate repeat players who draft the arbitration clauses (and thus decide which arbitration companies will receive their lucrative business). For example, arbitrators who rule against corporations and in favor of individuals are often blackballed from serving as arbitrators in future cases. Also, some arbitration companies have undertaken advertising campaigns aimed at prospective corporate clients which make a number of inappropriate promises of favorable treatment.

The Singletary column reports on a study that finds it is getting harder and harder for small investors to win claims against their brokers. While this is true, the small investor arbitration system run by the private regulator known as the NASD remains one of the few arbitration systems that is not stacked completely against the consumer. As an example concerning the private firm known as the National Arbitration Forum in Paul Bland's testimony explains:

From material taken from NAF's website disclosures pursuant to California's disclosure requirement, enclosed as Exhibit 8 hereto are the results from a single quarter's worth of decisions by just one NAF arbitrator. This person handled 80 cases brought by banks against individuals, and ruled for the bank in all 80 cases. In 78 of the 80 cases, she gave the bank 100% of the amount it claimed, in two cases, she gave slightly less. She also ruled on one claim brought by a consumer against a bank, and dismissed it.

One of NAF's largest corporate clients is the massive MBNA credit card company, now a unit of Bank of America. Bland's testimony explains that MBNA uses NAF as a debt collection mill, including to collect past-due debts, and how it forces identity theft victims to submit to arbitration.

A large number of cases have been documented establishing that the NAF has entered awards in favor of MBNA and other lenders against persons who were identity theft victims who did not, in fact, owe any debts.

Yes, let me explain that again. An identity theft victim is a person who never had an account with a financial institution. An imposter did. Doesn't seem to matter to MBNA.

Among the pro-small guy arbitration bills that have been introduced in the 110th Congress are the following:

S. 221 (Grassley-R-IA and Feingold- D-WI), to provide for fairness in livestock and poultry contracts. This bill may become law as part of the Farm Bill.

HR 1443 (Gutierrez-D-IL) to make mandatory arbitration clauses in consumer contracts an unfair and deceptive practice.

HR 1519 (Gonzalez-D-TX) to prohibit mandatory arbitration in homebuilding contracts.

S. 1133 (Akaka-D-HI) to prohibit mandatory arbitration in predatory tax refund anticipation loans.

We expect many more bills to be introduced. And we expect a lot of Congressional action to restore access to justice. Visit the PIRG-backed Givemebackmyrights.org campaign for more information.