Keeping arbitration fair for consumers

Sometimes the small print will cost you.

Few people bother to read the consumer agreements delivered with their cell phones, bank statements and credit card bills, but that fine print has triggered a nationwide legal battle over consumer rights.

Consumer agreements often contain mandatory arbitration clauses that block customers from suing the company or joining a class action lawsuit over unfair fees, exorbitant finance charges, or poor service. Disputes must be resolved out of court in arbitrations that are confidential and binding. But the supposedly independent arbitrators often side with the corporations that hire them, says Charles Shafer, president of the Maryland Consumer Rights Coalition and a law professor at the University of Baltimore.

“The corporations have a lot of influence,” Shafer says. “The businesses have access to the track record of the arbitrators so they know who is favorable [to corporations] and who is not.”

In a July 15 letter, the coalition asked Maryland Attorney General Douglas Gansler to investigate the National Arbitration Forum, the nation’s largest administrator of consumer arbitrations. A day earlier, Minnesota Attorney General Lori Swanson had sued the company alleging consumer fraud, deceptive trade practices, and false advertising. The suit also accused the Minneapolis-based company of concealing its extensive ties to the debt collection industry.

A 2007 report by the watchdog group Public Citizen found that National Arbitration Forum arbitrators ruled against consumers in 94 percent of the cases in California that were examined. One arbitrator handled 68 cases in a single day and ruled for the business in every case.

On July 20, the National Arbitration Forum settled the Minnesota lawsuit by agreeing to pull out of the consumer arbitration business across the country. The company denied wrongdoing but said it “lacks the necessary resources to defend against increasing challenges to arbitration on all fronts.”

The American Arbitration Association, which wasn’t involved in the Minnesota suit, also announced last month that it would no longer handle consumer debt arbitrations because of questions about the neutrality of arbitrators and other problems.

Congress is considering several bills that would ban mandatory arbitration clauses in consumer agreements. The bills wouldn’t affect arbitrations agreed to by both parties after a dispute arises. Arbitration also is different from mediation, which seeks to resolve disputes through nonbinding negotiations.

A lawsuit over a Maryland woman’s credit card bill went all the way to the Supreme Court, triggering a 5-4 decision in March. Betty Vaden was sued by Discover Financial Services over more than $10,000 in past-due credit card charges. Vaden then countersued, claiming Discover’s finance charges, interest rates and late fees violated state law.

Discover tried to compel arbitration over Vaden’s claims through a mandatory arbitration clause in its consumer agreement, even though the company already had sued her in Maryland state court. The Supreme Court ruled that Discover couldn’t have it both ways and the case would stay in state court.

The decision was a narrow victory for Vaden, who later settled her suit, but it might be bad news for consumers, says Vaden’s attorney, John Mattingly Jr. of Leonardtown. The Supreme Court ruling will make it easier for corporations to use the federal courts to compel arbitration against consumers, he says.

“Ultimately, those corporations are going to sit back and say, ‘We might have lost the battle but we won the war,’ ” Mattingly says.

Brendan L. Smith is a freelance writer based in Washington, D.C.