The Arbitration Trap

77 Pages·2007·0.5 MB·English

How Credit Card Companies
Ensnare Consumers
September 2007
Acknowledgments
The primary author of The Arbitration Trap: How Credit Card Companies Ensnare
Consumers is John O’Donnell, a Senior Researcher in Public Citizen’s Congress Watch
division. Congress Watch Director Laura MacCleery and Congress Watch Research
Director Taylor Lincoln edited the report. Congress Watch Senior Researcher Alexander
Cohen made significant contributions by converting the National Arbitration Forum’s
reports on its consumer arbitrations in California into a spread sheet and by assisting with
analysis of the data. Congress Watch Civil Justice Legislative Counsel Linda Andros and
Congress Watch Field and Outreach Director Angela Canterbury provided substantial
guidance. Public Citizen would like to thank F. Paul Bland, Jr., Staff Attorney at Public
Justice; Ira Rheingold, Executive Director of the National Association of Consumer
Advocates; Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School; and
Ed Mierzwinski, Federal Consumer Program Director at U.S PIRG, for their input and
advice.
About Public Citizen
Public Citizen is a non-profit organization with 100,000 members based in Washington,
D.C. We represent consumer interests through lobbying, litigation, research and public
education. Founded in 1971, Public Citizen fights for consumer rights in the marketplace,
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governmental agencies. Congress Watch is one of the six divisions.
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Public Citizen September 2007
Contents
Introduction.......................................................................................................................1
How Consumers Are Trapped by the Fine Print 3
How Credit Card Companies – and the National Arbitration Forum –
Pursue Consumers with BMA 5
What’s Wrong with BMA? 6
Troy Cornock: Identity Theft Claims Fall on Deaf Ears 11
Chapter I: Data Show BMA Is Stacked Against Consumers.......................................13
Data from Alabama Case Show Overwhelming Anti-Consumer Record of NAF 13
Use of NAF Yields Poor Results for Consumers 14
Public Efforts by NAF to Defend Arbitration 19
The National Arbitration Forum: Its Origins and History 21
Looking Closely: A Case Study of an Arbitrator-Turned Judge 23
Anastasiya Komorova: Lack of MBNA Account Does Not Appear to Matter 26
Chapter II: BMA Rife with Problems for Consumers ................................................28
Arbitration Proceedings Are Secret 28
Arbitrators Have Financial Incentives to Favor Firms that Hire Them 29
Arbitration Often Costs Consumers More Than Court 34
Arbitration Lacks Civil Courts’ Safeguards to Ensure Fairness 37
Judge Rules Arbitration Awards Are a Denial of Due Process 44
Antitrust Allegations Leveled Against Credit Card Industry over Arbitration
Agreements 47
Beth Plowman: Identity Theft in Nigeria Follows her Home 49
Chapter III: Congressional Action on BMA and Credit Cards..................................50
Javier Beltran: Lack of MBNA Account Does Not Dissuade NAF 55
Chapter IV: What Consumers Can Do to Fight BMA and Protect Themselves.......56
Use Credit Cards with Care 56
Examine All Consumer Contracts for Arbitration Clauses 56
Put Up a Fight 57
Appendix A: A Brief History of the Move to BMA......................................................58
Appendix B: Statistical Analysis....................................................................................60
Appendix C: Legislation Pending in Congress.............................................................63
How the Credit Card Companies Ensnare Consumers
Public Citizen September 2007
“If arbitration were in any way beneficial to
consumers, it could be made an option and
consumers would choose it.”
Richard Alderman,
Director, Consumer Law Center
University of Houston Law Center1
Introduction
This report summarizes the results of obscured by the arbitration firms, which
Public Citizen’s eight-month examina- post the records in a manner that makes it
tion of the use of binding mandatory arbi- difficult to see patterns and analyze re-
tration by the credit card industry. Due to sults.
widespread anecdotal evidence of abuse,
we particularly focused on credit card For the first time, we have comprehen-
giant MBNA’s reliance on one arbitration sively crunched data for the nearly 34,000
company, the National Arbitration Forum cases contained in NAF’s California re-
(NAF). This report shows that binding ports. We found the following:
mandatory arbitration is a rigged game in
which justice is dealt from a deck stacked • Enormous Numbers of Affected
against consumers. Consumers:With more than 1,600
part-time arbitrators on its national ros-
Consumers are railroaded into arbitration ter, NAF admits to handling more than
even if their identity was stolen or they 50,000 cases a year.2In California
never agreed to take disputes to arbitra- alone, NAF handled 34,000 consumer
tion. In several cases we uncovered, NAF, arbitrations between Jan. 1, 2003, and
which routinely handles MBNA’s “collec- March 31, 2007.
tion” arbitrations, ignored repeated con-
sumer protests that identity theft was the • Substantial Use of Binding Manda-
source of the alleged debt. tory Arbitration by the Credit Card
Industry: NAF identified virtually all
In fact, we found that NAF is today the of its California cases as “collection”
credit card industry’s go-to dispenser of cases filed against consumers by credit
swift decisions against its customers. The card companies or firms that buy debts
Forum and other arbitration providers ob- from these companies for cents on the
sessively enshroud their work in secrecy. dollar. Fifty-three percent of those
Yet the state of California in 2003 opened cases involved MBNA credit card
a small window into this seedy world by holders.
requiring arbitration providers to furnish
some limited data on their own corporate • Corporations – not Consumers –
Web sites on each consumer arbitration Choose Binding Mandatory Arbitra-
case they handle. Even this information is tion:All but 118 of the cases were
How the Credit Card Companies Ensnare Consumers 1
Public Citizen September 2007
filed against consumers by credit mation that would allow consumers to
card/finance companies or firms that even begin to assess the bias of an ar-
purchase their debts. In other words, bitrator.
consumers chose to bring only 118
cases before NAF while corporations • A Race to the Bottom for Arbitra-
chose this business friendly forum tion Firms:Companies track how ar-
nearly 34,000 times – 99.6 percent of bitrators rule, and do not choose
the total cases. arbitrators who do not rule in their
favor. One NAF arbitrator, a Harvard
• Stunning Results that Disfavor Con- law professor, was blackballed after
sumers: In the more than 19,000 cases she awarded $48,000 to a consumer in
in which an NAF-appointed arbitrator a case in which a credit card company
was involved, 94 percent of decisions filed a claim against the consumer.
were for business. After the same credit card company
had her removed from other pending
• Biased Decision-makers:Arbitrators cases, she resigned, citing NAF’s “ap-
have a strong financial incentive to parent systematic bias in favor of the
rule in favor of the companies that file financial services industry.”
cases against consumers because they
can make hundreds of thousands of • A Process Shrouded in Secrecy:NAF
dollars a year conducting arbitrations. is so keen to hide its work from the
The arbitrators are chosen by the arbi- public and limit information about its
tration firms hired by MBNA and other decisions that its arbitrators do not
corporations, which are unlikely to generally issue a written decision un-
pick arbitration firms that produce re- less one of the parties specifically re-
sults they do not like. Arbitrators rou- quests and pays for it in advance. In
tinely charge $400 or more an hour. one case examined by Public Citizen,
Top arbitrators can charge up to the cost of a three-page decision was
$10,000 per day and some make $1 $1,500.
million a year. In comparison, Califor-
nia Superior Court judges earn • A Lack of Due Process Safeguards:
$171,648.3 NAF also limits the access of parties in
arbitration to key information that they
• The Busiest Arbitrators Produce the would be allowed to obtain in court.
Results Corporations Seek: In Cali- And the sad state of the law makes it
fornia, a small, busy cadre of 28 arbi- nearly impossible for consumers to ap-
trators handled nearly 9 out of every peal adverse decisions by arbitrators.
10 NAF cases. This group ruled for
businesses 95 percent of the time. An- This report also takes a close look at the
other 120 arbitrators handled slightly handiwork of a few significant arbitrators.
more than 10 percent of the cases in What we found was troubling.
which an arbitrator was assigned. They
ruled for businesses 86 percent of the For example, one arbitrator, Joseph Nar-
time and for consumers 10 percent. dulli is a pro-business lawyer who handled
Outside of California, there is no infor- 1,332 arbitrations. He signed arbitration
How the Credit Card Companies Ensnare Consumers 2
Public Citizen September 2007
awards on 97 days spread over a 46-month found in database form on Public Citizen’s
period, sometimes signing dozens of deci- Web site at www.citizen.org.
sions in a single day. He appears to make
decisions in most cases based solely on In sum, we found that the privatization of
documents supplied by the credit card our justice system through pre-dispute
company. He ruled for business 97 percent BMA is being pushed by business interests
of the time (in 1,292 cases), awarding cor- well aware of its perils for consumers.
porate interests $15 million, and for the BMA is, in fact, a deliberate strategy to
consumer only 1.6 percent of the time (in substitute a secret, pro-business kangaroo
21 cases). (The remaining 19 cases on his court for an open trial on the merits of a
docket were claims against MBNA card- claim. The courts provide little protection
holders that settled without a monetary from this increasing threat.
award to either side.)
Bills now pending in Congress in both the
On his busiest day, Nardulli signed 68 ar- House and Senate would do much to rem-
bitration decisions, awarding credit card edy this unhappy situation for consumers.
companies and debt buyers every penny of Sen. Russell Feingold (D-Wis.) and Rep.
the nearly $1 million they demanded. Hank Johnson (D-Ga.) recently introduced
legislation, the Arbitration Fairness Act of
This Introduction explores how millions of 2007 (S. 1782 and H.R. 3010, respec-
consumers are trapped in contracts with tively) to fix the problem. This report pro-
businesses and summarizes the serious de- vides both the data and the stories that
ficiencies in the arbitration process for show why consumers and policy-makers
consumers, including the lack of due should support this common-sense solu-
process. Throughout the report are case tion and restore the rights and freedoms of
studies of BMA victims. millions of Americans.
Chapter One presents our findings from an How Consumers Are Trapped by the
investigation of the California data and Fine Print
provides compelling evidence of the un-
fairness of arbitration to consumers. Today, just about every American who has
a credit card, builds a house, has a cell
Chapter Two gives a brief history of the phone, gets a job or buys a computer has
move to pre-dispute BMA and proves that likely unknowingly agreed to settle any
at every turn, the system is stacked in dispute through binding mandatory arbi-
favor of corporate interests. Congressional tration (BMA), a for-profit backroom
action and the influence of money in poli- process of settling disputes. This report
tics on consumer protection legislation are takes a close look at the credit card indus-
discussed in Chapter Three. try’s abuse of BMA and provides a chilling
account of a stealth campaign by big busi-
The last chapter provides a short list of ness to undermine the ability of ordinary
consumer tips for those caught up in the Americans to seek justice in court.
BMA web. Finally, the appendices provide
the raw data underlying some of our find- These days, most Americans owe more
ings; the remainder of the evidence can be than they own. Credit card debt has been
How the Credit Card Companies Ensnare Consumers 3
Public Citizen September 2007
mounting and is estimated to be close to clause buried in the fine print strips them
$800 billion of consumers’ $900 billion in of their constitutional right to a trial by
revolving debt.4A recent film, “Maxed jury and an impartial judge.
Out,” depicted a national crisis in credit
card industry abuses. So what happens How is the system rigged? First, credit
when mistakes are made and the customer card and other companies drive millions of
has been wronged? dollars in business to arbitration firms,
which in turn hire arbitrators to rubber-
Many consumers will find themselves stamp rulings that favor business and then
forced into the shadowy world of binding pass many of the costs onto the consumer.
mandatory arbitration, where their chances The evidence proves that BMA stacks the
of successfully defending themselves are deck to favor corporate interests over con-
slim to none. Public Citizen found that in a sumers.
sample of nearly 19,300 California cases
decided by one arbitration firm, consumers The method is to isolate and conquer, as
prevailed in 4 percent of the cases, while the cloak of secrecy makes it impossible to
companies prevailed in 94 percent. (The see the full picture of corporate wrongdo-
prevailing party was not listed in the re- ing or to use the public courts to stop it.
maining cases.)
Safeguards built into the justice system are
Binding mandatory arbitration is wholly not found in binding mandatory arbitra-
distinct from post-dispute arbitration, non- tion. For example, arbitrators decide most
binding arbitration and mediation or other credit card cases on the basis of documents
forms of alternative dispute resolution, supplied by the company without the pres-
particularly because agreements to use ence – and sometimes without the knowl-
them are made after a dispute arises, not edge – of the consumer. Consumers must
before and as a condition of receiving the pay to have a hearing. Hearings are not
good or service. open to the public, no transcripts are pro-
duced and, unless one of the parties specif-
Binding mandatory arbitration is big busi- ically asks – and typically pays an extra
ness. Binding mandatory arbitration fee – written explanations of decisions
clauses are found in most boilerplate con- often are not provided. Even when written
tracts for everyday needs, including auto decisions are provided, they are not public,
insurance, as well as nursing homes or which means that consumers cannot learn
other services like cable television. To re- how or why arbitrators ruled in other
ceive a good or service, the consumer cases. And appeal is nearly impossible.
must sign the contract. According to a
legal brief filed by the Chamber of Com- Core principles like the right to discovery
merce of the United States in a 2006 of information about the case are severely
Supreme Court case, BMA clauses are in limited, and due process flies out the win-
millions of consumer contracts across the dow. Instead, for-profit arbitration firms
United States.5 like NAF make up the rules and then
choose when to apply them – usually to
Many consumers would be shocked to consumers’ detriment.
learn that a binding mandatory arbitration
How the Credit Card Companies Ensnare Consumers 4
Public Citizen September 2007
This is a deeply unfair end-run around the How Credit Card Companies – and the
public courts and our civil justice system. National Arbitration Forum – Pursue
This Public Citizen report contains many Consumers with BMA
compelling stories describing the plight of
consumers caught in the web of BMA. Public Citizen’s investigation found that
Even those who found justice at the end BMA clauses are used by major credit card
had to fight their way through years of companies, and most notably by MBNA,
costly battles before being vindicated. to collect consumer debts.aMBNA fre-
quently uses the services of one particular
And the secrecy about this widespread arbitration provider, the National Arbitra-
practice is nearly absolute. The data in this tion Forum. This small for-profit Min-
report were indefensibly difficult to un- nesota company has become a major
cover. Only one state, California, requires player over the last decade in the efforts of
arbitration firms to reveal any information corporations to keep disputes with cus-
at all about their use of arbitration and the tomers and employees out of court and in
win-lose rate of corporations and con- binding mandatory arbitration.
sumers. The data are maintained by arbi-
tration providers on their own Web sites, NAF, which also calls itself “The Forum,”
where they are stored in thousands of un- is arguably the most notoriously unfair of
wieldy individual records. For example, the few major companies that sell binding
NAF posts quarterly reports about its Cali- mandatory arbitration services nationally.
fornia work in a hard-to-find place on its While many prominent and respected
Web site, using a very cumbersome format lawyers are included on NAF’s roster, its
that makes analysis difficult. For the first Minnesota staff steers the vast majority of
time, with this report we are making these its cases to a very small number of hand-
data publicly available in an easily search- picked arbitrators. Naturally, these arbitra-
able and downloadable format. (Available tors have a financial incentive to move
at www.citizen.org/congress/civjus/arbitra- quickly through as many cases as possible.
tion/NAFCalifornia.xls.)
In 1999, an attorney for what is now part
Although billed as a neutral alternative of JPMorgan Chase described NAF in
that is cheaper and more efficient than the handwritten notes as “appearing to be a
courts, BMA is in fact weighted heavily in ‘creditor’s tool’,” according to an antitrust
favor of companies that pick the arbitra- lawsuit filed in federal court in 2005.6
tion provider. While providers publicly
tout arbitration as good for consumers, The California disclosures and documents
they market their services to major corpo- unearthed in court cases provide a small
rations as a cost-reduction program for window into the firm’s operations, sug-
them. These clear commercial ties be- gesting that NAF effectively acts as some-
tween arbitration providers and corporate thing like a debt collection agency.
interests produce a “repeat player” bias Between Jan. 1, 2003, and March 31,
that leaves consumers out in the cold. 2007, NAF handled nearly 34,000 con-
aBank of America acquired MBNA for $34.2 billion in 2006. MBNA’s name was changed officially to FIA
Card Services Inc. In this report, Public Citizen refers to the credit card firm as MBNA because virtually all
documents and Web-based material we used referred to the firm as MBNA.
How the Credit Card Companies Ensnare Consumers 5
Public Citizen September 2007
sumer arbitrations in California alone. The your clients to be exposed to the costs and
firm described 99.9 percent of those arbi- risks of the jury system.”9
trations as “collection” cases – and more
than half involved MBNA credit cardhold- What’s Wrong with BMA?
ers. If arbitration firms are in fact acting as
debt collectors, they should be subject to Consumers are most often locked into
regulation by the Federal Trade Commis- binding mandatory arbitration (BMA) by
sion under the Fair Debt Collection Prac- what are known in the law as “contracts of
tices Act and other statutes. adhesion” – pacts in which one side is so
dominant that the other party has no real
In a formal filing with the FTC in June, ability to bargain.
2007, two consumers’ rights organizations,
the National Consumer Law Center and Although some credit card contracts con-
the National Association of Consumer Ad- tain an “opt-out” clause that permits con-
vocates, said this about the NAF: sumers to refuse BMA, opting out usually
requires notice in writing within a short
“Certain debt collectors file claims with period of time from initiation of the con-
the NAF simply as data streams rather tract, typically 30 days. As the credit card
than fully formed complaints. NAF then companies well know, while an opt-out
formats the data streams into documents clause creates the appearance of a choice,
and sends the documents to the NAF arbi- this appearance is largely a fraud.
trators with pre-printed orders. The arbitra-
tors are not sent any original documents These clauses are legalistic and buried in
establishing that the consumers actually the lengthy fine print that accompanies
agreed to either the arbitration clauses or credit card contracts. It is highly unlikely
the credit contracts, but simply receive flat that most consumers read these documents
non-evidentiary assertions from the – or understand the full implications of the
lenders that the consumers agreed to arbi- contract or the arbitration clause. Never-
tration and the accounts.”7 theless, many courts have enforced arbitra-
tion clauses because consumers did not
In its own filing, NAF said, “NAF arbitra- take the extra steps that would have al-
tors do not receive ‘pre-printed orders’ lowed them to opt out.10
from case coordinators.”8
The shift toward arbitration was enabled
Yet NAF mounted an aggressive market- by a controversial 1984 Supreme Court
ing campaign to convince businesses that decision, Southland Corp. et al. v Keating,
binding mandatory arbitration reduces which proclaimed that “Congress declared
their costs and speeds collection efforts. a national policy favoring arbitration”
For example, in an October 1997 market- when it passed the Federal Arbitration Act
ing letter, the National Arbitration Forum’s (FAA) in 1925, and for the first time said
Edward C. Anderson wrote, “The Supreme the Act was binding on state courts. With
Court has cleared the way and major subsequent encouragement from federal
American companies are moving all of courts and promotion by arbitration
their contracts to an arbitration basis as providers, increasing numbers of busi-
fast as possible. There is no reason for nesses require employees and customers to
How the Credit Card Companies Ensnare Consumers 6
Public Citizen September 2007
agree that future disputes will be settled that force consumers into BMA enjoy a
through BMA. staggering success rate. And the system is
rife with problems that show its unfair-
One motivation for the courts’ blessing of ness:
BMA despite the lack of procedural safe-
guards appears to be sheer self-interest: to • BMA proceedings are secret. Hear-
reduce the number of cases in federal ings are not open, and lack both a tran-
court. In Circuit City v. Adams, for exam- script and, generally, a written
ple, Justice Anthony M. Kennedy noted explanation of the decision. With the
his concern that exempting employment exception of the California reports, in-
contracts from BMA would “burden” fed- formation on the work of the arbitra-
eral courts.11But, as Justice John Paul tion firms is rarely made public. This
Stevens wrote in a prominent dissent, the secrecy further slants the playing field
Court is playing “ostrich to the substantial against consumers. While companies
history behind” the law.12Duke University that employ the arbitration firms enjoy
law professor Paul D. Carrington noted a full view of past cases that both an
that the “Supreme Court rewrote that arbitration firm and an individual arbi-
statute as a service to corporations that trator handled on its behalf, consumers
don’t like jury trials.”13 have none of this information. “The
business defendant resolving disputes
While the 7th Amendment of the Constitu- secretly knows all about any successful
tion guarantees the right to trial by jury for claims and can guide itself accordingly
civil suits at common law, the courts have while his or her adversary negotiates in
eviscerated this critical right – a right at ignorance,” one arbitration expert
the heart of our Founders’ concerns about wrote.15Businesses enjoy this secrecy
the liberty of citizens – in dealing with because consumers, employees and
BMA. Under normal circumstances, waiv- small businesses stuck in BMA have
ing the right to trial by jury requires no idea if others similarly situated
waivers to be “knowing, voluntary, and in- were harmed by a similar kind of cor-
tentional.” But in the rush to uphold agree- porate abuse. Secrecy also means that
ments to arbitrate, courts use a much lower consumers cannot set a strong public
standard. “Ignoring the special standards precedent so that the rights of others
used to determine whether a waiver of jury can be vindicated more easily and effi-
trial is valid,” Professor Jean R. Sternlight, ciently.
an expert on arbitration, said in 2003,
“courts have typically employed an ordi- • Arbitration providers have a strong
nary contractual analysis and simply con- incentive to establish anti-consumer
sidered whether there was an agreement to rules to attract and retain clients.
arbitrate, whether it covered the dispute in Some supposedly neutral arbitration
question, and whether it was void for con- firms go so far as to advertise their
tractual reasons such as unconscionability pro-business policies to attract corpo-
or fraud.”14 rate clients. Firms that seek to level the
playing field face sharp consequences.
The sliver of arbitration results that are For example, one arbitration firm
publicly available reveals that companies briefly said it would permit class-wide
How the Credit Card Companies Ensnare Consumers 7