Could Consumer Dispute Resolution Have a Class Problem, Not an Arbitration Issue?

by John Kiernan on December 5, 2012

supreme courtHow can we fix arbitration?  That’s the question we posed last week after The Pew Charitable Trusts released a study that revealed how disturbingly prevalent mandatory arbitration clauses are in the fine print of checking account agreements.  The thing is, after exploring the issue a bit further and talking to some of the country’s foremost experts on arbitration and consumer disputes, a new question arose:  Is the arbitration process actually broken?

Don’t worry if you’re a little lost right now because a bit of background is certainly in order.

The Background:  Arbitration Issues

The aforementioned Pew study found that 56% of big banks force their customers into arbitration if they want to dispute a charge or company impropriety, 81% also ban participation in class-action lawsuits, and 44% include language limiting their potential liability, among other worrisome legal confines buried in the fine print.  Aside from the fact that consumers typically aren’t happy about unknowingly signing away their rights, these statistics were troublesome given the supposed conflict-of-interest issue that plagues the arbitration industry.

Studies in the past have indicated that arbitrators overwhelmingly side with their corporate clients because, whether they’re conscious of any bias or not, they naturally want to earn repeat business.  Such was the impetus for our original query of how to fix arbitration, and what we encountered was something of a modified cliché:  If it ain’t broke, don’t fix it (and if it’s only slightly damaged, find a simple workaround).

“Arbitration is capable of providing justice,” Sara Adler, a member of the National Academy of Arbitrators (NAA), said, adding that the ban on class-action lawsuits and the so-called repeat player issue are “the two huge problems that I see as an arbitrator.”  According to Adler, the way around the repeat-player problem – i.e. finding an arbitrator who isn’t “beholden to the institution that represents one side of the debate” – is to have a third-party pay the arbitrator, as is the practice of FINRA, or to use volunteers from the Better Business Bureau.

Others say that conflicts of interest in consumer arbitration aren’t a problem at all, instead arguing that studies such as that from Pew are themselves flawed because they stop at whether or not an arbitration clause exists and do not delve deeper into the specifics.

“It does not look into the rules and procedures that are implemented,” Richard Naimark, senior vice president of the American Arbitration Association (AAA) said, adding that if a bank designates a particular group such as the AAA to handle its arbitration hearings, that organization will implement its own rules into the process.  For example, AAA requires arbitrators to have law degrees and has the authority to require banks to engage in discovery.  “The lack of analysis of the implementation of the arbitration clause – in other words, what rules they use, what procedure they use – really makes a lot of these points potentially moot.”

Plus, Paul Bland – a senior attorney with the watchdog group Public Justice – also points out that the U.S. Supreme Court ruled in a 2010 case called Rent-a-Center v. Jackson that arbitrators have the right to decide if a mandatory arbitration clause is fair or not and adjust accordingly.

The Real Problem:  Class-Action Bans

The more significant problem seems to be with the class-action bans that typically accompany mandatory arbitration clauses and not arbitration itself.  This is especially true now that the National Arbitration Forum (NAF) – one of the most infamous arbitration groups – no longer engages in consumer arbitration.

“Most lenders, the main thing they’re worried about is class actions.  They don’t care so much about beating an individual consumer in a case because for the vast majority of what they do, there are no individual lawsuits.  Most people just aren’t going to challenge the credit card company over $100,” Bland said.  “The ban on class actions has really sort of given a lot of lenders free reign to completely rip people off, to lie to them, whatever.  It has enormous practical implications.”

The interesting thing is that until April 2011, courts across the country systematically struck down anti-class-action provisions when there was evidence that a consumer would be unable to pursue a claim otherwise.  Then the Supreme Court ruled 5-4 in favor of such clauses in a case called Concepcion v. AT&T, thereby overturning more than 100 lower court decisions nationwide.

The details of that case are another story for another time, but whether it’s a coincidence or not, some people say that the decision represented a clean split down political party lines.  In other words, while the law of the land currently holds that class-action bans are legal, there’s no telling how that will change in the future with new appointments.

The Future:  Is a Solution in Sight?

Ultimately, the fate of class action bans rests with either the highest court in the land or Congress if it decides to intervene, and what becomes of it no one knows.  However, while mandatory arbitration clauses might not be inherently biased, that doesn’t necessarily mean they have a certain future too.  For example, one could certainly make the case that consumers should at least have a choice between arbitration and a traditional court proceeding.

“It’s a one-sided system.  The corporations write the clauses and they decide who the arbitrator is, and a consumer has no say in the process whatsoever,” Ellen Taverna, legislative director for the National Association of Consumer Advocates (NACA) said.  “It’s privatizing justice without any legal protection.  There’s no meaningful appeal, there’s no judge or jury making the decision, there’s no public review of the decision, there’s no requirement that arbitrators have legal training or even follow the law.”

The Consumer Financial Protection Bureau is currently conducting a study on the effects of mandatory arbitration on consumers, the results of which could be the deciding factor in whether the NACA-championed Arbitration Fairness Acts of 2007 ultimately succeed or continue to languish in Congress as a result of powerful lobbyist opposition.

So, to bring everything full circle, there definitely seem to be issues with consumer dispute resolution.  And while experts disagree about what exactly the biggest root causes are, it’s certainly fair to say that this is an area that will garner increased attention from regulators moving forward.  That’s good news for the little guy (i.e. you and me).

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