Minnesota's blow to the largest consumer credit arbitration company has chipped away at another widely used tool of credit card companies, and may shatter it altogether.
National Arbitration Forum Inc., which handles hundreds of thousands of consumer arbitration claims each year, will stop handling such disputes by Friday as part of a settlement with Lori Swanson, the Minnesota attorney general. Swanson had filed a lawsuit last week against the Minneapolis arbitration company, which has long been criticized by consumer advocates and attorneys general around the country for its ties to debt-collection firms and perceived biases in favor of financial services companies.
But for Swanson and consumer advocates, the National Arbitration Forum is only part of a larger problem with mandatory arbitration clauses, which allow issuers and other financial services providers to divert consumer lawsuits into the privately run arbitration system.
"There are wider problems with these mandatory fine-print arbitration clauses that need to be solved," Swanson said in an interview Monday. "There are a lot of culpable players if you will, starting with the banks that put these clauses into the fine print in the first place."
The Minnesota settlement comes as Congress is considering a bill that would ban mandatory arbitration clauses from credit card agreements, amid a larger debate about financial consumer protections and an agency to regulate them. Swanson said that she would support a ban on such clauses on Wednesday, in planned testimony before the House Committee on Oversight and Government Reform.
"If you're a consumer and you want a credit card, it's not like you can shop around to find one that doesn't include the mandatory arbitration clause," she said, calling for banking companies to be "introspective" and end their use of the clauses. "In the meantime, I hope that Congress will act."
Many card companies and other financial services companies include mandatory arbitration clauses in their account agreements with consumers, stipulating that all disputes between the company and the consumer will be resolved not through the courts, but through an arbitration company like the National Arbitration Forum. Issuers and their representatives say that the clauses save time-consuming and costly litigation, but consumer advocates say that many companies use arbitration to pursue collections or defend against cardholder complaints in a forum that they know is biased toward banking interests.
The National Arbitration Forum has come under particular criticism for its perceived ties to debt-collection firms and industry interests: Last year, the San Francisco city attorney filed a lawsuit against the company and Bank of America Corp., which is still pending. And according to the Minnesota lawsuit, filed on July 14, the National Arbitration Forum "is financially affiliated with a New York hedge fund group that owns one of the country's major debt-collection enterprises."
In a statement, the arbitration company said it had decided to quit consumer arbitration due to "mounting legal costs, a challenging economic climate, and increased legislative uncertainty surrounding the future of arbitration." It will continue to handle disputes over internet domain names and personal injury protection claims, among others.
The settlement "could not come at a worse time for the issuers," according to Ronald Mann, a professor of law and co-chair of the Charles E. Gerber Transactional Studies Program at Columbia Law School. "I don't think, in the long run, the loss of mandatory arbitration would be all that devastating for card issuers," he said. "But things are tight right now, and I do think it would make the short run even harder for them."
Alan Kaplinsky, a partner in the Philadelphia office of Ballard, Spahr, Andrews & Ingersoll LLP and chair of its consumer financial services group , said the settlement is "going to make it a lot more expensive, particularly for card issuers who are using arbitration to collect debts." Kaplinsky, who represents banks, issuers and other consumer finance companies that use arbitration, said he had been "fielding calls all morning from clients who have designated the National Arbitration Forum" in their account agreements.
For card issuers, the problem is compounded by increased regulations and heightened consumer anger about credit card practices, which could contribute to an increase in cardholder lawsuits against the issuers. Currently those lawsuits are deflected from the courts to arbitration companies.
"There's certainly a worry about litigation with all the new rules and regulations that the Obama administration is proposing and the new proposal to establish a consumer protection finance agency," Kaplinsky said. "Whenever there's additional regulation, there's going to be an increase in litigation, and if arbitration is not available as a way to resolve that litigation, it's going to mean that their costs are going to go up and a lot of those costs are going to get passed along to consumers."
Andrew L. Sandler, co-chairman of the law firm Buckley Sandler LLC, acknowledged that some arbitration practices need to be reworked. "Clearly there has been significant dissatisfaction with the way it has been working among those who represent and are concerned with consumer interests," said Sandler, who also represents banking companies and issuers. "There is a pressing need to develop an arbitration-based dispute resolution mechanism that has credibility with all parties."
Many issuers said that they offer their cardholders a choice between the National Arbitration Forum and at least one other company, most commonly the American Arbitration Association. (Swanson also sent a letter to that company asking it to stop arbitrating consumer credit disputes.)
Robert M. Lawless, of the University of Illinois College of Law and a long-time critic of the National Arbitration Forum, said that the American Arbitration Association has "been around for a long time and has a very good reputation."
But even so, he said that for consumer disputes, "the court system's not perfect but I do think it's better than the arbitration system."