Briefing Room


What Should You Know Regarding Possible Changes to Consumer Arbitration?

October 5, 2009 | Faculty

In recent months, a major lawsuit was filed by the Minnesota Attorney General against one of the nation’s major arbitration providers, and Congress is considering legislative reform of arbitration guidelines. Professor Sarah Rudolph Cole, an expert in arbitration, discusses the developments and what is on the horizon.

What is consumer arbitration and why is it so controversial?

“Consumer” arbitration typically describes an institution’s unilateral imposition of an arbitration clause on an individual consumer. Banks and credit card companies, among others, impose these provisions on consumers using inserts included in monthly bank or credit card statements. Because consumers tend not to read such inserts, the first time consumers realize they are bound by an arbitration provision is when they try to file a claim against their bank or credit card company. Unquestionably, institutions do a poor job disseminating information to consumers about arbitration. Even so, the question is whether arbitration is as at least as good as, if not better, than any other alternative available – typically settlement or trial – for resolving consumer disputes.

While there is strong evidence establishing that arbitration provides an efficient and inexpensive forum for resolution of consumer claims, controversy surrounds consumer arbitration as a result of a report Public Citizen issued in 2007 and because the Minnesota Attorney General recently sued one of the major arbitration providers, the National Arbitration Forum (NAF), for deceptive trade practices. In addition, Congress is currently considering the Arbitration Fairness Act, which would create a blanket rule prohibiting companies from imposing pre-dispute arbitration agreements on consumers, employees, or franchisees.

What did Public Citizen say about consumer arbitration and was it right?

Public Citizen articulated two major concerns about arbitration. First, it argued that businesses prevail at a “stunning” rate in arbitration. Second, it claimed that arbitration costs consumers more than would litigation. A closer examination of Public Citizen’s findings, however, raised red flags. Public Citizen’s study examined approximately 34,000 consumer arbitration cases filed with the NAF (the arbitration provider that handled the majority of consumer arbitration claims) during a four-year period. All but 15 of these cases were designated “collections” cases. Collections cases are unlike other consumer cases. In a collections case, the consumer is the defendant. Typically, there is no question that the consumer owes the debt to the credit card issuer. In mediation, the consumer admits the debt and then typically works out a payment plan with the issuer. In arbitration, though, the debtor will lose, because he owes the debt. In such situations, all an arbitrator can do is enter an award against the debtor. Thus, the win-loss record for consumers in these cases is not cause for concern. Moreover, it mirrors consumer success in court collection cases.

The Public Citizen report also claimed that arbitration often results in consumer costs that are higher than those incurred in court. My examination of this data actually reveals that most consumers paid few or no fees in these arbitrations. In all but five of the approximately 34,000 cases, the consumer paid well under $500 in arbitration fees. In fact, the data shows that in 33,691 cases (99.6 percent of the cases), the consumer paid absolutely no fee. Thus, in the vast majority of cases, consumers appear to pay either no arbitration fee at all or a minimum fee.

Public Citizen’s use of collections cases to demonstrate inherent bias within the arbitration system undermined its conclusions. The win rate in those cases will always be low for consumers. Moreover, the available data demonstrated that when consumers participate in arbitration, they do not pay exorbitant fees.

If consumer arbitration benefits some consumers, why is Congress considering an Arbitration Fairness Act and why did NAF recently exit the consumer arbitration business?

In considering a prohibition on consumer arbitration agreements, I believe that Congress may be overreacting to a perception that arbitration is problematic. Rather than adopt a per se rule prohibiting arbitration in the consumer context, though, the Arbitration Fairness Act should instead focus more critically on the issue of consumer class actions. Currently, most arbitration provisions prevent consumers from bringing either a class action in court or as part of an arbitration. That prohibition truly harms consumers because the clauses effectively prohibit consumers, whose claims are typically quite small, from bringing claims at all.

Although it received considerable press coverage, NAF’s recent departure from the consumer arbitration business had little to do with the issues with which Congress is concerned. Unfortunately, NAF appears to have engaged in “deceptive practices” in hiding its ties to the debt-collection and banking industry. According to the Minnesota Attorney General, a hedge fund with a stake in entities NAF controlled had financial ties to a large debt-collection agency, raising concerns about NAF’s ability to deal fairly with credit card cases. NAF settled the lawsuit quickly, leaving the consumer arbitration business entirely. Although NAF’s actions unquestionably impugn the integrity of NAF arbitrations, it is not clear that any arbitration awards would be overturned if reheard because NAF arbitrators are independent contractors who typically have little or any connection to NAF as a business entity. Unfortunately, NAF’s actions cast a further shadow over consumer arbitration and provided fuel to those who oppose consumer arbitration (including those in Congress pushing for the Arbitration Fairness Act). Although it is not clear whether that Act will pass, NAF’s departure from consumer arbitration, followed quickly in time by the American Arbitration Association’s exit from administering such cases, suggests that the marketplace may handle this issue more quickly than will Congress. Recently, for example, Bank of America declared that it will no longer require its customers to participate in arbitration.

Is there a future for consumer arbitration? 

As I said earlier, I think the major problem with consumer arbitration is that pre-dispute arbitration agreements imposed upon consumers prevent them from pursuing class actions in arbitration or court. Rather than ban consumer arbitration entirely, a better choice might be to permit consumers to join together to conduct class action arbitrations. With regard to individual claims, arbitration may still be a consumer’s best option because it is the rare consumer who can afford representation, much less incur the expenses associated with having his or her “day in court.”