The Ohio State University Moritz College of Law January 2010
ADR @ Moritz

The Controversy Surrounding Consumer Arbitration and the Arbitration Fairness Act

Sarah Rudolph ColeBy Sarah Rudolph Cole
John W. Bricker Professor of Law; Director, Program on Dispute Resolution

“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 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.

Public Citizen articulated two major concerns about arbitration. First, they argued that businesses prevail at a “stunning” rate in arbitration. Second, they claimed that arbitration actually costs consumers more than litigation does. A closer examination of Public Citizen’s findings, however, raises 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. [1]

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. [2] 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% 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.

In considering a prohibition on consumer arbitration agreements, I believe that Congress may be over-reacting 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. [3] In recent days, for example, Bank of America declared that it will no longer require its customers to participate in arbitration.

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.”

Professor Sarah Cole is a contributor to Indisputably, a blog operated by law professors from around the United States concentrating on issues involving dispute resolution.

[1]Hillard M. Sterling & Philip G. Schrag, Default Judgments Against Consumers: Has the System Failed?, 67 Denv. U. L. Rev. 357 (1990) (finding consumers prevailed in Small Claims and Conciliation Branch of the Superior Court of the District of Columbia only 4% of the time, with the vast majority of cases being default judgments).

[2]Sarah R. Cole and Kristen M. Blankley, Empirical Research on Consumer Arbitration: What the Data Reveals, 113 Penn State L. Rev. 1051, 1067 (2009).

[3] NAF and AAA’s departure from consumer arbitration raises another potential issue. Most credit card agreements require a consumer to file an arbitration claim with either AAA or NAF. With both organizations out of the consumer arbitration business, are arbitration agreements between consumers and credit cards void because consumers no longer have anywhere to file their claims?

Latest Headlines
Moritz ADR Links
Contact Us

The Ohio State University
Moritz College of Law
55 West 12th Ave.
Columbus, Ohio 43210-1391

Erin Archerd
Langdon Fellow in Dispute Resolution
(614) 688-4192

The Caucus, the newsletter published by the Moritz Program on Dispute Resolution, is designed to share ADR news with the Moritz community and beyond, as well as provide Moritz students with information regarding externship and employment opportunities. Questions regarding this publication should be directed to Erin Archerd, Langdon Fellow in Dispute Resolution.