Arbitrating Debt Using
Binding Mandatory Arbitration

What You Don't Know About This Conflict Resolution Option Can Hurt You

Arbitration can certainly be a good thing if both parties agree to it after a dispute arises. However, a new business practice called Binding Mandatory Arbitration (BMA) has gained widespread acceptance and use by businesses in dealing with their employees and customers. And, as in any system in which a stronger party is able to exploit its strength against a weaker party, abuses, really bad abuses, can and do occur.

If you have a credit card, have signed an employment contract, own a cell phone, have health insurance, or cable TV or have bought a car from a dealer chances are you have agreed to binding mandatory arbitration if a dispute arises in the future. Generally it isn't brought to your attention. The clause is just another paragraph buried in the fine print you are given to complete a transaction. Sometimes, you don't have to do anything to waive your rights. Your credit card company can and does include the provision in an envelope stuffer and require you to opt out within 30 days. If you don't, you are covered.

What's So Bad About BMA, Part I

Home Purchase. Jordan Fogal, a Texas grandmother, and her husband bought a new home in 2002 for $360,000. The day after they moved in, her husband tested out the new Jacuzzi on the second floor. Because the builder had failed to connect the tub drain, when her husband pulled the plug, 100 gallons of water gushed into their living room. The house needed $150,000 of repairs which the builder refused to do. Also turned out the builder had installed a defective roof and had put some of the windows in upside down. Because the house became unlivable it went into foreclosure.

Although there was clear evidence of fraud, the Fogals were precluded from suing because the sales contract included a BMA clause. The American Arbitration Association, one of the largest, private service providers, supplied the arbitrator at $475 per hour and also charged for every subpoena, fax, phone charge, and room rental for the venue where the hearing took place. The builder alone had the right to select the arbitrator. The result: even though the arbitrator found that the builder had engaged in fraudulent practices, the award to the Fogals was $40,000, AND they were ordered to pay $14,000 of the builder's legal fees. All told they spent $30,000 in arbitration costs and now live in a small, third story apartment.

Employment. Jamie Leigh Jones, a 23-year-old Texan, claims that in 2005 she was raped, drugged, beaten and then confined to a shipping container by fellow employees at Kellogg Brown & Root Inc., a government contractor and former Halliburton Inc. subsidiary. Because no criminal charges were filed, the incident sparked outrage and media attention. Her employer, KBR, is now trying to force her to submit her sexual harassment claim to BMA, rather than a judge and jury, because of a BMA clause in her 2005 employment contract. Think they'd want arbitration if they thought the arbitrator would be tougher than a judge and jury?

Credit Card. Eve Curtis of Waban, Mass. is one of the few credit card holders who responded to an arbitration notice sending an opt out of arbitration letter to her credit card company MBNA, one of the largest. She even sent it in within the required thirty day opt out period. However, it was ignored. She admits she owed abut $16,000 to the company but was having trouble paying because her husband had suffered a traumatic brain injury. Eventually an arbitrator from the National Arbitration Forum ruled that she owed MBNA $28,000 in late-payment penalties and arbitration costs.

Check out this ABC News report for more. Why Do Card Companies Almost Always Win?

What's So Bad About BMA, Part II

Many argue that BMA clauses are designed to take fraud cases into the world of private justice, where big corporations hire the arbitrators that hear their cases, there's no right to appeal, and the company never has to face the consumer in court. As currently practiced BMA clauses seriously tilt the playing field in favor of businesses. The rules of procedure used to govern the arbitrations by most of the big players providing arbitration services eliminate many of the protections given to both sides of a dispute in court, things like meaningful discovery and the right of review. The rules also permit arbitrators to order losing parties to pay the winning side's legal fees, which they do regularly, raising the stakes considerably for anyone trying to find relief from fraudulent and deceptive practices.

Companies want to avoid facing consumers in court because of recent court cases like a recent Baltimore case in which a jury awarded over $400,000 to a woman who bought a new car that turned out to be used. When the car broke down, she called the dealership, which told her to have it towed to the lot where they'd give her a loaner. When she showed up with the car, and her 11-year-old child, the dealership tried to have her arrested for trespassing and then moved her disabled car to a tow-away zone.

Cases alleging fraud and deception are often the ones most likely to lead lawyers to file class action lawsuits on behalf of many victims whose individual claims are not sufficient for them to seek individual action but aggregated together can justify court action to remedy abuse. Class actions can also lead to multi million dollar judgments and bad publicity. By taking the dispute private, and insisting on handling each dispute individually, companies insulate themselves from significant liability for their bad acts.

How You Are Disadvantaged By BMA

Bias. For the system to work, arbitrators must be neutral. But arbitration providers' clients are businesses not consumers or employees, and arbitration firms know it. "Stays and dismissals of action requests available without fee when requested by Claimant-allows Claimant to control process and timeline," was a talking point in a marketing presentation made by the National Arbitration Forum, a major player, to a prospective client. A current NAF arbitrator, speaking anonymously explained in a Business Week 2008 cover story (see below) that the presentation reflects the firm's effort to attract companies, or "claimants," by pointing out that they can use delays and dismissals to manipulate arbitration cases.

The overwhelming majority of consumers who attempt to seek justice in mandatory arbitration lose. The nonprofit consumer group Public Citizen recently analyzed data the NAF provided to the state of California, one of the few states that actually requires arbitration firms to disclose information about their results. Public Citizen analyzed nearly 34,000 arbitration cases and found that in 94 percent of 19,000 cases, NAF arbitrators ruled in favor of the businesses that hired them. In fact, 90 percent of the NAF cases were handled by just 28 arbitrators, who awarded businesses $185 million. One arbitrator handled 68 cases in a single day, awarding every penny that the big companies were seeking.

See The Arbitration Trap, How Credit Card Companies Ensnare Consumers.

Another NAF arbitrator, Elizabeth Bartholet, a Harvard Law School professor and advocate for the poor, quit NAF after handling 24 cases in 2003-4. NAF ran "an unfair, biased process," she said in a deposition in September, 2006, in an Illinois state court lawsuit. Bartholet said that after she awarded a consumer $48,000 in damages in a collections case, the firm removed her from 11 other cases, even though she had ruled for the company in the majority of her cases. "NAF ran a process that systematically serviced the interests of credit-card companies.",/p>

Richard Neely, a former justice of the West Virginia supreme court, and former NAF arbitrator was troubled by award forms provided by NAF to arbitrators with the amount sought by the creditor already filled in. This encourages the arbitrator to "give creditors everything they wanted without having to think about it," says Neely. In the three NAF cases Neely decided, he granted the credit-card companies the balances and interest they claimed but denied them administrative fees, which totaled about $300 per case because such fees wouldn't be available to creditors who filed suit in court. Neely stopped receiving NAF assignments in 2006 after he published an article in a legal publication accusing the firm of favoring creditors.

But the NAF is hardly the only offender. The American Arbitration Association (AAA) handles disputes for big firms like Halliburton, the ultimate employer in the Jamie Lee Jones case, which places arbitration clauses in all its employment contracts, and the drug company Pfizer. Halliburton won 32 out of 39 cases arbitrated against it by an employee over a four-year period and Pfizer did even better, winning 97 percent of its cases over four-years.

Conflict of Interest. Most people don't realize that by accepting the credit card or computer, they are giving up their right to go to court if they have a dispute with the company, and in fact will be forced into a system in which the company holds all the cards. Not only do the companies hire the arbitrators and drive millions of dollars of business to arbitration firms - giving arbitrators a financial incentive to rule for the company - but proceedings are costly to consumers, largely handled through document exchange and kept secret.

Exclusion of Class Actions. Almost all arbitration clauses forbid you from participating in class action lawsuits, see above.

Inequitable Requirements. Mandatory arbitration clauses routinely require only the weaker side - the consumer, employee, franchisee, etc. - to arbitrate its claims. The company - the stronger side - is left free to sue you in court if it wants.

Inconvenient Venues. Binding arbitration clauses often require that hearings be held in a location convenient for the business but inconvenient for the consumer or employee, like in the Deborah Williams case. To get to a hearing you have to pay your own travel and related expenses adding an additional financial burden. E-Bay, for instance, requires that arbitration hearings with customers be held at its hometown of San Jose, California.

Limited Discovery. Discovery is the legal process by which parties get hold of information and evidence in the possession of their opponents or third parties. In arbitration discovery is not a right merely a privilege. Companies deliberately draft their arbitration clauses to severely limit your ability to obtain necessary information and evidence.

Limited Judicial Review. Arbitration awards are subject to only limited judicial review. A decision may be overturned only if there is "fraud" or "manifest disregard of the law." This is especially difficult to prove because arbitrators are not required to issue written findings of fact or legal conclusions. And, courts have often refused to hear appeals of arbitration awards even when both sides have agreed to permit judicial review.

Limited Remedies. Courts can provide a whole array of remedies that are not available to you as a claimant in arbitration. For example, injunctive relief - a court order compelling an unethical party to do or not to do some action - cannot be gotten through arbitration. Punitive damages - meant to punish particularly appalling behavior can be awarded by judges and juries, but not by arbitrators.

No Public Record. Court proceedings are open to the public, but arbitration proceedings are not. Most arbitration clauses and providers require that the proceedings remain confidential. This means that only the company can track decisions for or against it. Unlike court decisions, arbitration awards set no legal precedents to guide a company's future conduct.

What You Can Do

Senator Russ Feingold (D-Wis.) and Rep. Hank Johnson (D-Ga.) have introduced the Arbitration Fairness Act of 2007 which would amend the Federal Arbitration Act to get rid of mandatory, pre-dispute arbitration clauses in all consumer and employment contracts. That bill has the business community mobilizing against it, in part because there is some hope it could pass. To make your voice heard see the links immediately below.

National Association of Consumer Advocates, Join the Fight.

Public Citizen, How to Escape the Arbitration Trap

Give Me Back My Rights.

Additional resources for this article:

Banks vs. Consumers (Guess Who Wins)

Suckers Wanted: How Car Dealers and Other Businesses are Taking Away Your Right to Sue

To learn more about other conflict resolution topics, click on any of the links below.

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