Mandatory Arbitration on Trial

  As mandatory arbitration clauses have proliferated in contracts between corporations and consumers in the past decade, so have charges that the arbitration system is unfair to consumers. And complaints about the arbitration outcomes between consumers and credit card issuers are among the most publicized.
  If lawsuits or legislation force issuers to drop mandatory arbitration clauses, it would allow more class-action consumer suits, which some say would be an expensive blow to the credit card industry. "It would be very harmful," says Alan Kaplinsky, a partner at Ballard Spahr Ingersoll and Andrews in Philadelphia, which has helped many credit card issuers develop mandatory-arbitration clauses in consumer contracts. "We'd be back where we were 10 years ago, where abusive class actions were being filed willy- nilly."
  Others say say such fears are unfounded. "[Issuers] would be substantially as profitable as they are now if they did not have them," argues Ronald Mann, a law professor and arbitration expert at the University of Texas in Austin. He contends litigation with cardholders, even class actions, is not as expensive for issuers as are those with merchants over interchange and other payment issues.
  Businesses that use mandatory arbitration clauses often give disputing consumers a list of a few arbitration groups from which they may choose one. Those firms have relationships with hundreds of arbitrators, most of whom are lawyers and retired judges, based all over the country. The arbitrators either are employees or independent contractors for the arbitration firms.
  Arbitration advocates say the process is quicker, cheaper and less adversarial for both sides of disputes than is the public court system, and a better deal for consumers.
  But consumer-rights groups charge that arbitrators and their firms are biased because they depend on issuers to pay the bills. Arbitration firms handling disputes between large corporations and consumers must get the corporations, not the consumers, to list them among choices of possible mediators, and corporations pay most of their fees.
  Those who are against arbitration say this causes the firms and their arbitrators to be dependent on the corporations for new cases. As such, they charge, arbitrators are more likely to be biased in favor of the corporations, and some businesses could stop sending cases to arbitrators or firms they believe resolve disputes too often in favor of consumers.
  Indeed, allegations of bias are a part of a class-action suit brought by seven holders of Visa, MasterCard, American Express and Discover cards against several of the country's largest issuers (see story, page 42). The main complaint in the litigation is that the issuers allegedly colluded in developing mandatory arbitration clauses in their cardholder agreements.
  The suit, called Ross vs. Bank of America, questions the neutrality of the National Arbitration Forum. The complaint, which says the Minneapolis-based group is used by "nearly every defendant," states that the forum markets its services to companies in several industries as a way to lower potential costs from disputes with consumers. The forum used the slogan "the alternative to the million-dollar lawsuit" in one pitch, which the complaint alleges shows bias.
  Curtis Brown, the forum's general counsel, would not comment on the Ross complaint. But he says the slogan is not biased.
  "We market our services to everybody. We are unabashed proponents of alternative dispute resolution," Brown says. "We have a very rigorous procedure for selecting an arbitrator who has no bias or interest in the case. We provide biographical data of the arbitrator, and parties select who they want."
  The Ross vs. BofA complaint alleges that the National Arbitration Forum has an unbalanced record of findings for credit card issuers. The complaint says that First USA Bank, before it was acquired by Bank One, prevailed in 19,618 cases before the forum, while cardholders prevailed in only 87. The forum disputes the accuracy of the claim.
  To address concerns about bias, California adopted rules that require arbitration firms doing business in that state to make public the relevant biographies of their arbitrators and how those arbitrators ruled in past cases. Firms also must post quarterly reports showing the outcomes of all cases, including the names of business parties, how much money was in question and which party prevailed in the case. Arbitration firms started providing that information in 2003.
  A Cards&Payments analysis of the National Arbitration Forum's disclosure reports from the second quarter of 2003 through the third quarter of 2005 shows the organization reported 13,566 cases in California. The forum says businesses prevailed in 53% of those cases, while consumers prevailed in 28% of them. Neither party prevailed in 19% of the cases, often because they were settled after entering the forum's process but before an arbitrator decided them.
  Mann says he is concerned about the potential for biased arbitrators. But he does not believe arbitration itself is inherently good or bad. "It would be bad if the purpose was to prevent people from raising legitimate claims," Mann says.
  Cliff Palefsky, a San Francisco attorney who has fought against mandatory arbitration, says he believes arbitration often is a good option for resolving disputes, and he routes many clients to arbitration instead of court. But the process should never be mandatory or ban class actions, he says.
  "Arbitration can work if it's voluntary," Palefsky says. "Mandatory arbitration can never work. The only check and balance to make sure arbitration is fair is voluntariness."
  Kaplinsky disagrees, saying arbitration must be mandatory to allow corporations, including credit card issuers, to ban class-action suits in the clauses.
  "The class-action device became an abusive club that plaintiffs' class-action lawyers were using to extract enormous settlements out of credit card issuers for claims that did not have a great deal of merit," Kaplinsky says. "It's very expensive for a credit card issuer to defend a class action in court. If you end up before a jury, the risk can be enormous, even in cases that don't have a great deal of merit."
  Kaplinsky was one of the loudest critics of Irvine, Calif.-based JAMS Inc., another large arbitration firm, when it announced in November 2004 that its arbitrators no longer would enforce class-action bans in mandatory arbitration clauses. JAMS's move led some card issuers, including Citigroup and Discover, to stop listing the firm among choices for consumers in arbitrating disputes, says Jay Welsh, JAMS general counsel and vice president.
  Policy Change
  Welsh says JAMS made the decision partly because of uncertainty over the legality of class-action bans in various parts of the country. "The decisions were coming down every which way," he says. "What we felt was in good faith was viewed by the institutions as being non-neutral, and that really affected us because we work very hard to protect our neutrality."
  JAMS reversed the policy, saying it wanted to avoid the appearance of taking sides in the class-action issue. Consumer groups jeered. Corporations cheered, but the firm still lost business.
  One such case questioning class-action bans is working its way through the California court system. In Discover Bank vs. Superior Court, a credit cardholder filed a class-action lawsuit challenging Discover's late-fee policy. Discover moved to dismiss the complaint and compel arbitration on an individual basis because class arbitration and class actions were prohibited in the cardholder agreement. The arbitration agreement also said Delaware law would govern the contract.
  The plaintiff argued that the class-action ban was unconscionable and, therefore, unenforceable under California law. In June, the California Supreme Court agreed that, "at least under some circumstances," class-action bans in some consumer contracts are not enforceable, especially when the dollar amounts involved are so small as to make individual suits impractical. It found for the plaintiff.
  Battles Aplenty
  But in December, a California court of appeals sent that decision back to the lower Supreme Court to be heard again. In remanding the suit, the appeals court avoided the issue of whether the class-action ban was "unconscionable" but held that Delaware law, not California law, applied to the agreement.
  Mandatory arbitration is being challenged from a number of angles in courts around the country. In December, the U.S. Supreme Court was considering its response to arguments related to a Florida case, Cardenas vs. Buckeye Check Cashing. The plaintiff contends a consumer-loan agreement could not compel arbitration on a contract in which other clauses, namely those involving interest rates, clash with Florida law.
  Industry and consumer groups will be watching the courts closely over the next year, hoping that each legal decision will either erode or reinforce arbitration's standing.
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