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Deathstar Arbitration

posted by Elizabeth Warren

Arbitration may seem like the Andy of Mayberry form of dispute resolution--folksy, cheap and fair.  The data suggest, however, that it is Darth Vader's Death Star--the Empire always wins.  A new report from Public Citizen shows that the consumer loses in 95% of arbitration cases--dominance that would have made the Emperor proud.

The Public Citizen report follows an earlier jaw-dropping report this summer from the Christian Science Monitor showing that the most frequently chosen arbitrators ruled against consumers and for the companies 98.4% of the time.  After serving as an arbitrator, former judge Richard Neely described arbitration as full of "Godless bloodsuckers."  (Gee, Judge Neely, tell us what you really think.)  Several academic pieces of condemned the current use of arbitration clauses as well. 

Public Citizen has picked a good target, and they have written a superb report.  There is solid research to back up the claim that arbitration is systematically biased.  Senator Russ Feingold has introduced legislation to ban mandatory arbitration clauses imposed on consumers. Will this be the first serious consumer reform initiative in more than two decades? 

Any anti-arbitration initiative faces real problems.  Mandatory arbitration clauses are hidden in the fine print.  Most of us don't even know we are subject to them until we have a problem.  Arbirtation doesn't sound bad--it sounds cheaper and fairer and more informal than going to court.  And, most important for the legislative process, the industries that use mandatory arbitration have a lot more money for lobbying campaigns and make a lot more political contributions than the consumer groups.  (Is it any surprise that Russ Feingold, the sponsor of a campaign finance reform effort, would also be the sponsor of a pro-consumer bill on arbtration?  He's one person in Congress who isn't getting big donations from PACs.)

Consumers take it on the chin every day with hidden tricks and traps in credit card agreements, home mortgages, health insurance contracts, and dozens of other purchases. Public Citizen has focused on one way to clean up the fine print in those contracts.  The studies are in place, and the advocates are ready to go.  Will there be action? 


I've commented on this issue before and won't repeat myself. But I thought I'd add this vignette. My wife bought a car a few years ago, and financed part of the purchase price. The finance company was related to the manufacturer. The contract contained an arbitration clause written broadly enough that it could have extended not only to disputes over financing but also to disputes over the vehicle itself (e.g., vehicle defect resulting in injury or death). My wife and I both agreed that we would not sign the contract with such a clause in it. We were told that we were not allowed to make any changes to the contract or it would not be accepted by the financing company. My wife then said, "Fine, then, this is a deal breaker. I'll see you later." The dealer was not happy, but they did take it out. I guess they needed to move the steel.

Not everyone is in a position to do that, of course, and most think they are not allowed to do that, because that's what they are told.

Our public interest law firm, with our headquarters in Washington, D.C., and an office in Oakland, handles consumer, civil rights and environmental cases. We're getting more case intakes/complaints every single week relating to the abuse of mandatory arbitration in debt collection cases than we are getting any other type of case, and we have been for some time. Becausae we don't handle individual debt collection cases, generally, we mostly give people in this situation some resources and try to help them find a lawyer through the website of the National Association of Consumer Advocates. The bottom line of our experience, though, is that the Public Citizen report is 100% on target. While it is hard to get a lot of the people who feel that they've been cheated to agree to speak publicly about their experience (most of them are pretty afraid of the National Arbitration Forum), we routinely encounter people who have the types of experiences described in PC's report: identity theft victims who nonetheless see large awards entered against them by the NAF; people hit with all kinds of tacked-on fees (some from the credit card company, some from the NAF); people having awards entered against them on zombie debts that are far past the statute of limitations; etc. Virtually every lawyer I know who handles any significant number of consumer cases has a horror story.
The current system -- privatized secret tribunal hand-picks a surprisingly small number of decision makers whom it knows from experience will nearly always give the lender 100% of what it asks, without requiring any real proof (a "digitized signature" is inferred from the debt collector's e-mail data filing, which the NAF then turns into a complaint and a pre-filled-out ruling for the arbitrator) or worry about whether the amounts or right or what the statute of limitations is -- is plainly not sustainable. The question is, who will do something to fix a palpably broken system of justice for sale? Will some state or federal regulator beat the Congress and the courts to shutting this sham down, or is it imaginable that the lenders and debt collectors will move back to a system will some hallmarks of protection for consumers before the government has to act?
The only thing that is clear is that the status quo cannot continue unabated indefinitely; the level of consumer anger that we're encountering is just too high for the system to endure it indefinitely.

It would be a good thing if legislation unwound this 'built in' systemic exploitation of consumers.

And, it would also be a good thing if we asked and answered, "Who are the consumers hurt by this systemic bias?"

In asking this, I'm suggesting we look beyond the kind of consumers: credit card users, mortgage holders, insureds and so forth.

Rather, I'm asking that we take a deeper look and see that these consumers are also the employees of the companies that put these requirements in the fine print.

These consumers who are exploited are also the employees of companies doing the exploitation.

We do these things to ourselves.

And, yes, we need a more just government to prevent or limit our inclination to harm ourselves.

Let me, though, add this: Legislation typically succeeds in battening down one form of systemic bias while also resetting the rules for powerful, resourceful players to find new avenues toward the same result.

Put differently: Until we take responsibility in all the roles we play in life to end and/or limit the harm we do to ourselves, we'll continue to stumble our way toward similar effects.

Hence, a new form of the golden rule explained further in On Value and Values:

"As employees do unto others in their role as consumers what you would have them as employees do unto you as consumers."

I was shocked when I showed up for my dermatology appointment at a prestigious university hospital only to discover that I had to sign an arbitration agreement before my appointment could proceed. Like Judge Clark's car, this arbitration agreement covered any malpractice or negligence allegations against the doctors and staff as well as any financial disputes. I chose to sign the agreement because of the nature of my appointment and the services I was scheduled to receive, but under other circumstances (surgery, etc.), this would have been a deal breaker. I wonder if medical services arbitration agreements are becoming more common and, if so, there will be specific language in any reform proposals to address them.

To my surprise, you can cross out and refuse to sign just about any of the forms the medical office sticks in your face when you arrive without being thrown out, including arbitration forms. I just spent half an hour yesterday doing this, but, I went to law school, and had the extra half an hour. Plus, I didn't need emergency care. It is deeply offensive to have all this garbage handed to you with the implication that you have to sign to get medical for, for example, your sick six year old child.

California does have an interesting provision which allows you to nulify a medical arbitration agreement via written notice for thirty days after signing. Wonder if anyone has actually ever done this?

It is yet another example of how deeply entrenched the lending industry is in the legislative bodies in this country.

I would posit that a wholesale replacement of representatives and Senators in Washington would force the lending industry to spend billions instead of just millions to maintain the status quo.

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