« Paying for Mistakes | Main | The Supreme Court and the Consumer »

Have You Already Lost?

posted by Elizabeth Warren

The reasons to dispute a credit charge are many--mistakes, failure to credit a return, identity theft, a lost payment that triggered penalty interest and fees, etc. Maybe the company will be nice and settle, or maybe the charge will be small an the customer will grumble and pay.  But if you had a serious dispute you wanted to pursue, have you already lost? 

Business Week has a cover story this week about credit card disputes are settled through arbitration.  The focus is on NAF, an arbitration outfit that, by its own accounting, arbitrated 18,075 cases between a business entity and a California consumer. The score?  Business won 18,045, and consumers won 30.   

Read the story for all the details.  Reporters Robert Berner and Brian Grow are investigative reporters at its best. The story is factual, compelling and genuinely scary.

When Congress promoted arbitration with the Federal Arbitration Act, most people thought it provided a good alternative to expensive litigation for equally powerful parties (including me).  But today an arbitration clause slipped into the 30+ pages of incomprehensible language in a credit card agreement will mean that a customer has waived her rights to a class action.  Worse yet, as Business Week shows, it means the customer has agreed to submit to a process that the arbitration company markets to credit card companies as a cheap way to collect on debts--whether the card issuers can legally prove their claims or not. Business Week even raises serious questions about whether the most basic procedural fairness--sending notice of the dispute or providing a hearing when a consumer asks for one--is provided.

The City Attorney in San Francisco is suing NAF, based only on the publicly available data--a reminder of the importance of collecting and reporting basic data about consumer transactions. Of course, it will be eye-opening to see what documents will come out during discovery. 

Senator Feingold has introduced legislation that would let consumers decide AFTER a dispute arises if they want to go to arbitration. The practices reported by Berner and Grow should make more people in Washington take another look at that legislation.

In the meantime, have credit card customers pre-lost every dispute?   


Dear Prof. Warren,

I guess its the same everywhere. Here in India, arbitration has actually increased the cost of getting justice. The only recourse to arbitration is to high court where you can argue about if arbitration was properly conducted. The process to get all facts on record is so tedious and demanding that the even the middle class cannot afford it.

Sen. Obama has talked about credit card bill that resembles things you mentioned earlier. Hopefully, it takes a form that we in India can copy!


Ms Warren you've lost your mind. All the procedural safeguards are present. The lopsided outcomes are more likely the result of bad lawyers and bad cases.

See 9 U.S.C. §10:

(a) In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration—

(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

Like a consumer has a chance and the money to dispute in federal court. NOT! They wouldn't last the first of several 12(b)(6)s. Just like those people in Cali, they will get lost in the whole volume of it all.

If someone is over their head in debt then Bankruptcy is the cheapest way to avoid that whole mess. It turns the table and favors the consumer.

Let's not confuse legal remedies on the books with actual access to justice, SomeJarhead. Millions of consumers are subject to these arbitration clauses and the crooked practices of arbitration mills. Would you like to pay for everyone who can't afford an attorney to hire one? Didn't think so.

I don't know if they still do it, but it used to be that you almost always had to agree to arbitrate your credit card dispute in Utah.

If you don't live in Utah, that could be a problem.

The arbitration clauses also "atomize" small claims against credit card companies for systematic wrong doing - it isn't perfect protection from class action lawsuits, but it's pretty strong.

Some more information on arbitration unfairness at the consumer level - including the economic incentives to rule for the credit card companies - is here:


Arbitration agreements are not just prevelant in credit card agreements. Many consumer contracts contain them. I do a lot of home equity litigation here in Texas where equity lending is very restricted and at least half of the home equity loans I see have arbitration provisions. Many lenders never invoke them, but some do in every case.

I had an adversary in bankruptcy court where Wells Fargo invoked the arbitration provision (American Arbitration Association, not NAF) and as soon as I got the motion to compel arbitration I called my clients and said: "Sorry, you're screwed." Fortunately, opposing counsel knew very little about equity litigation (he admitted as much), and the arbitrator entered an award declaring the lien void. I had to read the award twice to make sure we really won, that's how surprised I was. Of course, this is a little more complicated than your basic credit card dispute.

I also see them in payday loans and some retail installment contracts.

Texas has a an arbitration act, Texas Civil Practice and Remedies Code Chapter 171, which controls if the agreement refers to state law, and (I argue) if the arbitration agreement does not specify (contract construed against the drafter). Most arbitration agreements specifically refer to the "federal Arbitration Act." Under the Texas act, an arbitration agreement is not enforceable if it involves "an agreement for the acquisition by one or more individuals of property, services, money, or credit in which the total consideration to be furnished by the individual is not more than $50,000, except as provided by Subsection (b)." Subsection (b) says that a less than $50,000 arbitration agreement is enforceable if it is in writing and is signed by "each party and each party's attorney." How many debtors have an attorney sign off on their car loan? I actually had a motion to compel arbitration denied based on this statute. Keep it in mind.

The comments to this entry are closed.


Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.



  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.