PC rebuttal to industry's misleading statment on BMA report

Banking Industry & Arbitration Firms Still Wrong on Binding Mandatory Arbitration:
Public Citizen Responds to Latest PR Spin

Public Citizen’s study The Arbitration Trap: How Credit Card Companies Ensnare Consumers (Sept. 28, 2007) prompted several business and banking organizations to release statements defending binding mandatory arbitration and attacking the report. Many of their claims were inaccurate or misleading. Below is our explanation of the serious flaws in their assertions.

Claim by American Bankers Association: “Independent, nationwide research by Ernst & Young shows that consumers are more likely to prevail than the businesses involved in the arbitration process. More than half (55 percent) of the arbitrations examined in the study were resolved in the consumer’s favor. Further, the majority of consumers (69 percent) report being satisfied or very satisfied with the arbitration process.”

The Truth:    Actually, we devoted an entire section (at page 20 of our report, which is available at www.citizen.org/documents/Final_wcover.pdf) to debunking the industry’s repeated and predictable reliance on this single biased and misleading Ernst & Young study. Here’s the breakdown:

  • First, the Ernst & Young study was not “independent” but was, in fact, funded by the American Bankers Association.

  • Second, the study cherry-picked the data. It only included lending-related cases consumers filed with the National Arbitration Forum (which totaled merely 226 in a four-year period) and ignored the tens of thousands of cases filed by lenders against consumers in the same time period. Such a selective – and minuscule – sample renders the study’s conclusions irrelevant.

  • Third, the finding that 69 percent of the consumers involved in the cases studied were at least “satisfied” was also flawed. Only 40 consumers were contacted for the survey, of whom only 29 responded – or less than 13 percent of the study’s already infinitesimal universe.

  • A fourth and final flaw is that the study relied on confidential data that the National Arbitration Forum (NAF) gave to Ernst & Young. It contains no details on the nature of the dispute, the parties, or the resolution. This means that there is no way to confirm the accuracy of the study. Except for the limited insight provided by disclosure rules in California, NAF proceedings are secret – a fact the company trumpets in its pitches to prospective clients.

In contrast, the far more comprehensive data Public Citizen examined presents a far less sanguine picture for consumers. Public Citizen examined 19,294 NAF credit card cases in which an arbitrator was appointed in California, where NAF must, by law, provide skeletal details of cases and the dispositions. In these cases, businesses prevailed 94 percent of the time, while consumers only won 4 percent (“N/A” were about 2 percent).

Claim by National Arbitration Forum: “Consumer outcomes in arbitration are the same as in court. Every published study and all empirical data indicate consumers prevail at a rate that is greater than or equal to litigation, where similar subject matter is at issue. Evaluating arbitration outcomes is only meaningful in comparison with court outcomes of similar cases.”

The Truth: The National Arbitration Forum’s statement should be dismissed out-of-hand because NAF provides no citation to a credible study comparing consumers’ success in arbitration versus court (let alone such a study for debt collection cases). In fact, it would be virtually impossible to conduct such a study given the dearth of information about arbitration-related proceedings, outcomes and facts.

Public Citizen’s report is, in reality, the most comprehensive attempt to date to measure consumers’ success in binding mandatory arbitration – and our findings prove the opposite of NAF’s claims.

There is one comparison that NAF could point out. In an op-ed in a trade publication, NAF previously cited research from court cases in the nation’s 75 largest counties indicating that businesses won 77 percent of cases they initiated and 79 percent of such cases involving a bench trial. In contrast, we found that businesses prevail in arbitration 95 percent of the time – a stark 15 to 17 percentage point difference from businesses’ success in NAF’s court sample.

Claim by U.S. Chamber Institute for Legal Reform: “Arbitration has successfully given American consumers an effective alternative to get justice by quickly and fairly resolving disputes without being forced into an overcrowded and expensive court system.”

The Truth: We have no quarrel with a voluntary system of arbitration that would allow consumers a real choice. That vision is a far cry from the current reality, however, in which big business uses the teensy print in boilerplate consumer contracts to impose mandatory binding arbitration on consumers. As we found, binding mandatory arbitration is also generally more expensive than court, and is prohibitively so for claims involving extensive damages.

Claim by American Bankers Association: “Another national study by Harris Interactive …demonstrates that clear majorities of consumers who have engaged in arbitration found it to be faster, simpler and less expensive than legal proceedings. Indeed, the fact that two-thirds of consumers say they would likely use arbitration again is a clear testament to the value of this process.”

The Truth: The Harris Interactive Survey was an online survey of 609 adults who had been through arbitration conducted in the winter of 2005 on behalf of the U.S. Chamber Institute for Legal Reform. The circumstances of the 609 people surveyed appear unrepresentative – at the least, they bear little resemblance to those in the 19,000 cases assessed by Public Citizen for its report.

A few salient differences are summarized below and in the chart:

  • Only 20 percent were required by contract to use arbitration. The other 80 percent participated voluntarily. (Public Citizen does not oppose arbitration that is agreed to by both parties after the dispute arises.)

  • Two-thirds of the participants had a lawyer, in contrast to 4 percent of those involved in the cases Public Citizen studied.

  • Less than half of the cases involved a dispute between an individual and a business, compared to 100 percent in Public Citizen’s study.

Harris Interactive Survey

Public Citizen Report

609 Respondents in a 10-minute online survey.

National Arbitration Forum reports on 19,294 cases in which arbitrator assigned.

20% of consumers required by pre-dispute contract to go to arbitration.

100% of consumers likely required by pre-dispute contract to go to arbitration.

64% of interviewees filed the complaint.

0.3% of cases filed by consumer.

21% “Other side filed the complaint.”

99.7% of cases filed by business.

16% of cases jointly filed by parties.

0% jointly filed.

67% of interviewees represented by an attorney.

4 percent of consumers represented by an attorney.

48% of cases involved business and consumer.

100% of cases involved business and consumer.

4% of cases involved allegedly unpaid bills/loans.

100% of cases involved allegedly unpaid bills/loans.

48% said “ruled in my favor.”

4% of decisions in favor of consumer.

And here’s the kicker: all survey participants were actually effectively pre-screened by the survey company for their acceptance of binding mandatory arbitration – because it was a condition of participation in the study.   All participants in the Harris Poll Online (HPOL) survey tool had to approve a 20-clause list of terms and conditions as part of an on-line agreement. Among other things, the agreement required settlement of all disputes between participants and Harris to be resolved through binding mandatory arbitration conducted in Monroe County, N.Y. Here’s the clause:

19. Arbitration: Any controversy or claim arising out of or relating to this Agreement shall be settled by binding arbitration in accordance with the commercial arbitration rules of the American Arbitration Association. Any such controversy or claim shall be arbitrated on an individual basis, and shall not be consolidated in any arbitration with any claim or controversy of any other party. The arbitration shall be conducted in Monroe County, New York, and judgment on the arbitration award may be entered into any court having jurisdiction thereof. Either you or Harris may seek any interim or preliminary relief from a court of competent jurisdiction in Monroe County, New York necessary to protect the rights or property of you or Harris pending the completion of arbitration.”

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