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Forced Arbitration Is Ubiquitous, New Public Citizen Study Finds

Sept. 14, 2009

Forced Arbitration Is Ubiquitous, New Public Citizen Study Finds

Research Points to Urgent Need for Congress to Act

WASHINGTON, D.C. – Mandatory binding arbitration, or “forced arbitration,” is ubiquitous in many industries, according to a study released today by Public Citizen. Seventy-five percent of companies in eight industries use forced arbitration, the organization found in a study released a day before a key congressional subcommittee holds a hearing on whether mandatory binding arbitration is fair or voluntary.

In most cases, consumers are stripped of their right to go to court over disputes when they open a bank or credit card account, obtain cell phone service, hire a stockbroker or buy a house. The same is true about half of the time when consumers buy computers or obtain cable or Internet service.

The study, “Forced Arbitration: Unfair and Everywhere,” is based on inquiries of major credit card providers, banks, cell phone providers, computer manufacturers, cable/Internet providers, auto dealers, brokerages and home builders. The majority of data in the report was obtained by Public Citizen researchers inquiring as consumers about businesses’ arbitration policies.

“Even though forced arbitration has been exposed as grossly unfair to consumers, the practice remains ubiquitous in many industries,” said David Arkush, director of Public Citizen’s Congress Watch division. “This means that millions of Americans have been stripped of their right to hold corporations accountable in court.”

Forced arbitration requires consumers to settle disputes before secretive, private tribunals instead of courts. A 2007 Public Citizen report revealed that arbitrators working for the National Arbitration Forum (NAF) had ruled against consumers 94 percent of the time. Consumer advocates have long alleged that forced arbitration is unfair because it undermines corporate accountability and deprives people of core protections against corporate wrongdoing. Americans believe they should have the right to legal recourse – including a judge, jury and the ability to appeal – and demand that decisions be based on law, according to recent polling conducted by Lake Research Group. The same poll also found that a majority of Americans – six in 10 – oppose forced arbitration.

In July, Minnesota Attorney General Lori Swanson sued NAF, alleging that it was financially connected to credit collection companies that provided NAF with the bulk of its business. Swanson also alleged that NAF had stopped referring cases to arbitrators who did not rule in favor of businesses and recruited individuals likely to rule against consumers to serve as its supposedly “neutral” arbitrators. Five days after the lawsuit was filed, NAF, the nation’s largest arbitration firm specializing in credit collection cases, announced it was closing its massive consumer arbitration practice.

Just one day later, the American Arbitration Association (AAA) said it would suspend its credit-collection practice because of “legitimate concerns” raised by Swanson. Soon after, two major banks, Bank of America and JPMorgan Chase announced that they, too, had dropped binding mandatory arbitration from credit card contracts.

AAA has not suspended consumer arbitrations that do not involve debt collection. A third leading arbitration firm, JAMS, has not suspended any part of its consumer arbitration business. Today, Public Citizen and its partners in the Fair Arbitration Now Coalition (www.fairarbitrationnow.org) sent letters to AAA and JAMS urging them to discontinue all forced arbitrations of consumer cases.

Despite NAF’s settlement and AAA’s concessions, forced arbitration remains widespread in certain industries. Moreover, it can be difficult or even impossible to learn many companies’ policies on arbitration before obtaining a product or service, Public Citizen found. The vast majority of auto dealers Public Citizen contacted were unable or unwilling to disclose their arbitration policies, often explaining that they will not disclose that information until the final paperwork for a sale is being signed. Most credit card companies refuse to disclose the terms of their arbitration clauses until a consumer applies for a card – a step that can jeopardize one’s credit rating.

Public Citizen found ample evidence of arbitration’s unfairness. One major credit card provider twice referred to the NAF – a purportedly neutral and independent company – as its “arbitration provision division” and referred Public Citizen investigators to NAF for information about the credit card provider’s arbitration policies. A cellular telephone provider reserves the right to sue its customers in court while prohibiting its customers from suing it in court. Most businesses that impose arbitration prohibit the use of class actions, which are usually the only viable way for victims of systemic fraud to obtain redress.

The continued use of forced arbitration coupled with overwhelming evidence of the process’ unfairness points to the need for Congress to pass the Arbitration Fairness Act, which would prohibit businesses from forcing arbitration on consumers and employees. The Lake Research public opinion polling showed that Americans support the Arbitration Fairness Act by a margin of more than two-to-one, including majorities of men and women, as well as Democrats, independents and Republicans. As Swanson noted, NAF’s consent judgment “cannot solve the systemic problems with mandatory pre-dispute arbitration clauses in fine-print consumer contracts.”

Arkush urged Congress to act quickly to protect consumers.

“After our report about the one-sided rulings issued by NAF, the U.S. Chamber of Commerce begged Congress to postpone taking action until more information could be obtained,” Arkush said. “Since then, what we’ve learned about NAF is far worse than we could have imagined. It is time to end the era of lawlessness and ensure that consumers can hold corporations accountable for wrongdoing.”

READ the report and letters.