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Mandatory Arbitration Stacks Deck Against Credit Cardholders, Data Show

*Note: This press release was updated on Oct. 11, 2007.

Sept. 27, 2007

Mandatory Arbitration Stacks Deck Against Credit Cardholders, Data Show

Major Arbitration Firm in California Rules Against Consumers 94 Percent of the Time, Uses Arbitration as Debt Collection Mechanism, New Report Shows

WASHINGTON, D.C. – Consumers who seek justice in disputes with their credit card companies shouldn’t expect to find it in binding mandatory arbitration (BMA); in cases decided in California by a major arbitration firm over a four-year period, consumers lost 94 percent of the time, a new Public Citizen report shows.

Further, virtually all were collection cases filed against consumers by credit card companies or firms that buy debts from these companies, indicating that credit card companies are using arbitration as a means to collect debts. The report, “The Arbitration Trap: How Credit Card Companies Ensnare Consumers,” was released at a press conference today with lawmakers who have introduced legislation to protect consumers from arbitration, and a victim of unfair arbitration proceedings.

In the report, Public Citizen pulls back the curtain to reveal the cozy and dangerous relationship between credit card companies and the private arbitration firms that decide their binding mandatory arbitration cases. The result of an eight-month investigation, the report provides, for the first time, a comprehensive analysis of data on nearly 34,000 arbitration cases, and in-depth stories of credit cardholders and their struggles in this nightmarish system.

The report focuses on the National Arbitration Forum (NAF), the go-to arbitration forum for the credit card industry and a major player in the California arbitration business. Between Jan. 1, 2003, and March 31, 2007, arbitrators working for the Minneapolis-based NAF ruled for businesses in 94 percent of the California cases examined. In fact, 90 percent of the NAF cases were handled by just 28 arbitrators, who awarded businesses $185 million. One arbitrator handled 68 cases in a single day – an average of one every seven minutes, assuming an eight-hour day – and ruled for the business in every case, awarding 100 percent of the money requested. The same arbitrator is an attorney with his own practice serving business and corporate clients.

“People shouldn’t have to give up their legal rights just to get a credit card,” said Public Citizen President Joan Claybrook. “This is a system that is unfair to consumers, many of whom are struggling financially, and a huge gift to big business. We need to ban mandatory arbitration clauses in consumer contracts now.”

“Public Citizen’s excellent report provides solid evidence of the abuses that take place when consumers are forced into binding mandatory arbitration agreements,” said Sen. Russ Feingold, who, along with Rep. Hank Johnson (D-Ga.), has introduced the Arbitration Fairness Act of 2007 (S. 1782 and H.R. 3010). “It’s time to restore choice to consumers and employees, and restore the effectiveness of the laws Congress has passed to protect them,” Feingold said.

The Arbitration Fairness Act of 2007 would ensure that citizens have a true choice between arbitration and the traditional civil court system by requiring that agreements to arbitrate employment, consumer, franchise and civil rights disputes be made after a dispute has arisen. The act would prevent a party with greater bargaining power from forcing individuals into arbitration through a contract.

Buried in the fine print of millions of customer-service agreements for everything from credit cards to cell phones, as well as employment contracts, binding mandatory arbitration clauses require customers to agree to settle any grievances through arbitration, thereby forgoing their right to a trial by jury.

Most people don’t realize that by accepting the credit card or computer, they are giving up their right to go to court if they have a dispute with the company, and in fact will be forced into a system in which the company holds all the cards. Not only do the companies hire the arbitrators and drive millions of dollars of business to arbitration firms – giving arbitrators a financial incentive to rule for the company – but proceedings are costly to consumers, largely handled through document exchange and kept secret. Consumers who want due process must pay; in one case examined by Public Citizen, a three-page decision cost $1,500 to obtain.

Public Citizen focused on California data because California is the only state that requires arbitration providers to disclose any information about arbitration results. In all other states, there is no oversight or accountability. Public Citizen’s investigation   revealed customers left in the shadows of arbitration, often spending years fending off collection agencies, cleaning up identity theft messes, untangling themselves from administrative bungling and bouncing back from credit rating hits.

Troy Cornock, a Hillsboro, N.H., resident, brought his arbitration horror story to Capitol Hill. Cornock’s credit rating was decimated after the card his now ex-wife opened in his name was not paid off. He tried repeatedly and unsuccessfully to make credit card giant MBNA aware that not only was it not his card, but also that he had moved to a different address. MBNA kept sending all correspondence, including notice that the case was being sent to arbitration, to his ex-wife’s address.

NAF ordered Cornock to pay MBNA $9,446.85 but sent that ruling to his ex-wife’s address. MBNA then went to court and successfully petitioned for a default judgment against Cornock. Cornock hired a lawyer, who had the default judgment set aside and successfully filed a motion to have the arbitration award tossed out. Cornock’s days in court are over, but his credit record is sullied and his financial trials continue.

Most people have no idea what an arbitration firm is, Cornock said. “Sure, it’s in the contract you sign, but that fine print should be in big old bold print, warning you. In my case, they held an arbitration hearing even though I didn’t sign a contract agreeing to arbitration.”

“Binding mandatory arbitration is a systematic, privately funded denial of justice for consumers,” said Laura MacCleery, director of Public Citizen’s Congress Watch division. “It is a get-out-of-jail-free card for corporate hucksters.”

Read the full statement of Joan Claybrook.

Read the full statement of Laura MacCleery.

Read the full statement of Troy Cornock.