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New Public Citizen Report Shows that Credit Card Companies Set an Arbitration Trap to Ensnare Consumers

Note: This statement was updated on Oct. 11, 2007.

Sept. 27, 2007

New Public Citizen Report Shows that Credit Card Companies Set an Arbitration Trap to Ensnare Consumers

Statement of Laura MacCleery, Director, Public Citizen’s Congress Watch Division

Today, just about every American who has a credit card, builds a house, has a cell phone, gets a job or buys a computer likely has agreed unknowingly to settle any dispute through binding mandatory arbitration (BMA), a for-profit backroom process.

Our new report presents the results of Public Citizen’s eight-month examination into credit card industry abuse of pre-dispute binding mandatory arbitration. We found chilling evidence of a stealth campaign by big business to undermine the ability of ordinary Americans to seek justice in court.

We focused on all available data from one arbitration company, the National Arbitration Forum (NAF), and investigated dozens of in-depth stories of injustice. We examined court records and scholarship on arbitration, and – breaking new ground – comprehensively crunched data for all 33,948 cases in NAF’s California records. As a result, our report sheds new light on this shadowy world.

Tens of thousands of consumers are affected by binding mandatory arbitration. With more than 1,600 part-time arbitrators on its national roster, NAF admits to handling more than 50,000 cases a year.

The credit card industry relies heavily on binding mandatory arbitration to enforce its will. NAF identified virtually all of its California cases as “collection” cases filed against consumers by credit card companies or firms that buy debts for cents on the dollar. Fifty-three percent of those cases involved MBNA credit cardholders.

Corporations – not consumers – choose binding mandatory arbitration. All but 118 of the NAF cases in California were filed against consumers by credit cards or debt collectors. In other words, consumers chose to bring only 118 cases before NAF while corporations chose this business-friendly forum nearly 34,000 times – 99.6 percent of the total cases.

The results of mandatory arbitration demonstrate a stunning bias against consumers. In the more than 19,000 cases in which NAF  appointed an arbitrator, 94 percent of decisions were for business.

Arbitrators also have a strong financial incentive to rule in favor of companies that file cases against consumers because those companies are their most loyal customers, and a busy arbitrator can make hundreds of thousands of dollars a year. Arbitrators routinely charge $400 or more an hour. Top arbitrators can charge up to $10,000 per day, and some make $1 million a year. In comparison, California Superior Court judges earn $170,000 a year.

The deck also is stacked against consumers by the same financial incentives. The slate of arbitrators is chosen by NAF, and NAF is, in turn, chosen as the arbitration firm of choice by credit card giant MBNA. It is highly unlikely, to say the least, that MBNA would pick an arbitration firm that produces results MBNA does not like.  And the results of our report show what MBNA has known all along – that the results it gets from NAF are great for the company.

In California, a small, busy cadre of 28 arbitrators handled nearly nine of every 10 NAF cases. This group ruled for businesses 94 percent of the time. Another 120 arbitrators handled slightly more than 10 percent of the cases in which an arbitrator was assigned. They ruled for businesses 86 percent of the time and for consumers 10 percent. Outside of California, there is little information that would allow consumers to even begin to assess the bias of an arbitrator because California is the only state with any disclosure law on the books.

Companies do not choose arbitrators who do not rule in their favor. One NAF arbitrator, a Harvard law professor, was blackballed after she awarded $48,000 to a consumer in a case brought by a credit card company. After the same company had her removed from other pending cases, she resigned, citing NAF’s “apparent systematic bias in favor of the financial services industry.”

Arbitration hearings are shrouded in secrecy. NAF is so keen to hide its work from the public and limit information about its decisions that its arbitrators generally do not  issue a written decision unless one of the parties specifically requests and pays for it in advance. In one case we examined, a three-page decision cost $1,500.

Last but not least, arbitration violates due process safeguards. NAF limits parties’ access to key information that they would be allowed to obtain in court. And the sad state of the law makes it nearly impossible for consumers to appeal adverse decisions by arbitrators.

Binding mandatory arbitration is, in fact, a deliberate strategy to substitute a secret, pro-business kangaroo court for an open trial on the merits of a claim.

The issue is ripe for congressional action. We are delighted and grateful to have the support of Sen.  Russ Feingold, Rep. Hank Johnson and all their co-sponsors. Our report lays out, for the first time, the shocking anti-consumer record of this egregious entrapment mechanism. Now that we know the truth, it is time to act. We look forward to working with these esteemed members of Congress to pass the Arbitration Fairness Act.