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Future of Mandatory Arbitration of Consumer Disputes in Doubt

By Henry R. Chalmers, Litigation News Associate Editor – August 19, 2009

Is mandatory arbitration of consumer disputes going the way of the GM Pontiac? The practice is probably not ready for the scrap heap just yet, but it is definitely encountering some bumps in the road.

Congress’s new Democratic majority is considering the Arbitration Fairness Act (AFA), which would make pre-dispute agreements requiring arbitration of employment, consumer, franchise, and civil rights disputes unenforceable.

President Barack Obama’s recently unveiled Financial Regulatory Reform plan envisions creation of a Consumer Financial Protection Agency to study the use and effect of mandatory arbitration agreements. If they are not found to promote fair adjudication and effective redress of consumer disputes, the Agency would be empowered to ban their use.

And in July, the National Arbitration Forum (NAF) agreed to get out of the consumer arbitration business entirely, as part of a settlement of claims brought against it by the Minnesota Attorney General that had alleged the NAF unfairly favored credit card companies against consumers.

Following suit, the American Arbitration Association has announced that it will stop arbitrating consumer-debt-collection disputes until new guidelines are in place.

Support for the AFA
Scott L. Nelson, Washington, D.C., former cochair of the ABA Section of Litigation’s Consumer and Personal Rights Litigation Committee and current member of the Section’s Special Committee on the Future of Civil Litigation, agrees with the push to reign in mandatory arbitration of consumer disputes.

“The notion that consumers are voluntarily agreeing to arbitration because of any benefits it has for them is a fiction,” says Nelson.

Nelson supports the AFA, which he says will return arbitration “to what it was intended to be, which is something that allows sophisticated entities to agree on an alternative means of resolving their disputes” as opposed to “something imposed on weaker parties in essentially one-sided transactions.”

Risks of Limiting Arbitration
However, others, such as Andrew L. Sandler, Washington, D.C., cochair of the Section of Litigation’s Consumer and Personal Rights Litigation Committee, disagrees. “Eliminating mandatory arbitration is a very bad idea,” says Sandler.

“It can be quite expensive to litigate individual disputes,” Sandler notes, “and many plaintiffs will have great difficulty finding lawyers to represent them in court.”

Edward M. Mullins, Miami, FL, former cochair of the Section’s Alternative Dispute Resolution Committee and current cochair of the Section’s International Litigation Committee, echoes Sandler’s concerns.

Mullins wonders how our already overburdened court systems would absorb all the new lawsuits that a ban on mandatory arbitration could spawn. “They already don’t have enough judges and money, and there are thousands of consumer arbitrations around the country that would be added to the courts’ dockets,” Mullins warns.

Bart L. Greenwald, Louisville, KY, cochair of the Section’s Commercial and Business Litigation Committee, questions the underlying premise motivating opponents of mandatory arbitration. “I think arbitration actually benefits the consumer more than the company,” says Greenwald.

“My experience is that if you are a rule follower, arbitration will work against you,” says Greenwald.

“Most companies and their attorneys are rule followers, whereas many plaintiff’s attorneys will try to get everything in, even hearsay. Arbitration often favors this latter approach,” Greenwald explains.

Mullins notes what he contends are procedural disadvantages to consumers litigating in court and questions whether consumers “are really going to get a fair result in a complicated county court with all of its rules of procedure.”

Nelson, however, isn’t buying it. “I think the supposed simplicity of arbitration is oversold as a benefit,” says Nelson.

“Most consumers are unlikely to be able to navigate either a lawsuit or an arbitration without a lawyer,” he says. Arbitrations have unique costs, such as “fees for three arbitrators at premium law firm billing rates,” Nelson notes.

A common refrain among several Section leaders polled on the issue is not to “throw the baby out with the bathwater.”

“The issue ought not to be eliminating arbitration, but rather ensuring that arbitration is fair to consumers,”says Sandler.

Echoing the “fix it, don’t kill it” approach, Lori Sochin, Miami, FL, cochair of the Section’s Alternative Dispute Resolution Committee, is comforted by the provision in President Obama’s plan that calls for study and analysis before imposing any restrictions on mandatory arbitrations.

“We” should focus on “making sure that procedures are in place so that arbitrations can be fairly administered,” says Sochin.

However, Nelson remains unconvinced. “You can sugarcoat it all you want, but at the end of the day, [mandatory arbitration] remains a bitter pill that you’re forcing down people’s throats,” Nelson says.

Keywords: arbitration, arbitration fairness act, consumer contracts, financial regulatory reform

  • September 21, 2009 – Most companies and their attorneys are rule followers, whereas many plaintiff s attorneys will try to get everything in, even hearsay. Arbitration often favors this latter approach, Greenwald explains.

    I heard that after banks save babies from burning buildings, plaintiff's attorneys try to eat the babies!

  • September 23, 2009 – As a consultant in the computer field, I have been forced to sign a number of employment contracts recently that included mandatory arbitration clauses.

    Had the clients failed to compensate me at the end of these contracts, as one of them not very subtly threatened to do, I would not have been able to collect the debts they owed me. I would have had to resort to arbitration, which would have cost more in one case than the contract was worth, and would certainly have cost far more than normal debt collection procedures.

    As a result of the threats and intimidation exercised against me in one case, I was obliged to work more than a third again the number of hours for which I was actually compensated, and to deliver items that were clearly beyond the agreed scope of my contract.

    This was extortion, pure and simple.


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