Top Arbitration Firms Exit Business

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Two of the leading arbitration companies have stopped taking consumer cases. The American Arbitration Association says it will stop mediating consumer debt cases and the National Arbitration Forum is getting out of all consumer matters.

MADELEINE BRAND, host:

If you have a credit card or a cell phone, you might want to listen closely to this next story. Most credit card and cell phone contracts have fine print in them that commits consumers to arbitration if there's a dispute. Well, this week, two of the largest firms that handle those arbitrations, they said they'll stop taking consumer debt collection cases.

NPR's Wade Goodwyn in Dallas has been following this issue for us.

Hi, Wade.

WADE GOODWYN: Hello.

BRAND: So, what's going on here? Why are they doing this?

GOODWYN: Well, I think for different reasons. The National Arbitration Forum, it's based in Minneapolis, is getting out of the consumer arbitrations as part of a settlement agreement with Lori Swanson, the Minnesota attorney general. She brought suit against the company after she uncovered evidence that the NAF is owned by the same New York hedge fund that owns one of the nation's largest debt collection agencies.

So the NAF was ruling on cases in which one of the parties in the dispute was, in fact, owned by the group that owns 40 percent of the NAF. According to the attorney general, company documents prove that this ownership connection was actively kept a secret by the NAF executives.

In 2006, the NAF arbitrated 214,000 consumer claims and 60 percent of those claims were filed by parties that had ties to the National Arbitration Forum. The Minnesota attorney general's settlement with the NAF has cast a pall over the entire arbitration industry.

BRAND: So, is that why the other big national arbitration company, it's called the American Arbitration Association, has voluntarily suspended its arbitrations, its debt collection arbitrations, even though it was not a target of the Minnesota attorney general?

GOODWYN: That's right, yes. I talked to Richard Naimark, who is senior vice president of the American Arbitration Association. They did about 17,000 of these cases last year, and he says they're not going to accept anymore debt collection cases for the time being. They may in the future if questions about fairness and due process can be resolved.

They make most of their money in commercial arbitrations, and that's a different ball of wax. Both parties are generally equally powerful. They agree to arbitration after a dispute arises, it's not compelled in advance. I got the feeling from Naimark that they're just fine doing without consumer debt collection, given the controversy the process is attracting.

BRAND: Wade, over the last two decades or so, companies have been putting these pre-dispute arbitration clauses in their contracts, right? These are contracts for nursing homes, home builders, not just credit cards and cell phones.

What is that going to mean for the companies and the consumers?

GOODWYN: That's a good question. I mean the settlement with the NAF does not put an end to consumer arbitration. The credit card companies can go find another arbitration company and give them their business. There's legislation before Congress called the Arbitration Fairness Act that would make arbitration voluntary and post-dispute. The theory is this will eliminate, you know, alleged arbitrator bias because if a consumer has a choice about whether to go to arbitration or court, the arbitration industry will have to be fair to consumers, or consumers will simply choose to go in front of a state judge who gets his or her paycheck from taxpayers.

BRAND: So, you mentioned earlier that there was this appearance of bias on the part of one these arbitration companies. What is their response and what is the industry's response to accusations that it's biased against consumers?

GOODWYN: Right, it's accusations. The industry has always defended the integrity of its arbitrators and that hasn't changed. As for the big winning percentages where the credit card companies win more than 95 percent of the time, the industry says that's not evidence of arbitrator bias. It's evidence that creditors bring stronger cases and that consumers often don't even bother showing up.

Ensuring fairness is a challenge when one of the parties in the dispute, the more powerful party, is paying most of the legal bill and usually picks which arbitration company will be used and can veto specific arbitrators. Like health care, I think this is an issue, a debate where the resolution is still very much up in the air.

BRAND: So bottom line, Wade, if I have a credit card problem, what do I do?

GOODWYN: I mean, that's going to depend on the state that you live in and what Congress does about the Arbitration Fairness Act. I think that for now, you will go to an arbitrator picked by the credit card company. It will not be the NAF any more. Who it will be? We'll find out.

BRAND: Right, we won't know yet. Okay. Well, thanks, Wade. That's NPR's Wade Goodwyn in Dallas.

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