Arbitration Firm Settles Minnesota Legal Battle

This week, one of the largest arbitration service providers agreed to get out of the business of consumer arbitration. The National Arbitration Forum settled a case brought by the state of Minnesota, which detailed the company's ties to debt collection firms.

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A company that once presented itself as a neutral judge between consumers and companies turned out to be less independent than it seemed. The National Arbitration Forum presented itself as a place you could go if, for example, you were a consumer who had a problem with debt. You make your case, the company makes its case, and the arbitrator decides how much you really have to pay.

This week the forum agreed to get out of the business of consumer arbitration. It took that step after the state of Minnesota asked how neutral it really was. Here's NPR's Wade Goodwyn.

WADE GOODWYN: The National Arbitration Forum did hundreds of thousands of consumer arbitrations a year, most of them involving debt collection. Although there have been accusations by consumer advocacy groups for years that the NAF was unfairly biased in favor of creditors, Minnesota Attorney General Lori Swanson's allegations were nevertheless a stunner.

Ms. LORI SWANSON (Attorney General, Minnesota): The thrust of it is, is that that National Arbitration Forum held itself out as neutral and independent and operating like an impartial court system, but it wasn't impartial at all. It had financial ties to the collection industry and other ties to the collection industry as well.

GOODWYN: Swanson says the NAF had carefully protected information about its ownership until her subpoenas lifted the veil. The NAF is 40 percent owned by a hedge fund which also owns debt collection companies, which regularly had arbitration cases before the NAF. In thousands of cases, the owners of the National Arbitration Forum had a vested stake in the outcome since they were parties to one side of the dispute as well as judge and jury.

Ms. SWANSON: They knew - the forum knew and this hedge fund knew as well that, you know, it wouldn't be a good thing if people knew about it. People wouldn't react favorably to it. And so they went to great pains to create a very elaborate corporate structure to keep it secret.

Back in November of 2006, the executive of the National Arbitration Forum had an email saying, you know, this can't become public. And in the event it does, we're going to have to look at blowing apart the transaction. And so I think even in those boardrooms, when the decisions were being made, they knew.

GOODWYN: Within a few days of the lawsuit being filed, the National Arbitration Forum settled with the Minnesota attorney general, agreeing to cease all consumer arbitrations, the vast bulk of their business, forever.

Mike Kelly, chief executive of the NAF, argued that in spite of appearances, the ownership arrangement involving the NAF and the company which brought cases before it was acceptable, and that their arbitration process was fair and legal.

Mr. MIKE KELLY (National Arbitration Forum): I want to reiterate, we have withdrawn the National Arbitration Forum from handling consumer arbitrations pursuant to an agreement with the attorney general. That being said, it's our continued belief that the forum's exit from this business, and the loss of consumer arbitration broadly would represent a significant loss to the consumers that you're seeking to protect. The logical conclusion of this decision is that the consumer cases will all now be brought in court.

GOODWYN: Kelly was not the only arbitration company executive to appear. The vice president of the National Arbitration Forum testified they would abandon debt collection arbitration cases until the process could be made fair to consumers. But Richard Naimark also asserted that private arbitration was an important alternative to the public court system. [POST-BROADCAST CORRECTION: Richard Naimark is the vice president of the American Arbitration Association.]

Mr. RICHARD NAIMARK (American Arbitration Association): We have spent our 83 years trying to establish appropriate processes, appropriate codes of conduct. We have codes of ethics for arbitrators and others. And that's really what we stand for. And it's painful to see the process even in another organization cast in this very negative light.

GOODWYN: A reform bill, the Arbitration Fairness Act, would ban pre-dispute mandatory arbitration clauses in credit card and other consumer contracts.

Wade Goodwyn, NPR News, Dallas.

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Correction July 23, 2009

Our story identified Richard Naimark as the vice president of the National Arbitration Forum. That is incorrect. Mr. Naimark is senior vice president of the American Arbitration Association.

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