Arbitration Firm Settles Minnesota Legal Battle

STEVE INSKEEP, Host:

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.

M: 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.

M: 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: 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.

M: I want to reiterate, we have withdrawn the National Arbitration Forum from handling consumer arbitrations pursuant to an agreement with the attorney general.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.]

M: 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: Wade Goodwyn, NPR News, Dallas.

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