Arbitration: Justice With A Thumb On The Scale

By Lori Swanson

October 30th, 2017

This year, the Consumer Finance Protection Bureau (“CFPB”) adopted a rule to significantly limit arbitration provisions in consumer financial contracts. Last Thursday, the U.S. Senate overturned the rule and shut the door on consumers’ access to the courts. The U.S. House has already rejected the CFPB rule, and now it is up to the President to make the final call.

With all due respect to Congress, this action is wrongheaded and should be reversed.

What is an Arbitration Provision?

Over the past 10 years, thousands of corporations have inserted arbitration provisions in their contracts with consumers. These provisions essentially create a private judicial system where, according to the New York Times, the arbitrator commonly considers the corporation to be the client.[1] The arbitration system has its own rules, largely determined by individual arbitrators, whose ultimate decision rarely can be challenged in a court of law. Absent the rule of law embedded in statutes and our rules of judicial procedure, the arbitration process can become stymied to the point of corruption.

Problems with Arbitration.

The following passage from the New York Times best describes the problems with arbitration:

Winners and losers are decided by a single arbitrator who is largely at liberty to determine how much evidence a plaintiff can present and how much the defense can withhold. To deliver favorable outcomes to companies, some arbitrators have twisted or outright disregarded the law, interviews and records show.

“What rules of evidence apply?” one arbitration firm asks in the question and answer section of its website. “The short answer is none.”

…some have no experience as a judge but wield far more power. And unlike the outcomes in civil court, arbitrators’ rulings are nearly impossible to appeal.

When plaintiffs have asked the courts to intervene, court records show, they have almost always lost. Saying its hands were tied, one court in California said it could not overturn arbitrators’ decisions even if they caused “substantial injustice.”

Unfettered by strict judicial rules against conflicts of interest, companies can steer cases to friendly arbitrators. In turn, interviews and records show, some arbitrators cultivate close ties with companies to get business.

Some of the chumminess is subtler, as in the case of the arbitrator who went to a basketball game with the company’s lawyers the night before the proceedings began. (The company won.) Or that of the man overseeing an insurance case brought by Stephen R. Syson in Santa Barbara, Calif. During a break in proceedings, a dismayed Mr. Syson said he watched the arbitrator and defense lawyer return in matching silver sports cars after going to lunch together. (He lost.)

Other potential conflicts are more explicit. Arbitration records obtained by The Times showed that 41 arbitrators each handled 10 or more cases for one company between 2010 and 2014.

“Private judging is an oxymoron,” Anthony Kline, a California appeals court judge, said in an interview. “This is a business and arbitrators have an economic reason to decide in favor of the repeat players.” [2]

It should come as no surprise that consumers lose 94% of the cases in arbitration.[3]

The Axis Powers of Arbitration.

In 2009, the National Arbitration Forum (“NAF”) was the largest consumer arbitration firm in the country. It arbitrated over 200,000 consumer cases per year.[4] NAF claimed to the public that it was an “independent and neutral” arbitration service. What it didn’t mention was that it was owned by a New York hedge fund that also controlled Mann Bracken, the largest collection law firm in the country at the time. Mann Bracken in turn had ownership affiliation with Axiant, one of the largest collection agencies in the country.

The affiliated companies—which I nicknamed the Axis Powers—circulated a confidential memo that described their operation as a “legal ecosystem” beyond the reach of traditional courts. They churned out decisions almost always in favor of their clients, who were mainly credit card companies, banks, and other lenders.

The Axis Powers were very clever in hiding their affiliation with each other. It took almost a year of investigative work by my office to establish connections between the companies. I took action against NAF, arguing that it committed fraud by not disclosing the conflicts of interest between the parties.[5] In the end, NAF agreed to cease any more arbitration business in the consumer field.[6]

Eventually, upon the culmination of our case, all three companies dispersed, with Mann Bracken and Axiant filing for receivership.

Our actions against the Axis Powers received positive recognition in Congressional hearings[7], from legal commentators,[8] from the national media,[9] from consumer groups,[10] and from federal agencies[11] for exposing the conflicts of interest inherent in forced arbitration cases.

I hoped our work was a watershed moment in reigning in the abuses of arbitration. The American Arbitration Association soon announced it would no longer handle consumer arbitration cases.[12] Bank of America announced that it no longer would force consumers into arbitration.[13] Other financial institutions began to step back from forced arbitration too.

It seemed that we had obtained a big victory for the little guy.

Judicial Review of Arbitration Provisions.

Enter the U.S. Supreme Court.

Vincent and Liza Concepcion, induced by an offer of a free cell phone, purchased cell phone service from AT&T. The Concepcions then were billed $30 bill for the phone, which AT&T refused to take back. The Concepcions went to court to demand a return of the charge on behalf of themselves and others who were similarly duped. The cell phone contract, however, required all disputes to be resolved by arbitration. In 2011, a little over a year after my case against the Axis Powers, the U.S. Supreme Court ruled that the AT&T arbitration provision effectively removed the jurisdiction from the courts to hear the case.[14] In the end, very few consumers were willing to bother with a $30 claim.[15]

Similar decisions soon followed.

The Impact of the Concepcion Decision.

The result is that tens of millions of Americans have lost a fundamental right to their day in court. Enough background. Let’s look at the real lives impact by forced arbitration.

A 94-year-old woman at a nursing home in Pennsylvania had a head wound, but the nursing home allegedly left in bed while the wound festered until she died. The family sued for negligence, but the court threw the case out, saying that because of a provision buried the admission papers, the family had to go before a private arbitrator instead.[16]

A woman from Alabama sued a car company over severe injuries caused by allegedly faulty brakes. Due to a provision in the purchase agreement, the case was thrown out of court, to be decided by a private arbitrator.

An employee on a cruise ship who was allegedly drugged and raped by two crew members was told that she could not take her employer to court for negligence and an unsafe workplace because of an arbitration provision in her employment contract.[17]

The parents of a baby who suffered deformities during delivery could not file a claim in court because of an arbitration clause in the hospital admission papers.[18]

Our Petition to the Consumer Bureau.

A few years ago, I filed a petition with several colleagues from other states to request that the Consumer Financial Protection Bureau ban arbitration clauses in financial contracts. The CFPB promulgated such a rule earlier this year. The CFPB rule put some real limits on the impact of the Supreme Court decisions mentioned above.

Unfortunately, as noted above, the U.S. Senate last week voted to overturn the forced arbitration ban. The House previously voted to undo the rule, and the bill is now on its way to the President’s desk.

How Do We Level the Playing Field?

Arbitration can be an appropriate way to resolve disputes when the arbitrator is fair and both sides want to arbitration. But too often, large corporations force arbitration through fine print contracts and then stack the deck in arbitration to get the outcome they want against the “little guy” who has no clout. If you want to read more about how this occurs, look at this recent City Pages article.

Because the courts have repeatedly held that federal law preempts state law on arbitration, only Congress can now stop this practice. It is not likely that the President or the Congress will change their position on the CFPB rule. Having said that, under the theory of “give an inch, take a mile,” we also shouldn’t make it easy for the federal government to strip people of their legal protections.

I hope you will tell members of Congress and the President how you feel about the CFPB rule on arbitration.