A Test Case For National Consumer Protection
Minnesota Challenges Mandatory Arbitration of Consumer Claims
News that Minnesota Attorney General Lori Swanson filed suit against the National Arbitration Forum of Minnesota, the nations largest arbitration company for consumer credit disputes comes on the heels of reports that the financial sector is lobbying hard to defeat proposed consumer protections at the national level. The Minnesota suit accuses NAFM of deceptive trade practices by holding itself out as a neutral third-party, when in reality it serves as a proxy for credit card companies.
Leading up to the lawsuit
According to Swanson, credit institutions such as banks, retail lenders, credit card companies and cell phone service providers include mandatory pre-dispute arbitration clauses into the fine print of consumer agreements. These clauses mean that consumers waive their rights to challenge institutional actions in traditional legal venues. Instead, these disputes must be resolved by an arbitrator selected by the creditor. Given the language of the waiver, and its location deep within the dense contract, Swanson said that often times consumers have no idea they have even waived these rights.
This kind of practice is at the heart of proposed federal regulations of credit issuing agencies. Amongst the most controversial proposal is a measure aimed at streamlining the consumer credit contract. The proposal calls for a universal form, so to speak, listing simply the amount of credit issued, the current percentage rate, the number of days in a billing cycle, and the occasions that would lead to rate increases. Credit card companies in particular have complained that the proposed regulation amounts to Washington D.C. writing contracts for them. The Minnesota case could prove to be a test study of the judicial tolerance for such actions.
Among the most problematic claims in the lawsuit are those that the NAFM pays commissions to executives to convince creditors to insert mandatory arbitration clauses into their contracts. Arbitrators were also allegedly pressured to award hefty attorneys fees to creditors' attorneys. Retired West Virginia Chief Justice Richard Neely, a former arbitrator at the NAFM, said he stopped receiving cases from the group after he refused to award attorneys' fees to the creditors. "I am happy that a government official has stepped in to try and address this problem," Neely said. "This company tilts the playing field toward creditors and makes a mockery of our legal system."
The credit industry's response
In defense of the allegations, NAFM spokeswoman Christina Doucet responded via email defending the group's practices. "As an adversarial means of dispute resolution, like litigation, arbitration provides for a decision in favor of one party, typically leaving at least one party unhappy with the result. As such, and administrator of arbitration is likely going to get complaints."
The lawsuit, filed in Hennepin County District Court, seeks first and foremost to provide consumers the opportunity to have their claims heard by a jury, if they so choose. "Just by keeping a credit card, the consumer agrees to the terms and conditions of the card, even if the arbitration provision was sent to the consumer after the card was issued. This is a classic case of the little guy being stepped on by fine-print contracts" Swanson said.
Lori Swanson
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