consumers signing away the right to sue
day, consumers are giving away one of their basic rights -- and
most of them don't realize it. Buried in the microscopic legalese
of many loan and purchase agreements is a provision that has a profound
impact on a customer caught in a dispute with a bank or other company.
Mandatory arbitration clauses, which compel
customers to give up their right to go to court, are becoming commonplace,
especially in financial contracts, but consumers often are unaware
of their existence or implications.
But this week, the Supreme Court began hearing
a case that may have a major impact on the use of mandatory arbitration
"Most of the big banks have them. The numbers
have approached or exceeded 50 percent in the lending arena," says
Will Lund, director of Maine's
Office of Consumer Credit Regulation. "It's probably more than
that for credit cards."
Lund says arbitration clauses started showing
up in 1985, but the trend boomed in the '90s beginning with Bank
of America. In 1992, the lending giant announced that credit card
and checking and savings account disputes would be resolved out
of court. Soon after, another West Coast bank, Wells Fargo, mimicked
that move -- at the same time it was fighting a class-action battle
over late fees that later resulted in a multimillion dollar award
"Lenders are very excited about arbitration
clauses because they tend to spend a lot of money defending class-action
suits. Arbitration eliminates class-actions," Lund says.
Other major creditors -- such as First Union
Corp., First USA, American Express and MBNA -- have since done the
In arbitration, a dispute is handled by a third party, called a
"neutral," that hears both sides and makes a decision. Courts routinely
use arbitrators to relieve the clogged legal system. In fact, some
of them require arbitration of civil cases such as family and divorce
disputes before a lawsuit can be filed. Just about any type of dispute,
whether it's between a worker and an employer, a retailer and a
customer, or an insurance company and a policyholder, can be arbitrated.
The majority of big business arbitration cases
are handled by the American
Arbitration Association, the National
Arbitration Forum and Jams
Endispute, all of which have long rosters of experts in the
law and other fields.
Attorneys agree that arbitration has its advantages.
For one, it's faster. The American Bar Association estimates it
takes two years for the average court case to be resolved, compared
with 8.6 months for arbitration. Expediency can save thousands in
"If you bring a claim against a corporate defendant
in a courtroom, they're just going to outlast you," says Ed Anderson,
managing director of the National Arbitration Forum. "If there is
no arbitration, the lawsuit system is a monopoly for the resolution
of disputes, and lawyers can charge what they want. You don't see
any lawyers getting rich on arbitration."
Arbitration is more flexible. Hearings are easier
to schedule and can even be held over the phone. The rules are not
as complex and the atmosphere is less intimidating than a courtroom
for people who are not familiar with the legal system.
Arbitration also may be the only realistic way
to handle disputes over online transactions. How would a person
in the United States pursue a claim against a seller in England?
Even if a person obtained a judgment against a foreign business,
enforcement is difficult -- if not impossible.
business' out-of-court advantage
But some legal experts contend that arbitration between individuals
and large companies is a lopsided playing field.
"It's wonderful when you have two parties of
equal bargaining power who agree to do it," says Jeffrey Kodroff,
a partner at the Philadelphia law firm Spector, Roseman & Kodroff.
"But in a consumer vs. corporation setting, it's inherently unfair."
Consumer advocates have a long list of problems
with arbitration in those cases:
- They say it strips an individual of his
or her Constitutional right to due process. Arbitrators can make
decisions based on what they think is equitable rather than what
the law says; they have say-so over how much evidence can be submitted;
the proceedings are confidential; and there is no written record
that can be used as legal precedent.
- Most arbitration decisions are binding and
cannot be appealed.
- Mandatory arbitration clauses force consumer
consent before a dispute arises. "How do you know if you want
arbitration before you know the nature of the dispute?" says Mark
Budnitz, a law professor at Georgia State University. "How does
a person know he may not want to go to court?"
- An individual who does not have a lawyer
during arbitration is on unequal footing against a bank or corporation's
legal experts. "Many times the customer has to go in by themselves,"
says Kodroff, "because it's not cost-effective for an attorney
to take their case."
- Federal consumer protection laws, such as
the Truth in Lending Act and the Fair Credit Reporting Act, "disappear"
under arbitration clauses, says Lund, of Maine's Consumer Credit
Regulation office. "The issue is: Do these consumer laws mean
anything if you can't go to court? If a lender violates the law
and the consumer wins, they get statutory damages and attorneys'
fees. If you can't go to court, it's difficult to take advantage
of those statutes."
- Some arbitration provisions maintain the
company's right to go to court while prohibiting the customer
from doing the same.
- Arbitration organizations vary in their
rules of procedure and the rules can change frequently. "What
are the rules? I don't know," says Budnitz. "It's a moving target."
- Fees vary and may be more expensive than
filing a suit in small claims court, especially if the fee is
based on a percentage of the claim. Costs go up when a consumer
wants a full hearing as opposed to a telephone hearing or a decision
based solely on a review of the documents.
Tips consumers should follow:
Read the fine print. Use of a credit card after a
"change in terms" notice may mean you are agreeing to those
If you have a dispute with your credit card company,
first try to resolve the matter with the bank by following
the dispute procedures spelled out in your card agreement.
Your correspondence must be in writing to guarantee protection
under the federal Fair Credit Billing Act.
Keep all receipts, contracts, copies of correspondence
and warranty information in case a dispute should arise.
Educate yourself. The Web sites for most major arbitration
administrators have information about their services, including
cost and procedures. Check out the American
Arbitration Association, the National
Arbitration Forum and Jams
consumers may fare better
But Anderson, of the National Arbitration Forum, says: "Pro-consumer
attorneys would favor arbitration. Consumers do better in arbitration
than they do in the court system. All the studies show that."
The American Bar Association says a consumer
plaintiff wins 71 percent of the time in court and 80 percent in
arbitration. Corporate plaintiffs win 63 percent of the time in
arbitration and 87 percent in court.
Anderson says arbitration rules change to conform
to legislation and court rulings.
"The rules of court change all the time," he
says, citing the U.S. Supreme Court's May 15 decision to strike
down the federal Violence Against Women Act of 1994, which gave
victims of sexual violence the right to sue their attackers. "One
day you could sue under that act and the next day you can't. When
legal rules change we all scurry to change how we do things."
As for requiring customers to waive their right
to sue before a dispute arises, Anderson says businesses that prefer
to arbitrate are taking the same risk as individuals. "The business
is making the same commitment to go to arbitration. It's the same
commitment you make to pay the price or accept the warranty. If
it were up to the lawyers, they would always choose court because
they can stall the case."
it fair for individuals
Robert Meade, senior vice president of the American Arbitration
Association, concedes that arbitration can be inequitable when it's
a business vs. a consumer. AAA's focus is business-to-business disputes,
but in 1998, with the input of consumer groups, it devised a separate
protocol for proceedings involving individual consumers.
"We were concerned that there were some systems
out there that were not fair," Meade says. "We've written a consumer
protocol that covers some of those concerns. We've served as kind
of a cheerleader, if you will."
AAA recommends that contracts allow disputes
over small amounts of money to be heard in small claims court. "They
don't have to arbitrate if they don't want to. That's a very important
factor," says Meade.
The organization also encourages companies to
make notifications of arbitration plain and conspicuous. Arbitration
clauses are usually in fine print, stuffed in an envelope with the
customer's credit card bill, buried at the bottom of a tedious insurance
contract or bundled with packing materials when a consumer buys
a new product such as a computer.
Lund says corporate lawyers are starting to
take a second look at arbitration language and some agreements have
become more consumer-friendly. For example, credit card behemoth
MBNA is making it optional. "The consumer can write within two weeks
and opt out of the change," he says.
MBNA also agrees to advance the customer the
fee to initiate the claim, and the consumer has the right to attorneys'
fees if he or she prevails. The fees, however, cannot exceed what
it would have cost the individual to file the case in court. "This
is different from any I've ever seen," says Lund. "They are making
an effort to modify it."
Of course, this is all spelled out in the fine
print under "change in terms," which means if the customers don't
read the inserts, they waive their rights.
Lund says consumers have to inspect every piece
of paper that accompanies loans, goods and services. "There seems
to be no natural limit to the number of contracts that consumers
can enter into that have these things," he says. "Going to court
is a right we always thought we had, but you can rent a campsite
for the night and might have to sign an arbitration agreement."
--Posted: Oct. 4, 2000