Binding arbitration can tie up consumers

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Unhappy customers used to threaten, “I’ll see you in court!”

That won’t work any more. These days, consumers are increasingly forced to resolve disputes via mandatory binding arbitration. Unfortunately, while many people now are covered by binding arbitration agreements, most don’t know what they are, how they work, when they come into play or who will be deciding the fate of their complaints.

Businesses love binding arbitration. For them it’s a faster and cheaper way to settle disputes and a great way to generate debt collections.

Consumer advocates aren’t quite as happy about it.

“I think binding arbitration is bad for a number of reasons, chiefly because it guts the U.S. Constitution, which is the one document that makes our country unique,” says David Rumley, an attorney with Wigington Rumley in Corpus Christi, Texas, who has worked on binding arbitration cases.

“Here, an ordinary person can take a big corporation to court and get a hearing in front of a jury of his or her peers. Binding arbitration, by contrast, is 100 percent in favor of big business and against the consumer.”

Binding arbitration
Since it’s very likely that you have signed up for at least one product or service that makes you subject to binding arbitration, you had better learn something about it.
What, who, when, how?
1. What is binding arbitration?
2. Who could be facing binding arbitration?
3. When will you be faced with binding arbitration?
4. How does binding arbitration work?

What is binding arbitration?

Mandatory binding arbitration is an agreement to have a third party weigh the merits of each side of a dispute and render a decision. That decision is final, and in most cases it can’t be appealed, either to another arbitrator or to a court of law.

You give up your right to sue when you sign a contract containing a binding arbitration clause and you expose yourself to fees that can run into the thousands of dollars plus the cost of a lawyer. You lose many of the protections you would have in a court of law.

The hearing could be in person or via a conference call. If the hearing is in person, it may be held in another state. If so, you’ll have to pay your own expenses for travel and lodging while attending the hearing. If you hire a lawyer, you’ll be paying his or her expenses, too.

While consumers can represent themselves in arbitration, just as they can represent themselves in court, it’s probably a bad idea, as binding arbitration is usually a one-shot deal. If you make a procedural mistake or miss a deadline, the arbitrator may rule in the other party’s favor and you will find it very difficult to appeal that decision.

Arbitration is supposed to provide a neutral third party to resolve disputes. However, many consumer advocates charge that because the major arbitration companies receive so much business from large corporations, they are biased toward those corporations and against consumers. The arbitration companies say that arbitrators must disclose their backgrounds and disqualify themselves in the event of a conflict of interest.

“Arbitrators are required to disclose conflicts of interest and in many cases you can get more information about an arbitrator’s background to see if that person might have a bias in favor of the other party,” says Pamela Kentra, an associate professor at the Chicago-Kent College of Law, who acts as an arbitrator in the Better Business Bureau arbitration and mediation cases.

“If you have a choice of arbitrators, the No. 1 characteristic you want is neutrality, so if an arbitrator in your case had a history of working for a company in the same area as the party you have the dispute with, you might want to request another arbitrator.”

Who could be facing binding arbitration?

Mandatory binding arbitration clauses are common these days. They have become so widespread in many businesses over the past 10 years that they are nearly impossible to avoid. For example, if you want to purchase a cell phone contract, almost all cell phone providers include a binding arbitration clause in their agreements. The only way to avoid binding arbitration is to not get a cell phone.

You also find them when you buy a home or a car, receive most kinds of medical services, get a computer or a software program, sign up for insurance, open a bank account, or obtain a credit card. 

In most cases, these are take-it-or-leave-it agreements under which consumers must accept all the terms of the contract in order to obtain a particular good or service.

Arbitration can be invoked by either you or the company. In most cases it will be the company.

Paul Bland, an attorney with Public Justice, a nonprofit devoted to consumers’ rights issues, says, “The vast majority of arbitration claims involving consumers are collections actions brought by creditors against consumers. For instance, the National Arbitration Forum is doing hundreds of thousands of arbitration cases where a creditor is invoking arbitration in order to get a customer to pay overdue balances.”

In many of these cases, Bland says, consumers either don’t open correspondence from creditors and/or arbitrators about claims or ignore them altogether, resulting in an automatic judgment against those consumers.

“It used to be that if you fell behind on your credit card bill, the credit card company would call you to find out what’s going on and work out a payment schedule,” he says. “Now, many credit card companies and other creditors are taking you right into arbitration. The arbitration awards in many cases will not only include your overdue balance, but also interest, penalties, arbitration and legal fees.

“This can ratchet the arbitration award up by thousands of dollars,” he says. “And since arbitration awards are extremely difficult to overturn, the consumer will be forced to pay that amount.”

When will you be faced with binding arbitration?

If you have a complaint, it’s best to try to resolve the problem directly, via phone calls and letters. Make sure to keep a log of all phone calls, e-mails and correspondence between you and the company that documents your efforts to resolve the issue, as these will come in handy later.

Before initiating arbitration, speak to an attorney who is familiar with arbitration clauses to see whether the clause is legally valid and if there are any grounds to set it aside.

“Wording of arbitration clauses varies and in some cases, if the clause is very one-sided in terms of favoring one party over the other, you might be able to get it thrown out in court,” says Geoffrey Gold, an attorney with Rutter, Hobbs & Davidoff in Los Angeles.

State laws differ on what types of arbitration clauses are allowed in standard contracts and agreements. State courts and judges also vary widely in their interpretation and enforcement of arbitration clauses. In some states, such as California, courts are more inclined to set aside arbitration clauses. In other states, such as Texas, they are rarely voided even if the contract containing the clause was fraudulent.

How does binding arbitration work?

There are four major arbitration providers:

The fees and rules will vary depending on which arbitration provider is used, so carefully check the Web site of whatever provider is named in the contract that you signed. The fees just to file a case start at $125 and go up from there. If the arbitration provider is not specified in the contract, ask the company which it will be. The company gets to decide.

You can file cases subject to arbitration online:
American Arbitration Association’s case-filing portal contains prefiling information and forms to file a case by mail, e-mail or fax.
National Arbitration Forum has an initial claim filing form, including a downloadable Microsoft Word document of the claim form.
JAMS also offers a case filing form and rules. For binding arbitration, you must download a Microsoft Word or PDF file and mail the application in.
Better Business Bureau Binding Arbitration site also lists its rules and procedures.

Generally, fees are due when you file a case. Depending on which company hears your case, the amount of money in dispute and the set of rules that your claim will be arbitrated under, fees can run from several hundred dollars to several thousand dollars.

You can’t defer arbitration fees like you can defer fees in a contingency lawsuit when you have a lawyer who will get a percentage of the award, should you prevail.

Because arbitration decisions are so difficult to reverse, it’s vital to pay attention to any communication from your creditors. If you do receive a demand invoking an arbitration clause, you’ll at least have a chance to present your side and head off an automatic judgment against you. You can use the designated arbitrator’s Web site to respond to a claim and read the particular rules that will apply to your case.

Depending on the amount of your claim, your case may be decided based on the information you submit with your application. In order to present as strong of a case as possible, Robert Meade, senior vice president with the American Arbitration Association, recommends that you submit copies of receipts, correspondence, photos and canceled checks, as well as an account of the events involved in the dispute.

Even if your dispute will involve a hearing, it’s best to get your arguments and evidence in order as early as possible in the process and to read the rules to make sure you aren’t missing anything. You’ll also want to describe how you’d like the case to be resolved. For example, if you have a dispute with a builder who won’t fix a cracked foundation, you’ll want to get estimates of how much it will cost to fix the problem as well as any money you’ve spent to pursue your claim, which can include legal fees.

Depending on which service you use, you pay an extra fee for filing for discovery, motions or objections. These fees, under commercial rules, which is where you can get a fuller hearing for larger claims, can add quite a bit of expense to your arbitration claim and are due immediately. Even if discovery is allowed under arbitration rules, it can be quite limited.

“While it depends on the rules, in general discovery, rights are limited and not like what you’d get in court,” says Gold.

Arbitration awards are very difficult to appeal or overturn.

“They are final and binding,” says Meade. “Under federal and state laws there are very limited defined grounds to overturn an award. One of those is if the arbitrator had a relationship with one of the parties and didn’t disclose it or if you were denied a hearing under certain rules.

“It is very rare that arbitration rulings are overturned and if they are it is because a court rules that the underlying process itself is unfair.”