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Arbitration: "Set up to squeeze small sums of money out of desperately poor people"
Nathan Newman on June 12, 2008 - 8:10am
The headline above is a quote from former West Virginia Supreme Court Justice Richard Neely, describing what his role was as an arbitrator at the National Arbitration Forum (NAF), a for-profit company hired to enforce mandatory arbitration clauses for credit card consumer loans. "NAF is nothing more than an arm of the collection industry hiding behind a veneer of impartiality," says Richard Neely.
In a devastating expose by BusinessWeek, Neely and other former arbitrators describe an arbitration system stacked completely against consumers-- a system where creditors win 99.8% of all disputes involving companies ranging from Bank of America to Sears to Citgroup. Arbitration clauses buried in the fine print of credit card offers means consumers lose the right to have disputes decided in an independent court and instead are forced into corporation-selected arbitration firms.
Elizabeth Bartholet, a Harvard Law School professor and an NAF arbitrator in 2003 and 2004 stated in a deposition that NAF ran "an unfair, biased process." Dennis J. Herrera, San Francisco's city attorney, has sued the firm in California state court: "NAF has done an end run around the law to strip consumers of their right to a fair collection process," Herrera said in an interview with BusinessWeek. And made a healthy profit doing so-- in 2006, NAF had a net income of $10 million, a 26% profit margin on revenue of $39 million.
What's shocking is that it's not just critics who describe arbitration as a way for industry to gain at the expense of consumers-- it's actually NAF's pitch to corporate clients. A confidiential September, 2007 NAF presentation aimed at creditors promised "marked increase in recovery rates over existing collection methods" and celebrated the fact that 93.7% of arbitrations are decided without consumers even getting to participate in the process. And if a consumer does respond and files a response, NAF promoted the fact that creditors can use delays and dismissals to manipulate arbitration cases.
As we described in a Dispatch in March, the use of mandatory arbitration clauses are increasingly being used by large corporations to deny consumers and employees any access to justice in the courts. While federal law makes it hard for states to ban mandatory arbitration altogether, they do have the power to stop the kind of the abuses of arbitration that companies like NAF promote. There are a series of key model state laws states can enact to preserve consumer rights, force arbitration companies to disclose the results of arbitration decisions, and limit any fees imposed on consumers by the process The kinds of abuses outlined in the .BusinessWeek expose should be a rallying cry for reform of arbitration in every statehouse.