Consumer Law & Policy Blog

Consent Decree in Minnesota v. NAF

Here's the consent decree that Richard mentions in the post below.  And here's the text of the press release from the Minnesota Attorney General's office:

Minnesota Attorney General Lori Swanson and the National Arbitration Forum—the country’s largest administrator of credit card and consumer collections arbitrations—have reached an agreement that the company would get out of the business of arbitrating credit card and other consumer collection disputes.

“I am very pleased with the settlement. To consumers, the company said it was impartial, but behind the scenes, it worked alongside credit card companies to get them to put unfair arbitration clauses in the fine print of their contracts and to appoint the Forum as the arbitrator. Now the company is out of this business,” said Swanson.

Swanson sued the National Arbitration Forum on Tuesday, alleging that the company--which is named as the arbitrator of consumer disputes in tens of millions of credit card agreements--hid from the public its extensive ties to the collection industry. The lawsuit alleged that the Forum told consumers and the public that it is independent and neutral, operates like an impartial court system, and is not affiliated with and does not take sides between the parties. The lawsuit alleged that the Forum worked behind the scenes, however, to convince credit card companies and other creditors to insert arbitration provisions in their customer agreements and then appoint the Forum to decide the disputes. The suit also alleged that the Forum has financial ties to the collection industry. The suit alleged that the company arbitrated 214,000 consumer arbitration claims in 2006, nearly 60 percent of which were filed by laws firms with which the Forum is linked through ties to a New York hedge fund.

Under the settlement, the National Arbitration Forum will, by the end of the week, stop accepting any new consumer arbitrations or in any manner participate in the processing or administering of new consumer arbitrations. The company will permanently stop administering arbitrations involving consumer debt, including credit cards, consumer loans, telecommunications, utilities, health care, and consumer leases.

NAF Exits Consumer Arbitrations

by Richard Alderman

In a major victory for consumers, the nation’s largest arbitration firm involved in adjudicating delinquent credit-card debt has agreed to pull out of the business. As reported by BusinessWeek, the move was announced today by Minnesota Attorney General Lori Swanson, who had filed suit against the National Arbitration Forum, alleging fraud, deceptive trade practices, and false advertising.

Under the terms of the consent decree, signed by the AG and NAF officials, the arbitration firm by the end of this week will stop accepting new consumer arbitrations of any sort. These include arbitrations over disputed credit-card debt as well as new lines of business the NAF has moved into, such as arbitrating consumer debts in healthcare, telecommunications, utilities, mortgages, and consumer leases. The only business NAF can now be involved with is in arbitrating Internet domain disputes, a business it has long been in.

The question now is where will all these arbitrations go, and will more lawsuits follow them.

Massachusetts Supreme Court Strikes Class Action Ban, Rejects Texas Law

by Deepak Gupta

Just before the holiday weekend, the Massachusetts Supreme Judicial Court issued an opinion in Feeney v. Dell Inc., holding that a statutory right to participate in class action lawsuits may not be be foreclosed by a provision in a consumer contract compelling individual arbitration. The court reached that conclusion based not on unconscionabilty doctrine, but on Massachusetts public policy. It emphasized the strong state policy in favor of class actions and relied on cases such as the First Circuit's decision in Kristian v. Comcast Corp., 446 F.3d 25, 54 (1st Cir. 2006), which reject class action bans because of their interference with consumers' ability to vindicate statutory rights: "Allowing companies that do business in Massachusetts, with its strong commitment to consumer protection legislation, to insulate themselves from small value consumer claims creates the potential for countless customers to be without an effective method to vindicate their statutory rights, a result clearly at odds with our public policy."  The decision joins the rest of the state and federal appellate courts in holding that the Federal Arbitration Act does not preempt its holding, relying on the analysis of the Ninth Circuit and the Illinois Supreme Court.

The Feeney opinion is also noteworthy for its choice-of-law analysis. The Dell contract at issue specified that Texas law--which appears to allow class action bans--would apply.  The court held that Massachusetts' fundamental policy in favor of class actions for small-value consumer claims outweighed Texas's interest in blocking consumers' access to the courthouse doors.  As the court put it, "[w]e likewise have little trouble concluding that the interest embodied in this policy--the protection of large classes of consumers and the deterring of corporate wrongdoing--is materially greater than Texas's interest, which the defendants identify as 'minimizing its companies' legal expense.'"  Massachusetts joins a growing chorus of courts that reject corporate efforts to use choice-of-law clauses to enforce otherwise impermissible class bans.  Another recent example of this trend is the Third Circuit's decision in Homa v. American Express.

White House Proposal Includes Authority to Ban Forced Arbitration

by Deepak Gupta

Included in President Obama's proposed Consumer Financial Protection Agency Act of 2009 is the following provision giving the new agency the authority to ban pre-dispute mandatory binding arbitration clauses:

SEC. 1025. AUTHORITY TO RESTRICT MANDATORY PRE-DISPUTE ARBITRATION.

The Agency, by rule, may prohibit or impose conditions or limitations on the use of agreements between a covered person and a consumer that require the consumer to arbitrate any future dispute between the parties arising under this title or any enumerated consumer law if the Agency finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of consumers.

This is a big step forward for arbitration fairness.

The measure follows up on a specific recommendation in the Treasury Department's blueprint for financial regulatory reform, which also suggests that the SEC should explore banning forced arbitration . (Jump to pages 62-63 and 72 of the report.) The Wall Street Journal wonders whether this is "The Beginning of the End of Mandatory Arbitration."

NPR's All Things Considered recently ran this excellent report on the forced arbitration debate, featuring Public Citizen's David Arkush.

Supreme Court Takes Arbitration Case

The Supreme Court yesterday granted cert in Stolt-Nielsen S.A. v. AnimalFeeds International, which raises the question, according to SCOTUSblog, of "when two companies agree to send their disputes to arbitration, may a court order that process to go forward as a class action, if the contract says nothing on that issue."  Because consumer arbitration clauses never provide for class actions, the case might have consequences for consumer contracts which provide for arbitration, but do not expressly bar class actions. Here is the question presented, as framed in the cert petition:

In Green Tree Financial Corp. v. Bazzle,  539 U.S. 444 (2003), this Court granted certiorari to decide a question that had divided the lower courts: whether the Federal Arbitration Act permits the imposition of class arbitration when the parties’ agreement is silent regarding class arbitration. The Court was unable to reach that question, however, because a plurality concluded that the arbitrator first needed to address whether the agreement there was in fact "silent." That threshold obstacle is not present in this case, and the question presented here--which continues to divide the lower courts--is the same one presented in Bazzle:

Whether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.

More on Arbitration Opt-Outs and Opt-Ins

by Jeff Sovern

Earlier this week, my co-coordinator Deepak Gupta suggested that instead of adopting a so-called compromise providing that consumers agree to arbitration unless they affirmatively opt out, Congress should provide that litigation is the default choice, and consumers should have the opportunity to opt in to arbitration after receiving notice.  I imagine this was a tongue-in-cheek suggestion designed to indicate that the compromise was no compromise at all, but I thought it worth pointing out how changing from an opt out to an opt in changes the incentives for businesses.  In most opt-out scenarios, businesses fare better if consumers stay with the default, which means businesses have an incentive to reduce the likelihood that consumers opt out.  That in turn gives businesses an incentive to present opt-out notices in a way that is likely to get them overlooked.  Accordingly, as I noted in an earlier post, businesses write dull, lengthy opt-out notices filled with as much legalese as they can fit in, print them in one color, and adopt other strategies to reduce the likelihood that consumers notice or plow through them.  But with opt ins, such as Deepak suggested, businesses benefit if consumers depart from the default. As a result, instead of conveying the information in a way that reduces the chances that consumers will actually take it in, businesses present the information in a fashion that will maximize the likelihood that consumers notice it and opt in.  Here's an example I wrote about in 1999:

After the FCC ruled that phone companies seeking to use phone-calling patterns for marketing purposes must first obtain the consumer's permission, the telephone company in my area attempted to secure that permission.  Its representatives called and sent mailings to subscribers. The company also set up a toll-free number for consumers with questions.  The mailing I received was brief, printed in different colors, and written in plain English. . . . A postage-paid envelope and a printed form were included for consumers to respond.  Consumers who accept the offer need only check a box, sign and date the form, and print their name.

Opting In, Opting Out, or No Options at All: The Fight for Control of Personal Information, 74 Washington Law Review 1033, 1102 (1999). The point is that switching from an opt out to an opt in increases the likelihood that businesses will present the information in a way that gets consumers' attention, which in turn increases the likelihood that consumers will make decisions that reflect their actual preferences, rather than blindly doing what businesses want them to do.

Opt in systems do have costs, though. One is the cost to businesses of getting consumer attention and providing a system for the opt in. U.S. West claims that when it tried to get permission from its customers to use their calling patterns, the cost per positive response from consumers reached over the phone was $20.66 while the cost per positive response of consumers reached via direct mail was over $29.  And that was back in 1997.  The reality, of course, is that probably businesses wouldn't even try to persuade consumers to opt in to pre-dispute arbitration clauses.  Not only would they have to incur those costs, but they don't have a persuasive story to tell consumers about why pre-dispute arbitration is in their best interests.  And if that's so, then why would anyone ever think an system that imposes arbitration on consumers---whether through an opt out or the current system--serves consumer interests?

ABA Dispute Resolution Section Appears to Be Backing Down From Arbitration "Opt Out" Proposal

by Deepak Gupta

Today, the ABA's Dispute Resolution Section issued a statement suggesting that it may be backing down from its ill-advised "opt out" proposal on forced arbitration (which we've criticized on this blog here, here, and here.) The memo says that the section's Executive Committee members had a conference call yesterday at which they agreed to recommend that the section "not go forward with the April 15 recommendation that dealt with the enforceability of pre-dispute arbitration clauses in consumer, employment, and civil rights cases."  It also says, somewhat cryptically, that the section's Council will "act" on that suggestion "and consider other options" by the end of this week.

This is encouraging news, and it suggests that the criticism on this blog, and feedback from the consumer and civil rights community, has had an impact. Paul Bland deserves a lot of credit for sounding the alarm. We may not be out of the woods yet, however. Our understanding is that ABA sections wishing to propose resolutions for the August 2009 meeting of the House of Delegates have until May 15 to do so.  And based on the memo, it appears that readers of this blog who are ABA members have until at least May 8 to let the Council know their thoughts on the resolution. You can find a list of the current council members here.

If you're reaching out to those in ABA leadership, it's worth pointing out that the ABA has already taken a position on arbitration fairness legislation. In February, the House of Delegates approved a recommendation to support the Fairness in Nursing Home Arbitration Act. Following up on the recommendation, the ABA sent letters to the House and Senate. The Dispute Resolution Section's "opt out" proposal can't be reconciled in principle with the February resolution. 

Default Rules and the Arbitration Fairness Debate

by Deepak Gupta

Jeff Sovern and Paul Bland have contributed thoughtful posts on a proposal being pitched as a "compromise" in the debate over arbitration fairness.  It goes something like this: Instead of passing a law like the Arbitration Fairness Act that would make arbitration voluntary, let's just allow consumers to "opt out" of mandatory arbitration clauses, presumably by means of fine-print notices that nobody will actually read, let alone respond to. Professor Sovern rightly describes this as illusory consumer protection and, as Paul Bland notes, it's a technique that many corporations are already employing to try to defeat unconscionability arguments.

The proposal strikes me as a great illustration of the importance of default rules in choice architecture, a subject explored in the literature of law and behavioral economics and discussed in Cass Sunstein and Richard Thaler's recent book, Nudge.  Their argument revolves around a pretty simple empirical premise: “[I]f, for a given choice, there is a default option—an option that will obtain if the chooser does nothing—then we can expect a large number of people to end up with that option, whether or not it is good for them.”  Corporations take advantage of this insight all the time in consumer transactions. Thaler and Sunstein give the example of offers for magazine subscriptions that consumers continue to receive unless they take affirmative steps to cancel them; Sunstein says he himself has been paying for subscriptions for years because he hasn't gotten around to canceling them. Another example is employer retirement plans; research shows that participation is greatly increased by making it the default instead of requiring employees to opt in.

So I wonder whether proponents of the "compromise" proposal on arbitration fairness would continue to support it if the opt-out mechanism stayed the same, but the default rule were switched: Instead of opting out of mandatory arbitration, consumers would have to read a notice and affirmatively opt in.  I suspect enthusiasm for the proposal would vanish--demonstrating that a truly voluntary system is not the true objective.

House Judiciary Holds Hearing on Credit Card Industry's Use of Arbitration To Quash Consumer Claims

David Arkush, the director of Public Citizen’s Congress Watch division, is testifying this morning at a hearing of the House Judiciary Committee, Subcommittee on Commercial and Administrative Law, on the need for arbitration fairness legislation. The focus of the hearing is how credit card companies use forced arbitration to avoid accountability for some of their worst practices. David will also explain how forced arbitration is tilted heavily toward businesses in the credit card collection industry, with a focus on the National Arbitration Forum (NAF), the collection industry’s go-to arbitration provider. A Public Citizen study found that in California arbitration cases heard by the NAF, the arbitrator ruled against the consumer 94 percent of the time. David’s testimony will counter the misleading arguments made by corporate lobbyists against giving consumers a choice to arbitrate. The other witnesses are Pennsylvania class action lawyer extraordinaire Mike Donovan, Prof. Rich Frankel (Drexel Law), and GOP witness Prof. Christopher Drahozal (Kansas Law). You can watch the hearing live at this link.

On Arbitration Fairness: Stop the ABA From Taking the Corporate Side Against Civil Rights and Consumers

by Paul Bland

I’ve gotten caught up in scores of e-mails and requests from angry lawyers asking "what can I do about the ABA getting hijacked?" This blog post has my answer.

It’s a pretty well-recognized phenomenon that lawyers who principally represent individuals against corporations have their own organizations, such as the American Association for Justice, state Associations for Justice and trial lawyers’ associations, the National Association for Consumer Advocates, and the like. Lawyers who generally represent corporations against individuals have their own organizations as well, such as the Defense Research Institute. In theory, the American Bar Association ("ABA") is supposedly an umbrella organization that welcomes all lawyers, and largely doesn’t take sides in the battles between plaintiffs’ lawyers and defense lawyers.

It sounds like all that’s right about to change. In the last week or so, the Leadership Council of the ABA Section on Dispute Resolution, has decided to inject the ABA into a major political battle entirely on the side of defense lawyers and their clients and entirely against plaintiffs’ lawyers and their clients. This Leadership Council has decided that the ABA should come in 100% against the civil rights community, every consumer rights organization in the United States, and a variety of other public interest organizations, and be 100% on the side of the American Bankers’ Association, the cell phone industry, and similar groups.

Background: The Battle Over Arbitration Fairness

The battle centers around the Arbitration Fairness Act ("AFA"), which would prohibit pre-dispute binding mandatory arbitration clauses in all contracts involving employment, consumer transactions, medical care, and franchise disputes. In the U.S. Senate, the lead sponsor of the AFA is Senator Russ Feingold (D-Wis.), and in the House, it is Rep. Hank Johnson (D-Ga). The legislation had more than 100 co-sponsors in the House. It is strongly supported by a large coalition of civil rights and consumer groups.  As the enforcement of fundamental civil rights laws and consumer protection laws has been increasingly undermined by pre-dispute binding arbitration, a large and rapidly growing number of persons have come to see this as one of the central civil rights issues of our time. There has been extensive testimony at Congressional hearings, extensive academic commentary, and a growing tide of rage from consumers and employees who are angry at the rapidly expanding use of mandatory arbitration.

The industry has fought back, of course. The Chamber of Commerce and its various allies have commissioned polls (which generally use extremely misleading questions to imply that the consumers, not the credit card companies and nursing homes, will be selecting the arbitration companies), have hired tons of lobbyists, and have funded studies designed to show that credit card companies are pushing their consumers into arbitration for their consumers’ own benefit.

The leading political strategy of the Chamber has been legislation introduced by Sen. Jefferson Sessions (R-Citibank) that supposedly is a "compromise." Leading bank defense lawyer Alan Kaplinsky has openly spoken of having drafted this legislation at several public events. The gist of the Sessions Bill is to permit corporations to continue to use pre-dispute binding mandatory arbitration (and particularly to use arbitration to ban class actions by consumers or employees), but to require (a) that a technical opportunity be given to "opt-out" of arbitration in advance; and (b) to list several vague procedural protections to make arbitration fairer.

It is safe to say that nearly every lawyer who represents individual consumers and employees strongly supports the AFA, and strongly opposes the window dressing Sessions bill. It is safe to say that the Chamber of Commerce strongly supports the Sessions bill, and that no defense lawyer eager to have any clients can speak out in favor of the AFA.

The ABA Dispute Resolution Section Steps Into the Fray

Amazingly--rather than staying neutral in the battle between corporate America and the civil rights and consumer community, rather than stay neutral in this battle between the defense and plaintiffs’ bar--the Dispute Resolution Section of the ABA has suddenly decided to weigh in and throw the weight of the entire ABA against the AFA and for the Sessions approach.

I’ve had several dozen plaintiffs’ attorneys tell me bluntly that if the ABA does, in fact, take the corporate position and oppose the civil rights community, that they will immediately resign from the ABA. It’s hard to say how many lawyers will actually resign from the ABA. For one thing, the corporate power grab is not yet that well known. But if the ABA follows the lead of the leadership of its Section on Dispute Resolution, it’s safe to say that the ABA will become less of an organization that can claim to represent and be comprised of lawyers of all stripes, and the ABA will become an organization of corporate defense lawyers. (Since the Defense Research Institute already serves that role, a good question at that point will start to be "what is the purpose of the ABA at all?")