Minnesota Attorney General Lori Swanson filed suit against the National Arbitration Forum of Minnesota, the nation’s largest arbitration company for consumer credit disputes. The suit, filed on July 14th, accused NAF of consumer fraud, false advertising and deceptive trade practices by “misrepresenting its independence” and hiding its “extensive ties” to the collection industry. Attorney General Swanson, when filing the suit, said in a press release:
This is a classic case of the little guy being stepped on by fine-print contracts. Credit card companies are among the most prolific users of mandatory arbitration clauses. 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. As a result of mandatory arbitration clauses, which appear in millions of consumer agreements, hundreds of thousands of consumer disputes are resolved each year not by a judge or jury, but by a private arbitration system.
As we have repeatedly reported, credit card companies, banks, retail lenders and cell phone service providers have been inserting “mandatory pre-dispute arbitration clauses” in the fine print of consumer agreements. The clauses require consumers to waive their right to seek legal action in the event of a dispute with the company. Disputes are to be resolved by an arbitrator selected by the credit card company or other creditor. In most every case, the consumer doesn’t realize that he or she is waiving an important right. Most don’t even know about the arbitration clause that affects them.
The lawsuit, filed in Hennepin County District Court, charged that the National Arbitration Forum works behind the scenes, “alongside creditors and against the interests of ordinary consumers,” to convince credit card companies and other creditors to insert arbitration provisions in their customer agreements and then appointing itself to resolve the disputes. The lawsuit alleged that the National Arbitration Forum pays commissions to executives to convince creditors to insert mandatory arbitration clauses in customer agreements, thus generating arbitration filings and revenue for itself.
I am pleased to report that within days after being sued, the National Arbitration Forum agreed to stop handling cases involving banks and credit card issuers over unpaid bills. Under the agreement with the Attorney General, no longer will NAF be allowed to settle disputes between consumers and credit card companies. This is a significant victory for American consumers.
The settlement also provides more evidence to consumer advocates who have been challenging mandatory arbitration clauses written into consumer contracts. In addition to credit cards, contracts involving autos, cell phones and health care require consumers to resolve disputes through binding arbitration rather than going to court.
The debate over the fairness of mandatory arbitration is still awaiting action in Congress. Lawmakers are considering whether to ban such clauses in all consumer contracts. Attorney General Swanson, in a statement about the NAF settlement, said:
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.
The allegations in the Attorney General’s suit cast doubt on the fairness of the proceedings by revealing a financial connection between the NAF and a New York hedge fund that also controlled a debt collection agency. The Attorney General said that the NAF handled more than 214,000 collection claims in 2006, 60% of which were filed by three law firms with ties to the hedge fund.
Source: Saint Paul Legal Ledger
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