The Future of Consumer Arbitraton: Back to the Common Law?

When the US Congress passed the United States Arbitration Act (now known as the Federal Arbitration Act or the FAA) in 1925, it seemed a good alternative to costly litigation. Before that, the common law rule of revocability (which allowed either party to revoke an arbitration clause before an arbitral award was determined) made enforcement of agreements to arbitrate future disputes all but impossible. The 1920 passage of the New York Arbitration Law, the first American statute to make arbitration effective, led to the federal legislation. Since then, arbitration has had the reputation of being an efficient method of alternate dispute resolution saving precious judicial resources for more serious matters. Over the years, US Supreme Court precedents have given an expansive reading of the FAA. The most recent ruling by the Court was the decision in Hall Street Associates, LLC v. Mattel, Inc. that parties cannot agree to a higher standard of judicial review of arbitration awards. That decision questioned the validity of a long-standing doctrine permitting courts to overturn arbitration awards that are in "manifest disregard" of the law.

For the average consumer, however, the favorable treatment of arbitration may have some unintended consequences. Typically, most credit card or bank loan agreements have "arbitration clauses" slipped into numerous pages of boilerplate stating that disputes must go to arbitration rather than to a civil jury. These clauses potentially impact disputes with credit card companies from mistaken charges, failures to credit returned items, penalty fees that were promised to be waived and even problems arising from stolen credit cards or identity theft.

This month’s cover story in Business Week reports on the large number of credit card disputes settled through arbitration by one of the nation’s largest for-profit arbitration firms, the National Arbitration Forum (NAF). Reporters Robert Berner and Brian Grow raise serious questions about the impartiality of the arbitrators. They cite a California law suit filed this March by Dennis J. Herrera, San Francisco's city attorney, accusing NAF of churning out awards for creditors without sufficient justification. The suit cites state records showing that NAF handled 33,933 collection arbitrations in California from January 2003 through March 2007. The suit alleges that of the 18,075 cases not dismissed or settled before arbitration, consumers won just 30, or 0.2%. The WSJ Law Blog’s Dan Slater posted a story on the suit.

Legislation is pending to invalidate pre-dispute arbitration agreements and allow consumers to decide if they want to go to arbitration after a dispute arises. Sen. Feingold (WI) introduced S. 1782 and Rep. Johnson (GA) sponsored H.R. 3010, the Arbitration Fairness Act in Congress during the current session. In addition to consumer cases, the proposed legislation would overturn the strong presumption in favor of arbitrability in decisions of the US Supreme Court under the Federal Arbitration Act in consumer and labor disputes. Prospects for passage are slim given the time remaining in the 110th Congress.

For further reading on the topic, see Consumer Arbitration Agreements: Enforceability and Other Topics, by F. Paul Bland, Jr. (Call No. KF9084 .B53 2007) in the library’s main collection.