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Business Week Looks Inside Arbitration Firm, Finds Shady Practices

By Graham Steele

In case you missed it, Business Week published an excellent story last week that highlights the abuses of pre-dispute binding mandatory consumer arbitration.  As you probably know by now, many consumer service contracts (credit cards, cell phones, cable/internet/telephone service, car purchase agreements, computer purchase agreements, etc., etc.) force individuals to resolve disputes in arbitration instead of court. Despite its innocuous sounding name, arbitration is a legally binding process. Most egregiously, companies that force their customers into arbitration actually hire the very arbitration firms that rule on disputes.

If you're an American consumer, chances are that you could be required to submit to arbitration before the NAF: their list of corporate clients includes Bank of America, Citibank, Discover, General Electric, JPMorgan Chase, Lowe's, Sears, Circuit City, Sallie Mae, and Toyota Motor Credit.  The article describes, in vivid detail, NAF's private, for-profit dispute resolution enterprise designed to secure repeat business for them and the highest possible judgment for their corporate clients.  Arbitration companies are essentially operated like judgment mills: consumers are rarely given notice and a chance to participate, most arbitrator decisions are made in a few minutes, and arbitrators are pressured to aware fees that would not be authorized in civil court. 

Some of the article's key findings:

  • NAF actively markets itself to large companies as providing a “marked increase in recovery rates over existing collection methods.” The article also explains: "current and former NAF arbitrators say they make decisions in haste—sometimes in just a few minutes—based on scant information and rarely with debtor participation."
  • NAF educates its corporate clients on ways to manipulate procedural rules to their advantage, even explaining how corporations can bring poorly documented cases with assurance that they won’t lose: either the consumer will not respond and the company will win by default, or, in the event that the consumer disputes, the company can ask for a stay or a dismissal. (If the case is dismissed, the company can always re-file later.)
  • Companies can also exploit rules and basic institutional pressures on arbitrators to ensure that they get a sympathetic “judge.”  They can drop and re-file a case if they get an arbitrator that they don't like, or simply demand that an arbitrator that they don't like be removed from all of their cases.
  • As part of an ongoing business strategy, NAF colludes with law firms specializing in debt collection to promote the use of arbitration to the law firms' corporate      clients.  This is akin to a judge coordinating with lawyers to persuade the lawyers' clients to bring suits to the judge – with the judge getting paid more when he hears more cases and the lawyers getting paid more when they win.

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