Arbitration may seem like the Andy of Mayberry form of dispute resolution–folksy, cheap and fair.  The data suggest, however, that it is Darth Vader’s Death Star–the Empire always wins.  A new report from Public Citizen shows that the consumer loses in 95% of arbitration cases–dominance that would have made the Emperor proud.

The Public Citizen report follows an earlier jaw-dropping report this summer from the Christian Science Monitor showing that the most frequently chosen arbitrators ruled against consumers and for the companies 98.4% of the time.  After serving as an arbitrator, former judge Richard Neely described arbitration as full of "Godless bloodsuckers."  (Gee, Judge Neely, tell us what you really think.)  Several academic pieces of condemned the current use of arbitration clauses as well. 

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In our running discussion of arbitration, the data are useful, but sometimes it helps to get the flavor of how an arbitrator makes a decision. An attorney forwarded this email to me, which I post with permission of the author:

Had a very interesting experience today. Responded to an arbitration claim by FIA Card Services f/k/a MBNA denying client agreed to arbitration and disputing amount owing.  Requested an in-person hearing and client paid $250 fee for the hearing. Originally the hearing was scheduled at a location more than 3 hours away from my office. I objected and it was rescheduled about an hour away. The arbitration was Harold Curry. I showed up at 12 noon. At 12:45 no one from FIA appeared or called. The arbitrator called NAF to find out what he should do and left a message that was not answered. Mr. Curry and I went into an office and talked a while. I pointed out to him that the claim was based on breach of contract, but no contract was ever produced, so he could not possibly determine the parties’ obligations or damages. He asked me what my client owed MBNA. I told him I did not know and that it was not my job to help MBNA establish damages. If they were so concerned, they could have shown up for the arbitration hearing. He admitted that they never show up and he has never had an attorney show up before. Just before I left, he suggested that we might reschedule. I told him I would not agree to rescheduling and that I believed he had no choice but to find an award in favor of my client. This made him extremely uncomfortable and he indicated he would need to talk to someone at NAF first. I reminded him that he was supposed to be impartial and he told me he would give me his decision in a few days.

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Elizabeth Warren already posted on the Consumer Arbitration Fairness Act (H.R. 3010 in the U.S. House and S. 1782 in the U.S. Senate). In addition to the Christian Science Monitor story about the abuses that helped to motivate this bill, see here for a Credit Slips story from one former arbitrator about his experiences. This new bill would do nothing less than end mandatory arbitration in consumer transactions. Warren’s post explains why consumers should care about this legislation, and I won’t add to that. Rather, I wanted to add some different thoughts.

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Senator Russ Feingold and Representative Hank Johnson have introduced legislation to stop the fine-print, mandatory arbitration clauses that show up in millions of credit card agreements.  Once a dispute arises, if both parties want to go to arbitration, that’s fine. But the company cannot hide an arbitration clause deep in the fine print of the credit card agreement, then require arbitration when they want to squeeze a customer for money the customer says she doesn’t owe.

Why is this such a big deal? Arbitration sounds like a cheap, fair way to settle disputes. But a study from the Christian Science Monitor shows another reason: the arbitrators are beholden to the repeat players (credit card companies) that pay their fees. The top ten arbitrators ruled for the customers just 1.6% of the time, while arbitrators who weren’t depending on arbitration fees (those who decided 3 or fewer cases a year) ruled for the customers 38% of the time.

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The other day I took out a store credit card at a department store.  I wasn’t happy about it, but it was one of those stores that does not take Visa or MasterCard, and I had planned on paying for my purchase with a debit card.  I read the contract, even though the sales person rang up my purchase before handing it to me.  (I admit that I take an academic interest in even my own credit transactions.)  I was not surprised to find that the contract featured a binding arbitration clause, but I was impressed to see that this clause included an exception for consumer actions in small claims court.  Specifically, the issuer agreed not to invoke its right to arbitration if the customer sued it in small claims court. 

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