If you look carefully — and you probably haven’t — at the fine print in your credit card agreement or in many of the consumer contracts you sign, you’ll probably find a provision that says if you have a dispute and want your day in court, you’re out of luck. Instead, you are forced to go to binding arbitration.
Businesses love arbitration. Companies argue that it keeps legal costs down and can limit class-action lawsuits, which they warn can result in higher consumer prices.
But consumer advocates say that such provisions are unfair because they deny consumers the chance to have their disputes settled by a judge or jury.
Groups such as Public Citizen argue that people are forced to waive their legal rights because arbitration clauses are presented in contracts on a take-it-or-leave-it basis. In other words, if you want the service or credit card, you have no choice but to agree to settle a dispute in arbitration.
Despite the complaints from consumer advocates, mandatory arbitration clauses aren’t going away. This month, the Supreme Court ruled 8 to 1 in favor of CompuCredit, overturning a decision by the U.S. Court of Appeals for the 9th Circuit that cardholders could sue the company. The customers filed their class-action lawsuit after discovering that their Aspire Visa cards, which were marketed to people with poor credit scores, came with a lot of hidden fees. Consumers complained that a card promoted as having an upfront $300 credit line was hit with initial fees totaling $257, leaving them with not much of an available balance.
The key to the case was the federal Credit Repair Organizations Act, which was enacted to address deceptive and abusive credit-repair business practices. Justice Antonin Scalia, writing for the majority, said the law wasn’t clear on whether consumers had a right to sue in court.
“Had Congress meant to prohibit these very common provisions in the CROA, it would have done so in a manner less obtuse,” Scalia wrote.
In the lone dissent, Justice Ruth Bader Ginsburg said the other justices were not considering the law as a consumer might.
“Congress enacted the CROA with vulnerable consumers in mind — consumers likely to read the words ‘right to sue’ to mean the right to litigate in court, not the obligation to submit disputes to binding arbitration,” Ginsburg wrote.
In another case last year, the Supreme Court sided with AT&T Mobility, deciding that the company could force customers to settle their disputes through arbitration.
This topic isn’t likely to garner mass consumer outrage. But you should care about it, especially if you have a beef with your credit card company, employer or any other company that wants to limit your right to sue.
At the very least, the CompuCredit decision should motivate the Consumer Financial Protection Bureau to put examination of the mandatory arbitration clauses high on its to-do list. Under the Dodd-Frank Act, the new consumer watchdog agency has to conduct an arbitration study and can prohibit or impose conditions or limitations on the use of binding arbitration if it finds that such restrictions are in the public interest and needed for the protection of consumers.
“We understand the importance of this issue, and we’ll be moving forward as required by Congress,” said Richard Cordray, the bureau’s newly appointed director.
Ira Rheingold, executive director of the National Association of Consumer Advocates, said he hopes the CFPB acts quickly to prohibit binding arbitration agreements in all consumer financial products and services contracts.
“The court is so cynical and doing everything it can in keeping consumers from pursuing their rights in a court of law,” Rheingold said in an interview. “Ultimately, we are going to need a legislative or regulatory fix to deal with arbitration clauses.”
Most arbitration clauses and provider organizations require that proceedings be kept confidential, and they often prohibit participation in class-action lawsuits, according to the consumer advocacy group Public Citizen.
A 2007 Public Citizen report claimed that arbitrators working for the National Arbitration Forum, at the time one of the largest U.S. administrators of consumer arbitrations, had ruled against consumers 94 percent of the time. Two years after that study, Minnesota’s attorney general filed suit against the arbitration company, alleging that it worked with creditors against the interests of consumers. As part of a settlement agreement and without admitting any wrongdoing, the National Arbitration Forum got out of the consumer arbitration arena.
The right of an individual to sue and the ability of consumers to bring public class-action lawsuits have forced companies to do the right thing. If companies can make people accept binding arbitration clauses and block their access to the courts and public scrutiny, then it’s paramount that our government thoroughly investigate what’s happening in arbitration cases.
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