National Arbitration Forum Sued by San Francisco City Attorney

Our consumer law firm has learned that if a potential client’s dispute is covered by an arbitration clause, we generally won’t take the case. There are several reasons. First, the company on the other side uses the arbitrator frequently. Since the company wouldn’t continue to use the arbitrator without good results, the arbitrator has an incentive to rule for the company. Second, there’s no requirement that the arbitrator follow the law. If an arbitrator doesn’t like a consumer’s case, that’s the end of it; there is no right to an appeal as there is in court. Third, arbitrations can be enormously expensive upfront, since arbitration is essentially a form of private justice system. Finally, even if there’s a statutory right to attorney’s fees for the winning consumer, because the arbitrator doesn’t have to follow the law, there is no guarantee that the arbitrator will award any fees at all.

We were delighted to read in The San Francisco Chronicle’s recent article that San Francisco City Attorney Dennis Herrera has sued the Minneapolis-based National Arbitration Forum (NAF), one of the nation’s biggest arbitration companies, for unfair business practices. The lawsuit says the NAF “is actually in the business of operating an arbitration mill, churning out arbitration awards in favor of debt collectors and against California consumers..

The complaint cites statistics showing that of 18,075 cases brought before one of the NAF’s arbitrators from January 2003 to March 2007, only 30 resulted in victories for consumers.

“The lengths to which [the NAF has] gone to ensure that California consumers lose in arbitrations against debt collectors is shocking,” Herrera said in a statement.

The Chronicle’s article says the lawsuit was based in part on a report by Public Citizen, a Washington, D.C.-based consumer advocacy group. Public Citizen has, in fact, been fighting for years to keep mandatory arbitration out of consumer agreements.

In a post on its blog in late 2006, arbitration guru Paul Bland wrote about an article entitled “Arbitration and the Godless Bloodsuckers” written by Richard Neely, a former justice of the West Virginia Supreme Court. After retiring from the bench, Justice Neely was approached by the NAF to serve as one of their independent-contractor arbitrators. But his experience was not what he expected. He concluded that “banks have converted apparently neutral arbitration forums into collection agencies to exact the last drop of blood from desperate debtors.”

Similarly, Harvard Law Professor Elizabeth Bartholet testified in a deposition about her experience as an NAF arbitrator. After ruling against a credit card company in a single arbitration, she was blackballed and blocked from hearing any more cases. Worse, the NAF sent out letters falsely stating that she would no longer be the arbitrator in future cases because she supposedly had a scheduling conflict. The professor did not have a scheduling conflict, but the NAF told consumers she did rather than explain that she had been blackballed by a lender who didn’t like how she had ruled.

We believe that the American justice system is generally quite healthy. The problem is that arbitration does not use that justice system and does not have to adhere to the rule of law. One-sided mandatory arbitration agreements have no place in consumer contracts. We wish Mr. Herrera and the City of San Francisco great success in their lawsuit.

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