Credit Cards and Consumer Arbitration

Capital One announced that is will no longer require consumer disputes to be resolved through binding arbitration. According to the Associated Press, Capital One will amend its credit card contracts starting next month.

Bank of America announced last week that it was removing the arbitration provisions from its consumer contracts. MSNBC reports here.

These amendments are subject to court approval.

We've blogged on this issue before with JPMorgan Chase & Co. as well as the National Arbitration Forum altering its practices in light of litigation. In this case, Capital One says that a class action suit naming it as a defendant did not drive the decision to eliminate the mandatory arbitration provision for its consumer contracts.

The AP reports that the class action suit, filed by Berger & Montague, alleges that major banks conspired to require card members to go to arbitration to resolve disputes.

But is this a good move? I'm not taking a position on this, but with current advancements in arbitration (including the company paying for arbitration, and not the consumer), does the argument that arbitration is more expensive (for the consumer) still hold water? Is there empirical evidence that arbitrators rule in favor of the creditors more often than the debtors? I would be interested to know what the empirical evidence suggests.

The Future of Consumer Arbitration

The future of consumer arbitration is uncertain with this week's developments.

Let's start with the National Arbitration Forum. NAF is (was) set up to arbitrate disputes between consumers and credit card companies. Earlier this week, NAF agreed, as part of a settlement with the Minnesota Attorney General, to cease administering arbitrations of consumer credit card disputes as of July 24, 2009. Versions of the story and settlement can be found here and here.

As part of this fallout, the American Arbitration Association announced that it will not participate in consumer-based arbitrations until new guidelines can be developed. Here's the Wall Street Journal's story and here's the release from the AAA.

On Wednesday, JP Morgan Chase announced that it would no longer engage in arbitration for credit card disputes and was examining its consumer contracts. Here's the link to that story.

With two major arbitration outfits leaving the field, and one major creditor leaving the field, what will the future look like?

While hard to tell, my initial thought is that consumer credit card disputes will be filed in courts instead of arbitration forums. That means more work for judges with heavier caseloads and more opportunities for mediators who will have access to these types of disputes that they didn't have before.

It may also lead to a larger break-up of mandatory arbitration of all consumer disputes, not just credit card disputes. There are a number of critics of arbitrating the consumer dispute (as well as a number of supporters)--too many to list them here (hint: Google "consumer arbitration unfair" for about 101,000 hits on the subject; "consumer arbitration unfair" yields about 130,000 hits). An excellent analysis of the pros and cons of consumer arbitration can be found here, a report by the Searle Center at Northwestern University Law School.

A sham arbitration?

I really enjoy Dan Slater's Wall Street Journal Law Blog. He recently wrote about a "sham arbitration" involving American Apparel and a former employee. AA agreed to pay the former employee 1.3 million dollars to settle a sexual harassment claim. As part of the settlement, the parties agreed to participate in a arbitration with a predetermined outcome so that AA could say there were no sexual advances.

Amazing.

The arbitration did not go forward, thankfully.

You can find the opinion from the California appellate court discussing this arrangement here.