On July 14, 2009, Minnesota Attorney General Lori Swanson filed a lawsuit against the National Arbitration Forum of Minnesota, the nation’s largest arbitration company for consumer credit disputes, alleging “consumer fraud, deceptive trade practices, and false advertising.” The lawsuit was filed in Hennepin County District Court.

In particular, Swanson’s lawsuit claims that the National Arbitration Forum (NAF) represents to the public, the courts, and consumers that it is independent, operates like an impartial court system, and is not affiliated with any party. However, the suit alleges, the NAF actually works in conjunction with creditors “behind the scenes” to convince them to place mandatory arbitration clauses in their customer agreements, and then to appoint the NAF as the arbitrator of any disputes that might arise in the future.

Essentially, this means that the NAF arranges it so that creditors will file arbitration claims against consumers in the NAF, generating revenue for itself. In fact, the complaint alleges, the NAF is affiliated with a New York based hedge fund group that has control of one of the country’s largest debt collectors. This is a pure conflict of interest for a group that presents itself as being on the side of the consumer in debt collection arbitration.

Mandatory arbitration agreements, which appear in millions of consumer agreements, strip consumers of their right to have any disputes resolved in a court of law. Instead, these arbitration agreements often require that any disputes be resolved through a private system of binding arbitration, with the arbitrator selected by the credit card company or other creditor. Many times, consumers do not realize they are agreeing to be bound by arbitration – giving up their right to a trial by jury.

“This is a classic case of the little guy being stepped on by fine-print contracts,” Swanson said.

A similar complaint was filed against NAF in 2008 by San Francisco City Attorney Dennis Herrera, alleging that the NAF is biased in favor of debt collectors. According to the complaint, in California, the one state where arbitration results are made public, statistics show creditors win 99.8% of the time in NAF cases that are decided by arbitrators. That case is still pending.

There currently is legislation before Congress, the Arbitration Fairness Act, which was introduced in the House of Representatives on Feb. 12, 2009 as H.R. 1020.

Read the Minnesota complaint.

 

Sources:

BusinessWeek

Saint Paul Legal Ledger – Capitol Report

 



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