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Vol. 15, No. 4

Arbitration & Mediation



Consumer Arbitration

If you’ve ever signed a contract to purchase goods or services, it is highly likely the contract contained an arbitration clause. Most, if not all, consumer contracts today have arbitration clauses. Most consumers have little or no idea what arbitration is. Many people use the terms mediation and arbitration interchangeably. It is important for lawyers to make sure clients know what arbitration is, as distinguished from mediation or other forms of alternative dispute resolution.

So, what is arbitration? Why are so many companies eager to make sure consumers are bound to use arbitration to resolve any disputes?

Arbitration is a private means of dispute resolution. One or more arbitrators are appointed to oversee the dispute and make a decision. The decision made by the arbitrator is called an “award.” The award may or may not contain a reasoned explanation of the decision made. Many arbitration providers do not require a reasoned explanation. Arbitration decisions are not public and can be appealed on an extremely limited basis. Many businesses believe that arbitration is quicker and less expensive than litigating a lawsuit in court.

Generally, an arbitration proceeding will be administered by one of a handful of arbitration companies, although there have been some recent developments, discussed below, which change that landscape. Until recently, the three main arbitration companies, which were listed in consumer and commercial contracts, were National Arbitration Forum, American Arbitration Association, and JAMS. Lawyers had varying opinions as to the favorability of one or the other company.

National Arbitration Forum, (NAF), for the most part, arbitrated consumer credit card accounts. Although NAF handled some other types of disputes, the bulk of its business was consumer credit card cases. American Arbitration Association (AAA) and JAMS both handle a variety of commercial disputes and some consumer disputes. Neither AAA nor JAMS were known for handling consumer credit card cases in any significant number, although they both handle employment cases.

You may wonder at the past tense used when referring to NAF. Recent developments have resulted in major changes in the consumer arbitration arena. On July 14, 2009, the Minnesota attorney general filed suit against NAF, which is headquartered in Minneapolis, alleging common ownership between NAF and collection law firms that appear before it, and bias of NAF toward consumers, evidenced by how NAF promoted its services to companies whose business it was seeking. Less than a week later, NAF announced that it would cease handling consumer arbitrations. Not too long after that announcement, AAA also announced that it would no longer handle consumer credit card arbitrations. Even more recently, Bank of America has announced it will no longer include an arbitration clause in its credit card agreements. It is expected that other major credit card issuers will make the same decision.

The developments of this summer drastically changed the landscape of consumer arbitration and dramatically changed the type of article that I planned to write. In the interest of full disclosure, I am a consumer litigation attorney and I have represented consumers in cases administered both by NAF and AAA. Although I had no knowledge of some of the allegations made by the Minnesota attorney general in her complaint, especially as to common ownership, I and many other consumer attorneys had long believed NAF was a forum more favorable to creditors.

Only time will reveal the long-term implications from the surprising developments of this summer in consumer arbitration. In the meantime, there are other types of consumer disputes that continue to be arbitrated in either AAA or JAMS.

So, what are the recommended procedures for handling a claim in arbitration and how do they differ from handling a case in court? What do you do when clients bring you an arbitration claim that has just been filed against them or what if a court compels a pending court case to arbitration?

First, determine whether there is an actual arbitration clause that is a part of the agreement between the parties. Although there is some variation among the federal circuits, courts generally favor arbitration. Determining whether an arbitration clause exists is a matter of basic contract law. Is there a written agreement between the parties that governs their relationship? Does the agreement contain an arbitration clause? Is the agreement signed by both parties? If the agreement was not signed by both parties, as is the case with credit card agreements, what is the evidence, if any, that the parties agreed to be bound by the agreement that contains an arbitration clause? Further, what is the scope of the arbitration clause? Does the clause cover the dispute that has arisen?

What does the arbitration clause say about how arbitration expenses are to be paid? Arbitration expenses can be a major concern to consumers. Arbitration expenses can be significant, including the filing and administrative fees charged by the arbitration company administering the arbitration, as well as the hourly fee for the arbitrator(s) assigned to the case. Many arbitration clauses, especially in consumer contracts, either provide for the company to pay arbitration expenses or make provision for the consumer to request the company to pay arbitration expenses. If the arbitration has already been filed, the expense concern is somewhat less of an issue. If a consumer has a dispute he or she wishes to pursue, however, which arises out of a contract with an arbitration clause, it is a factor that must be seriously considered prior to initiating any legal action. Procedurally, a consumer may proceed with filing suit in court. There is always the chance that the company will choose not to enforce the arbitration provision and will defend the case in court. Even if the company chooses to enforce the arbitration provision, it may be advantageous to begin in court. Once the award is made by the arbitrator, it must be confirmed by a court to make it enforceable as a judgment. Having a court already involved and available for any disputes that may arise can also be helpful.

Having made it to arbitration then, either by being compelled, filing the claim directly with an arbitration company, or being served with an arbitration claim, what is next? What can be expected in arbitration? The following description is based on my experience in arbitration and may vary somewhat depending on the arbitration company or arbitrator administering the case.

The arbitration companies that administer arbitration often also offer mediation to the parties that are arbitrating their dispute. Mediation offers the parties the option of working out an agreement or resolving the case short of an actual hearing and being subject to the decision of an arbitrator.

Once each party has submitted its claim and/or response, the arbitration company will assign a person to act as administrator and will then proceed to assign an arbitrator. How an arbitrator is assigned varies between companies. Sometimes several arbitrators with their credentials will be presented and the parties will be given the opportunity to strike one or more of the proffered candidates. Sometimes only one arbitrator will be appointed. Even then, if there is some reason a party believes the selected arbitrator should not serve, a written objection may be made and an alternative arbitrator appointed. Another initial determination that must be made is whether the arbitration will be conducted strictly by a review of the documents submitted or whether an actual hearing will be held. My preference is always for a hearing, although I have participated in an arbitration that was decided on written submissions only on a couple of occasions, which turned out favorably for my client.

The arbitrator will schedule a preliminary hearing, often held by telephone, to cover how the arbitration hearing will be held, and other matters relevant to the arbitration. If you wish to conduct discovery, this is the time to request it. Generally speaking, discovery is very limited in consumer arbitrations and may even be limited to the exchange of exhibit books and witness lists prior to the scheduled arbitration.

The hearing itself, often held around a conference table, will be more informal than a court proceeding. Usually the rules of procedure and evidence are relaxed. Each party will be permitted to present its witnesses and evidence and make opening and closing remarks. At the close of the hearing, the arbitrator may request written briefing from the parties. The arbitrator will announce that the arbitration is closed effective the date he or she sets for all submissions to be made and will issue the award following that date.

Arbitration proceedings are held in private. Awards are not published or made public. Arbitrators need not follow rules of evidence. An arbitrator is neither publicly chosen nor publicly accountable. Arbitrators are not limited by the law nor case precedent in making their decisions and, their decisions may not be overturned merely because it does not follow law or precedent.

As mentioned previously, once an award is made, it must be conformed to a judgment in order to be enforced. The Federal Arbitration Act contains a one-year statute of limitations for filing to confirm an arbitration award. A party seeking to vacate the arbitration award must file in court within 90 days of the arbitration award. There is still some room for contesting the arbitration award in court, following the arbitration proceeding, although it is limited, and it is beyond the scope of this article. Generally, the court may confirm, vacate, or modify an arbitration award. Once confirmed, the award functions as a judgment and may be enforced according to the rules of the state where it is confirmed.

In addition to the developments regarding the various forums hearing consumer arbitration disputes described above, legislation is pending in Congress to abolish binding predispute arbitration clauses. The Arbitration Fairness Act and the Fairness in Nursing Home Arbitration Act are generally being received favorably by the Congress although their passage is by no means certain. There is also a move to create a new federal agency, the Consumer Financial Protection Agency, which would have the power to invalidate arbitration clauses and to generally regulate arbitration in the consumer arena. The outcome of these pending matters is uncertain and therefore so is the outlook for consumer arbitrations. Stay tuned.

Sharon K. Campbell is a solo in Dallas, Texas, with a civil and consumer litigation practice. Contact her at

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