Consumer Advocates Push for Forced Arbitration Ban

Several consumer advocacy groups are calling for Congress to enact legislation that would ban corporations from making it mandatory for customers to sign arbitration agreements that waive their right to file a lawsuit if a dispute arises.

On Monday, one day before a congressional hearing on forced arbitration scheduled for today, Public Citizen released a report alleging that the practice is pervasive in banking, home construction, cable companies and automotive sales, leaving consumers with no choice but to sign these agreements to conduct necessary activities of everyday life.

In the study, “Forced Arbitration: Unfair and Everywhere” Public Citizen found that many key industries uniformly require customers to sign away their right to sue in open court if they have been wronged, and most companies refuse to give customers information about their arbitration requirements until they are ready to agree to sign a contract.

Forced arbitration contracts are agreements, usually part of a larger business contract, where the consumer must waive their right to file a lawsuit against the company over potential disputes that may arise, and instead agree to submit any such claims through private arbitration.

The U.S. House of Representatives Subcommittee on Commercial and Administrative Law is holding hearings today to review the issue, titled “Mandatory Binding Arbitration – Is it Fair and Voluntary?”

Critics of forced arbitration point out that the agreements are used throughout industries, leaving consumers nowhere else to turn.

There are also questions about the impartiality of arbitration companies that are designated to decide the claims. In 2007, Public Citizen revealed that arbiters for the National Arbitration Forum (NAF), the largest arbitration firm in the country, ruled against consumers 94 percent of the time. In July of this year, the Minnesota Attorney General, Lori Swanson, filed a lawsuit against NAF, saying that it was financially tied to its corporate customers and attempted to refer as many cases as possible to arbiters who were known for siding with corporate clients over consumers.

NAF shut down its consumer arbitration division five days after the lawsuit was filed, and the next day, the American Arbitration Association (AAA) suspended its credit collection division based on Swanson’s concerns. Both JPMorgan Chase and Bank of America also dropped their forced arbitration clauses shortly after the lawsuit was filed.

Similar legislation is already pending involving forced arbitration contracts used by the nursing home industry, which prevent residents and their families from filing personal injury lawsuits in open court if damages are caused by nursing home neglect or negligent care. The clauses are often buried in admission agreements, and families have little choice but to waive their right to air grievances in a public forum.

The Fairness in Nursing Home Arbitration Act of 2009 is currently being considered in committee by both the House and the Senate, which would invalidate all such clauses. The sponsor of the House version of the bill, Rep. Linda Sanchez (D-CA), is scheduled to be the first speaker at today’s hearing on mandatory consumer arbitration.