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the dangers of binding mandatory arbitration (bma) clauses


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washington post

by caroline e. mayer
washington post staff writer
thursday, february 24, 2005; page e01

beth plowman, a damascus international public health adviser, was shocked when she discovered that a $27,240 arbitration judgment had been levied against her for credit card charges incurred by an identity thief who bought sporting goods all across europe.

plowman had been in the united states at the time and had no idea about the charges: someone claiming to be her sister had called the credit card company and asked that all bills be sent to an address in england.

when she found out about the charges, plowman began trying to get them dismissed through the collection agency, not realizing that she also needed to show up at the arbitration hearing. she lost the arbitration and had to hire a lawyer to persuade the collection agency pursuing her for the debt to drop its claim.

"i don't have a sister," plowman said. "the fact that people are being held to pay these debts through an arbitration process is just frightening."

while her experience may be unusual, consumer advocates and trial lawyer associations say plowman is an example of what can go wrong when mandatory arbitration clauses are written into credit card agreements. longtime critics of such clauses, these groups say mandatory arbitration is being used as an "offensive weapon" by credit card companies seeking speedy resolution to disputes -- sometimes without a consumer's full knowledge. the result, they say, is that the arbitration process may saddle consumers with debts they may not have incurred, as well as substantial arbitration costs, including the credit card company's legal fees.

"before consumers know it, an arbitrator has issued an award against them, and the award can't be challenged on its merits" but only on narrower grounds such as whether the arbitrator was impartial or exceeded his or her power, said steve tripoli, consumer advocate for national consumer law center. the center just issued a paper on the practice, citing four consumer cases including plowman's. "the only thing left for consumers to do is fight the collection" of the award, which is usually hard to overturn once it has been issued, he added. most arbitration challengers are not as fortunate as plowman, he said.

banking industry officials disagreed with the law center's findings. the american bankers association called it a small set of cases that doesn't prove consumers are harmed by arbitration. spokeswoman tracey mills said a more detailed study done for the association shows that consumers who initiate arbitration cases benefit from the process.

critics say that businesses are more likely to bring cases to arbitration than individuals.

in the past decade, mandatory arbitration clauses have been appearing in the fine print of many consumer agreements, including those for credit cards, telephone service, car sales and even exterminator services. these clauses require consumers to agree in advance to waive their rights to a court hearing and refer all disputes to independent, third-party adjudicators.

businesses say arbitration is faster, more efficient and cheaper than litigation.

its critics, however, say mandatory arbitration is a way to protect firms from large jury verdicts and class-action lawsuits. they add that the process itself often stacks the deck against the individual since the cases permit less evidence-gathering than in trials and can be appealed only on narrow grounds.

consumer groups, smarting from their failure last week to block passage of a law that will limit class-action lawsuits, now plan to launch a campaign to get rid of mandatory arbitration provisions. a coalition of consumer advocates, civil and employment rights groups and attorney associations plans to unveil a web site today listing companies that do not require consumers to commit to arbitration in advance.

the coalition will also press for congressional action, noting that congress has already passed a law barring car manufacturers from imposing mandatory arbitration on their dealers, although dealers can include such provisions in their consumer contracts.

paul bland, staff attorney for trial lawyers for public justice, said it is unclear how many consumers may have unknowingly had arbitration decisions issued against them seeking repayment of debt. "however, he said, "in the last six months, we have received scores of phone calls from consumers who want us to represent them challenging collection activities."

mbna, which issued plowman's credit card, declined to discuss the specific case but said it is confident that the arbitration awards have been granted appropriately. "in fact, several of the awards were upheld in the courts," said the company's general counsel, former fbi director louis j. freeh, in a statement. "trial lawyers have long opposed this straightforward process [of arbitration] since it generally precludes them from litigating," freeh said.

edward anderson, the head of the national arbitration forum, the nation's largest arbitration firm, which handles as many as 50,000 cases a year, said consumers "get more notice in arbitration than they ever do in the court."

"in our system, if you don't respond, we send out two notices; in the courts you get one notice."

banks, he added, cannot collect the money awarded in arbitration decisions unless the awards are confirmed by a judge.

plowman considers herself one of the luckier consumers. she declined to participate in the arbitration proceeding because she had been contacted by a debt collection agency and believed the problem would be corrected once the credit agency realized she was an identity theft victim.

in august 2003, the arbitrator issued a $27,240 award against her. she subsequently hired an attorney who helped convince the collection agency that the charges were not hers. the agency dropped its claim, but only after plowman paid $2,200 in legal fees.

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