Arbitration Insight

In mid-June, 2009, the Minnesota Attorney General’s office filed suit against the National Arbitration Forum (NAF).  About one week later, NAF settled the case and agreed to stop doing almost all types of arbitrations.  Later that same week, the American Arbitration Association (AAA) announced that it too would be withdrawing from certain types of arbitrations.  If two of the biggest arbitration forums are closing down certain services, what does this mean for the future of arbitration?

Most credit card companies had written into their terms and conditions that consumers waived their rights to class actions and even to sue them in either state or federal court.  Written instead was a term requiring all disputes (more accurately, all disputes brought forth by the consumer) to go to arbitration instead of court.  Also in these terms was generally a statement of who would provide these arbitration services. 

The NAF was one of the biggest providers in the nation of these mandatory arbitration services.  The Minnesota Attorney General (AG) filed suit against NAF alleging consumer fraud in its credit card mandatory arbitration business.  It turns out that NAF was partially owned by one of the banks that issued the credit cards requiring arbitration, yet still held itself out to be a neutral third party capable of making unbiased opinions and did not disclose the ownership interest that the bank had in NAF.

Following closely behind, AAA announced that it would no longer be doing any credit card arbitrations.  In a statement, AAA stated that it would cease offering these services until some standards of impartiality had been developed and agreed upon.  This preemptive strike against litigation was likely a smart move for the single biggest player in the arbitration realm, but raises a lot of questions about where arbitration sits now and what the future might hold.

Arbitration allows limitless flexibility.  That is part of why arbitration became a popular choice to require in contracts.  Construction contracts, service contracts, employment contracts, consumer debt contracts, and even wills began requiring arbitration as a means of dispute resolution.  However, there have developed three more “famous” types of arbitration.

Type 1 is salary arbitration.  This has come to prominence in professional baseball as a function of the collective bargaining agreement between players and teams.  This type of arbitration has tomes written about it, so this article will not discuss it at length.  Simply, this type of arbitration is unaffected by the decisions of NAF, AAA, and the Minnesota AG.

Type 2 is equally unaffected by these recent events, in part because the populous generally does not know that it is arbitration.  Judge Judy, Judge Joe Brown, Moral Court, Judge Mills Lane, Judge Hatchet, Judge Maria Lopez, Texas Justice, etc. have become a daytime television reality-TV staple.  These are not actually “courts,” but binding arbitration (Type 3 below), with the reality-TV twist.  The producers of these shows find parties in small claims court and offer to pay them to drop their lawsuit and appear on TV for this binding arbitration.  While I have argued that the advent of these “Judge Shows” has been a driving factor behind the growth of the Alternative Dispute Resolution movement in the United States, it is possible that the third type of arbitration may become its downfall.

As alluded to above, Type 3 is binding arbitration.  This is generally utilized in the legal world as an alternative to court trials, the type offered by AAA and previously offered by NAF.  It came to favor because of the speed with which a case could be resolved, a reduction in cost, expert evaluation, and rule flexibility.  Expert evaluation allows, for instance, construction disputes to be arbitrated by construction experts, not a criminal law attorney elected as judge.  The rule flexibility in arbitration allows the parties to modify the typical courtroom rules, such as discovery rules, rules of civil procedure, etc., allowing for an adjudication of the dispute consistent with the parties desires.

One thing is consistent across the types of Alternative Dispute Resolution, that the third party neutral must be neutral.  In arbitration, this means that the arbitrator must be neutral.  Many commentators have complained about the lack of arbitrator neutrality in mandatory arbitration forums. 

The appearance of impropriety is hard to overcome.  For instance, presume that your contract with the Bank requires arbitration with XYZ Company.  XYZ Company serves as arbitrator for all of the cases that the Bank has in your area.  This means that XYZ Company relies on the Bank for a great deal of its income.  When you go in front of XYZ Company to arbitrate your case, will XYZ Company be biased in favor of the Bank because the Bank pays them so much money?  This appears to be why the AAA has backed out of credit card arbitrations.  Not that there was some impropriety, but that the AAA wanted some standard set for “neutrality” so that everyone can agree on what is or is not neutral.  NAF, on the other hand, went beyond the possible favoritism bias, to another level.  By being a subsidiary of a bank, at least in part, they could not be neutral.

Since these two major announcements by NAF and AAA, Bank of America has changed its credit card terms to unenforce the arbitration provision.  Other banks may be following suit.  Additionally, President Obama has urged Congress to consider invalidating all mandatory arbitration provisions in credit card contracts, with consumer advocates urging that this be extended to include many other consumer contracts. 

But does all of this signal the end of arbitration, the end of binding arbitration, or the start of a new era of arbitration?  With the popularity of Alternative Dispute Resolution continuing to rise in the United States, this author does not see this as the end of arbitration, but the indication that new reforms will be coming to protect the public.

If you have questions about the enforceability of your arbitration provisions in light of these developments and the new case law in Wisconsin on arbitration awards, please contact Attorney Michael D. Rust at Gerbers Law, S.C.