Arbitration Gets a Bad Rap

A report by Public Citizen comes front and center in Legal Blog Watch, skewering credit card mandatory arbitration though the National Arbitration Forum.  Called “The Arbitration Trap,” it tells of how this purportedly neutral arbiter is really a captive of the credit card issuer.  The allegations include:


  • In more than 19,000 cases involving NAF arbitrators, 94.7 percent were decided in favor of the credit-card company.
  • The decision to file for arbitration is made by the company, not the consumer, in 99.6 percent of cases.
  • A small group of just 28 arbitrators handled nine out of every 10 NAF cases in California, ruling for the credit-card company 95 percent of the time.
  • A Harvard law professor was blackballed as an arbitrator after she awarded a consumer $48,000.

This is a disgrace, whether true or not (and I have little doubt that it’s accurate), because of how it drags a concept that is crucial for the public benefit into the mud because of greed. 

Arbitration, in its conceptual form, has the potential to be the saving grace of our civil legal system.  The Courts do not present a truly viable option for the majority of money disputes that arise, whether because of the cost of litigating, including the ubiquitous attorneys fees, or the length of time required to reach conclusion, or the end product of an empty judgment.

Binding neutral arbitration offers an alternative, to the extent that arbitration doesn’t try to emulate the worst of courts.  And it’s failing miserably to fulfill its potential.  Why must this be?

The businesses that offer arbitration services (and you can never forget that they ARE businesses) want that constant stream of revenue that comes from having a captive client.  Here, it’s a credit card company.  It could just as easily be a car company, or a brokerage house,  It doesn’t really matter who the client is.  It matters that they can capture the revenue stream of the arbitration company.  Once that happens, they own it.

If I’m an arbitration company and you give me 90% of my revenue, I need you.  My Mercedes payment is due every month, and I need your business or I’ll have to drive a Yugo.  I don’t want to drive a Yugo. It’s unbecoming of an important person like an Arbitration company owner.  So I will kiss any part of your anatomy you want to keep those checks coming.

You don’t like an arbitrator because she’s fair?  She’s gone.  You don’t want to pay out more than $12 this week?  Done.    We need to let the consumer win one once in a while to give the appearance of fairness, without ever hurting you too badly?  We understand.  Just keep them checks a’rolling in, and we’ll make sure that your happy.

This is a gross subversion of a truly important dispute resolution model.  It’s not that it is fundamentally wrong (which it is), but that it has spoiled the publics’ vision and understanding of a legitimate model and thus denied them of a viable alternative because you, Mr. Arbitration company owner, are a greedy, disgraceful mutt.  You’ve taken something good and made it evil.  You’ve hurt us all for a dollar in your pocket.

But there is a way out.  Courts must refuse to endorse, compel and enforce arbitration clauses and awards that are not demonstrably fair.  They must clean out this rats nest of scum that has taken control of the arbitration field.  The captive arbitrator model must die, as it corrupts. 

Society should not be denied inexpensive, expeditious resolution of claims because the skels who own the show can’t be trusted.  Arbitration should not be forever tainted because the businesses that run them have perverted the model.  This can, and must, be stopped.  The word “arbitration” should be rehabilitated because it is a good thing, no, a great thing, for society.  It can be done. 

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2 thoughts on “Arbitration Gets a Bad Rap”

  1. Adam

    Good points, well taken. I am curious as to how you think the arbitration clean-up should proceed. Aren’t courts (extremely?) hesitant to strike out arbitration clauses? You understand the reasoning, of course: “The purpose of arbitration is to clear the docket- if we have to review every disputed arbitration result, what’s the point of arbitration in the first place?” Again, I agree that a housecleaning is in order… but how do you think it should proceed?

  2. SHG

    Arbitration has been turned from a great concept into a dirty word.  Based upon the model, courts have stringently enforced arb clauses up to now, but now need to deal with “new” reality. 

    I don’t have a cure, but I have some thoughts.  First, mandatory arb clauses in contracts of adhesion should not be enforceable.  If consumers don’t trust (with good reason) arb, then industry shouldn’t be allowed to ram it down their throats.  Second, the Uniform Arbitration Act needs serious review, and should include regulatory elements to assure neutrality. 

    It may require that industry be severely limited in its use of captive arb businesses, but I would venture to say that arb business be regulated and overseen for fairness.  Right now, anybody can open an arbitration business, and there are no qualifications whatsoever beyond the approval of the party that requires it by contract. There needs to be hard qualifications and assured neutrality. 

    This has been a giveaway to big business.  It’s ruined the reputation of arbitration, and rightfully so.  But if consumers and small businesses were assured that they could get a fair shake, it would be a panacea.  Of course, if arb was fair, would business love it so much?  Industry only wants to play with loaded dice, and if arbitration can’t be a guaranteed lock for them, they’ll look for some other weapon to win the game.

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