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The End of Compelled Consumer Arbitration?

Even the Manhattan Institute-sponsored blog PointofLaw.com is conceding the future looks bleak for mandatory consumer arbitration. Three major developments this week, capped by a congressional hearing yesterday, throw into question the fairness of the process and the neutrality of at least one group of supposed neutrals.

Let's recap the week's events:

• On Monday, Minnesota Attorney General Lori Swanson announced that she had reached an agreement with the National Arbitration Forum by which it would immediately get out of the business of arbitrating credit card and other consumer collection disputes. A week earlier, Swanson had filed a lawsuit against the NAF -- the largest arbitration company in the country handling consumer credit disputes -- alleging that the company had hid from the public its extensive financial ties to the collection industry.

• On Tuesday, fresh on the heels of Swanson's announcement, the American Arbitration Association announced that it would stop participating in consumer debt-collection disputes until new guidelines are established. The AAA's decision was first reported by the Wall Street Journal and then confirmed yesterday in testimony before a subcommittee of the U.S. House Committee on Oversight and Government Reform.

• At yesterday's hearing in Congress, U.S. Rep. Dennis Kucinich, D-Ohio, the committee chair, released a report showing what he called "deeply disturbing" abuses in consumer debt-collection arbitration. The report, based on a congressional staff investigation, reached a conclusion similar to that alleged by Swanson -- that NAF misled consumers and hid ties to debt-collection firms.

The NAF defended the integrity of its arbitrations, issuing a statement this week saying that it "provides fair and affordable access to justice to American consumers regardless of size of their claims." Its agreement to get out of the consumer-arbitration business was driven by economics, said CEO Mike Kelly. "Mounting legal costs, a challenging economic climate, and increased legislative uncertainty surrounding the future of arbitration have prompted the Forum to exit the consumer arbitration arena. At this time, the costs of providing consumer arbitration services far exceed the revenue generated."

One of the most intriguing aspects of all this is the role of the law firm Mann Bracken. This firm is the result of the recent merger of three debt-collection firms: Mann Bracken, based in Atlanta, Wolpoff & Abramson, based in Washington, D.C., and Eskanos & Adler, based in California. Mann Bracken is what might be called a "captive" firm, in that it works exclusively for one client, the debt-collection company Axiant LLC. Swanson's complaint against NAF alleges that, before their merger, these firms represented the credit-card companies in 60 percent of the arbitration cases heard by the NAF.

But here's the rub, according to Swanson: The majority owner of Axiant is Accretive, a New York private equity fund that operates under the control of investment manager J. Michael Cline. Accretive is also the parent of Agora, an entity created to invest in the NAF. Accretive then created Axiant to acquire the assets of the three law firms that merged into Mann Bracken. Together, Swanson alleges, "Accretive, Agora, Axiant, the Forum, and Mann Bracken form a complex web of companies that compose some of the largest debt collectors and arbitrators of consumer credit card debt in the country." One document describing the business plan for Accretive's investment in the Forum describes the goal as placing the Forum "at the center of a broad arbitration ecosystem."

The impact of all this remains to be seen. Alan Kaplinsky, a banking and financial services attorney at Ballard Spahr Andrews & Ingersoll, called the week's developments "devastating news for consumers and the banking industry." He predicted that the NAF's withdrawal from these cases "will place a staggering burden on the courts, which will have to absorb thousands and thousands of cases that had been diverted to arbitration." One other arbitration company, JAMS, continues to handle consumer debt cases. It may be the only one doing so on a national basis, according to Consumer Law & Policy Blog. But JAMS may be unlikely to fill the void, the blog says, and may feel pressure to follow the lead of the NAF and the AAA.

There is reasonable ground to debate the merits of mandatory binding arbitration in any circumstance. The American Association for Justice has long maintained that mandatory arbitration is one-sided and unfair. But whatever one thinks of mandatory arbitration, the allegations concerning NAF take the debate to a whole other level. One fundamental precept of arbitration is that the arbitrator be independent and neutral. Arbitrators are expected to disclose not just possible conflicts of interest, but even relationships that may create the appearance of a conflict. If NAF indeed had financial ties, however removed, to the very law firms that were appearing as advocates in its cases, then it violated a standard that underlies the very foundation of ADR.

Posted by Robert J. Ambrogi on July 23, 2009 at 11:38 AM | Permalink | Comments (4)