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Arbitration clauses on the rebound?

Fred Williams

Arbitration requirements got knocked for a loop a few years ago, but lately they show signs of bouncing back. And for consumers, that is not necessarily a bad thing — if the playing field can be leveled.

A mandatory arbitration clause in your card agreement means that, if you and the card issuer have a beef, you have to resolve it out of court. Generally the clauses spell out what triggers the process and gives a choice of arbitrators. Arbitration clauses on the rebound?

Corporations say that arbitration, run properly, is cheaper and faster than court, for both sides. Consumer advocates counter that arbitration arranged by corporations is a sham court that shields them from big lawsuits.

“We feel strongly that mandatory arbitration is bad for consumers,” said Kathleen Day of the Center for Responsible Lending.

A few years ago, mandatory arbitration clauses were almost impossible to avoid in big banks’ credit card agreements — then a bomb went off. The supposedly independent arbitrator National Arbitration Forum, a major provider, was found to have secret financial ties to debt collectors, and decided 94 percent of its cases against consumers.

After that scandal Bank of America, Chase, HSBC and Capital One dropped mandatory arbitration, as part of a legal settlement that expires during the second half of this year. Where do they stand now? Capital One says it has no plans to bring back arbitration clauses, Bank of America says it has no plans “at this time” to do so. Chase wouldn’t comment. HSBC’s U.S. card business was bought by Capital One in 2012.

As for American Express, Citibank and Discover, they kept their arbitration clauses, and they continue to defend them in court. Legal opponents claim the card issuers conspired to foist the clauses on consumers.

Since 2009, actual courts have been kinder to arbitration than the court of public opinion. In a landmark 2011 ruling involving AT&T, the Supreme Court upheld arbitration clauses — even where state law says they can’t be used as a shield against class action lawsuits. This was widely viewed as a huge win for corporations.

This week the high court heard arguments in a similar case involving American Express. That decision, expected within about four months, could broaden the application of class-action waivers — the kryptonite against big lawsuits — and strengthen the earlier AT&T ruling. With Justice Sonia Sotomayor unable to vote because of her involvement in the case in a lower court, the odds are that American Express will win.

Alan Kaplinsky thinks this is how the ruling will go — but he doesn’t see a big impact on credit cards. Kaplinsky, a partner at law firm Ballard Spahr who represents banks, says companies that don’t already have mandatory arbitration aren’t waiting to reinstate it based on how the court rules.

Kaplinsky, the practice leader for consumer financial services at Ballard Spahr, is close to this issue.  He writes the clauses in card agreements and even coined the term “class-action waiver.”

“Yes, that was me,” he said in an interview. It’s not an achievement that wins points with consumer advocates. But neither is it some kind of confession. Arbitration clauses are being crafted in consumer-friendly ways, he and other backers say. Often they will let customers opt out of mandatory arbitration at the beginning of the agreement — card issuer Discover is one example — and some go further. AT&T, for example, puts in a “bump up” clause that can pay you a $10,000 premium if an arbitrator decides you deserve more than you offered to settle for.

How often do those $10,000 checks get issued? “Probably very little, because it is such a club over AT&T they’d be foolish not to settle these kinds of cases,” Kaplinsky said, “which is a good thing for customers.”

The other camp would probably be skeptical of that claim from a corporate lawyer. Fortunately, the Consumer Financial Protection Bureau is in charge of figuring out whether arbitration can be good for consumers, and not just an alternative to justice as critics charge. The Dodd-Frank Act that created the consumer bureau also charges it with studying how arbitration works in financial products. Based on its study, the bureau can issue a rule saying how, and whether, arbitration can be used in future card agreements.

Today, arbitration isn’t a big blip on cardholders’ radar. Of 33 types of complaints about credit cards that the consumer bureau tracked in 2012, arbitration ranked 30th. The big companies that dropped arbitration in 2009 have more than a third of the U.S. card market. For now, at least, they’re not rushing to bring it back. And most credit unions and smaller banks never bothered with arbitration clauses in the first place.

Class action waivers may not mean much to an individual, but they add up to big money when you look at the whole system. Then there’s the argument that companies can use arbitration to keep a lid on mistakes or misdeeds, by settling with victims piecemeal.  Kaplinsky figures it’ll be 2014 before the CFPB hashes out the pros and cons.

In the meantime, there’s a homemade solution: If mandatory arbitration clauses rub you the wrong way, you can pick a card agreement that doesn’t include one. The trove of agreements maintained by the consumer bureau has many to choose from. The searchable database is updated quarterly and can be used as a shopping tool, although you’d still want to check your individual card agreement during the application process.

Most of the agreements on file from 300 card issuers lack mandatory arbitration clauses, said Peter Rutledge, a University of Georgia Law School professor who has studied card agreements. “For-profit, publicly traded banks use these far more than credit unions,” he said.

However unpleasant mandatory arbitration may sound, going to court against a bank isn’t a very pleasant prospect either. Here’s hoping that the consumer bureau sees a way for arbitration to fulfill its promise.

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