Another Reason to Avoid Arbitration Agreements with Big Financial Institutions

Readers of this blog are likely to know that those arbitration agreements that customers have to sign when opening a brokerage account are a scam. As the Wall Street Journal noted, clients must go to industry-operated arbitration forums, and doubts about the fairness of the system to investors have led three senators to urge the SEC to make arbitration voluntary.

It turns out that even in arbitration settings that appear more consumer-friendly, big repeat customers (meaning big companies) can and do load the dice in their favor. You may not realize it, but your credit card agreement in its teeny print almost certainly has an arbitration agreement, and guess what? Your chances of winning in a dispute are close to nil, as Elizabeth Warren tells us at Credit Slips in “Stacking the Deck:”

Senator Russ Feingold and Representative Hank Johnson have introduced legislation to stop the fine-print, mandatory arbitration clauses that show up in millions of credit card agreements….

Why is this such a big deal? Arbitration sounds like a cheap, fair way to settle disputes. But a study from the Christian Science Monitor shows another reason: the arbitrators are beholden to the repeat players (credit card companies) that pay their fees. The top ten arbitrators ruled for the customers just 1.6% of the time, while arbitrators who weren’t depending on arbitration fees (those who decided 3 or fewer cases a year) ruled for the customers 38% of the time.

How did this happen? The credit card companies keep track of how arbitrators rule, and they can strike those they don’t like. Customers don’t have a big information base about how the arbitrators ruled in the past, and they end up with whatever arbitrator the companies pick. It is just one more way the deck is stacked against ordinary consumers.

Consider the story of Harvard Law Professor Betsy Bartholet. In her first few cases, she ruled for the credit card companies, and she was asked to do more arbitrations. But once she ruled for a customer, her career as an arbitrator was over. As the CSM reports, sometimes the credit card company didn’t even bother to strike her–they just reported that she had a scheduling conflict. As a result, someone who might have listened to a customer’s story was always unavailable. Guess who was left to decide the disputes?

Feingold and Johnson think this isn’t fair. They can’t prove a particular arbitrator was biased, but they know a stacked deck when they see it.

A good article in the Los Angeles Times also discusses, using only anecdotal evidence but covering a broader range of situations, that former judges who become arbitrators quickly learn that it behooves them to take a pro-company stance if they want steady business.

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One comment

  1. GeorgeNYC

    I am a lawyer who handles, among other things, reinsurance arbitrations. Without a doubt, it has its advantages is complicated commercial disputes between relatively equal players.

    However, the thought of consumers, even those represented by counsel, being forced to arbitrate is simply ludicrous.

    What is interesting is that the key here is the “private” nature of the dispute. Generally, the rules that are incorporated by these agreements require the disputes to be “confidential.” Clearly,based ont he above (and my own experience to a certain extent) the issue is not the “process” but the informational deficiencies between the parties. I wonder if the results would be different if arbitrations, like court decisions, were allowed to be public records?

    I think that this is a good example of “informational asymmetries.” A truly efficient “market” result, to my understanding, would always require sufficient informational equality. Hence the enormous enforcement mechnism in place (the SEC) to police the supposedly “free” equity markets. Without the forced information flows, you could quickly lose confidence in the market. However, while capital enjoys such a government subsidized luxury, labor barely gets similar support. Unions aside, I wonder what would happen to emplyee bargaining power if wages were required to be publicly disclosed for all workers? Right now, as I apply for a job, I have only limited ability to know what the salary may be. I would suggest that eliminating that informational disadvantage would probably be more effective than unionization (which incorporate that feature)

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