`Mandatory arbitration,' a fine-print curb on suits

Staying Ahead

January 30, 2000|By Jane Bryant Quinn | Jane Bryant Quinn,Washington Post Writers Group

A PEEVED READER, James Genden of Evanston, Ill., sent me a notice he received from his credit-card bank, MBNA. Many of you have received similar notices, probably without reading them.

MBNA has instituted mandatory arbitration for customer disputes. New customers have been subject to the rule since December. Starting Tuesday, existing customers will be covered, too, unless the bank received a letter from them by Jan. 25, rejecting the process.

Few customers probably read MBNA's fine-print notice, even though it was headed "Important Amendments to Your Credit Card Agreement." They accepted arbitration by default.

Genden read the notice because he's a corporate lawyer (and former bank lawyer), hence more sensitive to the implications.

MBNA isn't the only bank to require arbitration of customer disputes. American Express imposed it on cardholders in June, without giving them the choice of opting out. First USA, Discover and some others have done the same.

Under compulsory arbitration, you cannot sue to right a wrong. Any unresolved dispute must go before a panel of arbitrators.

The big issue here isn't the individual lawsuit. A single customer rarely sues a major institution, especially over a modest sum. But a lawyer might bring a class action lawsuit on behalf of all customers who were defrauded of, say, $100 each. That's what compulsory arbitration aims to stop.

In theory, arbitration is a better way of settling individual disputes. It's quicker, hence cheaper, than a full-blown lawsuit.

In practice, however, it all depends.

If you have a very small claim, it's often cheaper to go to small-claims court, says Ken McEldowney, head of Consumer Action in San Francisco. But under compulsory arbitration, you can't.

Arbitration does work well when a claim is too big for small-claims court but isn't worth the price of hiring a lawyer. But where there's generic wrongdoing, a small sum owed to all customers or a violation of consumer rights, arbitration gives no relief.

"Class actions are the classic consumer remedy," Genden says. They cost consumers nothing, because lawyers take their fees out of the settlement.

There have been class action abuses, in which lawyers cleaned up and consumers got little. But there also have been arbitration abuses, in which the company manipulated the process.

The banks aren't letting customers choose the best approach for their particular cases. It's arbitration or nothing.

Compulsory arbitration clauses are fairly new in banking, says San Francisco attorney James Sturdevant. Bank of America tried to impose them in California in 1992. The bank had just lost an expensive class action suit and didn't want to see another.

Until then, imposing arbitration on existing customers "had not been tried by any major banking institution in the country," Sturdevant says.

Sturdevant sued the bank, arguing that arbitration couldn't be forced on customers who hadn't previously agreed to it. After years of litigation, California's Court of Appeals upheld that view. In February, the state's Supreme Court let the decision stand.

In April, Delaware's Legislature took up the cause of the credit-card banks. The state passed a law, declaring that the many banks domiciled there (including MBNA) could legally impose arbitration on customers.

Potentially, this opens the door to imposing arbitration on customers everywhere. Banks can usually go by their home-state rules when doing business in other states.

"They've tried to get around the Bank of America decision," Sturdevant says, "but the issue is going to be litigated."

"Arbitration is clearly a movement within the financial services industry," says Steve Gallagher, senior vice president of the American Arbitration Association.

Brokerage firms have required it for several years. Among banks, telephone companies and others, "it's now taking off," he says. You might find it in any new consumer contract.

But Gallagher worries that companies may overreach, leading courts to conclude that consumers aren't getting a fair shake.

"Pretty much anyone can provide arbitration," Gallagher says, and "that is of concern to us. Arbitration can be fabulous, but [not all] dispute resolution is equal and [not all is]fair and equitable."

Most consumer disputes won't even go to arbitration. They're too small to be worth it, or the company will settle them.

At MBNA, which has 40 million customers, customer representatives settled all but 140 disputes in 1999, says Vice Chairman David Spartin. Of those, two wound up in court. The rest were resolved without arbitration.

But do customers even realize they can arbitrate? If they don't read fine-print notices, probably not.

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