Wednesday, July 22, 2009


It was not too long ago that many of us could remember the Stop Binding Arbitration bumper stickers and billboards up and down the highways. Lawyers who represented consumers were dismayed by the proliferation of arbitration contracts in almost every consumer contract. Car dealers, credit card companies, even nursing homes added the provisions to their contracts.

There was no populist swell against arbitration. In retrospect, there a probably a number of reasons. First, many view attorneys with scepticism and a jaundice eye. Additionally, business groups portrayed arbitration as an efficient and cost effective way to resolve disputes. Besides, who could expect a jury of regular people to be able to understand and resolve such disputes---
I never really understood this argument since the jury system is the bedrock of our legal system and no one has ever argued or submitted that juries should not be allowed to determine whether someone is incarcerated or is sent to die in the electric chair.

Be that as it may, Big Business won and arbitration agreement proliferated contracts. Almost immediately, many consumer attorneys refused to take arbitration cases. The fees were high, the ability to prove cases through documents became limited, and most importantly, many argued that the arbitrators were biased in favor of business. Many argued that consumer attorneys were summarily rejected by arbitration companies.

In the end, consumers were placed on unequal footing and basically got screwed. I even hear story of a general counsel of a large company threatening an arbitration company if an unfavorable opinion came from one of that companies arbitrators.

Finally, the abuses went too far and the dam was broken.

Minnesota Attorney General Lori Swanson filed suit this week against the National Arbitration Forum of Minnesota, the nation's largest arbitration company for consumer credit disputes, accusing it of consumer fraud, false advertising and deceptive trade practices by "misrepresenting its independence" and hiding its "extensive ties" to the collection industry.The Attorney Generals lawsuit claims the National Arbitration Forum has ties to debt-collection law firms and works against consumers by virtue of having a mandatory arbitration clause set forth in a credit card, bank, or retail contracts.

Hundreds of thousands of consumer disputes are resolved each year not by a judge or jury, but by a private arbitration system. The Attorney General’s suit alleges that the National Arbitration Forum represented to consumers and the public that it is independent and neutral, operates like an impartial court system, and is not affiliated with and does not take sides between the parties. National Arbitration Forum, while holding itself out as impartial, works behind the scenes—alongside creditors and against the interests of ordinary consumers—to convince credit card companies and other creditors to insert arbitration provisions in their customer agreements and then appointing the Forum to decide the disputes. Forum pays commissions to executives whose job it is to convince creditors to put mandatory arbitration clauses in their customer agreements. Forum does this to generate arbitration filings in the Forum—and hence, revenue—for itself. The lawsuit alleges that, despite telling consumers and the public that it is not affiliated or aligned with the collection industry, the Forum in fact has financial ties to the collection industry.

Beginning in 2006 and through 2007, Accretive—a family of New York private equity funds—engineered two transactions. In the first transaction, Accretive formed several equity funds under the name “Agora” (meaning “Forum” in Greek), which invested $42 million in the Forum.In the second transaction, three of the country’s largest debt collection law firms—Mann Bracken of Georgia, Wolpoff & Abramson of Maryland, and Eskanos & Adler of California—merged into one large national law firm called Mann Bracken. Accretive then acquired the majority interest in a debt collection agency called Axiant, which acquired the collections operations of Mann Bracken. Through these transactions, Accretive took control of one of the country’s largest debt collection enterprises and became affiliated with the Forum, the country’s largest consumer collection arbitration company. Accretive principals remain actively involved with the Forum. In 2006, the Forum processed just over 214,000 consumer collection arbitration claims, of which 125,000, or nearly 60 percent, were filed by the above law firms. Swanson said that the Forum was aware of the affiliation problem in 2006 when it negotiated its relationship with Accretive.

An email from an officer of the Forum to the hedge fund stating: “…we should certainly plan for unwinding any deal in the event shared ownership becomes an acute issue.”

We'll follow this interesting story.View the complaint here: Attorney General Press Release Week
Labels: deceptive trade practices, fraud, Minnesota Attorney General, misrepresentation, National Arbitration Forum