Consumer Alert: Beware of Mandatory Arbitration

July 27, 2009 — -- Some consumer topics are utterly unsexy yet undeniably important and one of those is mandatory arbitration.

These days many consumer contracts -- for moving, financial planning, credit cards, cell phones and almost everything else -- contain a sneaky little fine-print clause that says if the customer has a problem with the company, the matter will be handled in arbitration rather than in court. Consumer advocates have long said that the clauses deny consumers their right to a fair hearing.

Now, one of the biggest players in the world of consumer arbitration has agreed to get out of the business after allegations that it was too closely tied to industry and didn't give consumers a fair shake.

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Minnesota Attorney General Lori Swanson sued the National Arbitration Forum for consumer fraud, deceptive trade practices and false advertising, and then swiftly negotiated a deal for NAF to exit the arbitration field.

"The company said it was impartial but, behind the scenes, it worked alongside credit card companies to get them to put unfair arbitration clauses in the fine print of their contracts and to appoint the Forum as the arbitrator," Swanson said.

NAF denied the allegations but agreed to bow out of the business. That leaves only two other large arbitration firms, and Swanson has also asked one of them to get out of the business.

Companies that have mandatory arbitration clauses in their contracts are now scrambling to rewrite them and name a different arbitrator. Consumer advocates are gleeful and hope this chain of events kills mandatory arbitration for good -- something years of lobbying and legislative proposals failed to do.

Protect Yourself From Mandatory Arbitration

Sally Greenberg of the National Consumers League called mandatory arbitration "one of the biggest problems" for consumers and said NAF's exit from the business is a "big deal."

But mandatory arbitration is not dead yet and my personal prediction is that other companies will rush to fill the void, keeping the practice in play. So here are some things you can do to protect yourself:

Read contracts thoroughly to see if they contain a mandatory arbitration clause.

Opt out of mandatory arbitration if you can. There may be a time limit to opt out, so don't delay.

If you cannot opt out and cannot find an alternate company to do business with, write on the contract: "I object to this mandatory arbitration clause, but am signing this contract because I am told I have no choice." Initial the statement.

If you receive a notice from, say, a credit card company or insurance company notifying you of changes to your contract, resist the urge to toss it. Read it and start the process again.

If a company files an arbitration case against you, never ignore it. Respond promptly in writing and send your response certified mail.