Mandatory Binding Arbitration Is Almost Dead

A provision buried deep within the recently passed Wall Street reform bill has the power to finally kill off mandatory binding arbitration, one of the more dangerous anti-consumer practices still sanctioned by law. While the bill includes a limited provision banishing arbitration agreements from mortgages and home equity loans, it also gives broad powers to the Securities and Exchange Commission and the new Consumer Financial Protection Bureau to kill off arbitration in all other consumer financial products.

There are two things standing between us and an arbitration-free world. The bill explains:

SEC. 1028. AUTHORITY TO RESTRICT MANDATORY PRE-DISPUTE ARBITRATION.

(a) STUDY AND REPORT.—The Bureau shall conduct a study of, and shall provide a report to Congress concerning, the use of agreements providing for arbitration of any future dispute between covered persons and consumers in connection with the offering or providing of consumer financial products or services.

(b) FURTHER AUTHORITY.—The Bureau, by regulation, may prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties, if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers. The findings in such rule shall be consistent with the study conducted under subsection (a).

Congress could have imposed an outright ban on mandatory binding arbitration altogether, but hey, we’ll take the study. Whether the rule that follows the study actually protects consumers depends on who runs the new agency. That’s why the President should appoint a pro-consumer advocate like Elizabeth Warren to head the new Consumer Financial Protection Bureau. Let him know how you feel by calling (202) 456-1111.

The Dodd-Frank Wall Street Reform Act: Mandatory Arbitration Provisions [Consumer Law & Policy Blog]

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  1. rahntwo says:

    This is great! MBA = bend over and take what we decide to give you.

  2. huadpe says:

    Note, this only has the power to ban MBA from debt agreements. Your cell phone contract can (and assuredly will) still have it, regardless of what the new bureau says.

    • BigBoat2 says:

      Little past debt agreements, e.g. check-cashing places, but yeah phones ain’t covered.

    • ShinGetterPoPo says:

      While this is true, the beauty of it is if you can use the debt thing as a springboard. With a good enough lawyer you can have your problem taken care of without binding arbitration.

      It’s a long shot, but it could happen.

  3. cloudedknife says:

    ymmv I suppose but mandatory binding arbitration worked well for me the one time I had to use it as a consumer. In fact the pros vs the cons weigh so in favor of pro in my view that when the corp I tussled with was forced to change their purchase agreements to make binding arbitration optional, I still chose to go with it!

    Here’s the calculus: Your claim is for something less than 2500bux, you have 2 options. You file in small claims court for 75-150 dollars, they pay a lawyer to contest it, or maybe they don’t, and a whole lot of your life is taken up waiting for dates, or showing up in court…or not. Best case scenario, you get what you wanted and it costs you an average 112.50.

    OR

    You spend 30dollars in copy and fedex fees to file arbitration papers with JAMS or some other org (I used JAMS), and the day of arbitration which is paid for by the corp will cost somewhere between 2500 and 10,000. Rather than spend 2500-10000 and risk losing anyway (there’s still a slight risk even if you believe arbitrators aren’t actually neutral), they can settle with you by avoiding monetary costs and just giving you what you want…all for a cost of 30dollars and very little time investment on your part.

    Also a side note, many arbitration orgs base their fee on the amount in controversy. as consumers often we are seeking enforcement of a warranty right, or replacement of damaged goods under said warranty. This is a “declaratory” judgement which at least 1 arb firm treats by default (and bills as such) the same as an amount in controversy of $74,999.

    Excluding credit companies and that whole disaster, it is my belief and experience that arb firms are in fact neutral and the whole issue can be cleared up by keeping arbitration mandatory but making sure that it is the consumer that picks which firm the corp has to pay.

    • SiddhimaAmythaon says:

      i smell a rat

    • huadpe says:

      Small claims court by me is $15 for a claim under $1000.

      And mandatory binding arb. agreements let them pick the arbitrator nearly always, which is why they like them so much.

      • cloudedknife says:

        where are you that filing fees are so cheap for small claims?

        Do you disagree that much of the supposed problems of MBA could be cleared up by keeping it mandatory but allowing the consumer to choose which arbitrator to use?

        • dg says:

          The problem is solved by forgetting about MBA and letting the matter go to Court where it belongs. Then a trier of fact, who is 100% disinterested in the outcome for either party decides what happens. It costs a small filing fee, and process service fee – all of which I get back if I win. I could care less how long it takes – I’m not paying them whatever I’m contesting in the meantime…

          • cloudedknife says:

            When the consumer chooses which arbitration firm to use, the impartiality problem (if there actually is one) should go away.

            furthermore, the guaranteed costs involved in arbitration for the corporation exceed that of small claims which increases your chance of a settlement giving you exactly what you want.

            arbitrators actually are neutral, I’m curious if you’ve experience to the contrary. I know all of my experiences in which I have used a mediator or arbitrator paid for by the opposing party have gone smoothly.

            Finally, while a billing dispute might work for your purposes (thus, I think mba for credit/billing disputes should be purely optional) warranty and defective product replacement issues don’t work so well. If it takes you 6months to go through court, you’re stuck 6months with a busted whatever the hell it is you bought. at least with mba the process from start to finish will be about 45days tops. My last corporate tussle involved me fighting customer service for nearly 3 months daily, then I settled for better than i had been asking for all of 10 days after filing MBA papers.

            • ben says:

              The point isn’t that arbitration is necessarily bad. It’s that *mandatory* binding arbitration is bad. It’s great that arbitration has worked for you, but if others want to go to court, why should they be forced to submit to arbitration instead?

              • cloudedknife says:

                well…mainly because they contracted to do so. Caveat Emptor and all that. There’s plenty of ways to argue that an MBA clause buried 13 pages into a 15 page contract pretty much only available online made up of 80% legalese is boilerplate and unenforceable anyway but really, before giving your money to another person or entity you should understand what you’re buying and what you’re not buying.

                I guess I don’t see why MBA’s should be blanket prohibited. Perhaps there should be regulations regarding how visible they are who gets to choose the arb firm used but regulation is a far cry from a ban.

                • ben says:

                  Yes, I get that the MBA clause is in the contract. That’s not my question, though. You were initially claiming that MBA clauses are a good thing, based on your experience. All you really showed, though, was how arbitration could potentially work out for someone in a specific circumstance. Your argument proved nothing about mandatory arbitration is good. If you want to argue that businesses should be allowed to put whatever they want into contracts, then that’s a completely different, and potentially valid line of reasoning, but it has nothing to do with whether or not MBA is good for the consumer.

            • Difdi says:

              Neutral you say? Technically, you’d be right.

              But consider this: As a private citizen, how many times will you pay for a specific arbitration firm’s services? Probably not more than once, if that. But a corporation might hire them for hundreds or thousands of arbitrations, and the arbitration firm thus has some financial pressure on it, since a firm that regularly sides with the consumer will be less attractive to the corporation than one that routinely rules against the consumer.

            • Bob says:

              Since when do you, the customer, get to chose the arbiter? Most MBA’s specifically say that they chose the arbiter and that you have no rights in a court of law if (when) the arbiter finds for the company, the same company that pays the arbiter.

              The one who can chose and pays the arbiter wins the case 90% of the time because that is a conflict of interest. Why would anyone think differently?

        • Extractor says:

          in 84 when I took Pontiac to arbitration, I was allowed to exclude all arbitrators that I felt would rule against me. Came down to a black community worker or a retired auto parts dealer. Wound up with black community worker and had the full hearing representing myself. I wound up winning 9500 on a car that cost 10,000 three years old, 47000 miles, no tires left. That was the end of 4 cylinders in my F cars. Went out got a z-28. Now I drive a 2000 SS convertible at 23 miles per gallon. I dont remember paying the BBB anything for the hearing and gm’s failed appeal. I was prevented from ever buying another Pontiac. Dont have that concern anymore.

        • huadpe says:

          New York – Suffolk County.

          They’re a bit more if you claim more than $1000 in damages, and they want a self-addressed return envelope, so $15.44.

    • wickedpixel says:

      small claims is $35 for me and lawyers aren’t allowed. level playing field vs. MBA where they’re getting paid by the corp… I’ll take small claims every time.

      • Thyme for an edit button says:

        I think lawyers are allowed if a party is a corporation. I mean, it’s not like the corporation can walk in and represent itself.

        • sonneillon says:

          Depends on the state. In some states they just are not allowed unless the defendant is bringing the small claims on their own behalf. So a corporation has to send somebody who is not an attorney who knows about the case well enough to represent the business. It’s why against large corps small claims are a good way to go, way better than class action suits.

          I personally think that when lawyers start trying to jockey for a class action. All of the participants drop out and go small claims. Death by a thousand cuts.

    • wickedpixel says:

      small claims is $35 for me and lawyers aren’t allowed. level playing field vs. arbitration where they’re getting paid by the corp… I’ll take small claims every time.

    • Tim says:

      I think you just proved why VOLUNTARY binding arbitration is good. If the case comes up and both parties would rather go through arbitration than court, yes, they may choose arbitration, and that’s a good choice to have. But MBA specifically denies one party a right if she/he/it doesn’t agree to binding arbitration before any specific issues come up. This might be employment (no job if you don’t agree to BA), a cell phone contract (no BA=no phone) or a lease (no lease).

      People should be allowed to weigh the options for the specific case and decide on litigation vs. arbitration. Your example proves that it can work sometimes.

    • AntiNorm says:

      So the company pays $2.5k-$10k for the arbitrator…you do realize that this creates a *HUGE* conflict of interest, don’t you?

    • calchip says:

      Unless I’m mistaken, most arbitration clauses state that the losing party will be responsible for arbitration fees and legal costs. Given that according to one study, over 90% of arbitration cases found for the corporation, I would not want to gamble the costs of some big corporation’s legal fees plus arbitration costs over a $2000 judgement. Small claims is a much better deal.

      Also, at least in California, I am pretty sure that even a corporation cannot be represented by an attorney in small claims; the corporation must designate an officer or manager of the company to represent them.

  4. tomok97 says:

    You can start by joing the “Put Elizabeth Warren in charge of the Consumer Financial Protection Agency” Facebook page.

    http://www.facebook.com/pages/Put-Elizabeth-Warren-in-charge-of-the-Consumer-Financial-Protection-Agency/139409822750621?ref=search

  5. dg says:

    Ding dong the witch is dead… the witch is dead… ding dong, the wicked witch is dead!

    • p. observer says:

      Well to be more accurate
      Ding dong the witch can no longer impose witchery on your mortgage or home equity loan etc

  6. whosyer12 says:

    Doesn’t matter much does it? What with all the “waive your right to a jury trial” clauses that seem to be popping up– they are the “new” arbitration.

    • Tim says:

      Um. That IS mandatory binding arbitration, and that IS what this targets.

      • ARP says:

        Not really. Depending on the state, you can request a jury trial, even for smaller claims. If you waive that right, it’s a bench trial. Not as good as having the option of a jury trial, but at least (theoretically), you have a disinterested person deciding the case (which is usually what is lacking in MBA)

      • whosyer12 says:

        Um- no it is not arbitration it refers civil action in the court systems.

  7. agpc says:

    This will be a huge win for consumers. If company’s can no longer rely on these clauses to effectively prevent consumers from having their day in court, they will have to adjust their unfriendly consumer practices.

  8. Minze says:

    I’m surprised that everyone is concentrating on the monetary aspect of MBA and leaving out the anonymity of it. Corps love MBA because it keeps things out of the court and out of public record.

    Deceptive Lending practices? MBA – no court record and no law involved.
    Stuck accelerators? MBA – no court record and no law involved.

    MBAs, by their nature, are there to protect the company, not the individual with the complaint.

  9. AI says:

    MBAs can be a great tool when they’re used in contracts between large companies. The arbitrator has to be agreed upon and paid by both sides, and it saves a lot of money vs going to court. But an individual being forced into an MBA agreement where the large company picks and pays the arbitrator is absolute bullshit and should be stopped.

    • mythago says:

      Interestingly, MBAs are much less prevalent in agreements between large corporations. Wonder why that might be.

      • Difdi says:

        Because they’re only a good deal when they’re financially rigged in your favor. Corporations tend not to like level playing fields.

  10. Andy S. says:

    Too bad the health care reform bill didn’t include a similar provision. It’s pretty much impossible to visit most specialists with first agreeing to binding arbitration.

  11. Mr Fife says:

    Mandatory Binding Arbitration = Legal Rape

  12. Nakko says:

    Does the rule on banishing arbitration from mortgages apply only to future mortgages, or all mortgages that exist?

  13. JustLaws says:

    Please press the SEC and Consumer Financial Protection Bureau to look deeper. MBA must be abolished in ALL agreements where corporations have an unfair financial, legal or technical advantage over consumers and where there’s no reasonable opportunity for consumers to negotiate terms and opt-out of pre-dispute arbitration clauses. That includes dealings with home builders, insurance companies, warranty companies, home owner associations, cellular/TV/Internet service companies, airlines, etc. It seems better to give consumers the opportunity to opt-in if they choose to, but that shouldn’t be a requirement for obtaining the product or service.

    See http://www.homeownersoftexas.org/ARBITRATION-mandatory-binding-unfair-and-everywhere.html.

  14. Francine says:

    My husband was the unfortunate award-winner of Mandatory Binding Arbitration held by AAA Arbitration and filed against Superior Gold Group, LLC. Mandatory Binding Arbitration was required by the, purchase-agreement/contract held by Superior Gold Group, LLC a contract which my husband and I signed in November, 2008. My husband had rolled over two retirement accounts into a Gold IRA through Superior Gold Group, LLC. Superior Gold Group had stated that they would lock us in at a $735.00 spot price if we agreed to open an account with them and permit them to assist us with rolling over my husbands 401K and IRA accounts with, Sterling Trust Company, the trust company they utilized to set up the gold IRA accounts SGG represents. Nearly 18 months later the precious metals had not yet been delivered to his retirement account; among a long laundry-list of additional issues we had with this company. Bruce Sands, the CEO of Superior Gold Group testified in the hearing and provided evidence that, the day prior to the start of arbitration, SSG had indeed fulfilled their contract by shipping all of the metals to the Delaware Depository Service Company. Fidelitrade, the administrator, for the DDSC confirmed to Sterling Trust Company, the trust holder overseeing my husbands retirement account, the metals had been deposited into my husbands FBO depository account by Superior Gold Group, LLC. In spite of that delivery the arbitrator declared us the prevailing party based on breach of contract due to the delinquent delivery date. However, he found that as outrageous as this delinquent delivery was; SGG had in fact fulfilled their contract based on the confirmation of deposit provided by Sterling Trust Company. This was all a lie! After the award was made my husband went to check his trust account only to learn that the metals deposited into the account the day before the arbitration hearing had been reversed from his account three weeks later and the day after the AAA arbitrators cut off date for submission of all final-brief arguments and any/all evidence to be entered into the hearings. We immediately had our attorney contact the arbitrator regarding this matter the day we received a copy of our award; which was about two or three weeks after the arbitrators cut-off-date. The AAA arbitrator said that this new evidence [including fraud] had been submitted too late. However, we could file for another arbitration hearing. This arbitration had already cost us $68,000.00 in legal fees and $13,000.00 in arbitration fees. Our ability at this time to litigate further is a moot subject; my husband was laid off from his employment a few months after we began litigation with Superior Gold Group. Hence, providing Superior Gold Group, LLC the ability to utilize the arbitration process as a harbor for criminal activity. This case had listed 4 counts: breach of contract; fraud, unfair business practices, misrepresentation. The money utilized to pay this litigation came from the nest-egg we had set aside for emergencies. We found it also necessary to drop our private health insurance policies and return one leased vehicle and dropping the insurance to that vehicle, in order to continue fueling the cost of further litigation. The arbitrator based his award on a $62,400.00 miscalculation made by Mr. Sands when he over-charged us for the metals based on the spot price we had been quoted and the respondents percentage rates listed in the SGG contract. It was decided by the arbitrator that our account representative, Adam Blaser, had misspoken when he quoted us spot price for the metals. The award did not include pre-trial interest or disgorgement; the arbitrator did not find proof of unfair business practices and felt that we had not proven any damages based on the breach of contract. In spite of the fact that my husband’s retirement had been left fully exposed for more than 17 months at the time of arbitration and to date is still being left exposed. Our account executive testified to and was further verified by Bruce Sands at the hearing that, it was company policy to; “Never give a price; the moment you give a price you lose” because the customer will shop for a better price.” Arbitration, is not inexpensive, it is not fair, it is non-appealing, the arbitrator is not even required to follow the rule of law; where is the consumer’s justice? An even better question than that one would be; where is my husband’s retirement? Contrary to the meager award given by AAA Arbitration; Superior Gold Group has yet to turn over the retirement funds to our attorneys. Since that award was made we are indebted an additional $25,000.00 in legal fees in pursuing the return of my husbands retirement. Ultimately, Bruce Sands the CEO of Superior Gold Group has invented a new way to game the system. Unlike the old pirate’s that would hold you up with a gun or threaten to slit your throat with a knife to acquire your money; Superior Gold Group will induce you to sign a contract and then have you agree to Mandatory Binding Arbitration. It is my opinion that Mandatory Binding Arbitration is legally equivalent to the miasma of a primordial swamp! Regrettably, for the consumer, Superior Gold Group is still out there practicing their Grifters-Craft and teaching other minions how to game the system; stalking their next prey! Our account executive, Adam Blaser, left his employment with Superior Gold Group, LLC, to start his own company called United Gold Direct, LLC; doing business as usual! Contrary to the 10 years Bruce Sands states his business has been around; the business was 3 ½ years prior after settling another contract fraud case, while working with another company. AAA Arbitration provided an award based on the lesser count “Breach of Contract” due to delinquent delivery and pricing-miscalculations, dismissing the more serious counts entirely; that’s called splitting the baby with the bath water in arbitration-speak! Permitting Superior Gold Group, LLC to continue business as usual and to possibly or probably close their doors today and open up as an entirely new LLC tomorrow; across the street, across the town, or, across the nation. Today I went to the dentist and I was required to sign a contract prior to starting the work, agreeing to… and you guessed it, Mandatory Binding Arbitration; I believe that I was induced by pain to sign this agreement! Next time I will just bite the dentist instead!

    Cheers,
    Francine