If The Contract Says It Shall Be NAF, Then There Shall Be No Forced Arbitration

Thank you, National Arbitration Forum (NAF). Recently, two federal courts, a New Jersey district court and the Fifth Circuit Court of Appeals, ruled that the consumers in the cases could not be forced into arbitration because the arbitrator designated in the contracts (NAF) was no longer in the consumer forced arbitration business.

The corporations in these cases had tried to force the consumers into arbitration despite the fact that NAF was the pre-selected arbitrator. They lost, and as a result, the consumers finally can take their claims to be heard in an open, public court. In other words, no NAF, no forced arbitration.

Credit card issuers and other large corporations regularly chose NAF as arbitrator for their consumer disputes, which NAF overwhelmingly would decide in the businesses’ favor. Indeed, a Public Citizen study found that NAF arbitrators ruled against consumers and in favor of the corporations 94.7 percent of the time! (You can read more about NAF’s shenanigans here). Corporations had so believed in NAF’s decisionmaking, that they designated the arbitration firm as the go-to arbitrator in the fine-print arbitration clauses hidden in their take-it-or-leave-it adhesion contracts with consumers.

Then in 2009, a fed-up Minnesota Attorney General filed a lawsuit accusing NAF of working against consumers’ interest and hiding its extensive ties to the debt collection industry. Minnesota alleged that NAF violated the state’s consumer-fraud, deceptive-trade-practices, and false-advertising laws. Less than a week later, Minnesota announced a settlement with NAF, where the arbitrator agreed to cease its consumer arbitration business.

NAF may no longer be in the consumer arbitration business, but there probably are many existing contracts specifying the company as their arbitrator if a dispute arises. Corporations are now trying to force these consumers to submit to arbitration before other arbitrator firms, continuing their effort to deny individuals their day in court.

These cases only reinforce the need for parties to consumer contracts to be allowed to choose the forum (whether arbitration or a public court) for hearing and resolving disputes after they arise. Choosing a forum before a disagreement develops only places unjustified and unnecessary limitations on the parties, and on consumers in particular. But this was always the plan for arbitration clauses in consumer contracts. The corporations get to run a private, unregulated system where they choose the location for the dispute to be heard, the arbitrator who will decide the case, and the rules for the arbitration. That is, consumers are railroaded.

The courts got it right. Let’s hope that Congress can eliminate forced arbitration clauses from all consumer and employee contracts, regardless of whether the pre-selected arbitrator is still in the business.