So begins, ominously, a complaint filed by the State of Minnesota against the National Arbitration Forum, the major provider of consumer debt collection arbitration services. Some of the complaint's allegations are a bit silly. (The NAF works "to convince creditors" to use its services, "thereby generating revenue for it." So ... marketing = bad?) But the substance of the complaint is troubling, alleging financial ties between the NAF and the consumer finance industry that I suspect most observers would find problematic. These and similar allegations have been levied against the NAF by consumer advocates for years and have occasionally surfaced in litigation as well. But the Minnesota lawsuit seems the most significant challenge to date to the NAF's business model. Go here for the NAF's statement in response to the lawsuit.
Perhaps the most significant aspect of the Minnesota lawsuit is its timing. A variety of pending legislative proposals potentially would deny enforcement to pre-dispute arbitration agreements. For example, section 1025 of the White House version of the Consumer Financial Protection Agency Act authorizes the new agency to regulate or ban pre-dispute arbitration agreements in consumer financial transactions, and the Arbitration Fairness Act of 2009 imposes an outright ban in contracts involving consumers, employees, and franchisees. The narrative used to support these proposals draws heavily on objections to arbitration practices in the consumer finance industry, and the Minnesota complaint will surely add fuel to that fire.
By and large, I'm supportive of efforts to regulate both formal and informal consumer debt collection. But I'm also skeptical that banning pre-dispute arbitration agreements is a rational regulatory response. Collections cases are hardly characterized by procedural rigor. For example, this report (caution: fairly large file) concluded that 80% of collections cases brought in New York courts in 2006 resulted in a default judgment, and that in 99% of those cases the plaintiff failed to provide sufficient evidence (as judged by the report's authors) to support the application. Perhaps we should expect high default rates in collections cases, and perhaps most of the studied New York cases involved legitimate debts notwithstanding the evidentiary inadequacies noted by the authors. Still, I doubt that a ban on arbitration will represent much of an improvement for individual consumer debtors.
I say "individual" consumers, because it seems to me that the subtext underlying the unfair-debt-collection narrative is really concern over the future of the consumer class action. That is an important concern, although its importance probably varies depending on the contracting context and the substantive right at issue. While there is nothing incompatible between arbitration and aggregate forms of dispute resolution - indeed, there are class actions pending in arbitration right now - it's hard to deny that the consumer finance industry has often paired class action waivers with arbitration clauses. From a tactical perspective, this makes sense. Current arbitration law makes it somewhat more likely that a socially-problematic term having nothing to do with arbitration - a class action waiver, say, or a waiver of the right to seek punitive damages - will be enforced when paired with an arbitration clause. But if this is a problem, the sensible solution is to change this aspect of arbitration law, or to deny enforcement to these problematic terms, rather than to deny enforcement to arbitration clauses generally.
Indeed, one of the more frustrating aspects of the current debate over arbitration is the tendency to conflate consumer debt collection arbitration with other forms of arbitration involving consumers, employees, franchisees, etc. In some contexts, such as employment arbitration, the evidence suggests that arbitration can work relatively well as a forum for vindicating individual rights. (Go here for a discussion of this evidence and its limitations.) I'll say a bit more about all of this in a later post. For now, I'll simply note that arbitration is not a unitary dispute resolution phenomenon and that differences in the way different arbitration systems operate may shed some light on what a rational regulatory regime would look like.
HT: ADR Prof Blog.
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