That day in court

Arbitration opponents complain that mandatory arbitration clauses “deprive” consumers of a day in court. One such set of complaints was aired in a big Business Week story (to which NAF responded and refuted); CNN recently repeated these allegations in a one-sided story. So it’s worth taking a look at how well consumers do in court when it comes to debt collection:

In the courtroom, the biggest advantage collectors have are lawyers while defendants rarely have legal representation. …

In 2007, debt collectors obtained 60,699 default judgments where the accused debtor did not appear in court [in Chicago].

(Ameet Sachdev, “Debt collectors pushing to get their day in court”, Chicago Tribune, June 8). In civil court, a default judgment can be obtained merely on a plaintiff’s say so. In contrast, most arbitration agreements require the arbitrator to scrutinize the evidence before granting an award, even when the debtor does not contest the arbitration claim–one of the many reasons why consumers are better off under mandatory arbitration. And because arbitration is cheaper and faster than court proceedings, the savings can be passed on to consumers at large. Unfortunately, there are thirteen separate bills before Congress proposing to abolish a consumer’s right to pre-commit to arbitration and extract the resulting savings from the businesses with which they contract. As a coalition of business groups note:

If successful, these legislative efforts would retroactively declare unenforceable potentially millions of provisions for the orderly and economical resolution of disputes. Opponents of pre-dispute arbitration have neglected to realize that, if enacted, these provisions will actually limit the realistic opportunity for an average consumer, employee, and investor to obtain a remedy if a dispute arises. Evidence shows that arbitration can be very useful in the context of low-value claims. Studies show that plaintiffs’ lawyers are reluctant to take cases involving relatively small claims because they seek larger potential attorneys’ fees than would likely result from these cases. According to one survey, plaintiffs’ employment lawyers said they would not take a case unless it was worth at least $60,000, on average. Therefore, without the option of arbitration, consumers would be faced with two choices—to try to navigate the legal system on their own, or to abandon their claim. The only real beneficiaries of these anti-arbitration provisions and bills would be class action lawyers who would benefit from both the rare blockbuster claim and the possibility of bringing more class action lawsuits—lawsuits that provide little benefit to class members while ensuring large payouts to class action attorneys.
These attacks on arbitration are unnecessary and would undermine a system that has benefited consumers, employees, and businesses for decades, and on which many of them now rely. Accordingly, we strongly urge you to oppose any anti-arbitration legislation or provision.


  • Here’s the issue, though. My parents bought a house, then afterwords discovered a title issue. They’d gotten title insurance, but the company denied the claim. But the Title insurance policy made mandatory arbitration required. Guess who picks the title insurance claim arbitrators? Yeah, the title companies.

    Now, given that I’m not aware of any title insurance company that does NOT have mandatory arbitration anymore, and they won’t sell you insurance without that provision, what expectation of fairness does anyone have in dealing with the title insurance company? They were clearly in the wrong–having missed a lien–yet, they refused to settle and just tried to get the case into arbitration where they’d picked the arbitrators. What chance of success does any average consumer have in this scenario?

  • Vance’s comment does not appear to be factually accurate.

    According to this article, (p. 28), the standard form title insurance contract arbitration clause provides that arbitration is done according to the Title Insurance Arbitration Rules of the American Arbitration Association.

    Under those rules, arbitrators are selected by the AAA if and only if the parties can’t agree to an arbitrator. And note that the AAA is not “the title insurance company.”

    Moreover, under the rules, “The insurer shall pay the filing fees associated with the filing of a claim by either the insured or the insurer.”

  • Under New York’s General Business Law, an arbitration clause in a consumer contract is unenforceable, and without researching the issue, I’m fairly sure that title insurance for a single family home would constitute a consumer contract.

  • Ted: The argument about how inexpensive arbitration is just doesn’t hold up.

    If a collection suit is brought in a municipal court, the creditor pays a filing fee. After service of process, if the debtor doesn’t object, the Court usually does grant a default judgment and the creditor can then collect. In those cases in which the debtor does object, the Court sets a quick trial date and the parties show up and present their cases. Most collection cases are handled with less than an hour’s worth of trial time. One fee, and a short amount of time.

    In an arbitration, the process is longer and more expensive. First the creditor pays a fee to the arbitration firm. Then, after having the evidence “scrutinized” the arbitrator grants an award to the creditor. Then, before the creditor can collect on the award, the creditor has to pay another filng fee to the court in order to have the arbitration award confirmed. At that time, the debtor can seek to have the award vacated or modified. This forces the Court to hold a hearing of its own, even if there was no objection by the debtor before the arbtirator. Only after prevailing at this stage can the creditor collect. Two fees, two proceedings, and more time spent.

    I have been a collection attorney for almost twenty years. When I walk into a municipal court seeking to collect against an unrepresented debtor, I know that the judge is going make sure I don’t abuse them. If I abuse them, that judge is not going to allow my life to be easy from that point on. I don’t have a problem with that. Moreover, the Court does make a legally incorrect ruling, my client can appeal.

    If the case is handled in court, both parties have the ability to appeal from legal errors made by the court. That right does not exist in arbitration (aside from patent misconduct by the arbitrator). The arbitrator can simply ignore the law if he chooses. This greatly erodes predictability, which, in my mind, is the greatest purpose of the law.

    VMS – I question whether New York’s prohibition against consumer arbitration is valid. I would guess that it is preempted by the Federal Arbitration Act.

  • I don’t know about New York, but in Michigan, an arbitrator is picked based on what is written in the contract, period. So if the contract says Arbitrator X will be the arbitrator, that’s basically the end of it. See MCL 600.5015. “If the arbitration agreement provides a method of appointment of arbitrators, this method shall be followed.”

  • Mahlon,

    If arbitration isn’t cheaper and more efficient than court, then competition would drive arbitration out of the market, because a vendor without binding arbitration clauses could undercut vendors with them.

    Perhaps you practice in an area with an especially efficient municipal court, but there is clearly a demand for alternatives to the court system, though I acknowledge there are unscrupulous parties that seek to impose burdens on those alternatives so that they would no longer be cost-effective.

    DBB: So what? You have yet to identify an arbitration contract that does not have a neutral arbitrator.

  • You seem to be implying that arbitration agreements always allow both parties to mutually agree on arbitrators – and I have yet to see you post anything to support that. The fact that there is no legal requirement that this happens is somewhat relevant to that, wouldn’t you think?

    Someone in this very thread said that they had an example that just happened with his or her parents where the arbitration contract allowed the title company to pick the arbitrator – did you miss that? You want me to point to an actual contract that does that, there’s one right there. Pointing out that some standardized forms don’t have such things doesn’t disprove that his person’s parent’s contract did.

    It is all well and good to point to idealized form contracts, but that doesn’t tell you what people actually do in practice. It makes me curious now to look up my own title company’s contract to see what is in there.

  • DBB, please stop trolling. You’re the one complaining about hypothetical problems with arbitration agreements without pointing to a single arbitration agreement that has such a problem.

    As I pointed out in my response to Vance, his allegation was simply incorrect: when I e-mailed him for more details, I found the arbitration agreement that applied to the real estate transaction, and it provided for joint selection of the arbitrator. Like every single mainstream arbitration agreement out there. The form contracts are what is done in practice. I can’t prove a negative. If you have a real counterexample, show it, and I’ll freely condemn that arbitration agreement.

    Your title company’s contract is almost certainly a form contract with the same rules as the Title Insurance Arbitration Rules of the American Arbitration Association if it has an arbitration clause.

  • Ted: First, I think I do work in an area with very good courts.
    Moreover, I take pride in treating my debtors well. Yes, I use hammers and tongs (figuratively speaking) but I try not to pinch too much.

    Second, your analysis is faulty for it stops at out of pocket cost, and does not consider other reasons that companies want arbitration. If the creditors can control the process, as the Business Week story implies, there is good reason for creditors to prefer arbitration. Creditors can absorb slightly higher costs, if their win rate increases enough. The objective is recovery of bad debt. Any expense is bearable if the recovery rate keeps increasing. It is the net recovery that counts.

    Finally, as much as I am a free-market advocate, I cannot agree with you optimism about the efficacy of the market in this regard. A market only works if it is populated with rational actors. The reason we are in the midst of a credit crunch right now is that the markets were not populated with rational actors. People over-borrowing. Banks over-lending. Investment bankers being overly optimistic to the point that they failed to do any due diligence when throwing money around. Unfortunately, all of the above are now getting what they bargained for.

  • I’m not trolling. Disagreement does not make one a troll. And if it is truly the case that arbitration agreements always allow both parties to freely pick whot he arbitrator will be, then that’s wonderful, why not make that the law of the land? That was one of the things that concerned me about adhesion arbitration provisions – I clearly said that if both parties get to choose, that is something I wanted and so that would be one less objection I’d have to such agreements. Under the law, there is no such requirement currently. But if what you say is true and it is always done in practice, there should be no problem getting legislation passed to always make that mandatory in arbitration clauses.

    The law clearly doesn’t mandate it now, which was why I was skeptical of your suggestion that it is always done that way.

  • Mahlon, you are confusing being mistaken about the future with irrationality. Rationality does not require perfect foresight. And even if consumers were irrational, what is important is that consumers are, at the margin, rational, and it is those informed consumers at the margin that move markets. In contrast, any argument that consumers are irrational has to account for the fact that political leaders are likely to be at least as irrational, with no guarantees of rationality at the marginal legislation, so it’s still better to put these decisions in the hands of consumers than in the hands of Congress. If you think creditors are costing themselves money by arbitrating, nothing stops you from pushing a business plan to George Soros and offering cheaper credit products that do not have arbitration clauses.

    DBB, if someone proposes a bill like that, I wouldn’t object to it so long as it doesn’t micromanage too much, though it would be largely pointless. But what is in front of Congress is not your hypothetical bill, so I have no reason to talk about it when there is an actual litigation lobby campaign out there to deprive consumers of all choice in arbitration agreements.

  • I would not think it would require micromanagement – simply require all arbitration agreements to allow each party to agree to who will arbitrate. I don’t think it would need much else on that point. You already know the other bit I would like to see, which is allowing consumers in adhesion contracts to “opt in” – as simple as a checkbox – if the consumer wants to give up the right to go to court and go by arbitration instead, they can check the box.

    As I stated before, I have no problem with arbitration in general – I think arbitration is a great thing and can be much faster and cheaper than court in many instances (though not necessarily always). I just objected to it being shoved down consumer’s throats.

    Give them the option, and also educate consumers on the benefits of arbitration, and I’m sure many will happily check that box.

  • Ted: First, please don’t use dirty words, like George Soros, on your blog. It makes me feel all slimy.

    Second, don’t misstate my position. I never said arbitration was costing creditors more, at least on a net basis. My position is that the out-of-pocket costs might be more, but the gain in collections more than offsets those additional expenses.

    Let me restate my position for clarity’s sake. Arbitration may be more expensive for creditors, but it provides the creditors with a better return. In this regard I cannot disagree with you that the use of arbitration increases default recoveries, and thus, reduces default losses, thereby permitting creditors to minimize their costs and deliver lower cost services. I just disagree with you on how that happens.

    Third, please define for me the difference between (1) being so severely incorrect about the future that there are, what, $200-300 billion in mortgage losses, and (2) being irrational. If someone borrows a $1 million because he thinks he’s going to win the lottery next week, is that uncertainty about the future, or irrationality? I mistake nothing. It is just a matter of degree.

  • DBB – The simple fact is that most American consumers are not literate enough to understand any explanation about arbitration. This is certainly true about a vast majority of the people who gets sued for consumer debts. You can disclose all you want to these people, but you can’t understand the disclosures for them.

  • Mahlon, a lengthy discussion of the series of good-faith mistakes and bad-faith fraud and screwed-up government meddling that led to the latest spurt of mortgage defaults is well beyond the scope of this comments section, but they’re sufficient to explaining the problem without resorting to irrationality.

  • Mahlon:

    Here is a case for you!

    Please note that no one seems to argue preemption.

  • By the way, the Talmudic way of picking an arbitration panel is for each side to pick an arbitrator and the two arbitrators then pick a third. Majority rules.

  • I would like to respond to Ted Frank’s recent response regarding what I stated in my post under “The absent defendant”, but the ability to return a comment has been shut off or I can’t find it. So I am responding here.

    Mr. Frank said “I have no idea what V is talking about with the “14 days under US Code Collection to review discovery documents.”) As noted above, V misstates the default rules for arbitration”

    But below is what I found under the US Code Collection. It just goes to prove to me that if I was mis-stating a rule of Arbitration, that Federal Law doesn’t apply in Arbitration.
    I take what I read as Federal Law to heart and I understood it to say I had 14 days to review any discovery documents and make my Objections, should they be presented to the Arbitrator/Judge.
    Like I said, I am not any attorney, I have no degree, I am just reading the law and taking it at its word.

    TITLE 28 App. > FEDERAL > V. > Rule 26
    Rule 26. General Provisions Governing Discovery; Duty of Disclosure

    (a) Required Disclosures; Methods to Discover Additional Matter.
    (1) Initial Disclosures. Except in categories of proceedings specified in Rule 26 (a)(1)(E), or to the extent otherwise stipulated or directed by order, a party must, without awaiting a discovery request, provide to other parties:
    (3) Pretrial Disclosures. In addition to the disclosures required by Rule 26 (a)(1) and (2), a party must provide to other parties and promptly file with the court the following information regarding the evidence that it may present at trial other than solely for impeachment:
    Unless otherwise directed by the court, these disclosures must be made at least 30 days before trial. Within 14 days thereafter, unless a different time is specified by the court, a party may serve and promptly file a list disclosing (i) any objections to the use under Rule 32(a) of a deposition designated by another party under Rule 26 (a)(3)(B), and (ii) any objection, together with the grounds therefor, that may be made to the admissibility of materials identified under Rule 26 (a)(3)(C). Objections not so disclosed, other than objections under Rules 402 and 403 of the Federal Rules of Evidence, are waived unless excused by the court for good cause.

    So did I misstate or misinterpret? Either way it is there and that is what I was stating.

  • The federal rules of civil procedure are for federal courts. Arbitration is done under whatever code or rules of civil procedure the parties have agreed to, in this case the NAF Code of Procedure. FRCP 26 is neither “US Code” nor applicable in arbitration, any more than the NAF Code of Procedure is applicable in federal courts. See NAF Code of Procedure Rule 29.

  • That is what the problem is with Arbitration.
    A CA can violate all Federal Laws written to protect the consumer including the FDCPA and the FCRA and the NAF Rules ignore those violations and will still give them an award. That is not Justice to me. I am not an example of winning anything, I lost 9 months fighting this claim that never should have been brought forth, as the Claim was served over 90 after it was filed, yet the Arbitrator did not dismiss it based on Rule 6-B(4) of the Code of Procedure saying service should be in accord with the Federal Rules of Civil Procedure of the United States or the rules of civil procedure. I read that service had to be within 90 days of the claim being filed, whether right or wrong that is all I could find for my local statutes. Six months down the road they want to give the CA more time to produce documents the CA said they had when they signed the claim. Why, when service was past 90 days? Because I was trapped into responding? I seriously doubt that the Arbitrator would have given me more time to produce documents, had I signed a document saying I had those 6 months earlier. I am also sure that the CA would have objected and I would have been denied that same opportunity. I cannot believe anyone can believe arbitration at the NAF is Fair when it concerns Collectors that pay them to make decisions.
    I am not any example it works.
    I am an example it is too confusing and time consuming.
    I did not win, I just avoided losing.

  • You’ve misquoted Rule 6(B) (which merely states that service can be under the FRCP, and sets out several other valid means of service), and you’ve misstated the applicable law binding arbitrators. This isn’t the place for you to try to relitigate a case you’ve already won. But it does go to show how fair arbitration is when even a pro se defendant who doesn’t understand what “or” means in a rule can defeat a big credit card company represented by attorneys. A judge in a courthouse wouldn’t have been that patient.