Arbitrary concern for the National Arbitration Forum

In the rarefied universe of consumer arbitration, the National Arbitration Forum is a giant.

From its headquarters in St. Louis Park, the company each year administers hundreds of thousands of arbitration claims, in which disputes concerning everything from credit-card debts to insurance claims are resolved outside of court. The company, which has 1,600 arbitrators worldwide, recently told Minnesota officials -- in a bid to administer state claims -- that its "administrative capabilities are simply unrivaled."

Yet the Forum has begun to attract the attention of consumer advocates and legal scholars who see it as emblematic of all that is wrong with mandatory arbitration, in which customers agree to settle grievances by a third party and forgo their right to sue. Mandatory arbitration clauses now appear in all kinds of customer-related agreements, covering cell phones to credit cards to mortgages -- often without consumers realizing it.

In March, San Francisco filed a lawsuit against the Forum, accusing it of "operating an arbitration mill" that favored credit-card companies. The lawsuit claims that the Forum ruled in favor of California consumers in just 30 of 18,075 credit-card cases that were heard before Forum arbitrators between January 2003 and March 2007.

The lawsuit came seven months after Washington-based Public Citizen, a consumer watchdog group founded by Ralph Nader, released a scathing critique of the Forum, describing it as "the credit-card industry's go-to dispenser of swift decisions against consumers." Public Citizen reviewed more than 19,000 credit-card arbitration cases in California in which a Forum arbitrator was involved, and said that 94 percent of the decisions were in favor of the credit-card companies.

The Forum disputes nearly every claim made in the San Francisco lawsuit, and said that Public Citizen has deep ties to plaintiff attorneys.

Arbitration provides "the same substantive outcome as court, but does so more efficiently and less expensively," it said in a written response to the Star Tribune. The Forum claimed in a 2006 study that courts took three to four times longer to resolve cases than arbitrators.

Even its critics concede that the lopsided victory rates are misleading, because the vast majority of credit-card cases are open-and-shut disputes in which the consumer never contests the amount owed.

Even so, the allegations come at an inopportune time for the Forum, which in February bid for a four-year contract to administer tens of thousands of no-fault insurance cases for the state of Minnesota. The contract is said to be worth an estimated $4 million, and the Minnesota Supreme Court expects to decide the winning bidder by July. In its bid, the Forum touted itself as a "Minnesota success story" with "an excellent reputation nationally."

'Not the right fit'

Yet some attorneys and legal scholars now are trying to distance themselves from the organization, in part because of the growing perception that it may be biased against consumers. Dwight Golann, a professor at Suffolk University Law School in Boston and a former chief of the consumer protection division in the Massachusetts Attorney General's office, said he was "troubled and annoyed" that the Forum was a primary sponsor of a conference held by the American Bar Association last year.

He and Jean Sternlight, a law professor at the University of Nevada-Las Vegas, asked the bar association to reconsider the Forum's sponsorship of future dispute resolution conferences. "I don't want to be associated with the Forum in the mind of my peers," Golann said.

In local legal circles, it is widely speculated that First Lady Mary Pawlenty resigned from her position as general counsel for the Forum in February 2007, just a month after she took the job, because she thought her involvement with the company might become a political liability. Pawlenty declined to be interviewed for this report, but said through a governor's spokesman that the job was "not the right fit."

Founded 22 years ago, the National Arbitration Forum was among hundreds of mediation and arbitration firms that sprouted in the 1980s, as the perception spread that third-party "neutrals," as they are called, could handle disputes quicker and cheaper than the courts could.

To distinguish itself from competitors early on, the company encouraged parties to file their claims online, reducing the costs of sending and storing documents. It also tries to limit costly depositions and information requests, a tactic it says benefits consumers by speeding up the process and lowering costs. The company's main rival, the American Arbitration Association, sets no such limits.

"The goal was to be positioned as a more disciplined and efficient operator," said Edward Anderson, who retired last year as chief executive and was the only Forum official the company made available to comment for this report.

In New Jersey, for instance, where the Forum outbid the once-dominant American Arbitration Association four years ago to administer the state's no-fault insurance claims, the company claims to have reduced user fees in the state's no-fault system by 20 percent by squeezing costs.

Famously low-profile, the privately owned company operates on a single floor of a nine-story brick office building off Interstate 394 in St. Louis Park. While the company declined to answer questions concerning its finances, public documents show that it earned $10.14 million in 2006 on revenue of $39.37 million.

The Forum's low-cost focus has made it attractive to credit-card companies, which began sending the company vast numbers of debt collection disputes, often for small amounts. "They selected a niche in the market -- the bottom of the market, in terms of the size of the cases," said Thomas Stipanowich, a law professor at Pepperdine University in California and an expert concerning arbitration.

However, that focus on consumer-related cases is the core of growing criticism.

In its lawsuit, the San Francisco Attorney's office argued that arbitrators have an economic incentive to decide credit-card cases quickly and with little review, to win more business with the Forum. According to the lawsuit, a total of 28 California arbitrators handled nearly 90 percent of all consumer collections cases it reviewed.

Blacklisting arbitrators

Critics say that's a problem. An arbitrator who rules against a credit-card company, even once, can be effectively "blacklisted," because the credit-card companies will choose arbitrators who are more prone to give them favorable decisions, critics charge. Each side in arbitration has a right to dismiss a potential arbitrator for a lack of impartiality.

Elizabeth Bartholet, a Harvard Law professor and former Forum arbitrator, said she ruled in favor of a single credit-card company in about 20 credit-card arbitration cases. But then, after ruling once in favor of a consumer who filed a counterclaim, the flow of new cases went dry.

"There's something fundamentally wrong when one side has all the information to knock off the person who has ever ruled against it, and the little guy on the other side doesn't have that information," she said. "That's systemic bias."

Richard Neely, a former chief justice of the West Virginia Supreme Court of Appeals who practices law in Charleston, W.Va., agrees. He said he handled two cases for the Forum in which he ruled in favor of credit-card companies, but declined to award attorneys' fees. He thinks those decisions are why he never received another Forum case.

Neely sees potential for abuse by arbitrators wanting to keep their incomes coming. "I could sit on my back porch and do six or seven of these cases a week and make $150 a pop without raising a sweat, and that would be a very substantial supplement to my income," he said. "I'd give the [credit-card companies] everything they wanted and more just to keep the business coming."

Anderson, the former Forum CEO, argues that dismissing arbitrators is no different from jockeying for more business-friendly judges, information that credit-card companies are more likely to have. "In any case, in any system, there's power of knowledge," Anderson said. "That's why you try to hire the best-informed lawyer."

Chris Serres • 612-673-4308