The Minnesota attorney general's office filed suit Tuesday against a St. Louis Park company that settles credit-card debts, claiming it stacks the deck against consumers and has hidden its ties to debt-collection law firms.
The lawsuit was filed in Hennepin County District Court against the National Arbitration Forum, one of the biggest arbitration companies in the country for consumer credit disputes. It says the company violated state consumer fraud, deceptive trade practices and false advertising laws.
"This is a classic example of the little guy getting stepped on by fine-print contracts," Attorney General Lori Swanson said in announcing the suit at a State Capitol news conference.
In a statement, the company said it stands by its arbitration process and "vigorously disagrees with any allegations of bias in the lawsuit and will defend against them." It added that its legal team is reviewing the complaint.
Swanson said that credit card companies, banks, retail lenders and cell phone companies increasingly place mandatory arbitration clauses in the fine print of their consumer agreements. The consumer agrees -- often without realizing it -- to have any dispute resolved by an arbitrator chosen by the credit card company or another creditor, waiving the right to have it heard in a court of law.
National Arbitration Forum, the suit said, convinces creditors to place those clauses in their agreements and to appoint the company to be the arbitrator should a dispute arise. It portrays itself as being an independent, impartial venue for settling disputes, but Swanson's office says it also has "extensive ties" to the debt collection industry.
"The impartial resolution of complaints is at the foundation of our democracy," she said. "The actions of this company are a threat to justice."
Consumer advocates have criticized the company, which administers hundreds of thousands of arbitration claims each year via about 1,600 arbitrators worldwide, in the past for an alleged bias against consumers. Last year, the city of San Francisco accused it of operating an "arbitration mill" that favored credit card companies. The lawsuit, which is still in litigation, said the company ruled in favor of consumers in just 30 of 18,075 credit-card cases that were heard before its arbitrators between January 2003 and March 2007.
Brief tie to Mary Pawlenty
Minnesota First Lady Mary Pawlenty worked at the company for barely a month in 2007 after she resigned as a Dakota County judge. When she quit, she said through a spokesman that the company "was not a good fit."
Asked Tuesday for more information about why she left, Pawlenty spokesman Brian McClung said: "As the First Lady has said before, working there was not a good fit."
At Tuesday's news conference, Richard Neely, a retired chief justice of the West Virginia Supreme Court of Appeals, said he handled a handful of National Arbitration Forum claims for $150 each after he retired but stopped receiving cases after he declined to award fees to creditors that he did not believe were permitted under law.
"They are professionals in squeezing small sums of money out of desperately poor people," Neely said at Swanson's news conference.
The lawsuit also said the company has financial relationships with the debt collection industry, despite claiming that it doesn't.
Swanson's office said Accretive, a family of New York private equity funds, invested $42 million in the company. Accretive also acquired the majority interest in a debt collection agency called Axiant, which acquired the collections operations of Mann Bracken, one of the country's largest debt collection law firms.
The company said Tuesday that its back office administrator, Forthright, has minority investors including private equity funds. "At no point does any minority shareholder or fund have any role or influence over the impartial arbitration process," a company statement said.
A quicker option
Arbitration dates back to 1925 when Congress approved the Federal Arbitration Act at the request of Wall Street traders who had grown frustrated by the length of time it took to resolve financial disputes in the regular court system. Today its a common method to settle everything from business-to-business issues, employment cases and commercial matters.
But most people never realize that they are entering into a mandatory arbitration agreement when they sign on with a credit card company or make a retail purchase, said Joseph Daly, a law professor at Hamline University School of Law.
Daly, who performs arbitrations and mediations for the Minnesota Bureau of Mediation Services and the Federal Mediation and Conciliation Service among others, said he had to apply to be an arbitrator, have his previous decisions put in review and participate in a training program.
Of the allegations contained in Swanson's lawsuit, Daly said, "If what she says is true, this is not good. It sets up a terrible conflict of interest."
Richard Naimark, senior vice president of the American Arbitration Association, declined to comment specifically on the Swanson lawsuit but said his nonprofit organization requires arbitrators to disclose any potential conflicts, including past contact with any of the parties in the arbitration or financial interests, such as stock holdings.
"The American Bar Association and the Triple A have a code of ethics that requires disclosure on the part of the arbitrator," said Naimark, whose 83-year-old organization does some consumer cases but few collection matters.
"If the consumer files the complaint, they win about half the time," he said. "If the business files, they win about 70 percent of the time."
Swanson also said that bills are pending in Congress to reform the arbitration laws to protect consumers from fine print contracts.
Tuesday's lawsuit seeks civil penalties and other unspecified relief, and asks the court to prevent National Arbitration Forum from making false claims or false advertising.
Staff writer David Phelps and the Associated Press contributed to this report. Suzanne Ziegler • 612-673-1707