Credit Card Companies Take Another Hit As AAA Bows Out

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When it rains, it pours.

The American Arbitration Association, often the go-to arbitration forum, has voluntarily agreed to stop participating in consumer-related debt collection disputes until guidelines addressing such battles are developed. 

This is an immediate follow-up to the lawsuit filed last week against the National Arbitration Forum that led to it agreeing to end its oversight of disputes between credit card companies and their customers.

A story on the announcement was on page one of today’s Wall Street Journal.

This has no doubt sent credit card and cell phone companies, who use mandatory arbitration nearly exclusively for debt disputes, scrambling.  It not only raises the question of where companies will file any disputes that arise in the near future, but also what will happen to the thousands of arbitrations currently on the NAF or AAA rolls. One can imagine consumers calling foul about continuing an arbitration in a forum no longer accepting such disputes, especially following allegations of unfairness. 

Customers are of course under contract – contracts that contain the mandatory arbitration clauses do not go away with this development – but the consumer companies whose contracts include mandatory arbitration clauses are about to be in the middle of a PR nightmare. Basically, it is a mess and will be something to watch in the coming weeks and months, especially since the disastrous economy means more people than usual are missing credit card and cell phone payments.

The first reaction of many will be that this will be a victory for trial lawyers (and I would not be surprised if we see talk of a class action against the NAF if any legitimate claim relating to the fairness of past NAF arbitration decisions can be developed), but it should also be recognised that a) arbitrations often involve lawyers, just like court cases and b) if arbitration is cheaper and easier for consumers, it is not crazy to think they will still opt to use arbitration or mediation to address debt disputes.

No matter what, with a Congressional hearing scheduled today to evaluate mandatory arbitration clauses and a fairly negative tone on taken in Obama’s proposed financial plan, the tide is turning against the clauses and companies who use form consumer contracts are going to have to figure out a way to put a finger in the dam.


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