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Give consumers their day in court

A string of Supreme Court rulings in favor of companies that force wronged consumers into arbitration instead of allowing them to pursue lawsuits shows change is needed. A Senate bill aims to do that.

January 13, 2012|David Lazarus

The Supreme Court once again gave its backing this week to the notion that businesses can deny consumers the right to file lawsuits and can instead require any disputes to be mediated by an arbitrator.

The high court overturned an earlier ruling by a U.S. appeals court in San Francisco that the 1996 Credit Repair Organizations Act prevented so-called arbitration clauses in certain agreements.

Writing for the court majority in the 8-1 decision, Justice Antonin Scalia said it wasn't Congress' explicit intention to prohibit arbitration of disputes when it set rules for companies that claimed to be able to improve people's credit scores.

"Had Congress meant to prohibit these very common provisions, it would have done so in a manner much more direct" than what was included in the 1996 law, he said.

I'm no attorney, but the language of the law seems pretty clear. It says that credit repair firms must inform consumers that "you have a right to sue a credit repair organization that violates the Credit Repair Organizations Act."

Scalia and the court majority interpreted this as meaning consumers have a right to be so informed, but not to actually file suit — a bizarre distinction.

In any case, the conservative-leaning court has made clear where it stands on mandatory arbitration. It ruled in a 5-4 decision last April that AT&T could block customers from filing suit and could require them to arbitrate disputes.

The ruling gave a green light to all businesses — phone companies, cable companies, credit card companies — that want to avoid individual lawsuits and potentially costly class actions by customers.

Businesses prefer arbitration because settlements are generally limited and because professional arbitrators, who are typically paid by the company in the dispute, tend to favor businesses. It's a classic example of not biting the hand that feeds.

This week's court decision appears to be limited to credit repair companies, but it only reinforces the position that all companies, and particularly those in the financial services field, can deny customers the right to a lawsuit or trial.

As it happens, I received a letter the other day from Michael Cornwell of Pasadena, who passed along one of a series of hard-sell "notices" he's received from a Texas company called CreditArbitrators.

The notices state that Cornwell is carrying as much as $30,000 in debt, and say he has only a short amount of time to contact CreditArbitrators and "activate a debt mediation plan."

Cornwell, 78, told me he'd be nervous about such warnings except for the fact that "our credit card balances have long been paid off."

Curious, I contacted CreditArbitrators and spoke with the company's manager, John Dodson. He acknowledged that some people can be spooked by the official-looking solicitations sent out by CreditArbitrators' marketers.

"Their job is to drive phone calls in," Dodson said. "That's what they do."

He speculated that the marketer who's been chasing after Cornwell "may be using old information."

CreditArbitrators isn't a credit repair firm. Instead, the company focuses on negotiating with creditors to reduce the amount of money people owe. Dodson said about $201 million worth of debt has been addressed by CreditArbitrators since 1997.

And how much will this service run you? The company charges a flat rate of 12% of whatever you owe at the outset of the settlement process. Thus, a $10,000 balance will cost $1,200 to reduce, on top of whatever you end up paying to creditors.

CreditArbitrators' website says that "no particular results are guaranteed." The disclaimer appears at the very bottom of the site in a lighter, barely legible font.

But don't think about suing if you feel like you've been misled after making regular monthly payments to the company. CreditArbitrators has a clause in its contract denying customers the right to sue and requiring arbitration for any disputes.

The Supreme Court has made clear where it stands. Now it's up to lawmakers to level the playing field.

The Arbitration Fairness Act — S. 987 — was introduced last year by Sens. Al Franken (D-Minn.) and Richard Blumenthal (D-Conn.), and by Rep. Hank Johnson (D-Ga.) in the House. It would amend the Federal Arbitration Act to invalidate all arbitration clauses in consumer and employment contracts.

The bill hasn't gone anywhere since it was unveiled in May. Its corporate opponents, including the U.S. Chamber of Commerce, have lobbied against it.

So who speaks for consumers here? Clearly it's not the Supreme Court. And it's not the deep-pocketed business community. And, at least so far, it's not Congress.

If there's going to be change, it'll be up to you to let your representatives know that you support the right to a trial by jury, as guaranteed by the 7th Amendment to the Constitution, and you oppose efforts to deny you that right.

Businesses say that arbitration is a fair, fast and effective process. If so, then it's perfectly reasonable that consumers have this as an option when things go sour with a company.

But it shouldn't be the only option.

Maybe we could take up the matter with an arbitrator.

David Lazarus' column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5. Send your tips or feedback to david.lazarus@latimes.com.

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