The Wonk Room

How Minnesota’s AG Saved Consumers From the Credit Card Industry

Minnesota Attorney General Lori Swanson

The bedrock of America’s legal system is an impartial judiciary; if judges are in the pocket of an industry, then laws regulating that industry simply cease to exist.  This is why the credit card industry absolutely loves a company known as the National Arbitration Forum (NAF), which for years has allowed this industry to effectively write and enforce its own laws against consumers.

The scam works like this:  beginning in the 1980s, the Supreme Court rewrote federal law to endorse a practice known as “forced arbitration.”  Under this practice, companies ranging from nursing homes to cell phone companies to employers can refuse to do business with anyone who doesn’t give up their right to sue or be sued in a regular court presided over by a neutral judge.  Instead, consumers and employees are shunted into a privatized, corporate-run judicial system, which overwhelming favors corporate parties.

No one has taken greater advantage of forced arbitration than the credit card industry–it may now be impossible for consumers to get a credit card in the United States without signing a forced arbitration agreement–and the industry’s most important partner in this shell game has been the NAF.  According to one study, which examined over 20,000 NAF cases between a credit card company and a consumer, the credit card company won an incredible 95% of the time.  In one case, NAF ordered a woman to pay the credit card company MBNA almost $8000 because she had the same name as another woman who owed MBNA money.  Conversely, when a Harvard Law Professor named Elizabeth Bartholet, who used to work part-time as an NAF arbitrator, handed down a single decision against a credit card company she was immediately stripped of her caseload by NAF at the request of the credit card industry.

The credit card industry’s halcyon days as judge, jury and victorious litigant may be numbered, however, thanks to a lawsuit brought against the NAF by Minnesota Attorney General Lori Swanson.  Under a settlement announced yesterday, the NAF will cease accepting any new consumer arbitration cases by the end of this week (NAF’s entire business will now be limited to arbitrating Internet domain disputes).  In other words, the credit card industry will need to find a new train conductor if they want to keep railroading consumers into lawless corporate tribunals.

For their part, NAF complained that they are being forced to shut down because “the Forum lacks the necessary resources to defend against increasing challenges to arbitration on all fronts, including from state Attorneys General and the class action trial bar,” but this simply shows that our court system worked.  Thanks to suits brought by Swanson and others, the cost of NAF’s lawbreaking finally became greater than the cost simply shutting down their corrupt business.

Unfortunately, NAF was vulnerable to this kind of attack because the evidence against it was so overwhelming–not every forced arbitration company has a Harvard Law professor prepared to testify about how they were strongarmed into shafting consumers–so it remains to be seen whether another, equally offensive company will emerge to fill the void (a bill, currently pending in Congress, would end the practice of forced arbitration in consumer and employment contracts altogether).  Even so, the near-total demise of NAF is one of the most important pro-consumer developments in decades; for the first time in years, credit card companies may actually have to follow the law.