Forcing consumers to forego their right to a trial has become a standard business practice. Businesses of all sorts, in increasing numbers, are placing arbitration clauses into their consumer contracts. Credit card issuers, cell phone companies, providers of financial services, and cable companies place arbitration clauses in their contracts on a regular basis. Consumers rarely realize this when they purchase the product or service in question. In “forced arbitration,” a company will not sell a consumer a product or service unless that consumer agrees to forego his right to sue should a dispute arise. Individual arbitration of the claim is the only available remedy. There is no judge or jury, but rather, an arbitration panel — that may be composed of industry representatives — which reviews the facts. The forced arbitration is mandatory and the decision is binding.
As recently reported in The New York Times, debt collectors have pushed the envelope in invoking arbitration clauses even further. First, the debt collection agency purchases debt from a lender for pennies on the dollar. Second, the debt collector quietly files a lawsuit in court to collect on that debt, ignoring the arbitration clause in the consumer’s underlying contract with the lender. Third, a judgment is obtained against the debtor in court, often without the borrower’s knowledge.
But what options does the borrower have if she believes that the debt collector acted improperly in obtaining that judgment? Can she sue the debt collector in response to the suit the debt collector filed against her? Can she seek to band together with other victims to hold the debt collector accountable for its wrongdoing? None, no, and no. In this real life situation, debt collectors routinely invoke the arbitration clause the borrower was forced to accept from the borrower (there are no contracts with the debt collectors).
So far, courts are upholding the arbitration clauses in claims brought against debt collectors. In fact, courts have even banned class actions where the collection of the debt was determined to be illegal. According to The New York Times, in a Maryland case, a company “reached a $1.2 million settlement with the state’s financial regulator, which found that the company had ‘engaged in unlicensed collection,’ the very issue that (another consumer) could not bring to court.” The borrowers, though, had no remedy.
In many instances, consumers want to fight back. There are cases where the debt is old and is no longer collectible by law. In other disputes, the consumer believes he does not owe anything or does not owe the alleged amount. It is reasonable to assume that a debt collector did not single out a particular debtor for mistreatment, but rather treats all debtors in the same manner. Therefore, the most economical and reasonable response would be for the consumer to file a class action lawsuit against the debt collection agency. But due to the arbitration clause, a consumer’s only recourse is arbitration. Arbitration can be a costly process, especially when battling the deep pockets of large corporations.
Once forced into arbitration, studies show that consumers usually give up. According to the NYT’s investigation last month, “banks, car dealers, online retailers, cellphone service providers and scores of other companies have insulated themselves from challenges to illegal or deceptive business practices. Once a class action is dismantled, court and arbitration records showed, few if any of the individual plaintiffs pursued arbitration.”
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