Credit Card Consumers, Beware the Arbitration Clause

October 14, 2008

credit cards

There’s nothing worse than knowing you’ve been wronged and having no way to fight back.  We’ve all been there, but few of us realize just how many consumer rights are being taken away from us every day. One of the sneakiest and worst tactics out there today is the arbitration clause.

Binding Arbitration is effectively providing many companies, including most credit card companies, the ability to circumvent the legal system to the detriment of consumers.  The arbitration clause has established a way for those with deep pockets to sidetrack our justice system and violate an individual’s right to a jury trial.

No way to fight

Take the case of Cathy Meyer of St. Petersburg, Florida.  She has an account with small business credit card company Advanta.  She went to the company’s website to determine her balance and make a payment online.  Cathy paid the minimum balance on time, but it turned out the company’s calculation online was off by 22 cents.  As a result of the payment being 22 cents short, Advanta charged her a late fee and jacked up her interest rate from 7.99% to a whopping 25%.  “It was absurd.  It really, really made me mad,” Cathy said.

At first, she assumed it was a mistake that would be cleared up, especially since she was a long time customer with very good credit who always paid her bills on time.  But when Cathy contacted the company to dispute the late charge and the jacked up interest rate, the company refused to reverse either.  Her dispute was denied, despite the fact that the company made the mistake.  “I was upset, but I couldn’t believe they would stick with it.  They totally ignored that it was their mistake,” she said.

The existence of an arbitration clause effectively prevents Cathy from seeking true justice, so she’s decided to pay off the balance and close out the account.  Unfortunately, this is a luxury most consumers cannot afford.

Circumventing the Justice System

In another case, James Hoyer Law Firm founding partner Chris Hoyer says it sickened him to have to tell a World War II veteran he couldn’t have his day in court in the country he fought for, because of an arbitration clause.  “This elderly man fought in the Battle of the Bulge and here we are telling him he can’t fight for justice in the American legal system.  It’s wrong and it’s an insult to all Americans and what this country stands for,” Hoyer said.

That veteran, Harry Barnes, and his wife Virginia, had a big chunk of their life savings ripped off because of an investment scam that targeted the elderly.  They were ages 80 and 77 when a broker persuaded them to move their entire nest egg out of secure CD’s and into a variable annuity, a risky investment for the elderly that ties their money to the stock market.  Within months, their savings dwindled by almost 50-percent.

Devastated, the Barnes tried to fight back in court, but they got a double-whammy.  An arbitration clause prevented them from having their day in court. Harry and Virginia never recovered financially from the major setback.  Virginia says from then on they had to watch every penny.  “She told us she can’t remember the last time she bought a dress,” said John Newcomer, James Hoyer Senior Partner.

Arbitration Favors the Company

“Arbitration clauses stack the deck against the average consumer’s ability to fight back,” says Attorney Chris Casper, “because lawyers don’t take individual cases that amount to small losses for one person.”  Unfortunately for consumers, many Arbitration clauses prohibit issues to be addressed in a class action lawsuit on behalf of all victims.

When you multiply individual losses by hundreds of thousands of customers, you see how the credit card company profits through improper behavior like rotating due dates, unexplained late fees, incorrect billing and improper credits.  As a result, the Arbitration clauses insulate credit card companies against class-action challenges in court that could help alleviate these abusive consumer practices.

Casper says Arbitration clauses often give these companies “a free pass to rip off consumers.”  He cites a study by Public Citizen, which showed arbitration, was heavily stacked in favor of businesses.  “Consumers won in only 5-percent of the cases they looked at,” he said.  Casper is now fighting a ban on class action suits included in the mandatory arbitration of several check cashing cases he’s handling.

Attorney Terry Smiljanich decided not to proceed with several credit card cases a few years ago, because the arbitration clauses made it impossible to act on a class-wide basis for consumers.   “There is a financial incentive for arbitrators to give credit card companies favorable outcomes,” Smiljanich says.

The Public Citizen study showed arbitrators from the National Arbitration Forum had a great monetary incentive to give favorable decisions to credit card companies to get more business.  “Top arbitrators can charge up to $10,000 per day and some make $1 million a year,” the study says.

Smiljanich also points to marketing literature sent by The National Arbitration Forum several years ago practically promising credit card companies they will “eliminate class actions” through arbitration.  The letter says a “properly drafted arbitration” ensures these companies can avoid jury trials.

It’s in the Small Print

The way Arbitration clauses are worded today, they are almost bullet-proof to court challenges.  They’re designed to make it appear the consumer has a choice, but the process is very misleading.  Consumers are given an “opt-out” provision, where you have to opt out of the Arbitration clause in writing within in so many days, but it’s extremely convoluted and no one even knows it’s there.

Smiljanich says one way to make it more fair to have an Arbitration clause would be to have an “opt-in” provision, not an “opt out.”  That way, people would have the opportunity to accept or reject the concept of arbitration rather than have it sneaked by them in the small print.

“This needs to be changed,” said Cathy Meyer, the small business owner who got stuck by her credit card company.  “It’s completely unfair to us as consumers.”