Small Print, Big Trouble
By: Sid Kirchheimer; Source: AARP Bulletin Date Posted: 2005-07-21 14:06:00-04:00
When you sign up for a credit card, enroll in a health plan, buy a car, redo your kitchen or take a new job, chances are you're signing away your rights.
Buried in the fine print of many contracts lurks a legal loophole: a binding mandatory arbitration—BMA—clause. This clause stipulates that any dispute between you and the company will be hammered out not in a courtroom but in proceedings without judges and juries—and without much chance for a just resolution, consumer advocates say. File a complaint about possible medical malpractice, unfair employment policies or shoddy goods and services, and the case will be decided by an arbitrator who is usually selected by the company and who may have no legal training yet earns up to $300 per hour.
"By removing people's opportunity to go to court, binding mandatory arbitration allows businesses to control their liability when they violate the law, giving consumers no recourse or appeal process," says Ira Rheingold, executive director of the National Association of Consumer Advocates in Washington, one of more than two dozen consumer groups trying to stop the use of the clause. "And since they are hired by the company, arbitrators know where their bread is buttered."
Just ask Robert Lowe, whose newly constructed $125,000 home was fraught with problems before he moved in. "The house was sagging in places," says the North Carolina resident. "Not one wall in the entire house was square, and no ceilings were level. The nails holding the drywall had already popped out, and screws had been put through the carpet to keep floors from squeaking."
Two estimates put the cost of repairs at $90,000. Lowe claims the builder, America's Home Place, offered $35,000 after he threatened to sue. But when he turned that down, the dispute went to an "independent" arbitrator—the owner, he says, of another home construction company.
"As soon as I walked into the hearing, I could tell that he and my builder were in cahoots," Lowe says. The arbitrator lowered Lowe's award even further, to $15,000, close to what he had spent in arbitration and legal fees.
Jim Schumer, America's Home Place executive vice president, acknowledges there were problems with Lowe's home, although he says they were "less severe" than Lowe claimed. Only when "three or four years" of negotiations failed to resolve the case, he says, did the case go to arbitration, through a service that specializes in construction projects.
The point of the arbitration clause "is to expedite some resolution—for the customer as well as the business," says Schumer, who claims his company spent almost $50,000 on legal fees "jockeying" with Lowe. He says Lowe refused to abide by the arbitration clause in the contract.
Ed Anderson of the National Arbitration Forum defends the clauses, which credit card companies adopted in the 1990s to prevent class action lawsuits. He says arbitration provides both parties with a faster, less expensive way to settle disputes. "The average filing fee for consumers is about $100, less than filing a lawsuit," he says. His company's website, however, lists administrative and other fees that can add up to thousands of dollars.
Anderson also says consumers have 30 days to opt out of arbitration clauses after a company announces that it is adding BMA clauses to its contracts. "If they opt out in time, we see that [their request] is not ignored," he says.
But often the announcements are "bill stuffers" that few people read, says AARP lawyer Deborah Zuckerman. "If you do opt out," she adds, "it's likely your account will be closed."
Eve Curtis, 60, sent MBNA, her credit card company and one of the largest credit issuers in the world, an opt-out letter within the 30-day period, but it was ignored. "I owed about $16,000 on my balance and couldn't pay it because my husband suffered a traumatic brain injury," says the Waban, Mass., resident, who didn't want to waive her right to go to court. Eventually the National Arbitration Forum ruled that Curtis owed MBNA more than $28,000 in late-payment penalties and arbitration costs.
In another recent case, the Forum ruled that an MBNA cardholder, a victim of identity theft, owed the company more than $27,000. But the woman said she never received a bill and couldn't fight in court. MBNA did not return repeated requests for comment.
At some point, most American consumers get contracts with BMA clauses. But there are ways to avoid them:
- Get a credit card issued by credit unions and smaller banks, which do not include BMA clauses. (Neither does the AARP credit card.)
- Make sure your mortgage qualifies for a Fannie Mae or Freddie Mac loan, which do not allow BMA clauses.
- Consider getting car and other loans from credit unions instead of commercial banks. Ask car dealers if they use the clauses in their contracts. If they do, shop elsewhere.
- Urge your elected officials to stop BMA clauses in contracts.
In California, insurers are now required to provide prominent notice of BMA clauses to all enrollees, thanks to the efforts of Chant Yedalian of Los Angeles. He became an attorney after a BMA clause prevented him from going to court on a malpractice claim when his mother, who had breast cancer, was denied expensive treatment that might have saved her life.
"These clauses are not bulletproof," says Yedalian. "It's an uphill battle and a tough fight, but they can be challenged. They need to be challenged."
Scam Alert: Late Fees—The Credit Card Sinkhole (April 2005)
AARP Credit Cards (AARP.org)
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