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Bait And Switch: Many Corporations Promise to Pay Arbitration Fees, But Don’t

Bait And Switch: Many Corporations Promise to Pay Arbitration Fees, But Don’t

By Paul Bland, Senior Attorney
@PblandBland

A lot of advocates for forced arbitration like to make a big deal out of how generally corporations pay most of the arbitration fees (that can be pretty expensive), rather than sticking those on the typical worker or consumer.  And this pro-arbitration promise is a pretty successful talking point for banks and other companies. I’ve listened to reporters ask “why isn’t it fair? Look, the company pays most of the costs,” and gotten similar questions from bright-eyed Congressional staffers.

“Well,” I might think, “for the costs of the arbitration fees, the corporation gets to ban class actions, gets to have a secretive place to take its wrongdoing out of the public eye, and has most of its cases decided by someone who’s main job is defending other companies. Besides, statistics and experience show that the vast majority of consumers never bring cases in arbitration, they’d rather just give up on their legal rights1, so the promise of paying the costs of arbitration doesn’t come due very often.”

But the thing is, on those rare occasions when consumers do take a case to arbitration, a LOT of corporations don’t even keep their promise, made in companies’ contracts and public relations settings. In a surprising number of cases, when consumers file their cases with an arbitration company like the American Arbitration Association, the corporate defendants refuse to pay the arbitration fees. The consumers are faced with the choice of themselves paying the fees that the corporation had promised to pay, or having to drop the arbitration and go back and file in court, having wasted a lot of time and some money (which is the point, of course).

Even the normally very business friendly AAA has been forced to take action in this situation. For years, AAA essentially turned a blind eye to the problem. In the past, AAA several times sent consumers letters unhelpfully saying “well, you could pay our fees, if you want the arbitration to start.” Talk about enabling abuse!  But now, after some time has passed while a corporation refuses to pay the promised fees, AAA will send it a letter saying, in effect,  “since you aren’t following our rules or your contract, please remove our name from your contracts with your customers.”

Because this issue recurs so often, Public Justice has filed comments asking the Consumer Financial Protection Bureau to consider this abuse in evaluating whether to exercise its authority under the Dodd-Frank Act to regulate or ban arbitration clauses in lending contracts.

Public Justice has just joined in a case  that highlights this bait and switch practice. A California man named Bryan Kearney bought a car warranty with Direct Buy Associates, a warranty company. He didn’t realize that Direct Buy has a D rating with the Better Business Bureau, or that tons of consumers have written up complaints about how Direct Buy regularly denies valid warranty claims.  (You can sure make more money if you sell warranties if you almost never pay when peoples’ products go bad.)

Kearney’s car developed problems that fell right into the heart of the type of claim that his new and expensive warranty is supposed to cover, and he filed a claim with Direct Buy. They declined to honor their warranty.

At this point, Kearney went to a lawyer to get help. After reading Direct Buy’s contract, which contains a forced arbitration clause but also a promise that Direct Buy would pay most of the costs of arbitration, Mr. Kearney filed a claim against Direct Buy with the AAA. Notwithstanding its promise to pay the filing fees and most of the costs of arbitration, it turns out that Direct Buy has also been refusing to pay the fees to AAA. (Do you notice sort of a pattern of Direct Buy not keeping its promises to people? It’s sort of like a corporate version of a bad boyfriend.)

AAA sent a letter to Kearney and Direct Buy saying “As [Direct Buy] has previously not complied with our request to adhere to our policy regarding consumer claims, we must decline to administer this claim and any other claims between [Direct Buy] and its consumers. We request that the business remove the AAA name for its arbitration and mediation clause so that there is no confusion to the public regarding our decision.”

Having refused to honor its part of the forced arbitration deal, Direct Buy will now get to answer for its illegal acts in court. Under the well known legal doctrine of Goose v Gander, Direct Buy can’t ignore and flout its promises to pay for arbitration, but demand that its consumers be bound by the arbitration clause it has abandoned.

Direct Buy is hardly the only company who has refused to honor its promises to pay arbitration fees. Comcast (with its spotty reputation, you’d think that would be a company that would really want to have a working fine print contract to insulate itself from class actions) refused to pay its share of fees and got an AAA letter telling it to stop using AAA’s name in its documents. This refusal to pay the fees is particularly common with car dealers, here (look at page 20) is an example with a New Jersey dealer; here is an example of a California car dealer doing the same thing, and here’s  an example of an Illinois dealer doing it. And here is a document AAA sent to a for-profit college that did the same thing.

It’s bad enough when corporations use arbitration to insulate themselves from the law when they scam people. But now the increasing use of bait-and-switching with arbitration fees is turning the process itself into a scam.

One last thing that is striking about this practice is that it shows that some of the basic claims corporations make about arbitration are false. “Arbitration is cheaper than going to court,” corporate advocates like to say. Well, sure it is, if the consumer ends up abandoning their case — having a cheated consumer give up is sure cheaper for the business than making things right. But if a case actually goes to arbitration, so that someone has to pay $400 or $500 an hour to the private judge, then it doesn’t seem so cheap, and that’s when corporations like Direct Buy decide that it would be smart to break their promise to pay the costs of arbitration. If corporations want to use arbitration so that they can sidestep consumer laws, they should stop pretending that it’s because the process itself is cheaper


If you have any doubts about whether many consumers actually take their claims to corporate controlled arbitration, look at the Preliminary Report of the Consumer Financial Protection Bureau on arbitration.  In a time period where literally more than 13 million consumers got hundreds of millions of dollars in relief from consumer class actions, only a few hundred consumers a year brought claims against lenders in arbitration, even though forced arbitration clauses are in hundreds of millions of credit card, checking account, payday lending and other similar contracts.  [http://files.consumerfinance.gov/f/201312_cfpb_arbitration-study-preliminary-results.pdf]