If you follow sports, politics, or celebrity marriages (or, you know, you’re a lawyer), arbitration is probably a word you’ve heard bandied about quite a bit. In fact, it’s been in the news a lot lately, what with the NFL’s ‘Bountygate’ scandal, NHL free agency, and union strife in Illinois. These issues are rather unlikely to impact you directly, however. The same cannot be said about the Supreme Court’s ruling earlier this year on binding arbitration for credit card debt.
The high court ruled 8-1 that federal law does indeed allow credit card companies to contractually establish that any disagreements arising from a credit card account be ruled on by an arbiter rather than in a court of law. Interestingly, while credit card companies have traditionally preferred to resolve most issues through arbitration, they exclude matters of collection so they can retain the ability to file a lawsuit against you.
So what, right? Aren’t arbiters, you know, impartial? Well, they’re supposed to be, but part of the reason that consumer advocates have gotten so up in arms about the issue of binding credit card arbitration is that the arbitration firms hired to hear disputes between issuers and consumers are being paid by the issuers. Most credit card arbitration cases concern debts allegedly owed by cardholders, and when a credit card company cannot collect – either on their own or through a debt collection agency – they pay for an arbitration firm to preside on the matter. In other words, the former judges and lawyers who work for the arbitration firm rule on a case that essentially pits their boss against a random person. Not surprisingly, statistics from the consumer advocacy group Public Citizen show that the corporate clients of these arbitration firms win about 94% of the time.
Those ominous odds, coupled with the fact that the 1996 Credit Repair Organization Act (CROA) gives consumers the “right to sue” debt collectors, made the decision to fight for a consumer’s day in court an easy one. The trick is, the words “right to sue” don’t mean the same thing to everybody.
“At the time of the CROA’s enactment in 1996, arbitration clauses such as the one at issue were no rarity in consumer contracts generally, or in financial services contracts in particular,” Justice Antonin Scalia wrote in the Supreme Court’s majority decision. “Had Congress meant to prohibit these very common provisions in the CROA, it would have done so in a manner less obtuse than what respondents suggest.”
“That reading may be comprehensible to one trained to 'think like a lawyer,’” Justice Ruth Bader Ginsburg wrote in her dissenting opinion. “But Congress enacted the CROA with vulnerable consumers in mind -- consumers likely to read the words'right to sue' to mean the right to litigate in court, not the obligation to submit disputes to binding arbitration.”In other words, Scalia suggests it’s not clear that “right to sue” refers specifically to a lawsuit in a courtroom, but rather that it could also mean the right to pursue legal remedies via arbitration. As the 8-1 decision indicates, though, not everyone in a black robe was onboard with this interpretation.
Regardless of where you stand on the matter (and most people likely side with Ginsburg), binding credit card arbitration is currently allowed, and that means you should know its implications for your wallet.
First of all, it’s important to note that binding arbitration clauses are less common than they once were. The recent ruling could help reverse this trend, but prior to it, many credit card companies (including Capital One, Chase, and Bank of America) were voluntarily removing them. By the way, in case you’re wondering what a binding arbitration clause looks like, here’s one from a First Premier credit card application:
Arbitration Notice: If you are issued a credit Card, your Credit Card Contract will contain a binding Arbitration Provision. In the event of any dispute relating to your Credit Card Contract, the dispute will be resolved by binding arbitration pursuant to the rules of the American Arbitration Association or an arbitration organization mutually agreed upon by the parties. Both you and we agree to waive the right to go to court or to have the dispute heard by a jury (except in regard to any collection activities on your Credit Account). You and we will be waiving any right to a jury trial and you also would not have the right to participate as part of a class of claimants relating to any dispute with us. Other rights available to you in court may also be unavailable in arbitration. When you receive your Credit Card Contract, you should read the Arbitration Provision in your agreement carefully and not accept or use the Card unless you agree to be bound by the Arbitration Provision.
With that being said, if your credit card agreement contains a binding mandatory arbitration clause, you must make sure to have a very strong case before you consider going after your issuer. Credit card companies are not stupid, as much as many of us would like to believe otherwise, and they’re not likely to make obvious mistakes that would make them financially vulnerable. The fact that they’re also well-versed in arguing arbitration cases means the odds are stacked against you in terms of both knowledge and experience. A shaky case is therefore a recipe for losing money.
On the flip side, the only way to truly protect yourself from being taken to court or arbitration by a credit card company is to pay your bills. That is, of course, easier said than done, but it all starts with changing what you think of as a necessity and adjusting your budget so as to spend only what you can afford to pay back each month. Many consumers also find it helpful to either setup automatic payments from a checking account or ask their credit card issuer to lower their monthly spending limit so that it equals their budgeted amount.
If you do rack up a bunch of credit card debt, as so many consumers have of late, it’s important that you know your rights pertaining to debt collectors and are aware of how the statute of limitations for written contracts should affect your actions. You may want to settle your debt with a creditor, seek an amended payment plan or consult an attorney.
Ultimately, it’s best that you know all your options and pursue that which will be most advantageous to you rather than being forced to abide by the decision reached in binding arbitration or a court of law.