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Minnesota Attorney General Lori Swanson today filed a lawsuit against the National Arbitration Forum of Minnesota--the largest arbitration company in the country for consumer credit disputes--alleging that it misrepresented its independence and hid from consumers and the public its extensive ties to the collection industry.

“This is a classic case of the little guy getting stepped on by fine print contracts,” said Attorney General Swanson.

Swanson said that credit card companies, banks, retail lenders, and cell phone companies increasingly place—in the fine print of their consumer agreements—what are known as “mandatory predispute arbitration clauses.”  Through mandatory arbitration clauses, the consumers waives, in advance, their right to have their day in court if a dispute arises.  Instead, the consumer agrees—usually without knowing it—that any dispute will be resolved by an arbitrator selected by the credit card company or other creditor.  Credit card companies are among the most prolific users of mandatory arbitration clauses.  Just by keeping a credit card, the consumer agrees to the terms and conditions of the card, even if the arbitration provision was sent to the consumer after the card was issued.  As a result of mandatory arbitration clauses, which appear in millions of consumer agreements, hundreds of thousands of consumer disputes are resolved each year not by a judge or jury, but by a private arbitration system.

The Attorney General’s suit alleges that the National Arbitration Forum represented to consumers and the public that it is independent and neutral, operates like an impartial court system, and is not affiliated with and does not take sides between the parties.

“The company tells consumers, the public, courts, and the government that it is independent and operates like an impartial court system.  In fact, it has extensive ties to the collection industry—ties that it hides from the public,” said Attorney General Swanson.

The lawsuit alleges that the National Arbitration Forum, while holding itself out as impartial, works behind the scenes—alongside creditors and against the interests of ordinary consumers—to convince credit card companies and other creditors to insert arbitration provisions in their customer agreements and then appointing the Forum to decide the disputes.  The lawsuit alleges that the Forum pays commissions to executives whose job it is to convince creditors to put mandatory arbitration clauses in their customer agreements.  The suit alleges that the Forum does this to generate arbitration filings in the Forum—and hence, revenue—for itself.

The lawsuit alleges that, despite telling consumers and the public that it is not affiliated or aligned with the collection industry, the Forum in fact has financial ties to the collection industry.  The lawsuit alleges that, beginning in 2006 and through 2007, Accretive—a family of New York private equity funds—engineered two transactions.  In the first transaction, Accretive formed several equity funds under the name “Agora” (meaning “Forum” in Greek), which invested $42 million in the Forum.  In the second transaction, three of the country’s largest debt collection law firms—Mann Bracken of Georgia, Wolpoff & Abramson of Maryland, and Eskanos & Adler of California—merged into one large national law firm called Mann Bracken.  Accretive then acquired the majority interest in a debt collection agency called Axiant, which acquired the collections operations of Mann Bracken.  Through these transactions, Accretive took control of one of the country’s largest debt collection enterprises and became affiliated with the Forum, the country’s largest consumer collection arbitration company.  The lawsuit alleges that Accretive principals remain actively involved with the Forum.

The lawsuit states that, in 2006, the Forum processed just over 214,000 consumer collection arbitration claims, of which 125,000, or nearly 60 percent, were filed by the above law firms.

Swanson said that the Forum was aware of the affiliation problem in 2006 when it negotiated its relationship with Accretive.  She pointed to an email from an officer of the Forum to the hedge fund stating:  “…we should certainly plan for unwinding any deal in the event shared ownership becomes an acute issue.”

Swanson was joined at the announcement of the suit by Richard Neely, retired Chief Justice of the West Virginia Supreme Court of Appeals.  Upon retirement, Justice Neely was appointed as an arbitrator by the Forum but stopped receiving cases after he refused to award attorneys’ fees to creditors that he did not believe were allowed under West Virginia law.  Neely praised Swanson’s lawsuit, saying, “I am happy that a government official has stepped in to try and address this problem.  This company tilts the playing field toward creditors and makes a mockery of our legal system,” he said.

Swanson said that this is the first occasion where the financial relationship between the Forum and the collection industry has been revealed.  A suit filed last year against the Forum, largely relating to a California statute that requires mandatory reporting by arbitration companies, is pending in California state court.   Swanson also noted that there are bills pending in Congress to reform the arbitration laws to protect consumers from fine print contracts.

The lawsuit was filed in Hennepin County District Court.  It alleges violations of Minnesota’s consumer fraud, false advertising, and deceptive trade practices laws.

Consumers may file a complaint with the Attorney General’s Office by calling 1-800-657-3787 or 651-296-3353. Consumers also may download a Consumer Complaint Form from the Attorney General’s website by clicking here and returning the completed form to: 1400 Bremer Tower, 445 Minnesota Street, St. Paul, MN 55101-2131.