National Arbitration Forum Information

Memorandum:  The National Arbitration Forum and the
Status of Contracts Naming It as the Sole Arbitration Forum

What is NAF?
The National Arbitration Forum is an arbitration forum company that specializes in selecting arbitrators and setting rules for the arbitration process, though they do not function as arbitrators themselves.  Until July 2009, NAF was involved in credit card debt and other consumer collection disputes.  A consent decree stopped NAF from participating in this practice, but it continues to function in other areas as an arbitration forum. (See http://www.nytimes.com/2009/07/20/business/20credit.html)

What is the NAF scandal?
Under many credit card and other contracts drafted by banks and creditors, consumers were forced to settle disputes in arbitration by an arbitrator picked by the arbitration forum NAF.  The contracts in dispute are those that named NAF as the sole arbitration forum.  The problem was that NAF presented itself as an independent, neutral-arbitrator.  In fact, corporations controlled by a hedge fund bought controlling interests in both NAF and Mann Bracken, a national debt collection company.  While not admitted by NAF and trial was avoided through settlement, it is alleged that NAF conspired to rule in favor of creditors and lobbied creditors to name NAF as the sole arbitration forum.  A United States House of Representative committee found that as much as 70% of arbitration cases should have been dismissed rather than resolved in favor of the creditor.  Only 0.2% of consumers won their cases in California when NAF was involved.

In July 2009, Minnesota Attorney General Lori Swanson obtained a consent decree that forbade NAF from remaining as an arbitration forum for any cases involving credit card or other consumer collection disputes.  This prohibition extended nationwide.  NAF was accused of fraud, deceptive trade practices, and false advertising.  The settlement allowed NAF to continue as an arbitration forum for Internet domain name disputes and a few other areas. 

The American Arbitration Association quickly mimicked the consent decree as it also ceased serving as an arbitration forum for credit card and other consumer collection disputes.

Ramifications of Consent Order for Future Claims Where Contracts Specify NAF as the Sole Arbitration Forum

Contracts Could Be Unenforceable, Especially When Arbitration Forum Was Integral to the Agreement
Case law is divided, but there is support for the proposition that the contract is unenforceable.  In contracts where NAF is named as the sole arbitration forum, that specific clause is certainly unenforceable as is.  The unresolved question is whether courts or companies can choose a replacement arbitration forum or if the courts themselves become the arbitration forum, and the normal arbitration requirement is void.

The Federal Arbitration Act, § 5 governs when a new arbitrator shall be appointed.  If there is a lapse in naming of an arbitrator or in filling a vacancy, then the court shall name an arbitrator.  The NCLC argues that this provision of the FAA only applies when there is a failure to name an arbitrator, not when the arbitration forum fails to perform its function.  The nature of an arbitration forum, as selector of the arbitrator, the applicable law, the procedures, the rules, the enforcement, and the cost of arbitration, is integral to the contract.  As a repercussion of the integral nature of the arbitration forum, then failure by an arbitration forum to perform its task renders the clause of the contract unenforceable, and § 5 does not apply.

For instance, many people may have relied on the especially affordable rates of the NAF when signing their contracts.  With the higher costs of other arbitration courts, consumers may have chosen not to sign contracts with those creditors.  Thus, the arbitration forum’s failure to appoint an arbitrator is only one of the many problems that render the clause unenforceable.  When courts find the arbitration forum to be integral, they generally do not enforce the agreement.

The NCLC cites this case law as support:  In re Salomon Inc. Shareholders’ Derivative Litig. 91 CIV. 5500 (RRP), 68 F.3d 554 (2d Cir. 1995); Dover Limited v. A.B. Whatley, Inc., 2006 WL 2987054 (S.D.N.Y. 2006); Martinez v. Master Protection Corp., 118 Cal. App. 4th 107 (2004); Alan v. The Superior Court, 111 Cal. App. 4th 217 (2003); Grant v. Magnolia Manor-Greenwood, Inc., 678 S.E.d2d 435 (S.C. 2009). Cf.; Zechman v. Merrill Lynch, Pierce, Fenner & Smith, 742 F. Supp. 1359 (N.D Ill. 1990).

Contracts May Be Enforceable, and Courts Can Pick Replacement Arbitrators
It appears that case law mostly supports this notion when the arbitration forum agreement is not integral to the contract.  The NCLC cites the following case law in support of this notion:  Brown v. ITT Consumer Fin. Corp., 211 F.3d 1217 (11th Cir. 2000); McGuire, Cornwell & Blakey v. Grider, 771 F. Supp. 319 (D. Colo. 1991); Warren v. American Home Place, Inc., 718 So. 2d 45 (Ala. 1998); New Port Richey Med. Investors v. Stern, 2009 WL 1563424 (Fla. Dist. Ct. App. June 5, 2009); Owens v. National Health Corp., 263 S.W.3d 876 (Tenn. 2008); In re Brock Specialty Servs., Ltd., 2009 WL 1546935 (Tex. Ct. App. May 29, 2009). 

Current/Recent Cases Involving Contracts Where NAF is the Sole-named Arbitration Forum

• Bank of America and Chase have both chosen to opt out of their arbitration forum clauses should consumers agree.
• The company cannot unilaterally change the arbitration forum.  However, a company can notify a consumer that continued use of its credit card is tantamount to agreement to abide by the new agreement.
  • This change cannot apply to consumers who have stopped using the credit card, such as litigation against debt buyers
    • In this situation, the creditor has declined future use of the card by the consumer, and the debt has been sold to a debt buyer
    • The debt buyer cannot use a restructured contract with a company-picked arbitration forum because the consumer never agreed to that contract
    • At which point, the aforementioned and unresolved problems concerning arbitrator replacement and contract enforceability return
    • Even if the change is accepted, prior disputes are not affected by the change

Ramifications of Consent Order for Past Claims Where NAF Was the Arbitration Forum, but Confirmation for the Award Has Not Been Granted

• Minnesota consent order only stops future NAF consumer proceedings, so how does the consent order effect past proceedings?
  • Consumers have 90 days or less, depending on state, to object to confirmation
  • Under the Uniform Arbitration Act and Revised Uniform Arbitration Act, consumers have 90 days after it is known or should have been known that awards were procured through corruption, fraud, or undue means
    • If fraud, corruption, or undue means can be demonstrated within the 90 day period to vacate the confirmation, then the award most likely can be vacated as well
      • The allegation can be made by affidavit, and no “mini-trial” is needed
• Most consumers will not know of these grounds unless they seek legal representation, at which point their lawyers will inform them, preserving objection to the confirmation of the award by the courts
  • The Minnesota consent order did not require notification of past consumer victims
• Virtually all awards not yet confirmed occurred during the corruption period of co-ownership between NAF and Mann Bracken and close relationship between NAF and creditors
  • Consumers’ cases are strongest in areas where Mann Bracken brought the arbitration action
  • The individual arbiter need not be corrupt according to the UAA and RUAA
  • Minnesota AG has a roadmap showing the corruption amongst NAF, creditors, and Mann Bracken.
  • Though this information is not publicly available
  • Three possible future scenarios
  • Creditors drop NAF-related confirmation claims
  • Creditors seek NAF-related confirmation claims; AND
  • Drop the confirmation attempt if the consumer challenges; OR
  • Continue the confirmation attempt if the consumer challenges, at which point the lawyer must be prepared to address novel ideas of whether or not common ownership of Mann Bracken and NAF is sufficient to vacate an award and be ready to prove the common ownership

Ramifications of Consent Order for Past Claims Where NAF Was the Arbitration Forum, and Confirmation for the Award Has Been Granted

• Future possibilities for already confirmed claims
  • Most states follow FRCP 60, which allows relief when there is newly discoverable evidence that could not have been known at the time, where there is fraud, misrepresentation, or misconduct by an opposing party, or any other reason that justifies relief
    • Newly discovered evidence or fraud or misconduct reviews must be brought within a year from entry of the confirmation award
    • But action based upon any other reason does not have that year limit
      • Other reasons are usually limited to “exceptional situations”
        • Maybe the Mann Bracken and NAF situation is exceptional
    • Also no time limit for situations involving fraud upon the court
• A significant amount of evidence may be needed for setting aside a confirmation
  • If confirmation is set aside, then collector must be granted a new award before proceeding with further collection
• To set aside the judgment, the consumer needs to allege this meritorious defense – need not prove that consumer will prevail

 CLIENT RESOURCE: http://www.arlegalservices.org/files/FSArbitration.pdf

 Consumer Law Resource Center (Advocate Homepage)