By Avi Kramer
A little over three years ago, a California woman named Heather Newton called American Debt Services, a debt consolidation company, to ask about getting her debt reduced. She was instructed to sign up online, and a few days later she received a packet in the mail. This “Welcome Packet” appeared to be from ADS, but Newton later learned that it was sent by Quality Support Services, LLC, another debt reduction company that worked with ADS. The materials said that the company could settle debt at an average of “40 percent to 60 percent on the dollar,” that the consumer’s credit score “should improve after successfully completing the program,” and that the company would help settle the customer’s debt and provide assistance if a creditor filed suit. Newton filled out the one-page application and mailed it in.
That signed application established a “Special Purpose Account” with Rocky Mountain Bank & Trust: Newton would deposit money into the account, and ADS would use those funds to pay her debts. Following the companies’ instructions, Newton stopped communicating with her creditors.
In order to use her own money to make the last payments to the bank, Newton had to pay ADS an additional $1,400 in fees, even though ADS had no role at all in negotiating the settlement.
Seven months later, Newton was contacted by one of those creditors, Bank of America, because her account was past due. When she told the bank about her arrangement with ADS, she was informed that ADS had never contacted the bank and, further, that Bank of America did not work with debt settlement companies. Unless she made four payments of $550 each, Newton was told, Bank of America would sue her.
To make the payments, Newton attempted to use the funds from her Special Purpose Account. She had already deposited nearly $3,000, but when she tried to take money out, she found that only $1,200 remained; according to a brief filed by Newton’s attorneys, ADS had already deducted more than half of the account’s value for fees, which were non-refundable. ADS then released $1,100 to satisfy the first two $550 payments—but only after Newton agreed to channel the third and fourth $550 payments to Bank of America through the account as well. This meant that in order to use her own money to make the last payments to the bank, Newton had to pay ADS an additional $1,400 in fees, even though ADS had no role at all in negotiating the settlement.
Just a month later, another of Newton’s creditors, Chase Bank, also contacted her about an overdue account. It was then that Newton learned that although she’d been in ADS’s debt settlement program for eight months, none of her creditors had ever been contacted on her behalf.
After finally settling up with Bank of America, Newton wanted out of her arrangement with ADS. She told them so and requested a refund. Of the $4,200 she had deposited into the Special Purpose Account, ADS paid $2,200 to Bank of America, refunded $70 to Newton, and kept $1,930 as fees—despite having made no communication at all with any of Newton’s creditors.
When I first moved to Washington, D.C., I didn’t have Internet access in my studio apartment. But this spring I adopted a dog and wanted to work from home while my new pet got settled. So before I picked her up from a local SPCA, I called Comcast.
Binding arbitration ensures that we will all continue to hand over our rights in exchange for things we use everyday.
After I was hooked up, a booklet came in the mail. This “Comcast Agreement for Residential Services” was 25-grayish-pages long, with small font and tightly spaced lines. I found the full text online and pasted it into a Word doc, where it came out to over 14,000 words.
Despite the length and aesthetics, I made my way through it. Among other things, I learned that I could not take Comcast to court. It was right there in Section 13, “Binding Arbitration.” If I wanted to challenge something the company did, I was bound by this booklet to arbitrate my claim instead of having it heard before a judge or jury.
Arbitration is a loosely defined forum for resolving disputes outside of court. It isn’t a new phenomenon; the Federal Arbitration Act dates to 1925. At that time, it was intended to more quickly resolve business-to-business disputes. Business-to-consumer arbitration first came into vogue in the 1980s. It has since proven woefully one-sided, strongly favoring business interests: arbitrators are usually hand-picked by corporations, and the proceedings often happen in secret and cannot be appealed.
It’s nice having Internet access in my apartment. Now that I sometimes work from home, my new dog doesn’t have to go in her crate and we can go on walks throughout the day. But to make this possible, I had to flat out give up my legal rights. Binding arbitration ensures that we will all continue to hand over our rights in exchange for things we use every day.
How will corporations act when they know they can keep us out of the courtroom by binding us to arbitration?
Comcast and ADS aren’t, by any means, the only companies writing these clauses into their contracts. Almost every bold-faced brand does something similar. With so many clauses in so many contracts—everything from Internet service and gym memberships to cell phone plans and Starbucks gift cards—you’d think that a lot of people would now be bringing their grievances through arbitration. But only about 1,000 such cases were brought nationally in 2009 and 2010. That miniscule number doesn’t lie: arbitration isn’t providing consumers with another avenue to bring grievances, it’s providing the illusion of such an option—in fact, it works to prevent us from challenging corporate malfeasance.
Many state and federal courts have, over the last few decades, struck down binding arbitration clauses as anti-consumer. But other courts around the country, including the U.S. Supreme Court, have given corporations the go-ahead to include these clauses in the fine print of their standard consumer contracts. How will corporations act when they know they can keep us out of the courtroom by binding us to arbitration?
The Consumer Financial Protection Bureau is now, as required by Dodd-Frank, studying these clauses from top to bottom—examining their overall prevalence, consumer awareness and understanding of these agreements, and how often consumers decide to bring claims. The CFPB is also looking into the type of language being used in the clauses. Rightly so: certain terms clearly discourage consumers from moving forward with their claims. For example, gag orders force all parties into silence; they block public scrutiny and sound threatening. There are also loser-pay provisions. These order the losing party to pay the other’s attorney’s fees. Loser-pay terms make it extremely risky financially for consumers to bring claims: thousands of dollars in attorney’s fees is no skin off a corporation’s back, but that could very well bankrupt a consumer of modest means.
Over the last few years, more of these wolfish provisions are making their way into arbitration clauses. One such tactic specifying a far-off venue for arbitration to take place, making it difficult for consumer plaintiffs to even get to the arbitration that they’re legally bound to.
“A corporation can choose whatever language it likes to put in its contract,” says Janet Varnell, a Florida attorney who handles consumer class actions.
But do consumers have certain, concrete rights that can’t be overwritten by contracts, or can we forfeit all rights to the right corporate legalese?
“Whether or not a consumer’s rights will supersede that language is primarily a function of two things,” says Varnell. “The first is what law applies to the contract—federal, state or both. The second is much more practical and more important and it is whether the consumer will have an attorney to represent their interests and whether that attorney is familiar with consumer protection law. It is a very rare circumstance that the consumer will find an attorney willing to represent their interests in most transactions because it is unlikely the attorney will be paid for their services.”
The people most susceptible to this scam? The poor, who typically lack a cushion in their bank accounts.
Further along in Section 13 of Comcast’s booklet, I discovered what’s known to consumer advocates like Varnell as a class action ban. These forbid any consumer from joining others to bring a claim as a group. For your average person who gets ripped off, this could mean the difference between having a claim heard or not: class actions are, in some cases, the only way consumers can realistically stand up to illegal corporate behavior.
Take, for example, a number of lawsuits that were recently brought against a handful of national banks. These banks were charging debit account overdraft fees that customers didn’t actually owe—by rearranging debit transactions from highest to lowest, a customer’s account balance was more rapidly drawn down and multiple fees levied. The people most susceptible to this scam? The poor, who typically lack a cushion in their bank accounts.
When all of those fees were added up, banks were pocketing an extra $30 billion per year. But the amount each individual customer was overcharged was small, maybe $50 or $100. No one was going to go through the trouble of bringing a lawsuit for such a small amount—and no lawyer was going to take on an individual client with such a claim—so the consumers teamed up and brought their claims as a class. And in the last year many of those banks agreed to settlements that returned millions of dollars to millions of people who were cheated. The result not only repays those who were originally swindled, it also protects other consumers by deterring other banks from engaging in similar scams.
Last August, Heather Newton got a lawyer and filed a complaint against ADS. But a few months later ADS, QSS, Rocky Mountain Bank & Trust and other affiliated entities—collectively, the “defendants” in the case—responded with a motion to compel Newton to enter into arbitration instead. The defendants claimed that Newton could not sue the companies in court; she had to go through arbitration. Attached to their motion was a single page—unnumbered, unlabeled—that contained a mandatory arbitration clause. Arbitration was to take place in Tulsa, Oklahoma, where one of the defendants is headquartered. (This is a far-off venue for Newton, who lives in California). The clause also said that ADS would have complete discretion in choosing the arbitrator.
This all came as a surprise to Newton: the application she’d filled out appeared to be a single-sided document that ended after the completion of a paragraph, and with room to spare at the bottom. She’d never come across anything about arbitration.
The defendants, however, argued that Newton was bound by the clause on the back of the page—and the terms were, in fact, on that reverse side. But nothing on the front or in the packet had indicated their presence. The arbitration clause itself was written in tiny font and buried among the company’s privacy policy and a reprinting of Patriot Act provisions.
In response to Newton’s claim, a federal district court in California ruled that ADS’s arbitration clause violated numerous consumer protection laws, and denied the defendants’ motion to compel arbitration. The defendants have appealed. Oral argument in the appeal has not yet been set.
Avi Kramer lives in Washington, D.C., and works in communications at the Public Justice Foundation.