Laura Rowley Money & Happiness

Irene Lieber, 61, lives in a dilapidated apartment in Brooklyn, N.Y., where she scrapes by on $759 a month in Social Security disability payments. Sometime before 2006, her MBNA credit card was stolen, and a collection agency began hounding her for charges she says she never incurred.

"I said I wanted to see the signatures -- who had signed for these purchases? And they wouldn't give me that," says Lieber. "They said, 'You're responsible, this is your credit card.' I ignored them because I thought they were nuts."

Scare Tactics

Lieber sent a letter demanding the agency cease contact -- which debt collectors must do under a 1996 federal law. But they continued to harass her and her spouse, Theodore, who was confined to a wheelchair following a stroke. Frightened by a menacing phone call, Theodore sent a payment to the collection agency.

"They made him think he had to pay because his name was on the card," Irene says, adding that the agency told him if he paid something, he would receive a full explanation of the dispute. "He said, 'They have our name; I don't want bad credit.' He was scared and depressed."

Theodore Lieber died of a heart attack in January. Shortly thereafter, his wife received a "second notice of arbitration" from the National Arbitration Forum in Minneapolis. Bewildered, Irene sought help from the Neighborhood Economic Development Advocacy Project (NEDAP) in New York.

Trapped by the Fine Print

"The second notice of arbitration didn't say who had sued her, and there was no claim attached to it," says Claudia Wilner, a NEDAP attorney. She helped Irene Lieber draft a response asking for the case to be dismissed, or that the National Arbitration Forum serve her with a claim.

Lieber heard nothing until another notice arrived, stating that MBNA had won a $46,000 judgment against her in arbitration. "Lieber never even had the opportunity to see what the claim was against her, or put in a defense," says Wilner. "They ruled against her without responding to her motion." A spokesperson for Bank of America, which owns MBNA, says, "We believe arbitration is an efficient and fair method of resolving disputes between our customers and the company," adding it could not comment on Irene Lieber's case.

Lieber isn't alone. Over the last 15 years, a variety of businesses -- credit cards, cell phones, computer equipment, car dealerships, stock brokerages, and health plans -- have inserted fine print into their contracts requiring mandatory binding arbitration in the event of a dispute with a consumer. Simply by buying the product or using the service, the consumer has waived his or her constitutional right to a court trial, and has almost no basis for an appeal. The clause is also widespread in employment contracts.

Creditors Benefit, Consumers Pay

Businesses argue that arbitration is a faster, fairer, and cheaper alternative to the courts. But opponents, including some members of Congress, call it a secretive, complex, and expensive process riddled with conflicts of interest -- and say the deck is stacked against individuals. In an examination of 19,000 binding arbitration cases in California decided by the National Arbitration Forum, watchdog group Public Citizen found that 95 percent of the decisions went against the consumer.

"I'm amazed at that statistic," says Celeste Hammond, an arbitrator, attorney, and professor at John Marshall Law School in Chicago. "I suspect the borrowers didn't know what to do next. They don't realize they should have an attorney, because arbitration has as much consequence as going to court. If they don't show up to meaningfully claim their legal rights, they're going to lose. Arbitration is not a first step -- it's the final step."

And while arbitration is supposed to be a tool for both parties, Public Citizen found that 99.4 percent of the arbitration cases involved creditors suing consumers. "It shows how impractical it is to bring an individual action in arbitration -- consumers just don't do it," says Jon Sheldon, attorney with the National Consumer Law Center.

In an email response to my questions about these findings, National Arbitration Forum managing director Roger Haydock called the Public Citizen report "a misleading presentation of anecdotes and innuendo ... [T]he outcomes of arbitration cases closely track the outcomes of similar court cases, and arbitration reduces delays and costs for all parties." Opponents of the practice claim the studies cited by the Forum are either biased or contain samples too small to be meaningful.

Arbitration Marches Ahead

Depending on the rules set by the arbitration provider, a consumer may have the right to a telephone or in-person hearing, and the ability to submit documents. The Forum's Haydock writes that his firm's "process and rules are designed to be easily understood with the consumer in mind. Legal-speak is kept to a minimum. Moreover, the Forum's simplified procedures often enable individual parties to proceed without the need to engage and pay an attorney."

Hammond found the opposite. She says when she first encountered arbitration in commercial real estate deals, she began doing research on how many other transactional attorneys like herself knew about the process. "A lot of them don't," she says. "There are all kinds of reasons for that, but it's a failing of our system that arbitration is marching ahead without anyone -- even the lawyers -- understanding it."

Arbitration foes also contend that the process can be more expensive than court, requiring hundreds of dollars in filing fees. Losers may be assigned all arbitration costs, including attorneys' fees. Los Angeles attorney Joe Ribakoff says one of his clients, an entrepreneur whose Internet business went bust, owed $20,000 in debt on credit cards. The award was doubled to $40,000 in arbitration.

Big Paydays for Arbitrators

When a case goes to arbitration, the consumer "receives a simple statement that says he owes the money -- there's no itemization of the account," says Ribakoff. "You don't know the basis of the claim; then it gets porked up with fees, and sits around and collects interest until the [company] gets a court judgment enforcing the award."

Then there's the troubling matter of bias. The Public Citizen study found that 28 California arbitrators handled nearly 9 out of 10 cases, and found in favor of the companies 95 percent of the time. Arbitrators routinely earn $400 or more an hour; top arbitrators make $1 million a year.

"Companies pick the arbitration firm, which picks the arbitrators, who get paid by the case," says John O'Donnell, senior researcher with Public Citizen and author of the report. "If you don't get cases, you don't get paid. And if an arbitrator doesn't produce results, he's not going to get the cases."

Help on the Way?

Arbitration was created long ago by commercial parties in the same industry, which chose to settle disputes through a neutral party who knew their business rather than going to court. The problem was that some courts wouldn't enforce the arbitration awards, so in 1925, Congress passed the Federal Arbitration Act to ensure the awards would be implemented. In 1983, the Supreme Court ruled that the Act had created "a liberal federal policy favoring arbitration" -- giving lower courts a mandate to uphold these agreements whenever possible.

"That's been completely extended, so that even in situations where people don't know what they're getting into, the courts have regularly decided they are bound by the arbitration award," Hammond notes. "The court says people could go to another credit card company. But all of them have the [arbitration] clauses, so there really is no consent here. The consumers have no choice."

Congressional hearings are expected next month on a bill that would increase consumer choice. The Arbitration Fairness Act of 2007, introduced in the Senate by Sen. Russ Feingold (D-Wis.) and in the House by Rep. Hank Johnson (D-Ga.), doesn't prohibit arbitration. But it requires that arbitration be freely chosen by consumers after the dispute arises -- rather than forcing people to agree to arbitration in advance through a contractual provision.

Too Late for Some

For Irene Lieber, the next likely step will be state court, where creditors seek to have arbitration awards confirmed.

But even if she can get the award dismissed, Lieber says, the damage is done. "My credit is ruined. For someone who is innocent to be found guilty -- that's what hurts the most."