The Wall Street Journal reports today on a lawsuit brought by the San Francisco city attorney against the National Arbitration Forum, a major provider of arbitrators in consumer vs. company disputes. (Here's the article; subscription required.) The city claims that NAF is biased in favor of the companies that hire NAF's arbitrators. NAF claims that it is not, and that the companies' higher success rates are the result of the companies' greater experience with and knowledge of arbitration. There are court decisions on both sides. My intuition is that San Francisco is right. But there does not appear to be an easy way out of this.

The Wall Street Journal reports today on a lawsuit brought by the San Francisco city attorney against the National Arbitration Forum, a major provider of arbiters in consumer vs. company disputes. (Here's the article; subscription required.) The city claims that NAF is biased in favor of the companies that hire NAF's arbitrators. NAF claims that it is not, and that the companies' higher success rates are the result of the companies' experience and knowledge advantages. There are court decisions on both sides. My intuition is that San Francisco is right. But there does not appear to be an easy way out of this.

My intuition is based on simple incentives: NAF arbitrators are paid by the parties in the cases before them, and the parties can refuse to hire individual arbitrators. Suppose that an arbitrator works on 10 cases. In each case, Credit Card Co. is suing a different consumer. If each party splits the costs, then half the arbitrator's compensation comes from Credit Card Co., which the arbitrator will likely see again, and the other half from 10 consumers who the arbitrator likely will not see again. Who will the arbitrator be more inclined to side with? (By the way, for better and worse, the estimate that the consumer pays half the fee is probably overstating it. Click here for NAF's fee schedule. According to page 4, the Consumer's fees can be smaller than half.) The WSJ reports on the experience of one former arbitrator (now law professor), and it wasn't pretty.

The Christian Science Monitor has found the same thing:

"A Monitor analysis of the last year of available data from NAF found that arbitrators awarded in favor of creditors and debt buyers in more than 96 percent of the cases. () Such results may be similar to outcomes in court. It also found that the 10 most frequently used arbitrators - who decided almost 60 percent of the cases heard - decided in favor of the consumer only 1.6 percent of the time, while arbitrators who decided three or fewer cases decided for the consumer 38 percent of the time."

Suppose that the opponents of consumer arbitration in its current form are right. What is the solution? Consumer groups scored a major victory in recent years when NAF and others lowered the fees that consumers would have to pay when they went to arbitration. That solved one problem, but might have exacerbated another. NAF and the other arbitration companies could institute more controls on its arbitrators. This might improve the statistics. The Supreme Court could reverse itself and rule that courts can examine arbitration clauses to see if they comply with state law. But even then, we would be settling for a private system in which the arbitrator's pay is linked directly to the parties before it and that lacks the full protections of our traditional (if flawed) state and federal courts and laws.