The fine print associated with service agreements from credit card, wireless phone, Internet access, and other service contracts is increasingly likely to includes a clause that removes contract disputes from the legal system, subjecting them instead to binding arbitration. Superficially, arbitration sounds like a great way to settle disagreements while avoiding the fees and animosity associated with legal action; arbitrators ostensibly offer an impartial decision quickly and painlessly. But a report (PDF) issued by the consumer watchdog group Public Citizen portrays the process as heavily slanted towards business, and a Kafkaesque nightmare for individuals.

The report was triggered by the fact that California, alone among the states, compels the law firms that handle arbitration rulings to list the results of their decisions. Public Citizen downloaded each individual decision made by the firm National Arbitration Forum during the period from 2003 to 2007 and performed a statistical analysis on the outcomes. The results provide a revealing window into the arbitration process.

Arbitration is apparently used largely as a debt collection mechanism and is almost uniformly triggered by the service providers. Of the 34,000 cases examined, all but 15 involved debt collection, and only 118 were instigated by consumers. Given the high levels of consumer debt, a high rate of success might be expected, but the study found that companies prevailed in a startling 95 percent of the cases. The records also suggest that very little care goes into many of these decisions, as it documents a number of cases where arbitrators decided over 50 cases in a single day, with the consumer losing in all of them.

These data do not appear to be a California aberration; a court case involving the NAF and First USA Bank in Alabama revealed that the credit card issuer prevailed in over 19,900 out of 20,000 cases there. The report also details anecdotal cases where people were hit with adverse rulings by arbitrators despite evidence of fraud, identity theft, and even mistaken identity.

More compelling is Public Citizen's description of the arbitration process, which goes a long way towards explaining the skewed statistics. As the instigators of the process, corporations can choose the firm that performs the arbitration, and can shop for those that have provided the most favorable outcomes in the past. They also have the option of rejecting the initial choice of arbitrators, allowing those with pro-consumer records to be screened out. Both the firms and individual arbitrators are paid on a per-case basis, and thus are under pressure to ensure they are viewed favorably by companies.

Consumers, in contrast, have very few rights. Arbitration can proceed provided the company has attempted to notify the individual; actual consumer awareness of the proceedings appears to be optional. There are also fees at nearly every stage of the process, including a fee simply to have a hearing on the dispute or to see the ruling itself. Having the reasoning behind the decision spelled out requires a fee paid in advance of the actual decision. Appeal options are limited, and even a flawed initial ruling isn't grounds for reversal. Finally, arbitration doesn't allow individuals to pool resources through class action status.

Given how the deck appears to be stacked, why would anyone ever agree to mandatory arbitration? In many cases, it's simply a matter of ignorance of the risks involved; the report includes a list of steps to take to avoid entering into a contract that includes mandatory arbitration. But in some instances, such as Internet or phone access, consumers may have few options and find these clauses hard to avoid. As a long term solution, Public Citizen urges support for the Arbitration Fairness Act of 2007 (PDF), which amends existing laws to limit binding arbitration to cases where the two parties have equal power within existing contracts.