When forced arbitration comes back to bite

By Jacob Kahn

In the last three years or so, there has been a veritable mountain of articles and opinions written about forced arbitration agreements.

Popular questions regarding forced arbitration run the gamut from debating its constitutionality, to trying to predict its impact on consumers and the courts, and, of course, just how enforceable is an agreement that is designed to serve as an interdiction against consumers utilizing the very avenue which exists, ostensibly, for the sole purpose of leveling the playing field?

An equally popular topic of late has been 15 US Code § 1692, the Fair Debt Collection Practices Act (FDCPA). Codified in 1978, the FDCPA remains a catalyst within the intermediate courts for a slew of constantly evolving dicta. One could make a lifelong career of only reading and curating FDCPA caselaw, and still manage to have just scratched the surface.

Given all that has been said of late regarding forced arbitration, and the FDCPA, one would expect that the courts or the legislature might have promulgated a clear set of guidelines as to how these two beasts interact. Of course, much and more has been written about how the FDCPA comes into play when it is the consumer who wishes to have her day in court, and is bound instead by a lengthy, merciless contract overflowing with legal jargon, which was undoubtedly signed in haste while trying to open a bank account, obtain a credit card, etc. However, there seems to be a blind spot in the reverse perspective – how does the FDCPA interact with a case in which the creditor, rather than the consumer, wishes to waive its agreement to forced arbitration?

Many lawyers, from sole practitioners to major firms, have taken to including mandatory arbitration clauses in their retainer agreements.

This is done of course with the presumption that in the event of a claim for malpractice, costs and outcomes are likely to be more favorable to the attorney in arbitration as opposed to a court room. But what becomes of these clauses, inserted into the retainer by the attorney, when a client skips out on their legal fees?

In placing such cases with a collection attorney, a certain quagmire is created. Yes, the precedent is clear, a creditor can disregard an agreement to arbitrate, and if the consumer answers the complaint and after a time fails to bring up the issue of arbitration, they too have waived their right to arbitration (Smith v. Adams & Associates, No. 1-14-C-5522, 2015 WL 5921098, at *5, (N.D. Ill. Oct. 9, 2015).

What remains unclear, however, is whether there has been a violation of the FDCPA when a creditor disregards a mandatory arbitration clause of a contract, and brings suit against a consumer. The FDCPA states broadly that, “A debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt,” (15 § 1692e).

The question then becomes, is it misleading for an attorney to bring suit against a former client, (regardless of whether the account is placed with in-house collections or a third party collector) when the retainer agreement speaks to mandatory arbitration of any claim arising from the representation? This question is exacerbated by the fact that the courts have continuously held that a consumer’s participation in such a suit can amount to their waiving of the right to arbitrate. Imagine yourself to be a layman, who has just been served with a summons and complaint. The summons will state to you in the plainest possible language that unless you file an answer with the court within a given time, you will be in default. No mention is made of the supposedly mandatory arbitration agreement, and unbeknownst to you, your interaction with the instant lawsuit may ultimately constitute your legal waiver of your right to arbitrate. Has the plaintiff, the debt collector, not created a deceptive or misleading scenario, thereby opening itself to liability under the FDCPA?

Unfortunately, at the present moment this question does not appear to have an answer. It remains undecided whether a consumer’s rights have been violated when a creditor chooses to overlook its own arbitration agreement in favor of a lawsuit for damages. As some prudent creditor’s rights attorneys shy away from serving as a guinea pig for such a test case, creditors may wish to consider an alternative: the addition of language into their contracts/retainer agreements which excepts them from forced arbitration strictly in the case of unpaid fees/invoices. After a fashion, the courts may come to decide that no violation has occurred when a creditor sets in motion the events which will ultimately deny a consumer their ability to arbitrate – but until such a time, and given the exorbitant fees associated with the litigation of FDCPA claims, it’s better safe than sorry.

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Jacob Kahn is an incoming L1 student at Wayne State University Law School. He received his bachelor’s in political science at the University of Michigan-Dearborn. He works as a process server and law clerk at the Law Office of Anthony Wayne Kahn.