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House Committee on the Judiciary Subcommittee on Commercial and Administrative Law “Mandatory Binding Arbitration – Is it Fair and Voluntary?” September 15, 2009 Members Present: Steve Cohen (D-TN), John Conyers (D-MI), Robert Scott (D-VA), Trent Franks (R-AZ), Howard Coble (R-NC) Witnesses: Panel I Hon. Linda T. Sánchez - U.S. House of Representatives 39th District, CA Hon. Henry C. "Hank" Johnson - U.S. House of Representatives 4th District, GA Panel II Alison Hirschel - National Consumer Voice for Quality Long-Term Care, Washington, DC Stuart T. Rossman - National Consumer Law Center, Boston, MA Stephen J. Ware - University of Kansas School of Law, Lawrence, KS Cliff Palefsky - National Employment Lawyers Association, San Francisco, CA Opening Statements: Cohen: There have recently been many changes in the realm of arbitration. The National Arbitration Forum has abandoned its consumer arbitration practices and the American Arbitration Association has halted its practice of arbitration debt collection cases. President Obama’s administration is proposing a new federal agency to regulate the use of arbitration in consumer transactions. While all these changes are a positive step, it is unclear what effect they will have on the arbitration process. We must balance the quicker and cheaper process of arbitration with the consumer’s right to choose. I have concerns about the use of mandatory binding arbitration. Adhesion contracts are a problem for me. We must be sure the arbitration process is fair and voluntary so we know all parties can reap the benefits of arbitration. Franks: Arbitration is a critical key to making our justice system accessible to many Americans. Without it, these citizens would be left out in the cold by overburdened courts and overpriced lawyers. I circulated a letter yesterday seeking to set the record straight on arbitration because I believe that record is so full of myths that it’s hard to see the issue clearly. I hear that voluntary use or predispute arbitration undercuts consumers’ rights to jury trials, but I think that couldn’t be further from the truth. Jury trials are remote prospects in the vast majority of consumer lawsuits in the first place. The norm for these cases is dismissal. Class actions routinely leave consumers with pennies on the dollar for their claims. It is the wealthy trial lawyers who reap the profits of litigation. Millions of Americans who have claim don’t generate enough legal fees to attract a lawyer. Arbitration is a simple, inexpensive procedure that allows them to seek relief. The second myth is that the Courts have interpreted the Federal Arbitration Act to trump state law, leading consumers little recourse in the few situations where arbitration may be unfair. But the Supreme Court has interpreted the act to permit anyone to challenge an arbitration agreement if the challenge is based on generally applicable state contract law. The third myth is that arbitration involves high administrative fees. The truth, again, is to the contrary. The American Arbitration Association limits consumers’ fees to only $125 for arbitration claims seeking less than $10,000. Recently, one incident has caused concern about mandatory binding arbitration, and that is the National Arbitration Forum’s withdrawal from consumer arbitration. Their debt collecting process provides no reason to restricting mandatory binding arbitration across the board. I hope the Congress does not pursue and unnecessary fix to the mythical problem of arbitration. It would come at a huge price of the practical means that many Americans have to obtain justice. Conyers: Arbitration has not always been beneficial or fair to all parties and has sometimes eviscerated the protection of some civil rights and consumer rights statutes. Originally, arbitration was conceived of as one organization in the same industry, such as GM and Ford, but what happens when it’s an employee going against an employer? That’s a different situation. It is unlikely to get a fair result. Also, mandatory provisions have escalated. They’re in every kind of contract, and it’s a take it or leave it deal. Credit card companies and cell phone providers are infamous for this. Panel I Highlights from Witnesses’ Testimonies: Sanchez: Arbitration is a very useful alternative to the court system, especially when the parties have about the same levels of knowledge and sophistication about the subject. On the other hand, in other situations, arbitration can be forced on vulnerable parties who have little knowledge about what they are signing and have little, if any, choice in the matter at all. I strongly support the principles and the arbitration process, but it must be willingly entered in to by both parties and not just imposed by the party with the superior economic power. Checking a family member into a nursing home is an example of when one party has no real power or choice in the matter, and for these reasons I introduced H.R. 1247 to make predispute mandatory arbitration clauses unenforceable and restore full legal rights to families and residents. Many people are not aware of the rights they are giving up when they sign these contracts. I believe Congress should protect the rights of these vulnerable families. Johnson: I firmly believe Congress must act to protect consumers from forced arbitration. In the 110th Congress I introduced the Arbitration Fairness Act, and I reintroduced it in this Congress. It already has ninety cosponsors. It does not eliminate all arbitration but merely eliminates forced predispute mandatory arbitration clauses so consumers may still choose to arbitrate if it is the appropriate situation when a problem arises. Consumers must still have access to the courts and not be prevented by the mandatory binding arbitration clauses. They remain in many contracts. We cannot count on companies to voluntarily remove these clauses. There is no fundamental check and balance on arbitration proceedings like there is in the court system. Panel II Highlights from Witnesses’ Testimonies: Hirschel: Most people don’t realize when they sign a contract that there is an arbitration clause, or if they notice them, they don’t know that arbitrators are industry lawyers, that awards are significantly lower than jury awards, and that there is virtually no appeal. It is the last thing on consumers’ minds, especially how to seek remedy if something goes wrong. Consumers enter a long term care facility seeking care and compassion, not arbitration or litigation. Even if the consumer understands the provisions, most won’t challenge them because they do not want to get off on the wrong foot with the facility that holds that very resident’s life in their hands. Courts continuously enforce onerous arbitration clauses that were signed under the most coercive conditions. Secrecy about process and outcomes is a signature of arbitration. Arbitration is often a process without transcripts, public observers, or reported outcomes. There has been a significant increase in the number of mandatory binding arbitration clauses in contracts. I’m not anti-arbitration. I’m only against forced mandatory binding arbitration. Rossman: We are concerned with protecting consumer rights and are supporters of the Arbitration Fairness Act. Arbitration clauses are ubiquitous. They show up in every kind of contract. They are particularly prevalent in credit cards, sub-prime mortgages, rent to own, etc. Forced arbitration clauses prevent access to the judicial system, to rules of evidence, civil procedure, to appellate review, and right to jury. There is a lack of transparency and lack of accountability with the right of review, a bias towards the merchant, a susceptibility of conflict of interests, and the expense to the consumer. Federal legislation is needed. With debt collection, the problem is not the actor, but the system itself. As a civil rights lawyer, I’m concerned about access to fair credit. At NCLC, we say that economic justice is a form of civil rights, and I ask Congress to sustain those civil rights by passing the Arbitration Fairness Act and all other consumer litigation designed to protect consumers from forced mandatory arbitration clauses. Ware: My request is to please proceed with caution because arbitration does a lot of good for ordinary citizens. I like the arbitration clauses in contracts with companies I do business with. It’s a quicker and cheaper process. If I ever have a claim against one of them, I’d like to have access to this quicker and cheaper process than litigation. It’s good for the business and for the consumer or employee or whoever has the problem. We shouldn’t be comparing arbitration to some ideal process, but we should compare it to the reality of the process of litigation. When you look at serious empirical studies rather than anecdotes, arbitration looks very good for consumers and business. You’re asking what should be the law regarding arbitration clauses in contracts. There are three choices. 1. None of these arbitration clauses should be enforced, which is the answer of the Arbitration Fairness Act. 2. Or all arbitration clauses should be enforced, but no one is advocating that 3. Current law enforces some of these arbitration clauses. I suggest that courts resolve cases individually than by using legislation. Palefsky: I’m an employment lawyer, and we are the people who help Congress enforce civil rights laws. I have an obligation to my clients to get their cases solved as quickly as possible without even filing a complaint if I can, because that’s what people in the employment sector need. That is my bias. We are still lecturing other countries about the rule of law while American workers are being sent to secret tribunals with no right of appeal. It is extraordinary that we sit here and debate the rights of terrorists when there are victims of sexual assault or whistleblowers who are denied the opportunity to appeal and tell them that they have to pay for that privilege. The notion that arbitration and the constitutional court system are equivalent is the modern day version of separate but equal. They are opposites. Public v. private. Free v. pay. Arbitration is a dispute resolution system and is not a justice system. What’s at stake here is the quality of the laws. You have passed civil rights and whistleblower laws that we cannot enforce. Questions and answers: Cohen: Mr. Ware, you stated that you like to go to stores that have arbitration agreements. Do you read those arbitration agreements before you go into a store? Ware: Yes, I look to see if there’s an arbitration clause and am pleased to see one. It’s a more efficient way of resolving disputes, and anything that saves business money in the long run will be beneficial to consumers. Arbitration has been shown to not be harmful to consumers and employees. When you move past anecdotes and look at statistics, arbitration is a good thing. Cohen: Why should it be compulsory? Ware: There’s a difference between pre-dispute and post-dispute arbitration agreements. After a dispute arises, the business can consult its lawyer and decide which one would be more beneficial to that specific dispute, arbitration and litigation, and the business can’t be expected to act against its self interest at that point and agree post-dispute to arbitration when that would be the more favorable process to the consumer. Similarly, consumers can consult a lawyer and choose the process that would be more favorable. Litigation is the default when both parties can’t agree to arbitrate, and it’s rare that they are going to see arbitration after-the-fact. Whichever party sees litigation as beneficial, that party can be expected to choose litigation. Cohen: What are your thoughts on Ware’s testimony? Palefsky: Statistics do matter. Employees win a fraction of the time than what they win in court. Statistics matter dramatically with what we’re saying that the laws are being undermined. We need to look at enormous cost of arbitration. This is a form of double taxation because taxpayers are already paying for the justice system. The notion that arbitration is cheaper for most plaintiffs is just simply not true. Cohen: Class-actions are prohibited. What injustices does that bring for small claims? Palefsky: If you can’t bring class actions, then you’re basically allowing people to cheat and to steal people’s rights and money. It simply is not economical to bring a claim of $100 to court or arbitration, so with certain small claims, class action procedure is the only way. You created a process recognizing that individual workers can’t afford to bring claims for their small wages that they’re owed. So without that ability, you’re giving them a get out of jail free card, and it’s an invitation to cheat and to steal. Cohen: Is there a way to have arbitration and class actions? Ware: Yes, you can have class actions in arbitration. It’s important to recognize that from the consumer standpoint, class actions are a mixed bag. What do I win if the case wins? But if I give up that right to give up class action to arbitration, I may have a better access to justice. So it’s a mixed question whether consumers should want to give up that right to class action. If, however, you conclude that they should not be able to, then you have a separate issue than just arbitration. Cohen: Don’t you think class actions change the policy and practices of the merchant and then it benefits everyone? Ware: Yes, I agree that would go into a cost benefit analysis of whether or not it’s worthwhile. You can tackle class actions separately and in a much narrower bill than the ones you’re considering in Congress now. Rossman: Class actions are the sole way consumer laws can be enforced. Many people don’t think about what the problem could be before anything happens, so they should have the right to consult with counsel and see the best options. Franks: Binding arbitration in the context we’ve discussed is something people sign up for ahead of time and is not imposed upon them later. Sometimes it occurs to me that it gives them the initial option to binding arbitration or a court system. Why are Palefsy’s comments so divergent from yours? Ware: He only mentioned the one empirical study that supports his side and not many other examples. The way scholars publish empirical articles, it’s a reach that he uses this one article to support himself that contradicts the norm as if it’s the only study. Franks: What conclusion do you draw from the recent action of the National Arbitration Forum regarding its debt collection practices? Ware: Debt collection, through arbitration or litigation, raises a set of issues that are unique to debt collection. Those issues have caused the FTC to study debt collection. In the arbitration context, the recent developments have largely put those issues aside. Franks: You argue to contractually agree to binding arbitration is more voluntary. Could you explain that? Ware: Arbitration doesn’t happen unless there is a contract saying it will happen. People agree to arbitration clauses in a contract. The problems of consumers not reading them or understanding them are a problem that goes far beyond arbitration. Let’s handle this like we do now on a case by case basis in each court where they are sensitive to the particular facts of the case. Franks: Opponents claim that if we eliminate predispute arbitration agreements consumers will still be able to agree to arbitrate their disputes after the disputes arise. Why is this unlikely? Ware: It’s highly unlikely. It doesn’t happen very often now, and it most likely won’t in the future. Once there’s a dispute, both parties can look at the dispute and decide what would be in their best interest for this dispute. So even if arbitration has lower process costs, it’s quicker and cheaper than litigation, there will often be one party who doesn’t want quicker and cheaper and wants the forum that’s best for them for whatever tactical reasons in that case. Johnson: Do you have an idea of a success rate of merchants of the commercial interest that has the consumer locked into the contract? Ware: Those are the empirical studies from earlier. We mentioned employment arbitration studies. On the consumer arbitration side, there’s been less study. The most reliable study is one done by my colleague, with comparable results in consumer actions in arbitration and litigation, supporting the general conclusion that arbitration and litigation do as well as each other for consumers in terms of outcomes. Johnson: Isn’t it true that you don’t have to take an oath to tell the truth in an arbitration proceeding? Ware: It varies. Johnson: Perjury is the legal route to address issues of lying. Ware: Yes, but the Federal Arbitration Act allows courts to vacate awards when there’s corruption in the arbitration process, such as lying. Coble: To your knowledge, has the American Arbitration Association ever stated that predispute contractual agreements to arbitrate are generally unfair to consumers? Ware: No, that’s an important distinction that AAA has temporarily refrained from taking debt collection arbitration cases, but they have not said that the problems and concerns about debt collection reach beyond them to all consumers in debt collection. Coble: Mr. Palefsky, are there any aspects of binding arbitration that you feel are effective and should be permitted and maintained? Palefsky: I think it can be a great way to resolve many disputes, such as contract disputes between parties of equal bargaining power. Voluntary arbitration can be an effective method. I believe mediation is a much better way. Coble: Are there instances where consumers can voluntarily consent to binding arbitration? Palefsky: Of course. Knowing and voluntary consent is all that is required to make it a valid arbitration agreement. Here’s the problem. The only check and balance that was ever contemplated to keep arbitration fair was voluntariness. The parties themselves ensured fairness. Make it voluntary, and the market will ensure fairness. Coble: Ms. Hirschel, if nursing homes could not use mandatory binding arbitration, how would it affect that industry? Hirschel: There is a concern about the costs that nursing homes would suffer, but if you’re looking at liability insurance premiums, there’s a study that shows that they are not tied to insurance payouts. Secondly, if you’re looking at litigation costs, only a very small number were repeatedly sued, and they were the facilities that were cited over and over for egregious violations. So I think liability insurance costs and litigation costs are not necessarily tied to ending mandatory predispute binding arbitration. Coble: Mr. Rossman, is it your view that mandatory binding arbitration is an ineffective venue for consumers? Rossman: Predispute is ineffective because there is no way that a consumer can make an informed judgment when they’re entering into a transaction and cannot foresee any conceivably dispute that may arise from that contract. If, after they’ve entered into the contract and a dispute arises, and they’re given an opportunity to choose between going through arbitration or litigation, I think it’s a perfectly acceptable choice. Scott: Explain the legal concept of adhesion contracts. Rossman: It has a clause that you either take the contract with the arbitration clause or you leave it. But when it’s a choice of having access to the service or not having access, that’s not a choice at all. If you want to get a cell phone or credit card, you have to get it with a mandatory arbitration clause. It’s a take it or leave it under those circumstances. Scott: Are there antitrust implications? Plafesky: Yes. Predispute clauses that designate a single provider are in every contract, and they eliminate competition and lock you into the most expensive option. It is absolutely inappropriate to allow one party to contract in advance with the providers themselves to get special arrangements in the administration of their caseloads. It is not uncommon for these major arbitration providers to have case managers assigned to a particular company. No matter where the arbitration arises, one person in that organization is charged with keeping the consumer satisfied. It is an invitation to abuse, and if consumers had ability to choose the arbitration provider, it would do wonders to improving the fairness of the system and reducing the costs. In the labor arbitration field, they would charge $100 an hour to resolve a dispute. The same arbitrators, when they’re doing my sexual harassment cases, are charging $500 an hour because they can. Scott: Can you explain what the EEOC thinks of mandatory arbitration? Palefsky: The EEOC unanimously, with both Republican and Democratic commissioners, passed a policy statement and say it has structural biases against the claimants, that it interferes with their ability to enforce the law, and that it inhibits their ability to do their job. You cannot say you support civil rights and support mandatory arbitration of civil rights claims. The reason we passed Civil rights laws was to provide access to a federal court and a judge who is obligated to apply the law. Arbitrators do not need to know or follow the law. That is not acceptable for civil rights laws. What does it mean to live in a constitutional democracy if the people you’re trying to protect don’t have a right to have that law enforced? In arbitration, you lose the right to have the law enforced. The law says that an arbitration award has to be confirmed even if it does not follow the law. Hirschel: This really is a gross injustice, especially in the nursing home industry and something only Congress can rectify. Rossman: The issue here is whether or not consumers are going to be able to enforce the rights that Congress has given each and every one of them to allow them a right to seek a full and fair hearing and to have an impartial arbiter. This is not only constitutional but it is a hallmark of our system of justice. Where one party is literally paying for the cost of the arbitrator is wrong. When the arbiter gets paid by the hour, they have little incentive to do it expeditiously, so you have a system that is inherently more expensive and it is in the interest of the arbitrator to drag it out as long as possible to get as many fees as they possibly can under the circumstances. Cohen: Mr. Palefsky, you distinguish employment law and statutory violations as areas where you don’t think the law of arbitration should apply. Are there any other types of cases that should not be included? Palefsky: Every citizen has right to access to the right of petition, to the right of due process, and to the right to trial by jury, and that right should not be waived unless it is waived knowingly and voluntarily. I don’t think adhesion contracts are an appropriate way to waive constitutional rights. An adhesion contract is a privilege we extend to business to allow them to conduct routine commercial transactions where the rights that are being exchanged come from the parties. It is not an appropriate way to waive constitutional rights and it is certainly not an appropriate way to waive protections of statutes that Congress passes after the free market has failed to protect those consumers. Ware: We should not be comparing arbitration to this mythical vision of litigation, but we need to compare it to the reality of litigation and the practical effects on consumers and employees’ access to justice.