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March 1, 2000

Congress Should Ban Use of Mandatory Arbitration
in Consumer Contracts

Buyers Often Unaware They Are Signing Away Their Rights

    WASHINGTON, D.C. -- Congress must intervene quickly to stop an increasingly used business practice that robs unwitting consumers and employees of their fundamental right to seek redress in court when wronged by large companies, Public Citizen President Joan Claybrook told lawmakers today.

    The problem stems from corporations’ escalating use of mandatory arbitration clauses in standard contracts, such as those signed by employees when they are hired and by consumers when they receive a credit card, get a mortgage, or buy a personal computer or cell phone, Claybrook said in testimony submitted to the Senate Judiciary Committee’s Subcommittee on Administrative Oversight and the Courts.

    Mandatory arbitration clauses require consumer disputes to be argued in a private, secret dispute settlement system with an arbitrator making decisions that are final and cannot be appealed. Thus, consumer access to public courts, juries and judges is blocked. When consumers buy or use the product or services, they sign away their right to sue the company, usually in ignorance. Arbitration is costly for consumers, and the outcome usually favors the company. Further, consumers often don’t even see these clauses because they are usually buried deep in fine print that is presented in a standard, take-it-or-leave-it contract, Claybrook said.

    "These clauses are designed to give large businesses significant advantages in their disputes with consumers, employees and small businesses," Claybrook said, "By insisting that consumers and employees waive their right to their day in court as a precondition to buying a service or product, corporate America is trying to insulate itself from the consequences of doing business negligently, recklessly and in violation of the law."

    These clauses are fundamentally unfair to consumers, she said in her testimony. Consumers don’t have equal bargaining power with large companies, don’t have much experience with arbitration, often do not understand what mandatory arbitration is, do not realize that they are signing away their right to take the company to court and don’t have the power to negotiate the arbitration clauses out of the contracts, Claybrook said.

    The clauses are often lopsided, allowing the corporation to retain its right to take the consumer to court. Arbitration fees are hefty -- hundreds of dollars to file for arbitration and thousands for a hearing -- and often must be paid up-front by the person bringing the dispute. Class actions are prohibited, thereby providing legal immunity to corporations that gain substantially through small injuries to many people. Further, arbitration often must be conducted in a place convenient to the corporation but not for the consumer, and the corporation generally gets to pick the arbitrator, giving arbitrators who seek repeat business the incentive to issue rulings favoring businesses, Claybrook said.

    The impact is to deny consumers a right guaranteed in the Seventh Amendment of the Constitution, which states that in lawsuits in which "the value in controversy shall exceed $20, the right of trial by jury shall be preserved," Claybrook told lawmakers.

    Claybrook noted that Public Citizen does not oppose arbitration. Rather, it should be entered into voluntarily after a dispute arises, and the consumer or employee should know what rights are being waived, who will arbitrate the dispute, who will pay for the arbitration, whether discovery will be allowed, what information will be made public and whether any recourse is available after the arbitration.

    Claybrook also said that:

  • State and federal legislators should pass legislation to ensure that parties with weaker bargaining power are not forced into arbitration;
  • Federal and state lawmakers should pass an "Arbitration Bill of Rights" that would ensure a level playing field between customers and companies. The document would require full disclosure about the arbitration process, allow mandatory arbitration to be rejected without jeopardizing the employment contract or consumer transaction, and make public the records of arbitration awards;
  • States should have the ability to regulate arbitration. (Some states have laws pertaining to arbitration, but the U.S. Supreme Court has found that the Federal Arbitration Act (FAA) preempts them. Because the Court decisions were based on interpretations of Congress’ intent in adopting the FAA, Congress should revise the law.)

    If nothing is done, Claybrook warned, the result will be "the creation of a massive system of private arbitrators parallel to, but untouchable by, our public courts. . . . We may be witnessing the birth of a private judicial system -- created by corporations seeking to avoid legal responsibility for their actions."


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