Testimony of Joan Claybrook Submitted to the House Judiciary Subcommittee on Commercial and Administrative Law Regarding H.R. 53

June 7, 2000

Chairman Gekas and Members of the Subcommittee, Public Citizen is submitting this testimony because we believe that the use of mandatory pre-dispute arbitration clauses presents a grave problem for consumer rights and public safety. The use of mandatory pre-dispute arbitration clauses is growing at an alarming rate and congressional action is urgently needed. If the trend continues, soon we will have a private justice system adjudicating disputes that is largely controlled by corporations.

We appreciate the power imbalance in contractual relationships and unfairness in forcing the less powerful party to waive the right to seek redress in court. The same arguments which support the argument against enforcement of these provisions in business-to-business contract apply more strongly to consumer contracts.

We applaud the proponents of H.R. 534 for raising the issue of unfair mandatory pre-dispute arbitration. However we believe that the bill does not go far enough because it addresses only arbitration clauses in contracts between businesses and would leave consumers disputes with businesses or employee disputes with employers out in the cold. If this Committee proceeds on the issue of arbitration, Public Citizen recommends the following:

Congress should amend the Federal Arbitration Act to remove the judicially-imposed federal preemption of state regulation of arbitration agreements, so that states have the ability to regulate arbitration procedures if they desire to better protect consumers and employees or to deal with specific local problems.

State and Federal legislators should pass legislation to ensure that parties with weaker bargaining positions are not forced into unfair arbitration. This legislation should take the form of an absolute ban on mandatory, pre-dispute arbitration clauses. Alternatively, legislation could make all such clauses in contracts between unequally powerful parties unenforceable. At a minimum, mandatory, pre-dispute arbitration clauses should be unenforceable in all consumer and employee contracts.

Congress and the States could promote fair arbitration by passing an Arbitration Bill of Rights. The Bill of Rights would be designed to make arbitration an attractive alternative that a fully-informed consumer would voluntarily choose to resolve a pending dispute by ensuring fair selection of arbitrators, fair distribution of arbitration costs, full and fair discovery and appealability of awards.

If this Committee is not prepared to go beyond H.R. 534, at a minimum an amendment should be passed prohibiting businesses that would benefit from the protections in this bill from using mandatory, pre-dispute arbitration contracts in their contracts with customers or their employees.


Public Citizen is a nonprofit, national consumer advocacy organization with approximately 150,000 members nationwide. One of our primary goals is to assure that injured consumers and workers have the ability to hold responsible and receive fair compensation from the wrongdoers that injured them.

On behalf of consumers and small businesses, Public Citizen's Litigation Group has argued two cases in the U.S. Supreme Court on arbitration issues and many more in lower courts. In Barrentine v. Arkansas-Best Freight System, 450 U.S. 728 (1981), the Supreme Court upheld Public Citizen's contention that a union contract arbitration clause did not preempt the drivers' right to sue with regard to a statutory claim under the Fair Labor Standards Act. In Doctor's Associates v. Casarotto, 517 U.S. 681 (1996), Public Citizen argued before the Supreme Court that states had an inherent interest in ensuring the fairness of arbitration agreements in all contracts. Unfortunately, the Court ruled that the Federal Arbitration Act preempted state protections, helping create the problem this hearing is exploring: the injustices that occur when the weaker parties to a contract are forced involuntarily into arbitration proceedings stacked against them.

We make the following recommendations with respect to H.R. 534 and mandatory pre-dispute arbitration in general:

Part I -- Congress Should Review the Injustice of Pre-Dispute, Mandatory Arbitration and Restore the Constitutional Right to Fair Dispute Resolution

The use of mandatory pre-dispute arbitration clauses is rising at an alarming rate in consumer and employment contracts. Today's hearing focuses on a bill that only addresses business to business contracts, and as such falls far short of the scope of the problem. For instance, the auto dealers, from which two representatives are appearing before you, are seeking relief from mandatory, pre-dispute arbitration contractually imposed upon them by the much more powerful auto companies. The dealers feel they have little ability to stand up to the auto manufacturers and distributors who use their power to impose these unfair clauses in the contracts vital to the dealers continued existence.

At least the dealers have some leverage as the auto companies need them to sell their cars. Imagine the fate of individual consumers or employees in such unbalanced situations.

Ironically, many of these same auto dealers are at the forefront of a trend to impose mandatory pre-dispute requirements on the consumers who purchase their cars.

I refer you to the attached exhibits showing that immediately after the U.S. Supreme Court's decision on January 18, 1995 ruling in favor of enforcing mandatory pre-dispute arbitration clauses in Terminix v. Dobson, auto dealer organizations began advising dealers to require arbitration clauses in their sales and service contracts with their consumers. As stated by one auto dealer association, the reason for requiring customers to sign mandatory pre-dispute arbitration clauses was to "substantially reduce the likelihood of sustaining large punitive damage judgments." Furthermore, the auto dealers are advised that "arbitration must be agreed to at the time of sale or lease, not when the dispute arises" so that the customer has no alternative to arbitration.

The pervasive use of mandatory pre-dispute arbitration clauses in the auto industry is best illustrated by a startling exception to the trend. I refer you to the attached exhibit of an advertisement for an Infiniti car dealer. The Brewbaker Infiniti dealership in Montgomery, Alabama, advertised that it would sell cars without requiring arbitration, although the dealership will continue to "ask customers to sign arbitration." The special promotion was limited, however, to new Infiniti cars. The dealer still "required" arbitration clauses to be signed for the purchase of used Infinitis, repair orders and body shop tickets "as a condition of sale." Moreover, as the advertisement states, the bank finance contracts the customer would need to sign in order to finance their purchase of a new Infiniti could still require arbitration. The use of non-negotiable, mandatory pre-dispute arbitration clauses has become standard practice to such a degree that not requiring arbitration is an advertising ‘hook,' though rendered impotent by the small print exceptions.

Consumers buying or repairing automobiles suffer from the same or greater disparity in bargaining power with the dealers as the dealers do with the manufacturers. Perhaps the subcommittee would consider expanding the scope of H.R. 534 in order to provide protection for all parties without the power to negotiate contract provisions and thereby restore all their rights to just dispute resolution.

Public Citizen is not opposed to arbitration per se. There is social benefit in voluntary arbitration as a fair and expeditious alternative to litigation. However, an arbitration agreement must be entered into voluntarily after the dispute arises and the consumer, employee — or even the small business owner such as an auto dealer — knows which rights she is waiving, who will arbitrate the dispute, who will bear the costs of arbitration, whether discovery will be allowed, what law will be applied, what information will be public, and whether she will have recourse following the award. Without a fully-informed voluntary consent, arbitration loses all credibility as a just alternative to litigation.

In the real world, most contracts are not made by equally powerful and knowledgeable parties. While this is certainly true of employment and consumer credit contracts, it is equally true for virtually all consumer contracts, as well as business-to-business contracts between disparately-sized companies. As Part II of this testimony reviews in detail, mandatory, pre-dispute arbitration clauses can never be fair, when the parties do not have:

Equal bargaining power,

Equal experience in arbitration,

Equal ability to understand the consequences of contract language, particularly the ramifications of the rights being waived, and an

Equal ability to insist on clauses being included or excluded in the contract.

Without this balance of power, there can be no effective voluntary consent to mandatory, pre-dispute arbitration clauses.

Public Citizen believes that the escalating use of mandatory, pre-dispute arbitration clauses in contracts between unequal parties is impinging on individuals' basic rights as guaranteed by the Constitution's Bill of Rights. The Seventh Amendment to the U.S. Constitution states, "In suits at common law, where the value in controversy shall exceed $20, the right of trial by jury shall be preserved ..." When the Bill of Rights was passed, the right to a jury trial was the only Amendment of the 10 proposed that was approved by all 13 states. The right to a civil trial was included in the Constitution because that right was a critical issue in the decision of the colonies to revolt against the arbitrary decisions of King George III. More than giving individuals a right to a particular procedure, the Bill of Rights guarantees public legal proceedings where the lowly and the mighty are equal and have the same ability to receive justice.

The escalating use of mandatory, pre-dispute arbitration clauses threatens that fundamental freedom. These clauses are designed to give businesses significant advantages in their disputes with consumers and employees. They threaten the very basis of our justice system -- equal justice under the law.

The profundity of this rising tide of mandatory, pre-dispute arbitration agreements and its effect on the right to trial by jury has not yet fully been felt. But the reality is that too many of America's businesses are trying to opt out of the American judicial system -- by exempting themselves from the rules of conduct and responsibility to which the rest of us are held. By insisting that consumers and employees waive their right to their day in court as a precondition to doing business, corporate America is trying to insulate itself from the consequences of doing business negligently, recklessly and in violation of the law.

The result will be the creation of a massive system of arbitrators parallel to, but untouchable by, the courts. Consumer and employee rights, public safety and public policy will be weighed by arbitrators neither elected nor appointed under any legal system. We may be witnessing the birth of a private judicial system – created by corporations seeking to avoid legal responsibility for their actions. As Judge Harry Edwards put it, an arbitrator "serves simply as a private judge...yet unlike a judge, an arbitrator is neither publicly chosen nor publicly accountable." Cole v. Burns International Sec. Servs., 105 F.3d 1465, 1476 (D.C. Cir. 1997).

We now have 75 years of experience under the Federal Arbitration Act (FAA), which sets the fundamental ground rules for arbitration. In its present form, the FAA is fostering arbitration procedures that severely weight the scales of justice toward large businesses and away from consumers, employees and small businesses.

Public Citizen believes that this threat to fundamental concepts of American justice is so significant that the U.S. Congress and the states' legislatures should work together to adopt policies that restore citizens' fundamental rights to impartial, unbiased and public adjudication of disputes. Without such a system of fair redress in a civil society, citizens will start to take the settlement of disputes into their own hands with potentially disastrous results. We propose a comprehensive federal-state legislative initiative to achieve these goals:

Congress should amend the Federal Arbitration Act to remove the judicially-imposed federal preemption of state regulation of arbitration agreements, so that states have the ability to regulate arbitration procedures if they desire to better protect consumers and employees or to deal with specific local problems. While federal legislation should establish basic minimum standards to guarantee arbitration fairness, states should be able to give consumers additional protections such as deciding whether arbitration is appropriate in a given situation or whether notice provisions or arbitration procedures are necessary to protect their citizens. Federal law should provide a foundation upon which the states could build greater consumer protection.

State and Federal legislators should pass legislation to ensure that parties with weaker bargaining positions are not forced into unfair arbitration. This legislation should take the form of an absolute ban on mandatory, pre-dispute arbitration clauses. Alternatively, legislation could make all such clauses in contracts between unequally powerful parties unenforceable. At a minimum, mandatory, pre-dispute arbitration clauses should be unenforceable in all consumer and employee contracts.

The Senate Judiciary Subcommittee on Administrative Oversight and the Courts began to take this approach recently when it held a hearing on S. 121, the Civil Rights Procedures Protection Act and S. 2117, the Consumer Credit Fair Dispute Resolution Act. Public Citizen testified in support of both S. 121 and S. 2117 at the hearing on those bills on March 1, 2000.

S. 121 would expressly prohibit the use of arbitration or other alternative dispute resolution procedures in federal civil rights discrimination claims unless the claimant voluntarily agrees to arbitration after the claim arises. Employers should not be allowed to force employees charging their employers with illegal discrimination into an unfair dispute resolution scheme of the companies' own device.

S. 2117 would make mandatory arbitration clauses in consumer credit contracts invalid and unenforceable unless the consumer voluntarily agrees to arbitration after the controversy has arisen. Mandatory arbitration schemes in consumer credit adhesion contracts deny consumers their right of access to the courts and the protection of state consumer laws.

Both S. 121 and S. 2117 would not eliminate arbitration in these situations, but would harness market forces to reduce current abuses. After a dispute has arisen, if both sides believe it is in their interest to proceed to a specified arbitration forum, they may agree to do so. After the dispute, both parties have inducements to pay attention to the equities of the arbitration procedure. If a consumer or employee is only offered a biased or procedurally unfair arbitration, then she will not choose arbitration. Therefore, the legislation provides the proper incentive to make these voluntary arbitrations demonstrably fair.

Eliminating the ability of the more powerful party to force the weaker party into unfair arbitration would go far toward eradicating the problems detailed in Part II of this testimony. Consumers and employees should be able to choose whether to go to arbitration only after the controversy arose. At that time they would have the proper incentive to carefully assess the pros and cons of the proposed arbitration and determine whether it would be a fair dispute resolution mechanism. Essentially this would institute a market-oriented system where parties who believe arbitration is the best forum would have to design arbitration systems that are attractive because they are fair to the other party.

Congress and the States could promote fair arbitration by passing an Arbitration Bill of Rights. The Bill of Rights would be designed to make arbitration an attractive alternative that a fully-informed consumer would voluntarily choose to resolve a pending dispute by ensuring fair selection of arbitrators, fair distribution of arbitration costs, full and fair discovery and appealability of awards. An Arbitration Bill of Rights should include:

A mutuality requirement -- parties should have identical opportunities to access the courts. One-way "agreements" favoring corporations should be prohibited.

Proof that both parties are actually aware of any arbitration provision in a contract.

Full disclosure about the arbitration process, including specific information about what kind of claims and rights are being waived and about the costs of pursuing arbitration.

True choice -- the ability to reject the arbitration clause without jeopardizing the employment opportunity or consumer transaction.

Judicial review of awards on the merits.

Availability of all judicial remedies, such as injunctions and punitive damages.

A fair system of cost allocation that does not deter or preclude valid claims from being made.

A choice of venue that is convenient to the party less able to bear the costs of travel.

Discovery to ensure the ability to pursue and prove the claim.

A requirement for a written opinion by the arbitrator explaining bases of findings of fact and applications of law.

Public records of arbitration awards so that consumers as well as corporations can learn about the arbitrators' past decisions and any previous awards on similar disputes.

Part II: Mandatory Arbitration Abuses

The Scope of the Problem

Over the past several years, more and more consumer creditors have inserted mandatory pre-dispute arbitration clauses in the fine print of their consumer credit contracts. You may not know it, but if you have a credit card, mortgage or other credit account with BancOne, First USA, GE Capital, Discover, American Express, Household Financial or Beneficial Financial Services; if you belong to an HMO or investment group; if you recently bought a personal computer, cell phone, mobile home, or product over an Internet site such as e-Bay; or if you bought a new home from a fly-by-night contractor, you have probably waived your rights to take those corporations to court if they harm you by breaching their contract or even by defrauding you.

You might be blissfully unaware that you have forfeited your right to a day in court, because the mandatory arbitration agreement was lurking in the fine print of your car lease or tucked in with the offers of personalized check printing from your credit card company, or perhaps in your teenager's employment contract with the local burger joint. By accepting the car lease, using your credit card or taking the job, you and your family forfeited one of the most treasured American rights -- the right to a day in court and a jury of your peers to judge whether you have been wronged.

If you don't know whether you have waived your rights to access the judicial system, you are not alone. You likely didn't read through the entire cell phone contract, or didn't notice the arbitration clause in your car lease. Like most Americans, you might not have understood that the clause meant you were forfeiting your constitutional rights as a consumer, rights that protect your health and safety and protect you from fraud.

If you did see the arbitration clause in your credit card contract, you might have thought that it might not be such a bad thing. Before any dispute has arisen between you and your creditor or service provider, the prospect of such a dispute is distant and theoretical. Arbitration might even sound better than litigation should the unthinkable happen and you and the company you are doing business with have a falling out. But the average consumer (and even the more sophisticated consumer) does not consider the breadth of rights waived by agreeing to the clause.

You should also be troubled that you had no choice but to agree to the mandatory arbitration if you wanted to make the transaction. It was not a term you could negotiate out of the contract -- most mandatory arbitration clauses are in standard form, take-it-or-leave-it contracts. And you could hardly "leave it" and go to another creditor or retailer because more and more of them insist you give up your rights. In these situations, it is manifestly unfair to allow these contracts of adhesion (one-sided contracts that are not negotiated by the parties and are embodied in a standardized form prepared by the dominant party) to take away consumers' constitutional rights of access to the courts to protect their rights. The power imbalance at the moment of contract is tremendous and without any real remedy for consumers, abuses will soar to new heights.

In the employment context, the power imbalance is even more obvious and insidious. There is no true voluntary assent to mandatory arbitration clauses when employees are told to either assent or lose their jobs and applicants who refuse simply are not hired. Very few job seekers are in a position to refuse proffered employment, which would provide the means to support their family, in order to preserve a comparatively intangible right should an unforseen problem develop years later.

Some courts have recognized the extreme power imbalance and lack of true bargaining power in employee contracts, particularly when the employee seeks to invoke state or federal anti-discrimination policy. Those courts have refused to enforce a mandatory, pre-dispute arbitration clauses. Unfortunately, other circuits have held such clauses are enforceable.

The Federal Arbitration Act and Its Preemption of Consumer Protection and Anti-Discrimination Law

The Federal Arbitration Act (FAA) of 1925 grew out of international maritime dispute resolution systems. In that commercial context, companies have essentially equal bargaining power and can negotiate over the suitability of adopting alternative dispute resolution systems such as arbitration.

However, in consumer credit and employment contracts, as well as in other transactions between individual consumers and businesses, the parties have extremely unequal bargaining power. In consumer credit contracts, consumers often don't even see the full language of the contract until the credit application or the consumer purchase has been completed. Job seekers focus on pay and benefit packages and are seldom in an economic position to insist on rights they never expect to use.

Many state legislatures have recognized these problems and have been particularly concerned about individuals in these types of adhesion contracts, where they are faced with signing take-it-or-leave-it contracts for employment or credit without the option to strike the arbitration clause or negotiate the terms. Some states have passed laws to protect consumers in those situations. Some have required arbitration clauses to be particularly visible to ensure that consumers know what they are agreeing to. Other states have disallowed pre-dispute arbitration agreements in particular subject areas of law, such as employment discrimination disputes, because they deemed arbitration to be unsuitable to enforce their state's public policy in those critical areas.

However, the Supreme Court has interpreted the Federal Arbitration Act as preempting those consumer and employee protection efforts by individual states. Despite the extreme power imbalance in formulating these contracts, the Supreme Court has in a series of decisions ruled that Congress' intent to promote arbitration preempts state regulation. The Court has enforced pre-dispute arbitration agreements even in consumer credit and employment contracts.

In particular, the Court has invalidated all state laws that single out as unenforceable arbitration provisions in contracts that are otherwise enforceable. Under the Court's rulings, the only way a state court may avoid enforcing a pre-dispute arbitration agreement is by voiding the contract under traditional, general contract rules regarding consent, fraud, unconscionability and revocation. State legislatures cannot pass a bill that just regulates arbitration abuses; they can only legislate general contract law changes. But mandatory arbitration clauses are different. They should not be treated the same as any other contract term (such as price, quantity, dates of service, etc.) because:

The constitutionally protect right to a day in court is too important;

Consumers do not fully understand the importance of the rights they are waiving until a dispute actually arises; and

The enforceability of the entire contract depends on the fairness of the arbitration provision because the consumer can have them enforced nowhere else.

In other decisions, including Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), the Supreme Court ruled that absent proof that Congress intended civil rights legislation to preclude arbitration, contractual mandatory pre-dispute arbitration can be enforced. The Court cited the FAA's provisions that manifest a "liberal federal policy favoring arbitration agreements."

Because the Supreme Court's decisions interpreted the U.S. Congress' intent in adopting the FAA, Congress has the responsibility to revise the law to level the playing field for the consumer and employees and restore their fundamental legal rights.

Mandatory Pre-Dispute Arbitration Clauses Are Discriminatory and Unfair

In addition to the denial of consumers' and employees' rights to seek remedies in court, arbitration between two parties with unequal bargaining power is too often a discriminatory and one-sided process, benefitting the corporations mandating it. The following are problems faced by consumers and employees who are forced into arbitration by contracts written solely by the corporation:

Substantial up-front costs. For most consumer transactions and many employment disputes, the fees imposed by mandatory arbitration may make it economically impossible for consumers or employees to vindicate their rights. Many arbitrators require hundreds of dollars in filing fees and hundreds or thousands more in hearing fees. Some consumers, particularly those who have just suffered a financial loss, will be unable to pay these fees and will therefore be precluded from any remedy. Similarly, high fees may preclude employees whose financial future may already be endangered because of their employment dispute from pursuing their anti-discrimination claims. In other consumer claims, the small amount in dispute may actually be less than the arbitration fees, making any arbitration a losing proposition economically. In contrast, most jurisdictions provide consumer access to small claims courts with minimal fees and costs.

Prohibition of class actions. Certain harms inflicted on consumers may be small yet widespread so that they would be impractical to pursue unless brought as a class action. Companies are using mandatory arbitration clauses to avoid class actions, making it impossible for plaintiffs with small claims to pursue their cases or afford any legal advice. The prohibition on class actions thereby provides legal immunity for corporations who may have gained a substantial benefit through small injuries to a large number of persons.

Choice of venue. Arbitration clauses often include a venue selection that favors the corporation, such as requiring arbitration in a location inconvenient to the consumer. Thus, consumers may find themselves having to bear the cost of long-distance travel to make their claims heard. For example, the Internet auction site e-Bay requires its customers to travel to its home turf of San Jose, California, to arbitrate any dispute. This requirement is obviously an impediment to justice for modest disputes of a couple of thousand dollars or less.

One-way agreements. Many arbitration clauses require only one side (the consumers or employees) to resort to arbitration on a particular claim, while allowing the other side (the corporation) to sue in court on the same claim. In addition, sometimes only one side (the consumers or employees) is bound by the outcome of the arbitration while the other (the corporation) is not. Arbitration clauses also may provide certain remedies for one side but not the other -- for example, allowing the imposing corporation to be awarded attorney fees, but not the consumer on whom arbitration has been imposed.

Choice of arbitrator. Many arbitration clauses give the company the right to pick the arbitrator, formulate the list of possible arbitrators from which the consumer or employee must select, or select the arbitration organization. When companies establish relationships with arbitration organizations to handle their continuing business, arbitrators have a self-interest in favoring the company in their decisions in order to attract repeat business. Moreover, neither arbitrators, nor those that impose arbitration, are required to keep a public archive of decisions. Therefore, consumers and employees suffer from the disadvantage of not being able to check for biases in prospective arbitrators, even when they have some role in choosing them.

Lack of a public record. Because in many cases no written decisions are made available and most arbitration clauses require that all facts relating to a dispute are confidential, public discussion on the validity and fairness of a given arbitration finding is discouraged, no legal precedents or rules for future conduct are set and individuals cannot cite previous decisions for precedential effect. Imagine if we had never learned about tobacco company misbehavior from the Minnesota litigation.

Since businesses that impose arbitration are likely to keep an archive of decisions, they enjoy the advantage of being able to choose those arbitrators that have ruled for them. And with no public record, the companies can present to the arbitrator favorable cases from their own files while not disclosing cases favoring the employee or consumer.

Lack of discovery requirements. Many arbitration schemes greatly restrict discovery, the process by which parties obtain information from one another, even though in-court claims cannot be litigated effectively without it. The lack of discovery and adherence to rules of evidence and procedure in arbitration amounts to the wholesale denial of one of the most basic rights in our civil justice system. Lack of discovery may make creditors' and employers' discriminatory behavior impossible to prove. Consumers and employees are prevented from discovering patterns of abuse that would reveal the corporation's culpability; this immunizes companies from sanctions, including injunctions, sufficient to deter continued wrongdoing.

Limited judicial review. Under the FAA, parties are allowed only limited judicial review of an arbitration award and virtually no review of the substantive merits of the award. The courts can review for bias in the process, partiality by the arbitrators, and whether the arbitrators exceeded their powers. But to overturn a decision on substantive legal grounds, the appellant must show "manifest disregard of the law," an extraordinarily difficult standard to prove. The true scope of review is even more limited because often there is no requirement for any written opinion and no requirement that any voluntarily prepared written opinion include a statement of what law the arbitrators applied or what facts were deemed proven. Any consumer wishing to show bias or partiality or error in applying law or finding fact has an extraordinary burden to meet, particularly where no records of the company's dealings with the arbitrator are made public and no discovery rules provide for their disclosure.

Arbitration is ill-suited to decide causes of action based on statutes involving preferred public policies such as civil rights protections. Statutory rights and remedies are not fully vindicated in the arbitration process. The use of unilaterally imposed pre-dispute mandatory arbitration clauses in employment contracts as a condition of employment harms both the individual employee and the public interest in eradicating civil rights violations. Those who the law seeks to regulate should not be allowed to exempt themselves from the enforcement of civil rights laws. Nor should they be allowed to deprive the civil rights claimants the ability to vindicate their rights in a court of law by a jury of peers.

Likewise, consumer protection statutes designed to ensure the public's safety embody important public policies. Corporations should not be allowed to avoid those policies, by forcing individuals into arbitrations where their rights are not protected.

Limited remedies. Mandatory pre-dispute arbitration clauses may eliminate some remedies, such as injunctive relief and punitive damages, or shorten the time within which a claim must be brought. These provisions circumvent carefully considered and crafted laws governing the creditor/consumer and employer/employee relationships. Many claims are not worth bringing without the prospect of full legal remedies. By inserting these clauses into their contracts, creditors and employers intend to prevent legitimate claimants from ever receiving justice.

Examples of How Current Arbitration Law Is Fundamentally Unfair to Consumers and Employees

Unfortunately, examples of how mandatory arbitration has unfairly twisted the resolution of disputes are quickly accumulating day by day. The Washington Post (3/1/00, pp. E1/E10) revealed that for just one large company, First USA, mandatory, pre-dispute arbitration had resulted in 19,705 arbitration awards over the last two years. Only 87 were decided in favor of the customer; First USA won 99.6% of the cases.

The following real life examples demonstrate how consumers and employees are severely disadvantaged by the mandatory arbitration process. As other consumers and employees have similar experiences, most injured persons will choose not to pursue their legitimate claims because the likelihood of a fair hearing and decision is so small.

Contractor/Finance Company Fraud

Harris v. Green Tree Financial Corporation (183 F. 3d 173; Third Circuit, 1999) illustrates how the courts have interpreted the Federal Arbitration Act in a way that is fundamentally unfair to consumers.

The Harrises were approached by home improvement contractors marketing themselves as Federal Housing Authority and U.S. Department of Housing and Urban Development-approved dealers promising affordable work with no payment required until the customer was satisfied with the construction.

In fact the contractors themselves had been solicited by Green Tree Financial Corporation to encourage consumers to use high-interest rate secondary mortgage contracts to finance home improvements.

The Harrises allege that they received little of value from the contractors, but were saddled by sizeable debt secured by mortgages on their homes. When they attempted to sue Green Tree and the contractors alleging fraud and breach of contract, Green Tree moved to compel arbitration.

The work orders for the home improvements that the Harrises originally signed when agreeing to have the work done did not mention arbitration. However, the secondary mortgage contract (described to them as standardized contracts that needed to be signed before construction could begin) included an arbitration clause in small print on the back page near the end of the contract.

The arbitration clause was not only boilerplate language about which the Harrises had no opportunity to bargain, but the clause bound only the Harrises, not the contractors or Green Tree. The companies who allegedly defrauded the Harrises retained their right to go to court to enforce the mortgage or to foreclose on the real property secured by the loan.

Despite the lack of effective notice, the unequal bargaining power of the parties, the use of a boilerplate contract of adhesion, and an arbitration clause that only bound one party to the contract, the Third Circuit upheld the arbitration clause. It found that the District court had erred in holding that the clause was not enforceable because of lack of mutuality or procedural or substantive unconscionability. The court then used the FAA's "liberal policy favoring arbitration clauses" to bar the courtroom door to these defrauded consumers, forcing them into arbitration where all the advantages lie with the repeat user of arbitration, not the one-time consumer complainant.

Automobile Consumer Credit Fraud

On January 31, 1999, Ann Brown of Sandusky, Ohio borrowed $5,500 at 25% interest from a J.D. Byrider Franchise car lot to finance her purchase of a car from Byrider's used car lot. The car turned out to be a "junker" and a safety hazard. The entire wheel and axle fell off when Ms. Brown's teenage daughter was driving down the road. In her lawsuit in Ohio court, Ms. Brown alleged that she was forced to pay an artificially inflated price in violation of the Truth in Lending Act. Ms. Brown also alleged that Byrider violated the Truth in Lending Act by requiring her to accept an $895 warranty fee that was also to be financed by J.D. Byrider at 25% interest. In addition, Ms. Brown alleged violations of the Ohio Sales Practices Act and fraud.

But Ms. Brown was denied her day in court by the district court in Ohio, which ruled that the arbitration agreement contained in Ms. Brown's contract had to be enforced because of the FAA's policy favoring arbitration. Under that arbitration clause, Ms. Brown lost all her claims under state and federal lending and consumer protection laws although Byrider retained the right to sue her. She also waived her right to punitive damages, no matter how reckless or malicious Byrider's conduct. Instead, she must proceed under Byrider's choice of arbitration, for which she must pay half the costs and attorney fees. The costs of arbitration, which begin with $300 - $500 filing fees and approximately $1,500 per day arbitrator's fee, exceed the value of her claim. It is simply not worth it to take the case to arbitration. In sum, Byrider is using this arbitration clause to insulate itself from the consequences of violating the Truth in Lending Act, Ohio Sales Practices Act and flat-out fraud.

Ms. Brown did not understand that she was waiving her right to go to court when she signed an arbitration agreement with Byrider. This is hardly surprising because the Byrider financing officer himself had no idea what arbitration is or what the rules of arbitration are, so he was unable to tell Ms. Brown what rights she was waiving. Nor was she given an option -- the credit contract was presented in a standard form, take-it-or-leave-it format and she was not allowed to challenge any of its provisions. The mandatory arbitration provision only applied to Ms. Brown. Had she defaulted on her loan, Byrider would have been able to file a lawsuit against her.

When Ms. Brown first filed her lawsuit, Byrider stopped using the mandatory arbitration clauses in their contracts. But once the courts refused to vindicate Ms. Brown's rights in court in favor of arbitration, Byrider began using the clauses again. Ms. Brown's attorneys have received inquiries from over 40 consumers similarly defrauded by Byrider. Unfortunately, no matter how many of J.D. Byrider's former customers are defrauded, they cannot file as a class action because the mandatory arbitration clauses in their contracts waive their right to maintain class actions.

Sexual Harassment

In a San Francisco, California case a woman named Sherry claimed that her employer, a prominent physician, physically and verbally sexually harassed her. Whether her claim was legitimate or not we will never know, but there was a great deal of evidence supporting her allegations, including: corroborating testimony from another employee, an admission that the defendant had been "squeezing titties," a calendar owned by the defendant showing his female employees nude, and expert testimony from a psychologist. Sherry filed suit in 1994 for violations of her civil rights.

The defendant employer had included a mandatory arbitration clause in the plaintiff's employment contract, although Sherry did not see the arbitration material until she had been working a week. At that time, the document was given to her while she was working and she was told that it was necessary for her to sign it to keep working; she was given no time to read the document. In addition, Sherry did not understand the mandatory arbitration clause or its significance. Despite this clear evidence that Sherry had not agreed to waive her rights, the court ruled that Sherry was bound by the clause and could not sue her employer in court.

Sherry took her case to arbitration under the American Arbitration Association (AAA). After three years and eight days of hearings, the arbitrator found in favor of the defendant. The result in the case perplexes civil rights attorneys -- and with good cause. The arbitration proceedings were conducted behind closed doors and the legal and factual bases for the arbitrator's decision are not publically available.

Most shocking in Sherry's case is that the arbitrator also found Sherry liable for over $207,000 in attorney fees to pay the defendant's attorneys. Under civil rights litigation in the federal and state courts, such attorney fees are only awarded for frivolous or bad faith suits, because public policy favors the bringing of such suits. In addition, the cost of the arbitrator and the AAA's fees totaled $16,000, compared to the $200 filing fee for a court case.

Sherry's ability to vindicate her civil rights was hampered in part by her inability under the arbitration rules to conduct discovery and develop a full factual record. Future employees who are discriminated against will not be able to use Sherry's experience to assist in building their cases. Under the arbitration procedure, both Sherry and her attorney are effectively gagged and cannot discuss the case without risking a lawsuit, which, ironically enough, the employer would be able to pursue in court.

The outcome in Sherry's case will act as a deterrent to others wishing to bring suit for sexual harassment when there is a mandatory pre-dispute arbitration agreement in their employment contracts. And more ominously, it will encourage employers to use pre-dispute arbitration clauses to insulate themselves from civil rights laws.

Conclusion: H.R. 534 is fundamentally flawed because it fails to address the growing crisis of mandatory, pre-dispute arbitration clauses in consumer and employment contracts.

As noted in Part I of this testimony, Public Citizen believes that the current state of arbitration law has resulted in a corruption of citizens' fundamental rights to equal justice under the law. We have suggested a comprehensive legislative initiative to resolve the problem. First, the Federal Arbitration Act should be amended to remove the judicially-imposed federal preemption of state regulation of arbitration agreements so that the states may protect consumers and employees from unfair arbitration clauses. Second, legislation should be passed to allow each side in a dispute to choose arbitration or litigation after the dispute arises. Third, an Arbitration Bill of Rights should be passed to ensure that the process of arbitration itself is fair for those who choose it as an alternative to litigation.

Public Citizen believes all of these provisions would provide the protections that small businesses, such as auto dealers, need against the inequities of forced arbitration. Moreover, they would extend to consumers and employers as well.

Pending consideration of that comprehensive solution, we urge to broaden your consideration of the arbitration crisis and pass legislation like S. 121, the Civil Rights Procedures Protection Act of 1999 and S. 2117, the Consumer Credit Fair Dispute Resolution Act of 2000. These pro-consumer, pro-worker bills would address two areas of law where arbitration is exceptionally inequitable. If the Committee is intent on pursuing as free standing legislation, Public Citizen believes it should be amended to protect consumers from arbitration clauses in their contracts with the businesses who would be protected from arbitration by this Bill.



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