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Arb Study Points Out System's Lack of Checks and Balances

Opponents of the Arbitration Fairness Act strained to see a glass half full in a new study on consumer arbitrations administered by the American Arbitration Association, but they didn’t realize that the tonic contained a poison pill.

The study – released Wednesday by the Searle Center, a conservative Northwestern University think tank – found that consumers received an award in 53 percent of the cases they initiated and received about 52 percent of the amount they sought in those cases. Businesses received an award in 84 percent of cases they brought and won 93 percent of what they ask for in those cases. This means that businesses got roughly 78 percent of what they sought compared to 28 percent for consumers.

Nonetheless, Lisa Rickard, the chief of the Chamber of Commerce’s legal policy arm, raced out a statement claiming the study showed arbitration to be “a fair, inexpensive and unbiased option” for consumers. (Her use of the word “option” was a bit ironic given that the Searle report examined only cases in which consumers were forced into arbitration by a contract clause; meanwhile, the Chamber is vigorously fighting the Arbitration Fairness Act, which would ensure that consumers have the option to go to court.)

While it is difficult to construe a finding of fairness from the study’s results (Businesses 78, Consumers 28), other data in the report undermined the proposition of arbitration’s fairness in a much more fundamental way – and the Chamber swallowed it whole.

The study found that AAA flagged nearly a quarter (23 percent) of the cases it received because businesses had included terms in their arbitration clauses that violated AAA’s due process rules. These violations included imposing excessive costs on consumers, limiting remedies, calling for arbitration hearings to be held in distant locations, and failing to provide for an impartial arbitrator. In most instances, the business agreed to modify its rules and the case went forward. But AAA refused to take nearly 10 percent of the cases.

Rickard cheered this finding: “AAA actively promotes consumer fairness by strictly enforcing their due process rules and refusing to administer arbitration in cases where businesses were repeat violators of the AAA’s protocol.”

Oops. While this finding made AAA look good, it is devastating to the current legal regime surrounding arbitration, which is akin to the Wild West. Let’s say, purely hypothetically, that AAA is a paragon of fairness, and is entirely impervious to financial incentives to recruit and maintain customers. Maybe, in fact, AAA’s business clients so value their reputation that they will only use an arbitration firm of impeccable integrity. The Searle study touches on this proposition by suggesting that some businesses might actually want pro-consumer arbitrators just as some retailers instruct their return-desk employees “to give customers every benefit of the doubt.”

This view sounds a bit Pollyannaish. But even if accurate in some cases, it still would do absolutely nothing for consumers who find themselves in disputes against companies that do not share that outlook – which are likely the vast majority. Does anybody really believe payday lenders are guided by a “customer is always right” philosophy? What about health insurers? Credit card and cell phone providers? Most businesses have every incentive to choose an arbitration firm that’s good for the business, not the consumer. Public Justice litigator Paul Bland pointed this out in response to a Wall Street Journal blog item. [Scroll to “Update” for Bland’s remarks]

It’s important to realize that businesses have complete control in designating who is eligible to conduct their arbitrations, that arbitration firms are entirely self-regulating, and that consumers’ recourse against even the most blatantly egregious arbitration rulings is next to nil.

None of this is to say that the report completely exonerates AAA. The study also revealed that while AAA polices contract terms in lower stakes cases, it does not do so for higher-stakes cases (those in which more than $75,000 is at stake). This is not a misprint. “Administrative review is limited to cases seeking $75,000 or less,” the Searle study says. “The Protocol still applies in cases in which the claimant seeks more than $75,000, but in those cases decisions on application of the Protocol are for the arbitrator.”

AAA’s fallibility and the lack of any assurances about other firms point to consumers enjoying almost no expectations of fairness in binding mandatory arbitration. Sure, arbitration might look fair in some instances. But those instances wouldn’t say much about the overall fairness of a system in which one side of a legal dispute can force the other into a hand-picked, private tribunal. Accepting that kind of system amounts to a public policy of crossing one’s fingers and hoping for a benevolent master. If our Founders had that philosophy, they would have commissioned a search committee for a better king and spared themselves from spending a hot summer in Philadelphia – indoors, with the windows closed – while they hammered out a system of checks and balances.