[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
MANDATORY BINDING ARBITRATION AGREEMENTS: ARE THEY FAIR FOR CONSUMERS?
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HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
JUNE 12, 2007
__________
Serial No. 110-69
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. (BOBBY) SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio
MAXINE WATERS, California DANIEL E. LUNGREN, California
MARTIN T. MEEHAN, Massachusetts CHRIS CANNON, Utah
WILLIAM D. DELAHUNT, Massachusetts RIC KELLER, Florida
ROBERT WEXLER, Florida DARRELL ISSA, California
LINDA T. SANCHEZ, California MIKE PENCE, Indiana
STEVE COHEN, Tennessee J. RANDY FORBES, Virginia
HANK JOHNSON, Georgia STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois TOM FEENEY, Florida
BRAD SHERMAN, California TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota
Perry Apelbaum, Staff Director and Chief Counsel
Joseph Gibson, Minority Chief Counsel
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Subcommittee on Commercial and Administrative Law
LINDA T. SANCHEZ, California, Chairwoman
JOHN CONYERS, Jr., Michigan CHRIS CANNON, Utah
HANK JOHNSON, Georgia JIM JORDAN, Ohio
ZOE LOFGREN, California RIC KELLER, Florida
WILLIAM D. DELAHUNT, Massachusetts TOM FEENEY, Florida
MELVIN L. WATT, North Carolina TRENT FRANKS, Arizona
STEVE COHEN, Tennessee
Michone Johnson, Chief Counsel
Daniel Flores, Minority Counsel
C O N T E N T S
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JUNE 12, 2007
Page
OPENING STATEMENTS
The Honorable Linda T. Sanchez, a Representative in Congress from
the State of California, and Chairwoman, Subcommittee on
Commercial and Administrative Law.............................. 1
The Honorable Chris Cannon, a Representative in Congress from the
State of Utah, and Ranking Member, Subcommittee on Commercial
and Administrative Law......................................... 2
The Honorable Hank Johnson, a Representative in Congress from the
State of Georgia, and Member, Subcommittee on Commercial and
Administrative Law............................................. 4
WITNESSES
Mr. F. Paul Bland, Jr., Public Justice, Washington, DC
Oral Testimony................................................. 5
Prepared Statement............................................. 8
Mark J. Levin, Esquire, Ballard Spahr Andrews and Ingersoll, LLP,
Philadelphia, PA
Oral Testimony................................................. 43
Prepared Statement............................................. 45
Ms. Jordan Fogal, Political Activist, Houston, TX
Oral Testimony................................................. 68
Prepared Statement............................................. 70
Mr. David S. Schwartz, University of Wisconsin Law School,
Madison, WI
Oral Testimony................................................. 82
Prepared Statement............................................. 84
APPENDIX
Material Submitted for the Hearing Record........................ 125
OFFICIAL HEARING RECORD
Material Submitted for the Hearing Record but not Reprinted
Publication by the U.S. Chamber Institute for Legal Reform entitled
Arbitration: Simpler, Cheaper, and Faster Than Litigation, April
2005. This report is available at the Subcommittee and can also be
accessed at:
http://www.arb-forum.com/rcontrol/documents/
ResearchStudiesAndStatistics/2005HarrisPoll.pdf
Study by Ernst & Young entitled Outcomes of Arbitration, An Empirical
Study of Consumer Lending Cases
http://www.arb-forum.com/rcontrol/documents/
ResearchStudiesAndStatistics/2005ErnstAndYoung.pdf
Publication by the U.S. Chamber Institute for Legal Reform entitled
State Court Enforcement of Arbitration Agreements, by John M.
Townsend, October 2006
http://www.instituteforlegalreform.com/issues/docload.cfm?docId=487
Document by the American Arbitration Association, Dispute Resolution
Services Worldwide entitled Consumer Due Process Protocol,
Statement of Principles of the National Consumer Disputes Advisory
Committee
http://www.adr.org/sp.asp?id=22019
MANDATORY BINDING ARBITRATION AGREEMENTS: ARE THEY FAIR FOR CONSUMERS?
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TUESDAY, JUNE 12, 2007
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:37 a.m., in
Room 2237, Rayburn House Office Building, the Honorable Linda
Sanchez (Chairwoman of the Subcommittee) presiding.
Present: Representatives Sanchez, Johnson, Delahunt,
Cannon, and Jordan.
Staff present: Norberto Salinas, Majority Counsel; and
Daniel Flores, Minority Counsel.
Ms. Sanchez. Good morning. I would bang my gavel, but I
don't have a gavel presently, but we are going to call this
Subcommittee on Commercial and Administrative Law to order.
I will recognize myself for a short statement.
In 1925, Congress passed the Federal Arbitration Act to
free up the courts from an increasingly heavy docket and to
place arbitration agreements on the same footing as contracts.
At the time, Congress found several benefits to arbitration,
including lower costs than litigating in courts, a choice of
neutral arbitrators with expertise in the disputed area of law,
and a quicker resolution to the dispute.
However, the use of arbitration has expanded from simply
involving disputes between commercial parties, to issues
between consumers and businesses, employees and employers, and
shareholders and corporations. This once-rare alternative to
litigation has become commonplace and arbitration clauses are
now frequently included in legal contracts of every variety.
As arbitration has increased in popularity, what was once a
choice has become a mandatory part of many consumer contracts.
In fact, according to a 2004 survey, one-third of all our major
consumer transactions are covered by mandatory arbitration
clauses. Despite all the benefits of arbitration, mandatory
arbitration agreements may not always be in the best interests
of consumers.
Mandatory binding arbitration clauses in agreements may
require consumers to pay fees to arbitrate a claim or travel
several States away for complaint proceedings. Advocates also
have shown that businesses often fare better than consumers in
arbitration matters. In fact, in one instance, it was reported
that a particular bank won an astonishing 99.6 percent of the
almost 20,000 arbitration cases in which it participated.
Besides the advantage of regular customers in the arbitration
game, there are real questions about due process and the non-
public nature of arbitration decisions.
Considering that the Federal Arbitration Act was created
only to cover businesses in equal bargaining positions, we have
to wonder how today's current use of arbitration agreements
comport with the legislative history and the spirit of the act.
Congress must now carefully consider whether arbitration is
fair for all of the parties to a dispute.
Today's oversight hearing will provide an opportunity to
learn more about the effect of arbitration on consumers and
whether mandatory binding arbitration clauses are an equitable
use of the arbitration process. First, we must review the
history of arbitration and the reason that Congress codified
it.
Second, we must understand how the use of arbitration has
evolved since 1925 and how it came to be used in the consumer
business context of today. Finally, we must decide how best to
ensure that the benefits of arbitration are maintained, while
addressing its negative aspects. It is also important to note
that several bills regarding arbitration agreements have been
introduced.
To help us learn more about mandatory and binding
arbitration agreements, we have four witnesses here with us
this afternoon. We are pleased to have F. Paul Bland, Jr., an
attorney at Trial Lawyers for Public Justice; Mark Levin, a
partner at Ballard Spahr Andrews and Ingersoll; Jordan Fogal,
an author and consumer advocate; and David Schwartz, a
professor at the University of Wisconsin Law School.
Accordingly, I look forward to today's testimony, and I
welcome all of our witnesses.
At this point, I would now like to recognize my colleague,
Mr. Cannon, the distinguished Ranking Member of the
Subcommittee, for his opening remarks.
Mr. Cannon. Thank you, Madam Chair.
Mandatory binding arbitration clauses in consumer contracts
have become more common in recent years. Some consumer
advocates argue that this is unfair. The claim is that the
practice excessively benefits companies over consumers and urge
that use of mandatory binding arbitration clauses in consumer
contracts be restricted. Proposals to restrict the freedom of
contract should be viewed cautiously and proposals to restrict
the freedom of contracting mandatory arbitration should be
viewed with special caution.
Arbitration is the classic means of alternative dispute
resolution for those wishing not to bring their dispute before
Federal or State courts. For many years, the law and the courts
have strongly encouraged arbitration. It can efficiently afford
justice and it eases the burden on our strained court system.
Free access to efficient arbitration is particularly useful
in the area of consumer contracts. Consumers benefit from a
quicker, less cumbersome and less expensive way of resolving
their often small-scale disputes, and companies benefit from
these same advantages because consumer claims can be repetitive
and large in number.
The use of mandatory binding arbitration clauses has risen
not because companies want to disadvantage consumers, but
because companies increasingly believe they need to protect
themselves from abusive class action suits. Actual or perceived
abuses of class action tort cases and class action lending
disclosure suits, along with the web of inconsistent
substantive law and civil procedure in competing jurisdictions
entertaining such lawsuits have prompted companies to resort
more and more to mandatory binding arbitration.
In this way, companies have sought to introduce a more
orderly, less expensive and more consistent set of rules for
the resolution of customer disputes. They are not seeking to
create a problem for consumers. They are trying to solve the
serious problem they confront themselves.
Is this solution working for both sides? I expect that the
evidence today will support the conclusion that it is, that
consumers are being fairly treated. For example, aware of
consumer protection concerns, companies have developed what are
known as ``fair'' clauses in consumer contracts. These clauses
protect against undue advantage to companies in arbitration.
They include provisions that comply with consumer due
process procedures of the major arbitrating services; allow
either the consumer or the company to invoke arbitration;
provide for fee-shifting, including for indigent consumers; and
open off-ramps to small claims court for certain claims.
In addition, consumer contracts increasingly include opt-
out clauses. These clauses allow consumers during a specified
time after entering into a contract to opt out of mandatory
binding arbitration clauses. Consumers who opt out will still
preserve the rest of the bargain embodied in their contract.
The National Arbitration Forum recently published a synopsis of
independent studies and surveys on the benefits of consumer
arbitration.
The results of these studies included the following.
Consumers prevail 20 percent more often in arbitration than in
court. Monetary relief for individuals is higher in arbitration
than in lawsuits. Arbitration is about 36 percent faster than
litigation, and 64 percent of American consumers would choose
arbitration over a lawsuit for monetary damages, and 93 percent
of consumers using arbitration find it to be fair.
The evidence from empirical studies suggests that mandatory
binding arbitration is fair to consumers. Institutional and
market forces appear to be working to promote the use of fair
arbitration clauses in procedures, and in turn, arbitration is
delivering fair results to consumers. There does not appear to
be an urgency for Congress to intervene in this area.
Restricting the freedom of contract over how to enter into
arbitration would reduce the options available to consumers and
it would reduce competition in the legal services and dispute
resolution markets. When the consumer confronts fewer services
and less competitive markets, the consumer inevitably suffers.
Trial lawyers and public advocacy groups--the lawyers who bring
class actions--might gain from restrictions, but consumers
likely would not.
I look forward to the testimony today, and I yield back.
Ms. Sanchez. I thank the gentleman for his statement.
I would now like to recognize the gentleman from Georgia,
Mr. Johnson, for his opening statement.
Mr. Johnson. I want to thank the Chairwoman for holding
such an important oversight hearing today.
The right to a jury trial is guaranteed by the Federal
Constitution, yet this right is lost as more and more
businesses impose arbitration agreements on their customers.
Although today's hearing focuses on consumers, this problem has
also permeated the employment and healthcare industries.
The Federal Arbitration Act was enacted as an alternative
to resolve disputes between businesses on equal footing. But
today businesses impose these so-called ``agreements'' through
envelope stuffers or in small-print notices which are often
overlooked by the average consumer. This take-it-or-leave-it
position leaves consumers, employees, and small businesses at a
disadvantage. Coupled with high administrative fees, lack of
discovery and limited opportunity to appeal, it has swayed away
from its original purpose as a voluntary expedited process to
resolving disputes, and it has become a tool for businesses to
divert disputes into a private legal system.
A fundamental feature of a fair justice system is that both
sides to a dispute have equal access to that system. Mandatory
arbitration agreements give one side the upper hand. It is my
hope, Madam Chair, that although we are looking only into the
issue of consumer arbitration agreements today, we will have
other hearings in other areas such as employment.
Thank you very much.
Ms. Sanchez. Thank you, Mr. Johnson.
Without objection, other Members' opening statements will
be included in the record.
Without objection, the Chair will be authorized to declare
a recess of the hearing at any moment.
I am now pleased to introduce our panel of distinguished
witnesses for today's hearing.
Our first witness is Paul Bland, a staff attorney for
Public Justice. Mr. Bland serves as a member and former co-
chair of the board of directors of the National Association of
Consumer Advocates. Mr. Bland is also the co-author of Consumer
Arbitration Agreements, published by the TLPJ Foundation and
the National Consumer Law Center.
Our second witness is Mark Levin, a litigation partner at
Ballard Spahr Andrews and Ingersoll. Mr. Levin concentrates his
practice in complex commercial and class action litigation,
with particular expertise in consumer financial services
litigation and the structuring and enforcement of consumer
arbitration clauses. Mr. Levin has co-published several
consumer financial services and arbitration articles which have
appeared in Arbitration of Consumer Financial Services
Disputes, and The Business Lawyer.
Our third witness is Jordan Fogal. Ms. Fogal, a political
activist, has waged a public advocacy campaign in the Houston
area for homeowners affected by questionable practices of
developers. Ms. Fogal has also been active in calling attention
to the lack of lending laws to protect homeowners who get
tricked into buying defective homes.
Our final witness is David Schwartz, associate professor at
the University of Wisconsin Law School. Professor Schwartz's
research interests include federalism, workers' rights and the
law of the workplace. Prior to joining the University of
Wisconsin Law School faculty, Professor Schwartz was senior
staff attorney at the American Civil Liberties Union of
Southern California in my home town of Los Angeles.
I want to thank all of the witnesses for their willingness
to participate in today's hearing.
Without objection, your written statements will be placed
in their entirety into the record of these proceedings. We
would ask that you limit your oral remarks to 5 minutes.
You will note that we have a lighting system that starts
with a green light. After 4 minutes, it will turn yellow to
warn you have 1 minute remaining. Then it will turn red when
the 5 minutes have expired. At that time, if you still have not
finished your testimony, I would ask you to just conclude your
final thought so that we have an opportunity to hear from all
of our witnesses.
After each of you has presented your testimony,
Subcommittee Members will be permitted to ask questions,
subject to a 5-minute limit. Those are the ground rules.
So at this point, we are ready to proceed with the
testimony. I would ask Mr. Bland if he would pleased proceed.
TESTIMONY OF F. PAUL BLAND, JR., PUBLIC JUSTICE, WASHINGTON, DC
Mr. Bland. Thank you very much, Chairwoman.
Arbitration, the way it is practiced in consumer cases
today in America, has essentially become a lawless system. It
is a system without rules. The arbitrators have a huge
incentive to tilt the playing field. There are a lot of
companies who compete for work as private arbitration
companies. They compete against each other. It is lucrative
work. Private arbitrators frequently make $300, $400, even $500
an hour in this city and a lot of other cities, and they want
this work.
Now, the companies, the corporations are the ones who right
standard-form contracts. I am sure that every Member of this
Committee and everyone in this room has a cell phone and a
credit card. None of you wrote the terms of the agreement that
govern your cell phone or your credit card. They were written
by the bank, the cell phone company, whoever. Those are the
companies who are picking the arbitration providers.
So if you are an arbitration provider and you want this
lucrative work, what you have to do is you have to pitch your
services toward the companies who are writing the contracts.
That is how you get the work. That is how the market works. So
as a result, it creates a dynamic which is a race to the
bottom. It shows up in a bunch of different ways. I spelled out
a huge number of illustrations of this in my testimony.
For example, one problem is again and again every time a
private arbitrator rules in favor of a consumer in a
significant way, they get blackballed and they don't hear any
more cases. So if you want to work as an arbitrator, and you
want to be able to charge $500 an hour, you better work for the
company who is picking you. If you bite the hand that feeds you
and you rule for the consumer, you may never work as an
arbitrator again. This has happened a lot. That is a problem.
A second problem is the arbitration companies, like the
National Arbitration Forum referred to by the Ranking Member,
send out advertisements to corporations, to banks, trying to
get them to pick them. So they will send out an advertisement
that says, we want a better system--the American Arbitration
Association--because if you pick us, we can set up the
following things that will make for rules favored on your side
against the consumer.
Now, when companies start advertising for business like
that, that is a problem. You don't get that in the court
system. I never have gotten in my 20 years of practicing as a
lawyer a letter from a judge saying, ``Hey, file your case in
this district of Texas and we are going to see you get a really
big bang-up result.'' If I did get that letter, I can guarantee
you the judge would be disbarred and it would be on the
editorial page of The Wall Street Journal. But the arbitration
companies act like this all the time. That is another problem.
Another example is they have loaded panels. Who is going to
be the arbitrator? When the companies go to pick the
arbitration panels, the people who they pick, who show up on
the panels, are a problem. Let me give you an example. Someone
recently approached us about a health insurance case in
Michigan. It was a medical malpractice case. The woman has
breast cancer. Her doctor proposes a certain course of
treatment. The HMO won't do it. They won't cover it.
As a result, she ends up not getting the treatment and
metastasizes. She is dying. She considers this a medical
malpractice case. She wants to go to court. They want to force
her into arbitration. She gets a list from the American
Arbitration Association of seven names.
Okay, so instead of a jury of her peers, she has these
seven names. This is the universe of people who can decide her
case. Every single person on the list from the American
Arbitration Association, notwithstanding the due process
protocols and everything, is somebody who works for an
insurance company or they work for a law firm where all the
work they do is for an insurance company.
So if it was your spouse or if it was you who had a medical
malpractice claim or any other claim against a corporation who
you felt had really done something wrong to you, do you want to
have a jury or do you want to have a defense lawyer who works
for that industry deciding the case?
Now, why do I say it is lawless? I say it is lawless
because courts do not meaningfully review arbitration
decisions. In order to make it so quick and so streamlined, the
court system has established a set of rules and they have
interpreted the 1924 act to basically say that there is
virtually no judicial review of arbitration decisions. There
was a case last year from the Seventh Circuit Court of Appeals.
Judge Posner wrote that even if an arbitrator's decision was
wacky--``wacky,'' think about that word--as a matter of law,
and that was not grounds for overturning it.
The year before, the Third Circuit Court of Appeals in
Philadelphia found that even if an arbitrator's decision had
gross errors of law, that was not grounds for overturning a
decision. In a case involving Steve Garvey, the U.S. Supreme
Court, with Justice O'Connor writing for the court, said that
even if an arbitrator's fact-finding was silly--``silly'' fact-
finding--that was not grounds for overturning the case.
About once a week in my practice of law, because I wrote a
book on this and I do a lot of cases in this area, about once a
week some consumer or employee someplace in America contacts
our firm and says, we had an arbitrator who issued a terrible
decision, that ignored all the evidence; they just ruled for
the company and they wouldn't even listen to me; they fell
asleep while I was talking; it was completely unfair.
And I will say, gee, were the errors of law wacky? Yes. Was
the fact-finding silly? Well, according to the courts, you have
no remedy at all. We turn that case down every time because it
is next to impossible to get these cases overturned. It is a
problem when you have a private system of justice, where you
have an incentive to suck up to one side, and then no one is
looking over their shoulders. Even if they were the best people
in the world, honest and intelligent people make mistakes. But
when there is no appeal, that is a problem.
[The prepared statement of Mr. Bland follows:]
Prepared Statement of F. Paul Bland, Jr.
Ms. Sanchez. The time of the gentleman has expired. I thank
you for your testimony.
Mr. Levin, would you please proceed?
TESTIMONY OF MARK J. LEVIN, ESQUIRE, BALLARD SPAHR ANDREWS AND
INGERSOLL, LLP, PHILADELPHIA, PA
Mr. Levin. Madam Chair, Ranking Member Cannon, I know and
like and respect Mr. Bland, but I could not disagree more
conceptually and intellectually with his positions.
It is my position, as one who has practiced law for 30
years and been a practitioner in the consumer arbitration area
for more than a decade, that arbitration agreements are fair to
consumers because there is a dynamic presently in place that
ensures fairness to consumers and to all other parties
involved.
That system has never worked better than it does today. It
involves four components. First, the Federal Arbitration Act
itself. The Supreme Court has noted that the FAA, was enacted
with consumers, among others, in mind, and it has operated
effectively for more than 80 years through ever-changing
economic, social and political times, to ensure that
arbitration agreements are as enforceable as other contracts
and that arbitration agreements and arbitration proceedings are
fair.
Contrary to what Mr. Bland said, courts do scrutinize
arbitration agreements that are alleged by consumers to be
unfair, and they do that because the FAA makes them do that.
The courts determine the validity of these contracts. The
Supreme Court has called them the ``gatekeepers,'' and they do,
from personal experience, a superb job of doing that. Courts
also have some powers of review following an arbitration award
to ensure that the proceeding was not biased and that the
arbitrator did not manifestly disregard the law.
The second component of the system is the companies with
whom consumers deal. In my experience, companies do act in good
faith to draft arbitration agreements that are fair to the
consumer, even giving the consumer a right to reject the
arbitration agreement at the outset of the transaction with no
strings attached. Today, the vast majority of arbitration
agreements require the arbitrator to apply substantive law and
authorize the arbitrator to award the same remedies that a
consumer could obtain if he or she were in court.
This includes, very importantly, the ability of the
consumer who prevails in arbitration to recover attorneys fees
and costs if applicable law so provides. I note that in almost
all Federal and State consumer protection statutes do require
fee-shifting, so this right is preserved in arbitration. The
U.S. Supreme Court has said time and time again that when you
go to arbitration, you are not losing your substantive claims.
You are merely changing the forum for resolving them.
The third component, the arbitration administrators. Again,
I hear Mr. Bland's apocryphal stories, but I think the best
testimony on behalf of organizations such as the AAA and the
NAF is the consumer protocols, consumer procedural rules and
the consumer fee schedules that are especially designed to
ensure that consumers are treated fairly.
I note that the AAA's, the American Arbitration
Association's, consumer due process protocol was drafted with
the intense involvement of all consumer groups that had an
interest in working with that group and devising due process
protocols. That is in my statement. There is a list of the
participants at the end.
The administrators will not deal with the agreements of
companies that do not meet their fairness standards. The
arbitration fees for small claims are actually far less than
the fees for filing a lawsuit in court. Justice Ginsburg
herself has called the fees charged by the AAA and the NAF,
``models for fair costs in fee allocation.'' Both organizations
will even waive that small fee if the consumer can't afford to
pay it.
And finally, the courts. Again, based on my experience,
courts very rigorously scrutinize arbitration agreements to
make sure that they are fair, and they are quite vigilant in
refusing to enforce those relatively few agreements that they
conclude do not pass muster under applicable State and Federal
laws. They take their job as gatekeepers very seriously.
To the extent there are comments made in the witness
submissions that have been made or at today's hearing about
cases in which arbitration agreements were not fair, the courts
invalidated them. I think that shows that the system is working
as it was intended to do. It should not be viewed as an
indictment for all consumer arbitration agreements, the vast
majority of which are drafted in order to be fair and
scrupulously complied with applicable laws.
My final thought, in closing, is that I submitted a good
bit of empirical evidence, which I believe rebuts the testimony
about the unfairness of arbitration. That empirical evidence
shows that arbitration is fair to consumers, and also
arbitration does reduce the cost of providing goods and
services to consumers, which is another element of fairness.
Thank you.
[The prepared statement of Mr. Levin follows:]
Prepared Statement of Mark J. Levin
Ms. Sanchez. Thank you, Mr. Levin.
Ms. Fogal, you are up next.
TESTIMONY OF JORDAN FOGAL, POLITICAL ACTIVIST, HOUSTON, TX
Ms. Fogal. On April 15, we moved into what was going to be
our last home. It had all the eye candy, even an elevator. The
children told everybody at school that their grandmother had an
elevator. We are senior citizens. We had a 30-year mortgage, 6
percent interest rate. We could afford our payments. We had an
elevator in case our knees went. We had a medical center close
by, and a funeral home three blocks away.
The first night in our new home, my husband tried out new
Jacuzzi tub on the third floor. When he pulled the plug, 100
gallons of water crashed through our dining room ceiling into
the dining room. This was not one overlooked plumbing
connection, as my husband and I so desperately wanted to
believe. It was a preview of coming attractions.
For 29 months, we begged our builder to fix our house. They
would come in and seal up the windows inside so the water
wouldn't run in, and then they would seal up the crack on the
outside in the stucco so the water couldn't run out. So the
house just filled up with water, and the mold grew. An
accredited laboratory said they had never seen toxic readings
that high in an inhabited dwelling.
Our doctor told us to move out immediately. We sent the
reports to the builder. He lied under oath, saying that he
never received it, and the engineer received it that day, his
engineer. We moved out. We had estimates for over $150,000 and
our new home did not last 29 months.
After we exhausted all other remedies, I began protesting
my builder's new property. I felt foolish standing on a street
corner holding up a sign because it was the only option left to
me. We did not file on our builder an arbitration. Our builder
filed on us for taking advantage of the only thing we had left,
our first amendment rights.
He warned me that his attorneys would take care of me in
arbitration. Two weeks after I stepped out on that corner, we
received our arbitration papers. The builder filed a fast-track
to dispose of us more expediently than regular arbitration.
We couldn't afford a lawyer anymore. We were paying for our
new house, moving costs, deposits on the apartment, storage for
our things. We had to keep the insurance and lights on in our
new house, even if we couldn't live there, because the builder
said that we had caused the damage. We knew that he was not
going to buy it back. He told us he only sold houses. He didn't
buy them.
We also called the mortgage company and sent them the
reports. After never being late with one payment, we allowed
our home to go into foreclosure. We felt ashamed. At the same
time, we also were paying for engineering, moisture, infrared,
mold and air quality testing, and our builder knew that all of
this was unnecessary.
In arbitration, all the burden of proof is on the
homeowner. The builder lets you do all the work and pay for it,
and he sit there smugly knowing all the while that you will run
out of money, shut up, go away, or he will win in arbitration.
We did everything right. We had our house inspected. We hired a
licensed realtor. We paid $3,400 a year for homeowners
insurance, but substandard construction and builder defects are
not covered by homeowners insurance. We were not in good hands
with Allstate.
We paid good money for an uninhabitable house and had no
recourse. We were constantly tormented by the American
Arbitration Association and billed a $6,000 counterclaim fee
that got us out of fast-track and into regular arbitration. We
were billed for case service fees, arbitration fees, even for
the rent on the room. After receiving hardship, our case was
dismissed due to failure of payment of fees by both parties.
Now, we could finally file in court and charge the builder
with fraud. We were dragged through 10 hearings before the
judge ordered us to return to arbitration. Once again in
arbitration, 2 years passed. We have not had a Christmas tree.
We have not grilled out. We have not planted a flower. We have
not had company. Our grandchildren have no place to stay with
us. We live in a small third-story apartment, a temporary
situation because surely justice was going to come soon.
After successfully proving fraud, my net award, including
my attorney fees, is $26,000. I had to pay $1,690 for a study
after arbitration was over before the arbitrator would issue
her award. They do not have to face you when they render their
verdicts. I feel an overwhelming responsibility as I sit here
before you today because I feel like I have to represent the
hundreds of families I have talked to over the years and the
hundreds of thousands that I have never met who have suffered
so much more than I have.
Please don't tell us that our houses would cost more if
they were built correctly, or tell us that arbitration works so
well. If it worked so well, why does it have to be mandatory?
By mandatory arbitration, we have lost our seventh amendment
rights to a trial by jury, and maybe a fight to getting their
first amendment rights due to the abuses and harassment from
arbitrators and unethical corporations.
In closing, I would like to quote our second president:
``Representative government and a trial by jury are the heart
and lungs of liberty. Without them, we have no other
fortification against being ridden like horses, fleeced like
sheep, worked like cattle, and fed and clothed like swine.''
Mr. Adams must have had a premonition about the privatization
of the justice system we now refer to as arbitration.
Thank you.
[The prepared statement of Ms. Fogal follows:]
Prepared Statement of Jordan Fogal
Ms. Sanchez. Thank you, Ms. Fogal.
Mr. Schwartz, please proceed with your testimony.
TESTIMONY OF DAVID S. SCHWARTZ, UNIVERSITY OF WISCONSIN LAW
SCHOOL, MADISON, WI
Mr. Schwartz. Chairman Sanchez and Members of the
Committee, thank you so much for inviting me to testify today
at this hearing.
I would like to emphasize four brief points. First, the
most basic principle of fairness in any dispute resolution
system is never let one part to a dispute make the rules. The
second basic principle of fairness in any dispute resolution
system is never let one party to a dispute choose the decision
maker.
Mandatory arbitration violates both of these fundamental
principles. It gives the company writing the contract--the
bank, the credit card company, the employer--the sole and
exclusive say about whether its disputes against consumers or
employees will go to arbitration or go to court.
Second, a basic pre-dispute arbitration agreement--and that
is what we are talking about here, agreements to arbitrate
before the dispute has arisen--one that simply picks
arbitration over a court is unfair enough for the reasons that
you heard from the previous witnesses, Ms. Fogal and Mr. Bland.
It deprives consumers of needed procedural rights like
discovery, that is the right to get information from the other
side and the right to appeal.
Many large businesses push the envelope by trying to
deprive consumers not only of their access to courts, but also
a crucial remedy that the law affords them: compensatory and
punitive damages, attorneys fees, and particularly class
actions. The class action remedy is vital to consumer
protection.
I believe that the primary goal of many companies that use
mandatory arbitration clauses is to gain immunity from class
actions, which can become in effect immunity from liability for
widespread, but small-dollar per capita, consumer frauds and
wage and hour violations.
Third, the surest way to tell that arbitration is unfair to
consumers is to look at the behavior of the people involved.
Who endorses mandatory arbitration?: The banking industry, the
Chamber of Commerce, large employers, and their lawyers. Do any
bona fide consumer groups endorse mandatory arbitration? No.
Mandatory arbitration boosters argue that mandatory
arbitration produces fair results indistinguishable from court,
maybe even better than court, but that is false. There is not
one reputable, impartial study showing that mandatory
arbitration produces fair results for consumers.
There are a handful of studies commissioned by pro-
mandatory arbitration partisans--the banking industry, large
employers and the attorneys who represent them--that claim that
arbitration produces fair results, but those studies I am
afraid to say are junk social science. They are based on very
small samples and very biased samples of cases to study. They
are not valid research.
If arbitration is a good deal for both sides, if it really
is faster, cheaper, but equally fair, then both sides would
choose it after they have a dispute. The only reason for
businesses to opt for mandatory pre-dispute arbitration is
because they believe, with good reason, that they will get
better results because they will reduce their overall
liability. In effect, they view mandatory arbitration as do-it-
yourself tort reform.
Fourth, the Federal Arbitration Act has been interpreted to
displace State law. This is a seriously mistaken Supreme Court
ruling that has thrown the lower courts across the country into
wide confusion about how much State law is in fact preempted,
essentially nullified by the Federal Arbitration Act.
Business defenders today are increasingly arguing in court
that the Federal Arbitration Act nullifies various State
consumer protection laws. Since most consumer protection law is
still State law in the United States, this doctrine of Federal
Arbitration Act preemption poses a serious threat of creating a
consumer protection gap that could only be filled by new
Federal regulations.
To conclude, the Federal Arbitration Act was not intended
by Congress to apply to consumer or employment claims. It was
not intended to preempt or nullify any State laws. We are in
this mess because of a serious of legally incorrect and
misguided court interpretations of the FAA. Unfortunately, the
courts are not going to correct their own mistakes because they
find that the caseload-reducing effect of arbitration, of
mandatory arbitration, is an irresistible temptation.
It is time for Congress to step in and clean up this mess.
Thank you.
[The prepared statement of Mr. Schwartz follows:]
Prepared Statement of David S. Schwartz
Ms. Sanchez. Thank you, Mr. Schwartz, for your testimony.
We will now begin a series of question rounds. I would like
to recognize myself for 5 minutes for questions. I would like
to start with Ms. Fogal.
In your testimony, which is very compelling, I must say,
for this hearing, you describe your experience in having gone
through the arbitration process, and you indicate that you feel
like you are representing other consumers who may have been in
a similar situation.
I am wondering, how many other people have you spoken with
who had a similar experience with arbitration or a better or
worse experience with arbitration?
Ms. Fogal. There are two consumer groups that track this
information: HOBB, which is Homeowners for Better Building, and
HADD, which is Homeowners Against Defective Dwellings. They did
statistics every week and get phone calls. I talked to these
people. I talked to people who would call me and ask me, what
can we do? And all I can tell them is, I don't know.
Ms. Sanchez. I don't mean to interrupt you.
Ms. Fogal. That is okay.
Ms. Sanchez. Do you find that people's experience with
arbitration has been about as bad as yours has been, or better,
or worse?
Ms. Fogal. What I found is that they are usually horrible,
if they can talk about them, but when you come out of
arbitration, a lot of people are under secrecy agreements.
Like, I can go to their houses and see that their houses are
still in horrible condition, but they can't talk to me.
Ms. Sanchez. Okay. One of the many arguments that have been
used to advance arbitration is that it is less costly than
litigating in a traditional court system. Have you personally
found arbitration to be less costly than what you would expect
to pay if you took your claim to court?
Ms. Fogal. What I really hate is when they say
``arbitration costs,'' because first you have arbitration costs
paid to the arbitration company itself, and then you have costs
of arbitration, which is like being on a trial. So you have the
same trial costs of getting witnesses, testimony. You even have
to pay to send out your own subpoenas for $50. You have all the
costs of a trial and you better put on a good one, or it really
didn't matter. You have all the same costs. Sometimes it is
worse.
Ms. Sanchez. Okay.
Mr. Schwartz, how did mandatory binding arbitration between
equal commercial entities expand into the consumer business
realm where the parties generally are not on equal footing?
Mr. Schwartz. Well, basically for 60 years, from 1925 until
the mid-1980's, the courts uniformly correctly interpreted the
Federal Arbitration Act to apply only, as you said in your
opening statement, in business-to-business kinds of disputes.
And then suddenly in the 1980's, the Supreme Court essentially
surprised everybody with a series of decisions saying, oh, we
have this new view of arbitration. It is much better than we
previously realized.
They don't come out and say this in their court opinions,
but that happened to correspond with the views of the chief
justice then, Warren Burger, and subsequently the views of
Chief Justice Rehnquist, that there are too many cases in
Federal courts and too few judges. Whether that is true or not,
it doesn't seem that the way to reform the Federal caseload is
to place the cost of it onto consumers and employees who have
no say in whether they are going to arbitrate or not.
Ms. Sanchez. Thank you. I have several questions for you.
Are mandatory binding arbitration agreements really mandatory,
because we have heard the argument that if a consumer is
unhappy with an arbitration agreement, they can simply refuse
the agreement and take their business to a competitor. What is
your response to that?
Mr. Schwartz. There are two problems with that argument.
The first is that for a lot of businesses, there are no
competitors who give you a choice. Every cell phone company and
every credit card company today--and those are perfect
examples--has an arbitration agreement. So you cannot get a
credit card or a cell phone without agreeing to that. It is
becoming more and more true in the healthcare situation.
Second of all, with a lot of situations, do people really
have the freedom to go do something else? If somebody has
looked for several months to find a job and they desperately
need a job, and that employment agreements says, okay, here is
a mandatory arbitration agreement if you want to come to work
for us. Is a person going to refuse the job because of some
possibility that they might down the road have a dispute with
that person?
Ms. Sanchez. Along that same vein, I was thinking of
examples in my life where I have seen actual arbitration
agreements that you have to sign. I am a sophisticated consumer
here. I am an attorney and I am a Member of Congress, but I can
remember, and probably never even realized that my credit card
and cell phone had mandatory arbitration agreements.
But I do remember one time I broke a tooth and went to the
dentist. And before I got service from the dentist, I was asked
to sign a binding arbitration agreement. It seemed to me that I
was in so much pain that had I even really thought about it,
because I will quite honestly tell you I was in so much pain
that I signed it. I would have signed anything in order to get
the services that I needed in order to not feel that pain.
So I understand perfectly what you are saying and I
appreciate your testimony.
My time has expired, so at this time I would like to allow
the Ranking Member, Mr. Cannon, 5 minutes for questions.
Mr. Cannon. Thank you, Madam Chair.
Ms. Fogal, I empathize with what you are saying. I decided
after my last building experience that I would never, ever
build anything again in the future because builders are very
difficult. They control the facts of their world, and quality
is iffy.
I am wondering, as I listened to you, if there isn't some
other kind of way to deal with the problem. You had a very
intense experience with a very big issue, a house, as opposed
to, say, for instance, cell phones. Cell phones have
arbitration clauses, but they tend to be small amounts of
money. And cell phone companies tend to compete.
On the other hand, in the same vein, if cell phones have
arbitrary elements to their contracts, people would tend to
move away from one company with their cell phone and go to a
company that is better. So I am wondering if there isn't a way
that we could have a kind of quality assurance like you have on
eBay so that people can understand who the good builders are
and who aren't.
In other words, you had a terrible problem with a builder
who was a jerk, apparently. I don't know this guy so I am not
maligning him.
Ms. Fogal. He was.
Mr. Cannon. And you don't necessarily need to go there. The
short of it is he was in business and you weren't.
Ms. Fogal. Right.
Mr. Cannon. And you ended up with a house and all the
burdens of a house and a mortgage, and he just had the
relatively minor costs of opposing you. That is a very
different environment, it occurs to me. But I don't know if you
built or if you just bought from a builder, but wouldn't you
have liked to have known something about his quality and all
the other houses he built and all the other people who have
lived in the houses that he built?
Ms. Fogal. Yes. That is why you go to the Better Business
Bureau and he had a perfectly legitimate rating with the Better
Business Bureau. Because he had operated under so many
different names, when they would complain under one name, he
would just change it.
So after we went there, and he was the fourth-largest
builder in Houston, and I did see other houses he had built. So
I felt like, oh, very nice. But I also, after all this started
happening, found out that he could build $1.3 million with
$300,000 worth of foundation damage, or $120,000 that was
uninhabitable. So you know, he was kind of an equal-opportunity
crook.
Mr. Cannon. Would your problem be somewhat lessened if
there was a world in which you could identify your builder,
having been able to identify your builder, and found out that
other people had rated him and he was poorly rated.
Ms. Fogal. Yes, that might have helped, but I also thought
that anybody that was going to build a house, why would they
need an arbitration agreement? Why wouldn't they build a house
that they believed in enough that they didn't have to have me
sign that? In Texas, you can't buy a new house without an
arbitration agreement. It is a contract of adhesion. You either
buy it or you don't get one.
Mr. Cannon. The nice thing is you can rent, but that is a
different issue, I suppose. There are alternatives.
Ms. Fogal. Well, there goes your homeownership.
Mr. Cannon. It is not really adhesion because you have lot
of options in life.
Mr. Schwartz, would you address the point of the difference
between a cell phone company that has an arbitration clause in
a highly competitive environment, and, say, the problem that
Ms. Fogal had?
Mr. Schwartz. Yes, they are both bad for different reasons.
With the cell phone company, their goal is to avoid class
actions because they figure that most of the disputes they are
going to have are going to be for small dollar amounts. They
could rip off 50,000 customers for $50 each and no one is going
to sue them individually because it is too costly to bring an
individual case. What you need is a class action.
So I think the goal of the cell phone company----
Mr. Cannon. The key probably is a better cell phone
provider. In other words, I see the distinction of where you
are headed, but the market needs to be a little robust.
In fact, Mr. Bland, you have dealt with class actions. How
many class action settlements are you aware of where individual
plaintiffs recover even 20 percent of the economic damages they
were seeking?
Mr. Bland. Actually, there is a study that was done a few
years ago by the head of a periodical called Class Action
Report. He was sort of a green eyeshade guy and he collected
every class action settlement anywhere in the country that he
could find. He found that across the board, collectively in the
aggregate for consumer class actions that about 80 percent of
the economic value went to the consumers.
Now, there are some really bad abusive settlements. I
personally have objected to bad settlements where most of the
money goes toward----
Mr. Cannon. This guy died. When did he stop collecting
data?
Mr. Bland. He died 2 years ago in an accident.
Mr. Cannon. I have had like dozens of invitations to join
class actions over the last 10 years. They are all frivolous.
They are all flaky.
Mr. Bland. Sir, if I can give you an example. I just
settled a case as a class action where a bank promised people
that they would never charge them more than 24 percent
interest, then it broke that promise and charged people 30
percent interest. The individual damages to people were $100 at
the most. We settled that case for $16 million and we have sent
out checks, or we are in the process of sending out checks to
280,000 people. Plus, we fixed everybody's credit records.
There are bad class action settlements, but that is not the
majority of it. I feel very proud about the case that I just
handled.
Mr. Cannon. My time has expired, Madam Chair. Would the
Chair indulge me to just ask what your fees on that case were?
Mr. Bland. The fees were 20 percent of the amount that was
recovered.
Mr. Cannon. So it was $4 million?
Mr. Bland. About $4 million.
Ms. Sanchez. We may have time for a second and possibly
even a third round of questions. I would like to give everybody
an opportunity in this round, so I will recognize Mr. Johnson
for 5 minutes of questions.
Mr. Johnson. A 20 percent contingent fee is definitely a
reasonable fee in a situation like that. I don't know who could
argue with the fact that attorneys serving a public purpose
should not be fairly compensated for the work that they do.
But let me ask you, Mr. Levin, do you agree generally with
the principle that whoever is paying the piper calls the tune?
Mr. Levin. No, I do not.
Mr. Johnson. Do you disagree with that generally?
Mr. Levin. Well, if by that you mean that if a company is
paying the cost of arbitration, they are going to be favored.
Is that your question?
Mr. Johnson. My question is generally, just taking it away
from legalities. Whoever is paying the piper generally is
calling the tune, is telling the piper what tune to play. Is
that not a general----
Mr. Levin. I disagree with that. I think the major
arbitration organizations such as the American Arbitration
Association and the National Arbitration Forum have put their
rules and their procedures in writing. Their arbitrators are
sworn to uphold those rules. The rules call for neutrality and
fairness at every stage of the procedure. The rules give each
side the right to strike arbitrators. I think there is a
difference between saying----
Mr. Johnson. You are not really answering my question.
Mr. Levin. I am sorry. Maybe I misunderstood your question.
Mr. Johnson. I asked you this question.
Mr. Levin. Okay.
Mr. Johnson. In your statement, you have written that in
the vast majority of cases the existing system works and works
well. That is this arbitration.
Mr. Levin. Yes.
Mr. Johnson. Because companies and employers have gone to
great lengths to make arbitration programs fair, to the point
of giving the consumers unfettered and unconditional rights to
reject arbitration when they enter into the transaction. Can
you cite some specific instances of that statement?
Mr. Levin. All of the arbitration agreements that I have
had a hand in working on, drafting, providing legal comment on
for the past several years have included a right to reject
arbitration.
Mr. Johnson. Now, I want you to hold up right there.
Mr. Levin. Yes.
Mr. Johnson. Mr. Bland, how would you respond to that
assertion?
Mr. Bland. I have seen that type of clause in maybe eight
banks' contracts. I have never seen an opt-out right in a
nursing home contract, a car sale, a cell phone, or employment
or any other type of contract. But there are some banks that
are doing it. The problem with it--if I can just quickly add--
is that it is in the fine print of a contract, usually and
literally like the seven-size font. I am physically incapable
of reading these things. It is in legalese that is very hard to
follow.
The typical sentence in some of these contracts will be
over 200 words, and people just don't even know it is there. No
one opts out. They opt-out rate is like 1 percent or less. It
is like .01 percent. Nobody reads the fine print of contracts.
There is a word in America for people who read every word of
the fine print of their contracts. It is ``paranoid.''
How many people in this room know whether their cell phone
company chose the National Arbitration Forum or the American
Arbitration Association? How many people know whether their
cell phone contract requires them to do their case here or
there? Nobody in this room knows those things.
Mr. Johnson. All right. I understand. All right.
Mr. Levin, you were champing at the bit wanting to get back
in there.
Mr. Levin. Yes, thank you, Congressman.
Certainly with respect to the arbitration agreements that I
am familiar with on behalf of consumer financial services
companies, such as banks and credit card companies, we make
sure that we do not----
Mr. Johnson. Mr. Bland said he has seen eight in his----
Mr. Levin. Well, but he also said that they were buried in
small type, but certainly----
Mr. Johnson. I am just talking about the opportunity for
people to actually reject arbitration when they enter into
their various agreements.
Mr. Levin. Yes. We make----
Mr. Johnson. Mr. Bland says he has seen it eight times in
his 20-year career. How many times have you seen it?
Mr. Levin. A lot more than that. I can't give you an exact
number, but that represents agreements that may be in the hands
of millions of people, because these credit card companies and
banks have a lot of customers. The right to opt out of
arbitration we always make sure is in boldface type, put right
at the beginning, even before it describes our----
Mr. Johnson. By ``we,'' who are you referring to?
Mr. Levin. As a lawyer, advising a client.
Mr. Johnson. Your law firm?
Mr. Levin. As a lawyer advising a client how to structure
an arbitration agreement. We urge them to put the right to
reject right up front, distinguished by either capital or
boldface letters.
Mr. Johnson. Okay. Well, let me ask you----
Ms. Sanchez. The time of the gentleman has expired.
Mr. Johnson. All right. Thank you.
Ms. Sanchez. I am sorry to say. It goes quickly.
Mr. Jordan is recognized for 5 minutes of questions.
Mr. Jordan. Thank you, Madam Chair.
Mr. Levin, you said in your work, your presentation, you
thought the judicial review process was pretty good. So
elaborate on that. Try to help me understand the sharp
contrasts out there, and how the review process does in fact
work.
Mr. Levin. Well, I think what Mr. Bland is saying is that
once you get outside the court system in to any alternative
dispute resolution program, in a sense you are operating
``technically outside the law,'' because there is not a court
involved.
But in fact, the United States Supreme Court and the vast
majority of courts in this country, both State and Federal,
have recognized arbitration as a very valuable and significant
way of making sure that everyone has access to justice and
making sure that the courts do not get overburdened and that
the costs of reducing costs for both consumers and companies
are reduced by reducing litigation costs.
The companies try to write their arbitration agreements in
a very fair and equitable way. They try to write them so that
they will be enforced by arbitration organizations which have
adopted formal due process standards and protocols and
standards of fairness for consumers.
As I mentioned in my introductory remarks, the consumer
protocols that were prepared by the American Arbitration
Association were done so with the input and very active
involvement of many, many consumer advocate groups to make sure
that what came out was something that satisfied everyone
involved in this process.
The courts also provide an important check and balance by
making sure that if someone claims that an arbitration
agreement is unfair, that agreement is scrutinized and
scrutinized very intensely. If a court rejects an arbitration
agreement, that to me shows that due process is working because
it has gone through court review. Again, there is court review
going in and some amount of court review coming out.
But I think it is all of these elements coming together and
coalescing that produces a system which, in the vast, vast
majority of cases, works and works very well. I am sympathetic
to Ms. Fogal's comments. I can't comment on them. I have no
personal knowledge of them.
But I can say in the vast majority of cases, the system
does work and arbitration does produce fair results, and it has
been endorsed by not only the vast majority of courts, but by
virtually every State. Virtually every State has its own
Uniform Arbitration Act, which is another system of arbitration
in addition to the Federal Arbitration Act.
Mr. Jordan. Mr. Bland, does your organization represent
folks in arbitration cases situation or just in the courtroom?
Mr. Bland. We have done some cases in arbitration.
Mr. Jordan. As a public interest group, do you do a fair
amount of educational work with consumers out there about the
dangers of arbitration? Tell me about your----
Mr. Bland. Mostly what we do is we provide training
information to consumer lawyers and employment lawyers where
they get an arbitration clause that in addition to sending you
to arbitration, adds some other provision like it strips you of
some of your rights under some statute or something like that,
which is very common. We try and train lawyers in how to
respond to those.
A lot of consumers come to us because of what they googled
on different issues relating to arbitration. They find us and
come to us, so we spend a lot of time talking to individual
consumers over the phone or who come into our office, but we
don't have a true educational program.
Mr. Jordan. Thank you, Madam Chair.
Ms. Sanchez. Thank you. The gentleman yields back his time.
Thank you.
The gentleman from Massachusetts, Mr. Delahunt, is
recognized.
Mr. Delahunt. Thank you, Madam Chair.
This is a very interesting discussion, but let me go back
to a point I think that was raised by Mr. Bland. We can talk
about the size of the font. We can talk about national
arbitration groups, whether it is the American Arbitration
Society, et cetera. But I think we have to deal in the real
world.
I think the point that you made, Mr. Bland, was how many
people actually read the solicitation or the credit card
agreement, 1 percent? I dare say it would be far less than 1
percent. I mean, substantially less than 1 percent.
So we can talk about due process. We can talk about the
nuances and the rules of arbitration, the right to appeal, et
cetera. But in the end, a credit card agreement is an adhesion
contract between the parties. You either get a credit card or
you don't, particularly when all of the credit card issuers
have these clauses within them.
It really comes down to, I believe, a public policy issue
which, you know, I think is really worthy of great debate, but
to talk, I mean, is there a Member on this panel that has ever
read--Mr. Jordan? Mr. Cannon? Mr. Johnson? Ms. Sanchez?--have
you ever read your credit card statement?
Mr. Cannon. Absolutely not. [Laughter.]
Mr. Delahunt. Is there anybody in the audience--please
raise your hand? So, three.
Mr. Cannon. Probably lawyers.
Mr. Delahunt. I am a lawyer. I have never read that.
Mr. Cannon. Paid to read it; paid to read it.
Mr. Delahunt. Thank you. I will pay you. [Laughter.]
I mean, the reality is that we are dealing with a subject
that is esoteric at best; that simply creates a situation
where, I don't know what the precise definition of an adhesion
contract is, but it fits my definition.
Then I think it is an issue of what we do as a Committee,
as a Congress, where it is documented, where if it can be
documented by solid studies that implicate a scientific
methodology, that there are abuses relative to consumers.
And by the way, small businesses dealing, and I would even
go so far as to say the business-to-business arbitration issue
ought to be reviewed. I dare say there are a lot of small
businesses that don't have many options other than to accept a
binding arbitration agreement from some single-source supplier.
Is it fair to, you know, everyone in the business community? It
really comes down to a question of fairness.
I am sure, Mr. Levin, the documents that you draft are
fair, are balanced, and the font is huge. It is right at the
beginning, and it is probably in glaring red, but I have to
tell you, nobody is reading it. That is the real world that we
are dealing with.
Mr. Cannon. Would the gentleman yield?
Mr. Delahunt. I yield.
Mr. Cannon. The question is really actually very
interesting. This Committee certainly has jurisdiction over it.
One of the problems is where we see a proliferation of
standardized contracts. So for instance, have you ever bought
software online and read the agreement that you have to say you
read?
Mr. Delahunt. Of course not.
Mr. Cannon. Absolutely not. [Laughter.]
And may I suggest that what I think Mr. Levin is saying and
others is that there are procedures that help protect consumers
in the process.
Mr. Delahunt. I would ask the Chair for an additional 2
minutes.
Ms. Sanchez. The Chair will be generous and grant the
gentleman from Massachusetts 2 minutes
Mr. Delahunt. I thank the Chair for her generosity.
Ms. Sanchez. Although I might add, it seems that there is
enough interest to do a second round of questions, so perhaps
that might be a better way to tackle that.
Mr. Delahunt. I will defer to whatever the Chair rules.
Mr. Cannon. If the gentleman would continue to yield, one
of the really interesting things to do here, and our role is to
be part of that process for creating a system that can work.
Mr. Delahunt. Reclaiming my time.
Mr. Levin, would you object to, you know, the choice of the
arbiter, I think, is significant. How would you feel about
legislation dealing with credit cards that would allow the
consumer to select the arbiter? How would you feel about that?
Ms. Sanchez. The time of the gentleman has expired, but I
will allow Mr. Levin to answer that before we move on to our
second round of 5-minute questions.
Mr. Levin. In fact, I believe that National Arbitration
Forum rules permit the parties to select an arbitrator who is
not with the National Arbitration Forum.
Mr. Delahunt. No, no, I am saying how would you feel about
legislation that would allow, that would mandate in binding
arbitration agreements by the credit card industry that the
arbitrator will be selected by the credit card holder, by the
issuer, not by the credit card company?
Mr. Levin. All the agreements that our firm participates in
drafting give the consumer the right. Now, we do identify the
major national organizations because they have promulgated
standards of fairness that we have confidence in. But we give
them the right to choose which organization they would like. We
are not trying to force them to choose one or the other.
That is true even if the company initiates arbitration, we
give the consumer the right to choose which organization. Once
you are within that organization, there are all sorts of
internal procedures that are in the organization's rules for
choosing specific arbitrators, but we do try to give the
consumer the right to do that.
I think in terms of legislation, it would have to be
drafted very carefully because it is a contract. You do want
both sides, and this is something that both sides are supposed
to agree upon. So the reason the company's names the AAA or the
NAF is because you can get a copy of their rules; you know what
they are supposed to stand for; and you can understand what is
going to happen to you in arbitration.
But within that context, we always give the consumer the
right to choose.
Ms. Sanchez. Thank you, Mr. Levin.
We are now going to move on to our second round of 5-minute
questions. I get to start. I have a couple of questions I have
been dying to ask.
Mr. Bland, according to proponents of mandatory
arbitration, the courts rigorously protect consumers from
unfair arbitration agreements. Are they correct? Can we not
just depend on the courts to protect consumers from unfair
arbitration clauses?
Mr. Bland. If a company just has the arbitration clause
that I talked about at the beginning, where they pick the
arbitration firm who is going to give you basically a defense
lawyer, I mean, that industry, as your decision maker and there
is no judicial review other than the incredibly limited review,
that is always enforceable.
Now, if a company gets greedy and they start tacking on
other things, not only do you have to go to arbitration instead
of court, but also we are going to repeal the consumer
protection laws of your State--which, by the way, is shocking,
and a shocking number of companies do. Then you can go to court
and fight it.
I mean, my career is basically finding cases where we have
been able to get some courts to strike down companies that
added on these unfair bells and whistles to the arbitration
clauses.
Some courts are striking them down. A lot of courts aren't.
There are some courts in this country where they think there is
such a strong Federal policy in favor of arbitration that they
would enforce an arbitration clause of anything short of a gun
to the head of somebody.
The Connecticut Supreme Court upheld an arbitration clause
that required this guy to arbitrate a case against an
accounting firm where the arbitrators were partners in the
accounting firm. And they said, well you know, just because the
arbitrator might rule for the guy, they would each only have to
pay $1,200 themselves, so they would never be biased by that.
Can you imagine when they start offering judges $1,200 to
rule for me? And the Connecticut Supreme Court unanimously
said, no problem with that. I thought that was like the
unlosable case. So yes, we win some cases when companies really
rig the system. It is not like my entire career is going around
losing cases, but there are a lot of cases where courts will
uphold things that are shocking.
Ms. Sanchez. The point is well-taken.
Mr. Levin, if I could ask you, you are counsel and you deal
with arbitration clauses. Do you ever urge corporations to
select arbitration companies which structure arbitration rules
in a way that favors the corporate clients that you have?
Mr. Levin. No. There are really only a few major national
organizations, so those are the ones we tend to think of
because they have the published protocols, rules and
procedures. Certainly, in our own clients' interests, we want
to make sure that whatever rules we are suggesting are fair to
both sides. So to the extent, do we look at whether it protects
the company? Yes, but we also look to see whether it protects
the consumer. It should be----
Ms. Sanchez. Do you believe that they are absolutely
equally balanced?
Mr. Levin. I do.
Ms. Sanchez. Ms. Fogal, I wanted to give you an
opportunity, and I wanted to recognize something--as some of my
colleagues here have talked about--consumers educating
themselves about services that they may be buying and going to
other places. I want to touch on that, but I also want to
recognize that you have made a concerted effort to try to
inform other future consumers about the bad experiences that
you had with somebody.
I appreciate that because I think a lot of people here
would have just felt so defeated that they would have just
walked away and kept their mouth shut. So I really do want to
recognize the work that you are doing in terms of trying to
help other people avoid that pitfall.
Ms. Fogal. Thank you.
Ms. Sanchez. Let's talk about the Houston housing market. I
think you made a statement that all homebuilders in Houston
have the arbitration agreements, so if you want to buy a home--
--
Ms. Fogal. A new home.
Ms. Sanchez.--a new home, you don't really have a choice of
declining one because he has a mandatory arbitration agreement,
and selecting some other new homebuilder. Am I correct in that
statement?
Ms. Fogal. Yes. Now, if you buy a home from someone else
that is not a builder, or an older home, you can sue them. You
can sue each other. You just can't sue a builder.
Ms. Sanchez. Right.
Ms. Fogal. That is how it is equal.
Ms. Sanchez. So in that particular market, there really
isn't another option. If you want to purchase a new home----
Ms. Fogal. No. We had a representative from our State try
to buy one and she couldn't find one.
Ms. Sanchez. I am assuming, and I heard in your testimony--
and I don't want to add facts that are not in evidence----
Ms. Fogal. That is okay.
Ms. Sanchez. You talked about being senior citizens and
wanting a home with an elevator and sort of looking ahead
prospectively to the future. I have to imagine that probably
one of the considerations that you put into buying a home was
that you wanted a newer home that perhaps would not have the
maintenance costs of an older home.
Ms. Fogal. Exactly. No repairs.
Ms. Sanchez. Unfortunately, you ended up in the exact
worst-case scenario of that.
I think I have finished my questioning, so I will now turn
to Mr. Cannon for 5 minutes of questions.
Mr. Cannon. Thank you, Madam Chair.
Just following up on our discussion with Mr. Delahunt, let
me just point out that one of the possibilities that we ought
to consider as a Committee is standardized language that we put
in statute, and then require people to explain the variations
from that standardized language. Now, you might end up with
lots and lots of explanations, but it is something we may want
to consider as a Committee.
I just wanted to follow up. The question about your
attorney fees, I don't ask that to question the value of your
services or the fees, but only to put into contrast the fact
that there are huge attorneys' fees here. How much was the
average benefit to each of the members of the class?
Mr. Bland. The cash that the individual class members,
because there were so many claims, the average is going to be a
little over $25. Some people are going to get over $1,000,
depending on what their damages were, but for most people it is
going to be like $25.
Now, the injunctive relief by cleaning everybody's credit
reports and getting false information off, that is going to
lower people's interest rate, so people are going to actually
make a lot more money in terms of savings. But the cash is
relatively low per person compared to the attorney fees, no
doubt about it.
Mr. Cannon. And that really is the core of the issue of
what we are dealing with here. Is it better and, granted, for
attorneys that are bringing these lawsuits, there is a loss,
but is the system better off if people get robust and we have a
market where people can understand what they are getting into
and decide which bank or which cell phone company they want to
use, or which builder.
I had a builder that I actually thought I had blackballed
because I reported his failures. And 3 years later, I saw him
driving around in a truck with a new name. So we have to have
some identifiers, especially on the high-end activity.
But it just seems to me that the cost of the lawyering in
these cases, the cost of the defense to companies, is great,
but obviously in the particular case you mention, you got what
sounds like a clear violation--24 percent promised, 30 percent
charged--and people are getting money. I suspect that the
effect of those costs in some of those cases where people had
their credit smashed because they started bouncing checks
because they didn't expect the higher interest rate.
I have a very young son who just experienced his first
cascading effect of overdrawing his account, $350 in fees later
and a problem with his credit report, which I think we solved.
He realized that a little mistake redounds to huge benefits to
banks.
This is not a defense of banks. It is not even a criticism
of lawyers or the way you do business. As a society, are we
better off with devices and methods and processes to protect us
from the big fraud artists who build houses that are hundreds
of thousands of dollars on the one hand, and protect us from
companies who might cheat us by $50 here or there?
But again, with those companies that cheat on cell phones,
if you have a robust market, how much is it worth to a bank to
cheat somebody out of $25 with a little higher interest rate?
When people find out that they were being charged 30 percent,
they tell all their friends that that bank is creepy, or that
my cell phone was bumped up because of something I don't agree
with and therefore--and we have all had I think some
experiences for instance with texting and how the texting
system works.
At least I have had experience with my kids over texting.
And you go with the $5 plan it doesn't cost you anything, but
you don't do the $5 plan, you are at $400 or something like
that.
So we have all these pickups in the market, but what
happens when you starting saying, I don't like this cell phone
company, because they hurt me by charging this horrendous
amount. Well, that hurts the company more than I think the $25
they gained in your case, or the $50 that you mentioned, Mr.
Schwartz, in the case of cell phone companies.
Our question is: How do we actually solve this problem in a
way that doesn't enrich a class of lawyers, for instance, and a
much higher cost to society by litigation which is expensive,
which may have merit, but which for any individual who has only
$25, as I said earlier, I have had dozens of--maybe not dozens,
but it seems like dozens--of requests to join a class where
there might be something like, you know, I look at it a and say
how much could I have possibly lost, if I really lost something
here, $25, $10, $2?
So it seems to me that what we are dealing with here
transcends the narrow parochial interests in how we structure
ourselves so that we actually make this all work, because I
don't think anybody on the panel is going to disagree that
these costs get passed back onto consumers.
Mr. Bland, is this not going to be a matter of
disagreement?
Mr. Bland. Actually, I do disagree because I think that
what a lot of class actions do is a company will promise one
thing and then charge something that is quite a bit higher. If
you bring a successful class action, it forces them to keep to
their promise to actually lower their prices back to what they
originally promised.
I think that Public Citizen, an organization, did a report
last year around the successful tort reform bill to federalize
all class actions, where they went through a series of
industries and found that class actions actually lowered the
prices of a lot of goods, because what was happening is you had
bait-and-switch types of things where a company would promise
one price, then charge something higher, and they already had
the consumer on the hook. The class action caused them to go
back to their honest price.
Ms. Sanchez. The time of the gentleman has expired. I am
sorry.
Mr. Cannon. I yield back.
Ms. Sanchez. The gentleman from Georgia, Mr. Johnson, is
recognized for 5 minutes.
Mr. Johnson. Thank you.
Mr. Levin, I hate to pick on you, but you provide me with
some interesting material here, particularly the fact that your
paper seems to be weighted down with information about
empirical studies that have been conducted which would tend to
support arbitration as being consumer-friendly and basically
something that is pretty benign and fair.
Yet, it appears that the firms that called for the studies
to be done were actually from the business community that uses
the arbitration clauses, and then the results seem to
substantiate the version that you would expect that they would
want to hear, and that is arbitration is a good thing.
How could you respond to the assertion I believe, and I am
not sure if it was Mr. Schwartz or Mr. Bland made about the
selective samples that were used, the definitions that perhaps
people use when they say ``winning,'' that kind of thing? How
can you justify who paid for the studies and whether or not
those studies were actually done in a way that would pass
muster as far as a statistician is concerned?
Mr. Levin. I think that the fact that a study might have
been commissioned by a business does not mean that the outcome
of that study was in any way influenced by the fact that it was
commissioned. Businesses are frankly used to hearing the kinds
of comments that Mr. Bland and Professor Schwartz have made,
and are interested in trying to gather factual information.
Mr. Johnson. You don't think that it would perhaps be
biased?
Mr. Levin. I would hope not. I think they are undertaken in
good faith.
Mr. Johnson. And you also don't think that who pays the
arbitrators, who selects them and gives them their business,
would probably be favored by the arbitrators themselves?
Mr. Levin. No, I don't, because there is a difference
between an arbitration organization and an individual
arbitrator deciding a case.
Mr. Johnson. Where does the arbitrator get their assignment
from? Don't they get their assignment from the arbitration
company?
Mr. Levin. There are usually panels of arbitrators' names
and the parties through a process of give-and-take settle upon
one.
Mr. Johnson. And the arbitration company pretty much is
free to decide who the individual arbitrators might be?
Mr. Levin. They have their own ways of doing that.
Mr. Johnson. And if the arbitration company is owned by,
say, the brother-in-law of the company that writes the contract
imposing the arbitration agreement, don't you think that that
brother-in-law is going to make sure that all of the
arbitrators are friendly toward those who are paying the bills?
Mr. Levin. I certainly don't know that to be the case, but
there are safeguards built into the selection process for an
arbitrator where disclosures have to be made. Most of these
arbitrators, a lot of them are retired judges. A lot of them
are very experienced lawyers on both sides of the fence.
Mr. Johnson. Let me ask Mr. Schwartz to respond to that.
Mr. Schwartz. I would just repeat the statement that Mr.
Bland made. I think he is absolutely correct, that there is
going to be a preponderance of industry lawyers as panels of
arbitrators. Yes, the American Arbitration Association and
these other companies have their system of choosing the seven
arbitrators that you can pick from, and one is going to be
worst than the next.
The thing that I don't understand is that we hear from
folks like Mr. Levin that arbitration is fair, it is fast, it
is cheap, it is efficient, it is the greatest thing since
sliced bread. What I have never understood to this day, in the
more than a decade that I have been studying these, if
arbitration is so great, then why do the companies have to say
it is so great for you, Mr. Consumer, that we are going to
force you whether you like it or not to accept it.
Mr. Johnson. Now, let me stop you at that point and ask Ms.
Fogal. Ma'am, when you first saw this home plan and thought it
was so beautiful, you were so happy.
Ms. Fogal. Right.
Mr. Johnson. And then you went and signed the contract. Do
you feel like you had a choice at that time of rejecting
arbitration?
Ms. Fogal. It was in my earnest money contract, and I could
have not purchased the house. I could have not purchased a new
home in Houston. My builder was on the Harris County Housing
Authority, so I assumed he knew what he was doing.
Mr. Johnson. Could you have purchased a house through any
other builder in Houston?
Ms. Fogal. Not without signing an arbitration clause.
Mr. Johnson. Because all of the builders in Houston insist
on arbitration clauses----
Ms. Fogal. Arbitration clauses.
Mr. Johnson.--and are mandatory in their agreements?
Ms. Fogal. That is correct, sir.
Mr. Johnson. Thank you.
Ms. Fogal. You are welcome.
Mr. Delahunt. [Presiding.] I am not Congresswoman Sanchez,
but let me take the gavel and recognize the gentleman from
Illinois, Mr. Jordan, for his time.
Mr. Jordan. I am from the Midwest, but Ohio. [Laughter.]
Mr. Delahunt. Anything west of Boston is west. [Laughter.]
Mr. Jordan. Mr. Chairman, I went to college close to
Illinois. In fact, I will start with Professor Schwartz because
I was a University of Wisconsin undergraduate.
Let me just ask this, and last night, my staff was
together, and the 6,437 letters we have sent out for the best
part of this year. They break it down by category, and we had
hundreds of letters on immigration, on the Iraq war, several
dozen letters on gas prices, as you might guess, but not one
single letter, and I scan through the pages of the categories,
and not one was on binding arbitration out of one of our
constituents.
I appreciate and am sympathetic to Ms. Fogal, but just tell
me how big a concern this really is? I mean, none of the
constituents in God's country that I represent in west central
and north central Ohio have taken the time to call their
congressman about this. We have evidence suggesting consumers
are pretty happy with arbitration when in fact they go there.
So tell me a little bit more, professor.
Mr. Schwartz. Thank you. I have to point out that I am
always told that I live in Michigan, even though it is
Wisconsin. I am in one of the ``M'' states in the Midwest.
I think it is a very large problem. I think, as the
Chairwoman cited a study at the beginning of her remarks
suggesting that up to one-third of consumer contracts now have
arbitration agreements. But it is one of those low----
Mr. Jordan. If the contract has it, are consumers
expressing frustration with it? Are they saying, ``Yes, this is
terrible; I got a bad deal''? I have not heard it again, in
letters and things we are sent. I have not heard it from our
constituents.
Mr. Schwartz. We hear it in the cases. The thing is that
litigation and arbitration both talk about things going wrong.
You have a consumer transaction or an employment situation that
has broken down and gone wrong. So that is not going to be
every consumer transaction or every employment situation. But
there are large numbers of them, and we hear about them through
the cases that we study.
The studies that suggest consumer satisfaction, the one
that I am aware of from the Harris Interactive Group, which is
cited to say that consumers are very satisfied with
arbitration, it turns out that they mixed up both consumers and
business arbitrations and they excluded from their sample any
cases where a party was ordered into arbitration by a court. So
again, you have a skewed sample that doesn't really deal with
mandatory, compelled arbitration.
The problem isn't necessarily a consumer who has a horrific
experience like Ms. Fogal did. The problem could be the
consumers who simply walk away from their cases. A small-dollar
amount fraud that is going on on a massive scale will go
unremedied because no one is going to pursue that claim and a
class action is not allowed because of the arbitration clause.
Mr. Jordan. I recognize that, and maybe that exists. But
you would think at some point it would rise to the level that
they would let their public officials know that, look, this is
not a big deal; I didn't press it; but I got a bum deal. You
would think that I would have heard about it. I just have not.
Mr. Schwartz. I think the way that you would hear about it,
the problem is that they haven't pursued the arbitration
because the dollar amount was small so they didn't pursue a
case and have a bad experience. The problem is they are going
to have experience with is my credit card company ripped me
off, and there is nothing I can do about it.
Now, I don't know if you have been getting letters in your
office with people complaining about banks and credit card
companies and cell phones for small dollar amount rip-offs. If
you haven't heard it, it may be the same problem there, that
the effort of writing a congressman is not going to be sparked
by the small dollar amounts, and yet you have a problem on a
wide scale that just kind of stays at this low level of public
awareness.
Mr. Jordan. Thank you.
Ms. Sanchez. [Presiding.] Thank you, Mr. Jordan.
The gentleman from Massachusetts, Mr. Delahunt, is
recognized for 5 minutes.
Mr. Delahunt. To pursue the line of questioning that Mr.
Jordan had undertaken, let me submit an opinion and see whether
you agree. I think part of it is we discussed earlier that
people are unaware of the availability of arbitration.
I think as you indicate, Professor Schwartz, in most cases
it is a small-dollar item and it is not sufficient to pursue,
to provoke that kind of interest. I dare say that if you are a
member of the local government, if you serve on the city
council or if you are a State legislator, the chances are that
that is where you are going to hear it because it is very much
something that is local in nature.
But the question does I think go to another issue that I
would like to explore--the relationship between the FAA and
State law. I have a real concern about the federalization, if
you will, the preemption of State consumer protection laws. I
happen to be a conservative, a real conservative, one that
embraces the concept of devolution and States' rights.
I believe that when the Federal Government inserts itself
in matters that are particularly local--and I am not suggesting
that that was the case with you, Ms. Fogal--but please describe
for us the relationship between the FAA--and I will start with
you, Mr. Bland--and State law.
Mr. Bland. The Supreme Court has held a number of times
that the Federal Arbitration Act strikes down any State law
that would limit the enforcement of arbitration clauses. There
are literally 100 court decision or more in which courts,
particularly Federal courts, have struck down a variety of
different State consumer protection laws, State franchise laws
that protect small business franchises and that kind of thing,
provisions of them.
In fact, there are splits between some courts in which some
courts will find that the FAA reaches even further, but there
are just a ton of cases out there in which courts have struck
down----
Mr. Delahunt. Let me ask your opinion in terms of, isn't it
time that we have a revolution in this country and respect
States' rights, and acknowledge that----
Mr. Bland. Can I give you an extreme example of this?
Mr. Delahunt. Sure.
Mr. Bland. I had my first case in the Supreme Court 1 1/2
years ago. I lost. What the case was about was a case involving
a payday lender and they were charging 500 percent to up to
1,300 percent interest. We had a client that had 1,300 percent
interest rate. Under Florida law----
Mr. Delahunt. That is not its interest. [Laughter.]
Mr. Bland. Right. They were wearing suits, as Tony does,
but they were operating a storefront so it is different in that
respect from the Sopranos. But it was a crime under Florida
law, loans-harking. Anything that high was considered criminal
loan-sharking.
Under Florida law, the Florida Supreme Court said that any
contract whose principal purpose is criminal, any agreement
whose principal purpose is criminal doesn't form a contract, so
you don't have an arbitration clause because it is embedded in
this thing that is a criminal agreement.
The Supreme Court struck this down. I lost. In the oral
argument, Chief Justice Roberts said to the lawyer for the
payday lender, gee, what if you had a murder-for-hire contract,
some guy hires someone to go kill his wife, and it had an
arbitration provision. Are you saying that Federal law would
require you to enforce that?
And the guy said, oh, well, that is very unlikely; how many
murder-for-hires have contracts--you know, this kind of thing.
He said, but yes, that is our answer; yes, that is our answer;
yes, that is the answer. And that was what the Supreme Court
did under Federal law. They wiped away basic contract law,
contract law that is true in every single State was wiped away.
Mr. Delahunt. Let me direct this to the Chair of the
Committee. I think what we are hearing here is an encroachment
on State contract law, consumer protection laws, that I dare
say Congress has a responsibility to review, to examine, to see
whether it is time to review the Federal Arbitration Act
itself, and start to limit its encroachment on State policy.
With that, I will yield back, unless you want to get into
this, Mr. Levin.
Mr. Levin. May I add just one comment, Congressman? Section
2 of the FAA does preserve State law, because it permits a
party to refuse to arbitrate or to oppose a motion to arbitrate
on any ground that exists at law or in equity for the
revocation of any contract, which means that if you think
that----
Mr. Delahunt. If you are aware that you have an arbitration
clause.
Mr. Levin. No. What the FAA says is that any State contract
defense that is applicable to contracts generally can be used
to defend against an arbitration clause. As for people being--
--
Mr. Delahunt. But you still have to go to binding
arbitration.
Mr. Levin. Well, not necessarily because you oppose that,
for example, if a company files a motion in court to compel
arbitration of a lawsuit that someone has filed, the judge will
look at the defense of whether there are State law contract
grounds that can be used to defeat the arbitration agreement.
If the court--and several have--decided that this arbitration
clause on some basis that arises out of State contract law is
an unconscionable contract----
Mr. Delahunt. I think I have an additional minute. Let me
go back to Mr. Bland or Professor Schwartz.
You have the position of the statement by Mr. Levin. Do you
agree with the statement, and if you disagree with the
statement, do we need to clarify the language in the FAA to
accomplish what he is suggesting?
Mr. Bland. If the courts--I am sorry. I was just going to
say, if you believe in that, you know the phase ``the half-
truce''? That was like a one-tenth truce. Yes, there are
certain State laws that the Federal Arbitration Act doesn't
override, so if you have an arbitration clause it adds a bunch
of things separate from arbitration, like a ban on punitive
damages or repeal of the Consumer Protection Act or whatever.
Then you have a good argument against that.
But the basic core problem is Federal law overrides any
States that deal with them. Yes, the Federal Arbitration Act
completely squashes all kinds of State consumer protection
laws. There are a few general contract laws that come out. That
is basically what my jobs is, is finding the few places where
you can get State law to beat an arbitration clause. But there
are so many injustices that you can't touch, that it is
outrageous.
Ms. Sanchez. I believe the question was for Mr. Schwartz,
so I want to give him a chance to respond.
Mr. Bland. I am sorry.
Ms. Sanchez. Your time has expired, Mr. Delahunt. I want
you to know that.
Mr. Delahunt. Again, I want to extend my gratitude for your
generosity.
Ms. Sanchez. Mr. Schwartz?
Mr. Schwartz. The courts have done a terrible job
protecting State laws from preemption by the Federal
Arbitration Act, a dismal job. So bad, in fact, that Justice
O'Connor said, ``I am throwing up my hands.'' She wrote an
opinion that Congress has to correct a mistake that we have
made. She said that in a 1995 case. Things have not gotten any
better. They have only gotten worse. More and more State laws
are being preempted.
As I said earlier, what is going to happen is there is
going to be a major consumer protection gap because State
consumer protection law is going to have huge holes in it if
things continue to go in the direction that the courts are
taking them now in interpreting the Federal Arbitration Act.
You will either have unprotected consumers or you have the
Federal Congress having to step in and fill this gap.
Ms. Sanchez. Thank you, Mr. Schwartz.
I am going to yield to my colleague, the Ranking Member,
Mr. Cannon.
Mr. Cannon. Thank you, Madam Chair.
I just ask unanimous consent that we introduce four items
into the record. One is a statement--I will just give a brief
identification--on consumer arbitration; the second is State
court enforcement of arbitration agreements; the third is a
Harris study; and the fourth is called Outcomes of Arbitration:
An Empirical Study of Consumer Lending Cases.
If we could have those introduced in the record, I would
appreciate it.
Ms. Sanchez. Without objection, so ordered.
I would like to thank all of our witnesses for their
testimony today.
Without objection, Members will have 5 legislative days to
submit any additional written questions, which we will forward
to the witnesses. We ask that you answer those written
questions as promptly as you can because they will be made a
part of the record.
Without objection, the record will remain open for 5
legislative days for the submission of any additional material.
Again, I want to thank everybody for their time and their
patience.
This hearing of the Subcommittee on Commercial and
Administrative Law is adjourned.
[Whereupon, at 12:12 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
ATTACHMENT 1
ATTACHMENT 2
ATTACHMENT 3
ATTACHMENT 4
ATTACHMENT 5
ATTACHMENT 6
Prepared Statement of NCCNHR
Mandatory binding arbitration agreements are forcing American
consumers in almost every avenue of commercial life to waive their
constitutional right to seek redress in the courts when the products or
services they purchase are defective and even dangerous. For thousands
of American families with aging parents, mandatory arbitration
agreements--included in the admissions contracts of nursing homes and
assisted living facilities--compel them to agree to arbitrate the value
of their mothers and fathers' lives if they are seriously injured or
die from neglect or physical abuse by the facility's employees. Some
admissions agreements even require families to waive their loved one's
expectation of receiving the quality of services and safe environment
that the nursing home contracted with the government to provide when it
was certified for Medicare and Medicaid.\1\
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\1\ In addition to agreeing to mandatory arbitration, applicants
for admission to many nursing homes are required to watch a video
called ``Setting Realistic Expectations.'' The video is intended to
waive facilities' liability by treating injuries as normal, unavoidable
occurrences and getting family members to acknowledge risk and accept
responsibility. For example, by signing a statement that they have seen
the video, applicants acknowledge they know that ``residents are
unsupervised a great deal of the day'' and may wander ``into a
situation inside or outside the facility where there is a potential for
injury.'' If residents refuse to eat because they don't like the food
or are depressed, the facility will ``courteously encourage'' them to
eat or drink but will not take responsibility for malnutrition or
dehydration that occurs as a result--this responsibility once again
rests on family members, who ``need to accept full responsibility for
any failure of the resident to eat properly or drink enough fluids.''
(Researchers estimate that 40 percent of nursing home residents are
malnourished and that many do not receive fluids on a regular basis
because of critical understaffing and high staff turnover.) Likewise,
families are advised that their elders in the supposed safety of the
nursing home could be at the same risk of physical or verbal assault,
neglect, and theft that they would be in the community since ``the
nursing home simply cannot read the minds and consciences of all its
employees'' to ensure that they will not abuse their charges.
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There is also a ``Setting Realistic Expectations'' video for assisted
living.
Families usually have little choice in the matter and must accept
the provider's terms. (Nursing home admissions, in particular,
frequently occur after unexpected medical emergencies and under
pressure from hospital discharge planners.) There are few options for
long-term care in many rural communities, and options are often even
scarcer for those who depend on Medicaid to pay part of their care. And
just as options are limited when choosing a nursing home, there are
often few or no good alternatives to transfer to if the quality of the
care turns out to be bad.
In 2002 and 2005, NCCNHR members voted overwhelmingly to approve
resolutions asking the federal government to prohibit long-term care
facilities from including binding arbitration clauses in their
admissions agreements. Support for the resolutions stemmed from strong
concern among consumer advocates across the country that long-term care
facilities in most states can neglect and even abuse residents with
impunity if residents and their families are unable to take them to
court. Countless government studies have found that in spite of
improvements in nursing home regulation and enforcement in the past 20
years, state regulators still consistently under-cite the seriousness
of deficiencies in which residents are harmed; levy fines that are
little more than the cost of doing business for profitable
corporations; and allow facilities to operate year-after-year with
serious, repeat problems.\2\ The nursing home industry regards
mandatory arbitration agreements as mechanisms to protect nursing homes
from juries, who are less lenient that regulators when presented with
evidence that vulnerable elders were victims of avoidable neglect and
preventable abuse.
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\2\ See the most recent Government Accountability Office report,
Nursing Homes: Efforts to Strengthen Federal Enforcement Have Not
Deterred Some Homes from Repeatedly Harming Residents, March 2007.
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A book published by NCCNHR in 2006, The Faces of Neglect: Behind
the Closed Doors of Nursing Homes, documents the gross neglect of 36
long-term care residents in 10 states.\3\ We were able to document
these cases because they were litigated. Through the discovery process,
their attorneys were able to show the failure of nursing homes and
assisted living facilities to provide even the most basic care to
prevent these men and women from suffering from:
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\3\ The Faces of Neglect: Behind the Closed Doors of Nursing Homes,
NCCNHR, April 2006.
Multiple infected, painful pressure sores exposing
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muscle and bone, often leading to amputations;
Malnutrition, dehydration, and severe weight loss;
Head injuries;
Bruises and fractures from a physical assault by
another resident;
Renal failure from severe dehydration;
Extreme and often untreated pain;
Sexual assaults;
Gangrene and osteomyelitis;
Multiple lacerations, skin tears, and abrasions;
Strangulation on a privacy curtain;
Second degree burns, exposing nerve ends, from 140-
degree bath water;
Disfiguring and extremely painful contractures;
Drowning;
Broken leg; amputation of the leg; and broken neck
because of staff negligence, all in the same resident;
Suffocation by choking;
MRSA infection and multiple urinary tract infections;
Brain poisoning from untreated dehydration; and
Usually, death.
When most families sign nursing home or assisted living admissions
contracts, they have had no experience with how badly care can go wrong
or how much suffering their parent or other loved one may experience.
Many think that daily family visits, careful monitoring, and advocacy
for their loved one will ensure good care, only to say later, as one
California daughter did, ``We were there every day, and we still
couldn't make a difference.''
Consumers might voluntarily choose to arbitrate the purchase of a
defective cell phone. Few would voluntarily arbitrate the suffering and
death of their mother or father, because almost always, their mission
is to expose poor care and deter future abuse.
NCCNHR and its member groups are urging Congress to end the use of
mandatory binding arbitration agreements in long-term care admissions
contracts.