[Senate Report 107-266]
[From the U.S. Government Publishing Office]
Calendar No. 210
107th Congress Report
SENATE
2d Session 107-266
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THE MOTOR VEHICLE FRANCHISE CONTRACT ARBITRATION FAIRNESS ACT
_______
September 10, 2002.--Ordered to be printed
_______
Mr. Leahy, from the Committee on the Judiciary, submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany S. 1140]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Judiciary, to which was referred the
bill (S. 1140) to amend chapter 1 of title 9, United States
Code, to provide for greater fairness in the arbitration
process relating to motor vehicle franchise contracts, having
considered the same, reports favorably thereon, without
amendment, and recommends that the bill do pass.
CONTENTS
Page
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I. Purpose of legislation...........................................2
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II. Legislative history..............................................2
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III. Vote of the Committee............................................2
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IV. Background.......................................................2
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V. Need for legislation.............................................5
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VI. Section-by-section analysis......................................9
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VII. Cost estimate....................................................9
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VIII.Regulatory impact statement.....................................10
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IX. Minority views of Senator Sessions..............................11
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X. Changes in existing law.........................................16
I. Purpose of Legislation
The Motor Vehicle Franchise Contract Arbitration Fairness
Act, S. 1140, is a targeted amendment to the Federal
Arbitration Act which requires that whenever a motor vehicle
franchise contract provides for the use of arbitration to
resolve a controversy arising out of or relating to the
contract, arbitration may be used to settle the controversy
only if both parties consent in writing after such controversy
arises. This legislation would allow motor vehicle dealers the
option of either going to arbitration or utilizing procedures
and remedies available under State law such as those involving
State-established administrative boards specifically created
and uniquely equipped to resolve disputes between motor vehicle
dealers and manufacturers. This legislation is intended to
ensure that motor vehicle dealers are not required to forfeit
important rights and remedies afforded by State law as a
condition of obtaining or renewing a motor vehicle franchise
contract.
II. Legislative History
In the 106th Congress, legislation similar to S. 1140 was
introduced by Senators Grassley and Feingold as S. 1020, the
Motor Vehicle Franchise Contract Arbitration Fairness Act of
1999. The legislation was referred to the Committee on the
Judiciary and given a hearing on March 1, 2000, in the
Subcommittee on Administrative Oversight and the Courts. It was
subsequently placed on the markup calendar on October 5, 2000,
but no Committee action was taken. A similar measure, H.R. 534,
was reported favorably by the House Committee on the Judiciary
on September 13, 2000, by voice vote, and approved by the House
of Representatives on October 3, 2000, by voice vote.
On June 29, 2001, Senator Orrin G. Hatch introduced S.
1140, the Motor Vehicle Franchise Contract Arbitration Fairness
Act of 2001, along with Senators Feingold, Grassley, Leahy,
Warner, Breaux, Burns, Reid, Craig, Torricelli, Bennett, Snowe,
DeWine, Thomas, and Hutchinson as original cosponsors.\1\ On
March 29, 2001, a similar measure, H.R. 1296, was introduced in
the House of Representatives with over 30 original
cosponsors.\2\
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\1\ Since its introduction, S. 1140 has received exceptionally
strong bipartisan support and is currently cosponsored by more than 60
Members of the Senate.
\2\ H.R. 1296 is currently cosponsored by more than 200 Members of
the House of Representatives.
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III. Vote of the Committee
The Committee on the Judiciary, with a quorum present, met
on Thursday, October 18, 2001, at 10 a.m., to consider S. 1140.
The Committee ordered the Motor Vehicle Franchise Contract
Arbitration Fairness Act to be reported favorably to the full
Senate by voice vote, with one dissenting vote by Senator
Sessions, with a recommendation that the bill do pass.
IV. Background
Dealers of new motor vehicles are virtual economic captives
of automobile manufacturers. Unlike some other franchisees, who
may have a broad choice of franchisers with which to contract,
new motor vehicle dealers may only obtain the right to
merchandise and sell their product from an extremely limited
group of manufacturers. As a result of the imbalance in
bargaining power inherent in this relationship, manufacturers
possess unparalleled leverage over dealers and potential
franchisees. Motor vehicle manufacturers have historically, and
do currently, require dealers to execute standard contracts of
adhesion defining the manufacturer-dealer contract on a ``take
it or leave it'' basis. Additionally, manufacturers have broad
discretion to allocate vehicle inventory and to control the
timing for delivery of dealer stock. Manufacturers also
exercise considerable control over the flow of revenue to
dealers, such as warranty payments.
In recognition of the disparity in bargaining power between
motor vehicle dealers and manufacturers, all States have
enacted laws specifically designed to level the playing field
between manufacturers and dealers and prevent unfair contract
terms and practices. In fact, State laws govern nearly every
aspect of the franchise contract (except for the inclusion of
arbitration clauses as discussed below). Motor vehicle
franchise contracts and resulting disputes greatly affect the
competitive distribution of vehicles which directly affects
consumers as well as individual States' economies generally. In
fact, the U.S. Supreme Court has held that State legislatures
are constitutionally empowered to regulate the motor vehicle
contractual relationship as a valid exercise of their police
powers. New Motor Vehicle Board v. Orrin W. Fox Co., 99 S. Ct.
403 (1978). As a result, dealers have clear and enforceable
rights under State franchise laws. Generally, these State
rights and procedures are nonwaivable, and contract terms that
conflict with State law are routinely rendered unenforceable,
irrespective of contract terms.
In 1987, many automobile and truck manufacturers began to
include mandatory binding arbitration clauses in their dealer
contracts. Mandatory binding arbitration clauses require that
all disputes between the dealer and manufacturer be resolved by
binding arbitration under the Federal Arbitration Act
(``FAA''). These provisions ultimately require dealers to
relinquish forums otherwise available under State law,
including many of the State-established boards designed to
regulate the relationship between dealers and manufacturers.
Since dealers are unable to modify boiler-plate franchise
contracts and delete the mandatory binding arbitration
provisions, they have no choice but to accept such provisions
as part of the standardized franchise contract or risk losing a
business or prospective business.
Today, almost every major motor vehicle manufacturer uses
mandatory binding arbitration either in the dealer franchise
contract or in side contracts with certain dealers.\3\
Manufacturers increasingly are inserting mandatory binding
arbitration clauses in non-negotiated side contracts with
dealers, such as those governing dealer finance disputes and
incentive disputes. Many States, frustrated by the fact that
mandatory binding arbitration provisions nullify their State
statutes and procedures, have repeatedly attempted to enact
laws to prohibit the inclusion of mandatory binding arbitration
clauses in certain contracts. These State laws, however, have
been universally preempted by the FAA.
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\3\ These manufacturers utilizing mandatory binding arbitration in
their dealer franchise contracts include: Bering Truck, DaimlerChrysler
(which provided limited opt-out of arbitration by addendum),
Freightliner Truck/DaimlerChrysler, Sterling Truck/DaimlerChrysler,
Ferrari, Ford Dealer Development--principally with dealer development
programs, General Motors Dealer Development--principally with dealer
development programs, Saturn/GM, Hino Diesel--Toyota majority stock
holder, Kenworth Truck, Nissan Diesel, Peterbilt Trucks, Suzuki, and
Western Star.
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The Supreme Court articulated the preemptive effect of the
FAA in Southland Corporation v. Keating, 104 S. Ct. 852 (1984).
Chief Justice Burger, writing for the Court, stated that ``[i]n
creating a substantive rule applicable in state as well as
federal courts, Congress intended to foreclose state
legislative attempts to undercut the enforceability of
arbitration agreements.'' Id. at 854.
In 1985, the Supreme Court further held that the FAA
provided no basis for implying a presumption against
arbitration of statutory claims or for departing from the
Federal policy favoring arbitration in situations where a party
bound by an arbitration agreement raises claims founded on
statutory rights. In the case of Mitsubishi Motors Corporation
v. Soler Chrysler-Plymouth, 105 S. Ct. 3346 (1985), a motor
vehicle dealer attempted to avoid the enforcement of a
mandatory arbitration provision in its distribution agreement
on the grounds that the enforcement of the arbitration clause
would deprive the dealer of the ability to invoke its statutory
right to bring an antitrust action under the Sherman Act. The
Supreme Court was not persuaded by the argument that only
contractual disputes, not statutory rights, should be
determined through mandatory binding arbitration even when the
claims presented are complex and carry as many public policy
implications as a claim under the Sherman Act. Writing for the
Court, Justice Blackmun stated that, ``[b]y agreeing to
arbitrate a statutory claim, a party does not forego the
substantive rights afforded by the statute; it only submits to
their resolution in an arbitral rather than a judicial forum.''
Id. at 3354. Thus, the Court implied that statutory rights are
not infringed when adjudicated in an arbitral rather than a
judicial forum.
Following this line of cases, the Federal preemption
principle was specifically interpreted by the Fourth Circuit
Court of Appeals to apply to contracts between motor vehicle
dealers and manufacturers in ``Saturn Distribution Corp. v.
Williams, 905 F.2d 719 (4th Cir. 1990). In 1989, Saturn filed
suit against the Virginia Commissioner of Motor Vehicles when
the Commissioner refused to approve Saturn's franchise
contract. The Saturn Contract was rejected because it contained
a mandatory binding arbitration clause in violation of the
Virginia Motor Vehicle Licensing Act. Va. Code Ann.
Sec. Sec. 56.1-515 et seq. That law specifically precludes any
provision that denies access to the procedures, forums and
remedies provided for under State law. The Commissioner had
indicated to Saturn that he would approve the contract if it
gave the dealer the option to delete the exclusive arbitration
clause, but that Saturn could not make the inclusion of that
clause a prerequisite to becoming a dealer. Saturn declined to
make these modifications. Saturn Distribution Corp v. Williams,
717 F. Supp. 1147, 1149 (E.D. Va. 1989).
At trial, the district court ruled in favor of the
Commissioner. Id. at 1153. However, the fourth circuit, holding
that the Virginia Motor Vehicle Licensing Act conflicts with
the FAA and is preempted under the Supremacy Clause of the
United States Constitution. The court relied on two Supreme
Court decisions, Southland, 104 S. Ct. 852 (1984), and Perry v.
Thomas, 107 S. Ct. 2520 (1987). The Supreme Court denied
certiorari and let stand the mandatory binding arbitration
provision in Saturn's dealer franchise contract.
V. The Need for Legislation
In the majority of States, an agency is charged with
administering and enforcing motor vehicle franchise law.\4\
These State forums, boards, and commissions serve as efficient
and cost-effective alternative dispute resolution systems for
motor vehicle franchise disputes because State agencies have
both expertise and experience in these matters. State motor
vehicle administrative forums were specifically established for
the public policy purpose of providing alternative dispute
resolution mechanisms, but with the added features of important
legal safeguards, particularly that of a right to appeal.
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\4\ Arizona, Arkansas, California, Delaware, Florida, Georgia,
Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland,
Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New
Jersey, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island,
South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia,
Washington, and Wisconsin have such agencies.
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Additionally, most metropolitan motor vehicle dealer
associations participate in nonbinding third-party dispute
resolution programs designed to mediate disagreements between
consumers and new car dealers and/or manufacturers.\5\ The
Automotive Consumer Action Program (``AUTOCAP'') is one such
program, voluntarily sponsored by franchised motor vehicle
dealer associations and administered in accordance with
national standards established by the National Automobile
Dealers Association.\6\ AUTOCAP is available in many States and
in the District of Columbia.\7\ Often, these programs are run
in conjunction with the offices of State attorneys general.
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\5\ Mandatory binding arbitration clauses are not prevalent in most
dealer-consumer new car contracts except in Alabama, and some State
associations actively discourage the practice.
\6\ States with AUTOCAP programs are Arizona, California (San
Diego), District of Columbia (MD and VA area), Hawaii, Illinois,
Kentucky, Montana, New Hampshire, New Mexico, New York, North Carolina,
North Dakota, Ohio, Rhode Island, South Carolina, South Dakota, Texas,
and Vermont.
\7\ Manufacturers including BMW, Honda/Acura, Isuzu, Jaguar,
Mitsubishi, Nissan/Infiniti, and Volvo use the AUTOCAP resolution
program.
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AUTOCAP dispute resolution begins with an effort at
informal mediation. If informal mediation is unsuccessful,
disputes are then mediated by a panel comprised of consumer
representatives and motor vehicle dealers. The decision to
accept or reject an AUTOCAP decision is at the sole discretion
of the parties, and in all cases is nonbinding on the consumer.
If dissatisfied with the outcome a consumer is free to pursue
other types of legal recourse. The Council of Better Business
Bureaus sponsors a similar program, Auto Line, in which
manufacturers participate on a manufacturer-by-manufacturer
basis.
The use of mandatory binding arbitration can be
distinguished from State-established administrative boards and
programs such as AUTOCAP and Auto Line in that mandatory
binding arbitration does not allow for further judicial review.
A dealer seeking to overturn an arbitration decision often
cannot appeal the decision even when it is clear that the law
has been misapplied. Arbitration also lacks the formal court-
supervised discovery process often necessary to learn facts and
obtain documents. Arbitrators generally have no obligation to
provide a factual or legal basis for the decision in a written
opinion, and the impartiality of arbitration providers may be
affected by the knowledge that the manufacturer may be likely
to bring them repeat business but the dealer is not. In
addition, the fees required to initiate an arbitration
proceeding can be prohibitive to a small business owner,
particularly in contrast to State forums that may be otherwise
available.
The inclusion of mandatory binding arbitration clauses in
contracts between dealers and manufacturers also provides
automobile manufacturers with an advantage in disputes with
dealers because these clauses create an easy means by which to
avoid State-established forums. For example, a dealer in
Virginia, who believed he met all of Virginia's franchise
requirements to remain a Sterling Truck dealer, had his
franchise terminated by the manufacturer because of his refusal
to comply with a unilateral contract modification that mandated
8-hour shifts in the dealership's parts and service department
on Sundays and required the creation of a separate facility to
house a new line of trucks. When the dealer sought a hearing
before the Virginia Division of Motor Vehicles, the
administrative body designated to hear these disputes, the
request was denied because the dealer had been forced in his
franchise contract to waive his rights under State law and
submit to mandatory binding arbitration.
The dealer decided that due to the legal expense involved,
fighting Sterling in arbitration was not economically feasible,
and Sterling subsequently terminated his franchise despite his
42-year tenure as a heavy-duty truck dealer. Had the dealer not
been forced to accept mandatory binding arbitration, he could
have proceeded to the Virginia Division of Motor Vehicles
dispute resolution forum, where, had State law been applied, he
believes he would likely have successfully retained the
franchise.\8\
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\8\ See letter to Senator John Warner, dated March 14, 2000, from
Charles M. Robertson, President of Magic City Motor Corp.
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Mr. William Shack, a California dealer and long-time member
of the National Association of Minority Automobile Dealers,
testified before the Senate Administrative Oversight and the
Courts Subcommittee on March 1, 2000, about his adverse
experience with mandatory binding arbitration with his
automobile manufacturer, Saturn. After a substantial financial
investment by Mr. Shack and his partner, Saturn unilaterally
terminated their dealer contract and forced them into mandatory
binding arbitration. Mr. Shack believed the arbitration panel's
monetary award to be grossly inadequate considering his total
acquisition-related expenses, all incurred to comply with
Saturn's terms and conditions. As a result of the mandatory
binding arbitration clause unilaterally inserted in the
franchise contract by the manufacturer, Mr. Shack believes he
never received a fair hearing on the merits. Mr. Shack's
franchise was terminated, and he consequently suffered
tremendous economic loss.
Mr. Shack further testified that:
The administration of Saturn's mandatory binding
arbitration process is fundamentally unfair. All of the
decision makers in the process have economic ties to
Saturn. Under the mandatory binding arbitration that I
was subjected to, I had no state remedies, no right to
a hearing on the record, no right to an unbiased
decision maker, and no real right to an appeal on this
issue.\9\
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\9\ See testimony of Mr. William Shack before the Senate Judiciary
Committee, Subcommittee on Administrative Oversight and the Courts,
March 1, 2000.
It is clear that dealers are being required to forfeit
important rights and remedies afforded by State law as a
condition of obtaining or renewing their motor vehicle
franchise contracts. Furthermore, since State laws prohibiting
mandatory binding arbitration clauses have been held to be
preempted by the FAA, targeted Federal legislation amending the
FAA is necessary to remedy this problem.
As discussed below, Congress has acknowledged that a motor
vehicle dealer, after making a tremendous investment, depends
completely upon the manufacturer to survive and prosper. For
example, manufacturers can determine the dealer's stock with
the allocation of hot selling models; manufacturers can
accelerate or delay warranty payments with great discretion, or
alter the rate paid for certain types of work that the dealer
performs to honor the manufacturer's warranty; and
manufacturers can limit dealers' rights to transfer ownership
or control of the dealership--even to family members. According
to a recent National Automobile Dealers Association (``NADA'')
survey,\10\ half of the member dealerships are second or third
generation family businesses, and many of the family-owned
first generation dealerships plan to pass their small
businesses on to their children.
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\10\ NADA survey conducted May, 2000, of the total 2,148 surveys
returned: 1st generation dealerships: 1,029 (48 percent); 2d generation
dealerships: 670 (31 percent); 3d generation dealerships: 398 (19
percent); and 4th generation dealerships: 51 (2 percent).
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Noting the imbalances in bargaining power inherent in the
manufacturer-dealer relationship, in 1956 Congress enacted the
Automobile Dealers Day in Court Act, 15 U.S.C. 1221-1225, to
provide small business dealers with recourse in Federal court
against manufacturer abuses irrespective of contract terms.
This Federal statute serves as precedent for Federal
legislation to deal with problems in this area caused by
disparities in bargaining power between manufacturers and
dealers. However, the Automobile Dealers Day in Court Act has
proved to be insufficient to level the playing field between
dealers and manufacturers. The act does not provide for
equitable relief and fails to address the ``one sidedness'' of
the motor vehicle franchise contract itself.
In addition, Congress has passed legislation to prevent the
forced waiver of substantive rights in disputes between small
business service station owners and multinational oil
companies. The Petroleum Marketing Practices Act (``PMPA''), 15
U.S.C. 2801-2806, which regulates the franchise relationship
between oil refineries and gasoline retailers, was enacted to
prevent oil companies from improperly exploiting their unequal
bargaining power and to deter unfair conduct by prohibiting
refineries from forcing gasoline retailers to accept mandatory
binding arbitration and surrendering important statutory
rights. Similarly, S. 1140 would ensure that motor vehicle
dealers will not be compelled to surrender their statutory
rights as a condition of obtaining or renewing their dealer
contracts.
In 1925, Congress passed the Federal Arbitration Act
(``FAA'') to address the judicial hostility to arbitration and
make arbitration decisions enforceable in Federal courts. Since
1947, when the FAA was reenacted and codified in title 9 of the
United States Code, there have only been minor amendments.
However, in two recent alternative dispute resolution (``ADR'')
statutes discussed below, Congress specifically provided
statutory language to ensure that arbitration is voluntary. In
the same vein, S. 1140 does not void arbitration as a viable
option for dispute resolution, it merely seeks to ensure that
participation is voluntary by both parties.
In 1988, Congress first passed the Judicial Improvements
and Access to Justice Act, 28 U.S.C. 651-658 (1988),
authorizing 20 Federal judicial districts to establish
experimental court-annexed arbitration programs as an
alternative to formal civil trials. From the outset the law was
drafted to ensure the voluntary nature of arbitration. Then, in
1998, Congress passed the Alternative Dispute Resolution Act
(``ADR''), 28 U.S.C. 651-658 (1998 amendments), expanding the
program to all Federal district courts to provide litigants in
all civil cases with at least one alternative dispute
resolution process such as mediation, mini trial or
arbitration. In that measure, Congress specifically included
protective provisions to ensure that arbitration is voluntary.
Under the ADR statute a district court may only allow
arbitration if the parties consent. The law further clearly
creates safeguards to provide true consent by requiring
procedures ensuring that ``consent to arbitration is freely and
knowingly obtained, and no party or attorney is prejudiced for
refusing to participate in arbitration.'' Therefore, a party
retains the right to pursue a judicial determination of the
matter if it so chooses.
Similarly, the focus of S. 1140, to make binding
arbitration voluntary rather than mandatory, is fully
consistent with the prominent theme that arbitration must be
voluntary in court-annexed proceedings. In addition, S. 1140
will not discourage alternative dispute resolution. In fact,
the proposed legislation attempts to protect the State ADR
forums established to resolve dealer-manufacturer disputes.
Similar to court-annexed arbitration, these forums reduce costs
and delays and preserve judicial time and resources.
Additional legislation enacted in 1990 and 1996, the
Administrative Dispute Resolution Act, 5 U.S.C. 581-593 (1990
and 1996 amendments), authorizes Federal agencies to use
arbitration to resolve administrative disputes if the parties
consent. The act goes to great length to emphasize that the
decision to arbitrate must be voluntary for both parties. For
example, section 585 states that ``an agency may not require
any person to consent to arbitration as a condition of entering
into a contract or obtaining any benefit.'' 5 U.S.C. 585
(1990). As stated in the Senate Governmental Affairs Committee
Report accompanying the bill:
A new Section 585 authorizes the use of arbitration
whenever all parties consent in writing. It prohibits a
federal agency from requiring any person to consent to
arbitration as a condition of receiving a contractor
benefit. This prohibition is intended to help ensure
that the use of arbitration is truly voluntary on all
sides.\11\
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\11\ S. Rept. 101-543, p. 12.
This provision in the 1990 statute was maintained in the
1996 legislation.
The Motor Vehicle Franchise Contract Arbitration Fairness
Act, S. 1140, would simply guarantee that binding arbitration
to resolve disputes involving a motor vehicle franchise
contract is entered into only after voluntary agreement by both
parties. Voluntary agreements would prohibit motor vehicle
manufacturers from mandatorily depriving dealers of rights they
are entitled to under Federal and State laws. Thus, S. 1140
conforms with recent congressional efforts to streamline the
Federal judicial system, which have recognized the importance
of maintaining voluntary consent to binding arbitration.
VI. Section-by-Section Analysis
Section 1.--Short title
Section 1 provides that the short title of the bill shall
be the Motor Vehicle Franchise Contract Arbitration Fairness
Act.
Section 2.--Election of arbitration
Section 2 amends the Federal Arbitration Act to require
that whenever a motor vehicle franchise contract provides for
the use of arbitration to resolve a controversy arising out of
or relating to the contract, arbitration may be used to settle
the controversy only if both parties consent in writing after
such controversy arises. This section also requires the
arbitrator to provide the parties with a written explanation of
the factual and legal basis for the decision.
Section 3.--Effective date
Section 3 provides that the amendments to the FAA made by
this legislation shall apply only to contracts entered into,
modified, renewed or extended after the date of enactment.
VII. Cost Estimate
In compliance with paragraph 11(a) of rule XXVI, of the
Standing Rules of the Senate, the Committee sets forth, with
respect to the bill, S. 1140, the following estimate and
comparison prepared by the Director of the Congressional Budget
Office under section 403 of the Congressional Budget Act of
1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, November 2, 2001.
Hon. Patrick J. Leahy,
Chairman, Committee on the Judiciary,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
contemplated a cost estimate for S. 1140, the Motor Vehicle
Franchise Contract Arbitration Fairness Act of 2001. The CBO
staff contacts for this estimate are Lanette J. Walker (for
federal costs), and Paige Piper/Bach (for the private sector
costs).
Sincerely,
Dan L. Crippen,
Director.
Enclosure.
congressional budget office cost estimate
CBO estimates that implementing S. 1140 would cost less
than $500,000 annually, assuming the availability of
appropriated funds. Enacting the bill would not affect direct
spending or receipts, so pay-as-you-go procedures would not
apply. S. 1140 contains no intergovernmental mandates as
defined in the Unfunded Mandates Reform Act (UMRA) and would
not affect state, local, or tribal governments. It would impose
private-sector mandates as defined by UMRA, but CBO estimates
the direct costs if those mandates would fall well below the
threshold established by UMRA ($113 million in 2001, adjusted
annually for inflation).
S. 1140 would provide that contract disputes between motor
vehicle manufacturers and motor vehicle dealers can be resolved
by arbitration only after both parties agree to arbitration as
a means of settling the dispute. Under current law,
manufacturers can include clauses in contracts with dealers
that provide for mandatory arbitration if a contract dispute
would arise.
CBO estimates that implementing the bill could increase
costs to federal courts to the extent that such contract
disputes are tried in federal court. Based on information from
the Administrative Office of the United States Courts, CBO
estimates that any increase in federal costs would be less than
$500,000 a year because of the relatively small number of cases
expected. Any additional costs would be subject to the
availability of appropriated funds.
S. 1140 would impose private-sector mandates on certain
motor vehicle manufacturers and arbitrators involved in
disputes arising out of or relating to a motor vehicle
franchise contract by allowing arbitration only after both
parties in a dispute agree in writing to arbitration, and by
requiring an arbitrator elected to resolve such a dispute to
provide the parties with a written explanation of the basis for
the award. Based on information provided by the National
Automobile Dealers Association, the Association of
International Automobile Manufacturers, and the American
Arbitration Association, CBO estimates that the direct cost of
those mandates would fall well below the threshold established
by UMRA.
This estimate was approved by Peter H. Fontaine, Deputy
Assistant Director for Budget Analysis.
VIII. Regulatory Impact Statement
In compliance with paragraph (11)(b)(1), rule XXVI of the
Standing Rules of the Senate, the Committee, after due
consideration, concludes that S. 1140 will not have a
significant regulatory impact.
IX. MINORITY VIEWS OF SENATOR SESSIONS
Senate bill 1140, the Motor Vehicle Franchise Contract
Arbitration Fairness Act, takes a piecemeal exemption approach
to arbitration reform. The bill takes one type of contract--
motor vehicle dealership franchise contracts--and exempts the
parties to such contracts from the Federal Arbitration Act
(FAA). The bill does not address issues with other types of
arbitration and does not attempt to reform the FAA itself.
Instead, the bill reverses a long-standing congressional policy
favoring arbitration in a manner that undermines the sanctity
of contract and has serious implications for other types of
transactions to which the FAA currently applies.
Arbitration is an informal process of resolving disputes in
which a neutral third party arbitrator renders a decision after
hearing both parties. As the Supreme Court has explained,
``[b]y agreeing to arbitrate a * * * claim, a party does not
forgo * * * substantive rights * * *; it only submits to their
resolution in an arbitral, rather than a judicial, forum.'' \1\
Arbitration in intended to avoid the formalities, expense, and
delay of formal dispute resolution before courts.
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\1\ Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473
U.S. 614, 628 (1985).
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In 1925, Congress passed the Federal Arbitration Act
(``FAA'') to preempt judicial aversion to arbitration by making
arbitration decisions enforceable in Federal courts. Under the
FAA, now codified in title 9, United States Code, when two
parties agree to a binding contract that affects interstate
commerce, an arbitration clause waiving the right to trial in
court and calling for the informal settlement of any dispute
arising from the contract will be enforceable.\2\ If one party
to the contract containing an arbitration clause attempts to
avoid arbitration and file suit in court, the other party can
move to stay or dismiss the action on the grounds that the FAA
requires the arbitration clause of the contract to be
enforced.\3\
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\2\ 9 U.S.C. 2 (1988).
\3\ Id. at pars. 3 and 4.
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Since 1925, Congress has amended the FAA in only minor
respects. Instead of repealing the FAA, Congress has expanded
arbitration, in a nonbinding form, to contexts in which the
parties have not agreed to binding arbitration prior to a
dispute. For example, Congress has encouraged nonbinding
arbitration in the Judicial Improvements and Access to Justice
Act, 28 U.S.C. 651-658 (1988), the Administrative Dispute
Resolution Act, 5 U.S.C. 581-593 (1990 and 1996 amendments),
and the Alternative Dispute Resolution Act (ADR), 28 U.S.C.
651-658 (1998 amendments).
As the expense of court litigation has risen, the use of
arbitration has expanded. Clauses requiring parties to submit
disputes to arbitration are now found in a variety of
contracts, including union contracts, employment contracts,
consumer credit contracts, and securities contracts. In cases
dealing with arbitration contracts, the Supreme Court has
emphasized that the FAA establishes a Federal policy favoring
arbitration.\4\ In an unbroken line of decisions starting in
1985, the Supreme Court has consistently upheld the application
of the FAA to claims arising under the Sherman Act,\5\
securities law claims,\6\ civil Racketeer Influenced and
Corrupt Organizations Act (``RICO'') claims,\7\ and employment
claims.\8\ Thus, when parties to various types of contracts
agree to arbitrate disputes, the FAA applies and the courts
will enforce the arbitration clause.
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\4\ See, e.g., Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp.,
460 U.S. 1, at 24 (1983).
\5\ Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473
U.S. 614, 638-40 (1985).
\6\ See Shearson/American Express Inc. v. McMahon, 482 U.S. 220
(1987) (applying FAA to claims arising under the Securities Exchange
Act of 1934); Rodriguez de Quijas v. Shearson/American Express, Inc.,
490 U.S. 477 (1989) (applying FAA to claims arising under the
Securities Act of 1933).
\7\ McMahon, supra note 3, at 239-42 (applying FAA to claims
arising under RICO).
\8\ See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991)
(applying FAA to claims arising under Age Discrimination in Employment
Act); Circuit City Stores, Inc. v. Adams 532 U.S. 105 (2001) (applying
FAA to State law employment discrimination claim).
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In passing the FAA, Congress stated that ``[a]rbitration
agreements are purely matters of contract, and the effect of
the [Federal Arbitration Act] is simply to make the contracting
party live up to his agreement. He can no longer refuse to
perform his contract when it becomes disadvantageous to him. An
arbitration agreement is placed on the same footing as other
contracts, where it belongs.'' \9\ The Supreme Court has ruled
that arbitration clauses must not be put on a lesser footing
than any other clause of a contract.\10\ Arbitration clauses
are subject, however, to the same defenses available under
State law to the contract itself, such as fraud duress,
adhesion, or unconscionability.\11\
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\9\ House Report No. 96, To Validate Certain Agreements For
Arbitration, 68th Cong., 1st sess. (Jan. 24, 1924).
\10\ Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 687
(1996) (``Courts may not, however, invalidate arbitration agreements
under state laws applicable only to arbitration provisions.'').
\11\ See id. at 686-87.
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Senate bill 1140 would reverse the intent of Congress as
interpreted by the Supreme Court by singling out arbitration
clauses in motor vehicle dealer franchise contracts for non-
enforcement. S. 1140 would do this even when the U.S. Chamber
of Commerce reports that only a small fraction of motor vehicle
franchise contracts contain arbitration clauses:
NUMBER OF FRANCHISE AGREEMENTS WITH MANDATORY BINDING ARBITRATION CLAUSE
(MBAC) \1\
[Source: U.S. Chamber of Commerce (Feb. 27, 2000)]
------------------------------------------------------------------------
Approx. No. Dealers
Manufacturer \2\ of Dealers with MBAC Note
------------------------------------------------------------------------
DaimlerChrysler.............. 4,435 Appr. 1,336 Dealer option
at time of
agreement,
except in
Alabama.
Ford......................... 4,958 5
General Motors............... 7,753 0
Saturn....................... 236 236
Honda and Acura.............. 1,254 4
Suzuki....................... 285 285
BMW.......................... 337 0
Ferrari...................... 29 29
Hyundai...................... 483 0
Isuzu........................ 567 0
Kia.......................... 441 0
Land Rover................... 118 0
Mazda........................ 763 0
Mercedes-Benz................ 316 0
Mitsubishi................... 495 0
Nissan/Infiniti.............. 1,230 0
Porsche...................... 194 0
Rolls-Royce.................. 36 0
Subaru....................... 603 0
Toyota....................... 1,195 0
Lexus........................ 174 0
Volkswagen................... 567 0
Audi......................... 258 0
Volvo........................ 332 0
Saab......................... 215 0
------------------------------------------------------------------------
\1\ Excludes agreements with public companies.
\2\ Manufacturers listed include members of the Alliance of Automobile
Manufacturers and the Association of International Automobile
Manufacturers, Inc.
By singling out arbitration clauses for non-enforcement, S.
1140 tends to undermine the sanctity of the contract and the
stability of contract law.\12\ This in turn undermines the
certainty of transactions upon which our commerce is depends.
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\12\ E. Allan Farnsworth, ``The Past of Promise: An Historical
Introduction to Contract'', 69 Columbia Law Review 576 (1969); Charles
Fried, ``Contract as Promise: A Theory of Contractual Obligation'', 57
(1981).
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Further, the piecemeal, exemption approach of S. 1140 could
have broader implications in areas other than motor vehicle
franchise contracts. In a letter to the Judiciary Committee,
the Chamber of Commerce of the United States of America stated:
While [S. 1140] purports simply to undo the
arbitration clauses in contracts between motor vehicle
manufacturers and dealers, its long-term effects would
cause serious damage to the use and availability of
alternative dispute resolution. * * * S. 1140 would
weaken clear congressional intent to encourage
alternative dispute resolution. Most importantly, the
legislation could also call into question the U.S.
Supreme Court's continual reaffirmation of arbitration
clauses including its decision earlier this year in
Circuit City Stores, Inc. v. Saint Clair Adams [532
U.S. 105 (2001)].\13\
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\13\ Letter from R. Bruce Joston, Vice President of Governmental
Affairs, U.S. Chamber of Commerce (Sept. 13, 2001).
Because predispute binding arbitration is often less
expensive than litigation in court,\14\ arbitration provides
the critical benefit of allowing access to dispute resolution
to many with small claims who cannot afford the higher price of
court litigation. Lewis Maltby, Director, National Task Force
on Civil Liberties in the Workplace of the American Civil
Liberties Union and a Director of the American Arbitration
Association, has stated:
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\14\ Stephen J. Ware, ``Arbitration Under Assault'', Cato Policy
Analysis No. 433, p. 3 (Apr. 18, 2002) (``[A]rbitration typically
reduces costs. Arbitration gains speed and efficiency by streamlining
discovery, pleadings, and motion practice. This streamlined process
generally results in much lower legal fees and related process
costs.'').
Even if the client has clearly been wronged and is
virtually certain to prevail in court, the attorney
will be forced to turn down the case unless there are
substantial damages. A survey of plaintiff employment
lawyers found that a prospective plaintiff needed to
have a minimum of $60,000 in provable damages--not
including pain and suffering or other intangible
damages--before an attorney would take the case.
Even this, however, does not exhaust the financial
obstacles an employee must overcome to secure
representation. In light of their risk of losing such
cases, many plaintiffs' attorneys require a prospective
client to pay a retainer, typically about $3,000.
Others require clients to pay out-of-pocket expenses of
the case as they are incurred. Expenses in employment
discrimination cases can be substantial. Donohue and
Siegelman found that expenses in Title VII cases are at
least $10,000 and can reach as high as $25,000.
Finally, some plaintiffs' attorneys now require a
consultation fee, generally $200-$300, just to discuss
their situation with a potential client.
The result of these formidable hurdles is that most
people with claims against their employer are unable to
obtain counsel, and thus never receive justice. Paul
Tobias, founder of the National Employment Lawyer's
Association, has testified that ninety-five percent of
those who seek help from the private bar with an
employment matter do not obtain counsel. Howard's
survey of plaintiffs' lawyers produced the same result.
A Detroit firm reported that only one of eighty-seven
employees who came to them seeking representation was
accepted as a client.\15\
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\15\ Lewis L. Maltby, ``Private Justice: Employment Arbitration and
Civil Rights'', 30 Col. Hum. R.L. Rev. 29, 57-58 (1998).
Indeed, Prof. Stephen J. Ware of the Cumberland School of
Law has concluded that ``[a]rbitration tends to reduce consumer
prices, raise employee wages, and increase access to justice
for meritorious claims. Those benefits would not be fully
realized if binding arbitration agreements could be entered
into only after a dispute arose.\16\ Thus, this piecemeal,
exemption approach of S. 1140, if applied to other types of
transactions, could have negative implications for consumers
and employees.
---------------------------------------------------------------------------
\16\ Ware, supra note 14, at p. 2.
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At least the automobile manufacturers and dealers that S.
1140 would exempt from the FAA, unlike many consumers and
employees, could generally afford to litigate franchise
disputes in court. The ability of a relatively wealthy group of
businesses to afford to litigate, however, does not compel
Congress to completely exempt that group from the FAA. Further,
the ability to afford in-court litigation does not justify an
exemption from the FAA when such procedural protections, much
like those available in court, could be incorporated into the
FAA itself.
Even with the savings in expense and delay, arbitration can
result in unfairness in certain cases depending on the
procedural protections for the parties embodied in the contract
containing the arbitration clause or those protections that are
incorporated by reference, such as the rules of the American
Arbitration Association. Accordingly, instead of a piecemeal
reform of the FAA via exemptions, a comprehensive review of
procedural protections that can be used in arbitration for all
parties is more appropriate at this time. For example, a
comprehensive reform could include the right to notice and
hearing, the right to be represented by an attorney, the right
to discovery and the presentation of evidence, the right to a
written decision by the arbitrator, the right to a timely
resolution of the matter, and the right to a neutral
arbitration selected by both parties.\17\
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\17\ See, e.g., Consumer and Employee Arbitration Bill of Rights,
S. 3210, 106th Cong. (2000).
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Given the broad Federal policy in favor of arbitration, in
multiple contexts, the cost and time savings available in
arbitration, the limited applicability in practice of
arbitration clauses to motor vehicle franchise contracts, and
the availability of procedural protections that could be
incorporated into the FAA, I cannot support S. 1140 in its
current form.
Jeff Sessions.
X. Changes in Existing Law
In compliance with paragraph 12 of rule XXVI of the
Standing Rules of the Senate, changes in existing law made by
S. 1140, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in bold brackets, new matter
is printed in italic, and existing law in which no change is
proposed is shown in roman):
UNITED STATES CODE
* * * * * * *
TITLE 9--ARBITRATION
Chapter Section
1. General provisions 1
* * * * * * *
CHAPTER 1--GENERAL PROVISIONS
Sec.
1. ``Maritime transactions'' and ``commerce'' defined;
exceptions to operation of title.
* * * * * * *
16. Appeals.
17. Motor vehicle franchise contracts.
* * * * * * *
Sec. 1. ``Maritime transactions'' and ``commerce'' defined; exceptions
to operation of title
``Maritime transactions'', as herein * * *
* * * * * * *
Sec. 16. Appeals
(a) An appeal may be taken from--
(1) an order--
(A) refusing a stay of any action under
section 3 of this title,
* * * * * * *
(b) Except as otherwise provided in section 1292(b) of
title 28, an appeal may not be taken from an interlocutory
order--
(1) granting a stay of any action under section 3 of
this title;
(2) directing arbitration to proceed under section 4 of
this title;
(3) compelling arbitration under section 206 of this
title; or
(4) refusing to enjoin an arbitration that is subject
to this title.
Sec. 17. Motor vehicle franchise contracts
(a) For purposes of this section, the term--
(1) ``motor vehicle'' has the meaning given such term
under section 30102(6) of title 49; and
(2) ``motor vehicle franchise contract'' means a
contract under which a motor vehicle manufacturer,
importer, or distributor sells motor vehicles to any
other person for resale to an ultimate purchaser and
authorizes such other person to repair and service the
manufacturer's motor vehicles.
(b) Whenever a motor vehicle franchise contract provides
for the use of arbitration to resolve a controversy arising out
of or relating to the contract, arbitration may be used to
settle such controversy only if after such controversy arises
both parties consent in writing to use arbitration to settle
such controversy.
(c) Whenever arbitration is elected to settle a dispute
under a motor vehicle franchise contract, the arbitrator shall
provide the parties to the contract with a written explanation
of the factual and legal basis for the award.
* * * * * * *