Businesses, Consumers at Odds Over Proposed Arbitration Act

BATTLE LINES ARE DRAWN

The proposed 2009 Act has its detractors. Critics claim there is nothing “fair” about it and take serious issue with its legislative findings. William K. Slate, II, president and CEO of the American Arbitration Association, has dubbed it “inhospitable to arbitration”[FOOTNOTE 5] and the U.S. Chamber of Commerce views the proposed legislation as effectively eliminating arbitration. Its Institute for Legal Reform just released a poll stating that 71 percent of likely voters oppose removing arbitration agreements from consumer contracts and 82 percent prefer arbitration over litigation as a means to settle a serious dispute with a company.[FOOTNOTE 6]

The U.S. Chamber of Commerce also points to a new study titled “Consumer Arbitration Before the American Arbitration Association” which noted that consumers with disputes worth less than $10,000 only paid an average of $96 to resolve the dispute.[FOOTNOTE 7] Conducted by the Searle Civil Justice Institute of Northwestern University School of Law, the study found that the average claimant spent $219 in arbitration for claims between $10,000 to $75,000 and the disputes were settled in average of less than seven months. In 301 cases, consumers won some relief 53 percent of the time and recovered an average of $19,255 whereas business claimants won relief 84 percent of the time and recovered an average of $20,648.

The study pointed out that the American Arbitration Association (AAA), which adheres to the Consumer Due Process Protocol,[FOOTNOTE 8] a set of principles for a fundamentally fair alternative dispute resolution process, deliberately refused to administer any arbitrations where the arbitration provisions were unfair per se to the consumer or employee.

“You need not throw the baby out with the bath water. Rather, fix pre-dispute arbitration for consumers and employees via reference to our Due Process Protocols,” says the AAA’s Slate.[FOOTNOTE 9] The protocols are designed to ensure that (i) arbitrators are truly neutral and make appropriate disclosures to ensure impartiality and (ii) the arbitration’s cost, location, time-limits and access to information are “reasonable” to consumers. They also contain a “carve-out” permitting, if both parties agree, to seek relief in a small claims court.

Proponents of the 2009 Act point to their own studies as evidence for the need for the legislation. Public Citizen, a non-profit organization with 100,000 members which represents consumer interests through lobbying, litigation, research and education, issued a report in September 2007. Titled “How Credit Card Companies Ensnare Consumers,”[FOOTNOTE 10] it focused upon the use of binding mandatory arbitration by the credit card industry. This eight-month examination, based solely upon arbitration awards issued by the National Arbitration Forum, concluded that mandatory arbitration was a “rigged game in which justice is dealt from deck stacked against consumers.”

The same study also concluded that (i) corporations — not consumers — chose binding mandatory arbitration; (ii) in more than 19,000 cases, 94.7 percent of the decisions were for business; (iii) arbitrators have a strong financial incentive to rule in favor of the companies that file cases against consumers because they can make hundreds of thousands of dollars a year conducting arbitrations; (iv) the National Arbitration Forum arbitrations were shrouded in secrecy with a lack of due process safeguards and (v) the arbitrations often cost consumers more than had they proceeded in court.

One thing is certain: the battle lines have been drawn and when the proposed legislation is submitted to both houses of Congress, the fireworks will fly.

Neal M. Eiseman, a partner at Goetz Fitzpatrick, specializes in construction and real estate law.

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FN1 In 2001, the U.S. Supreme Court in Circuit City Stores Inc. v. Adams, 522 U.S. 105, 121 S.Ct. 1302 (2001), upheld the validity of pre-dispute arbitration provisions and employment agreements, noting that, “There are real benefits to arbitration in the employment context, including avoidance of litigation costs compounded by difficult choice-of-law questions and by the necessity of bifurcating the proceedings where state law precludes arbitration of certain types of employment claims but not others.” Last year in Hall Street Associates, LLC v. Mattel, Inc., 552 U.S.; 128 S.Ct 1396 (2008), the U.S. Supreme Court declared that the Federal Arbitration Act’s limited grounds to vacate and modify arbitration awards constitute the sole and exclusive remedies available for any party seeking to overturn an award. By so ruling, the Court refused to enforce language in an arbitration provision providing that a judge may vacate an award if an arbitrator erred in applying the law.

FN2 NYLJ, April 2, 2009 at pages 1 and 6.

FN3 H.R. 1020.

FN4 Chapter 1 of Title 9 of the United States Code.

FN5 March 30, 2009 American Arbitration Association press release at www.adr.org.

FN6 U.S. Chamber of Commerce press release, April 2, 2009, entitled “Voters Strongly Back Arbitration, New Poll Shows” at www.uschamber.com.

FN7 March 12, 2009 ABA Journal article captioned “Consumers Won More Than Half of Arbitrations Studied” at www.abajournal.com.

FN8 March 30, 2009 American Arbitration Association press release at www.adr.org.

FN9 See American Arbitration Association’s Web site at www.adr.org.

FN10 Publication number B9915 at www.citizen.org.