Senate committee debates fairness of mandatory arbitration

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Sen. Al Franken, D-Minn., a champion of the proposed Arbitration Fairness Act, recently led a hearing before the Senate Committee on the Judiciary called “Arbitration: Is It Fair When Forced?”

Franken focused specifically on mandatory arbitration, as opposed to other voluntary types of alternative dispute resolution.

At the hearing, Dr. Deborah Pierce, associate director of emergency medicine at Einstein at Elkins Park Hospital in Pennsylvania, said she became aware of arbitration clauses after she was not offered a medical partnership at another hospital as agreed to before she accepted the position.

Pierce said when she signed her employment agreement, she did not know it contained a mandatory arbitration clause.

“I consider myself an educated person, but I am not a lawyer and would not have known to recognize that the forced arbitration clause meant that I could never bring any future claims against the practice in a court of law,” she said.

“Further, even if I understood the provision, I could not have removed it from the agreement. I had a choice: Either accept the terms of the agreement, including the mandatory arbitration provision, or refuse to sign and not get the job.”

Despite a favorable decision in a gender discrimination claim filed with the Equal Employment Opportunity Commission, Pierce’s case could not be heard in federal court and she was forced to arbitrate, a process she testified cost her more than $200,000. She won, but was charged twice as much as the amount the hospital was ordered to pay her.

“For me, the mandated arbitration process was unbelievably expensive, unfair and biased,” Pierce said. “It took away my faith in a fair and honorable legal system which is supposed to protect the civil rights of its citizens.”

Minnesota Attorney General Lori Swanson also spoke at the hearing, where she detailed a 2009 suit her office brought against the National Arbitration Forum, which she said was then the largest arbitration company in the country for consumer credit disputes.

Swanson said the lawsuit alleged the forum deceptively represented itself as independent and neutral, but it worked behind the scenes convincing credit card companies and other creditors to insert mandatory arbitration clauses in their customer agreements and have the forum decide the disputes.

In soliciting creditors, she said, the forum aligned itself against consumers, claiming customers did not know what to expect from arbitration and were more willing to pay and that creditors had all the leverage because customers had little choice, but to take care of their accounts.

The suit also alleged the forum had financial ties to the collection industry, including Accretive, a family of New York private equity funds that invested $42 million in the forum and became one of the country’s largest debt collection enterprises.

“In the course of our year-long investigation, we heard from arbitrators who were ‘deselected’ or not given more cases after ruling for the consumer or not awarding the credit card company any attorneys’ fees,” Swanson said. “We heard from employees who were told to find arbitrators who were anti-consumer and not to assign additional cases to arbitrators who asked the creditors to provide evidence to support their claims.”

The suit was settled through a consent judgment in which the company is barred from arbitrating credit card and other consumer disputes, must stop accepting new consumer arbitrations and may not participate in administering new consumer arbitrations.  “Our investigation of the forum and interviews of consumers highlighted underlying problems with the arbitration of consumer disputes arising out of mandatory arbitration clauses in fine-print consumer contracts,” Swanson said.

The investigation revealed there is unequal bargaining power, she said, between consumers and large corporations, which often present consumers with ‘take it or leave it’ fine-print contracts. It also was revealed, Swanson said, that arbitrators have “a powerful incentive” to favor the dominant party, that consumers did not recognize the significance of arbitration notices and that due-process protections may be lacking in arbitration with no right to appeal.

“In short, while our consent judgment may have removed a problem company from the consumer arbitration marketplace,” she said, “it did not and cannot solve the systemic problems with mandatory pre-dispute arbitration clauses in fine-print consumer contracts.”

At the hearing, Swanson said Congress is the only body that can protect consumers since the Federal Arbitration Act has been interpreted by federal courts to prohibit state legislatures from regulating the clauses.

F. Paul Bland Jr., a senior attorney for Washington, D.C.-based Public Justice, a national public interest law firm, focused on several points during the hearing.

He said a large and rapidly growing number of corporations are forcing millions of consumers and employees to give up their rights to trial by jury or to be heard in the public civil justice system because of mandatory arbitration clauses.

Bland said the recent U.S. Supreme Court case AT&T Mobility LLC v. Concepcion has curtailed efforts by states to protect consumers and employees against unfair contract terms.

“In many cases,” he said, “mandatory arbitration clauses have the effect of immunizing corporations from any liability or accountability even when they have blatantly violated consumer protection or civil rights laws.

“In all too many cases, the promise of fair and inexpensive arbitration is not kept for American consumers and employees, and companies use mandatory arbitration clauses as a tool to avoid accountability.”

Victor Schwartz, a partner at Shook Hardy & Bacon LLP, spoke on behalf of the U.S. Chamber of Commerce and the U.S. Chamber Institute for Legal Reform.

“In this country, we have choices,” he said. “It is true that in some industries, pre-dispute arbitration agreements are widespread, but still one does not have to sign them.”

Schwartz argued that eliminating the clauses would benefit lawyers, not consumers, because consumers would not have the arbitration alternative and would have to resolve disputes through time-consuming and expensive litigation.

Dispute resolution systems that businesses offer are aimed at ensuring customers are satisfied that they receive a fair shake, he said.

“From a business point of view,” Schwartz said, “the premise that a business would wish to place its customers into a forum where there is no fair chance to have cases properly heard is deeply flawed.

“Stated plainly, businesses want repeat customers. They often make accommodations for consumers when under no obligation to do so.”

During the hearing, Franken highlighted the work of some colleagues to limit the use of mandatory arbitration clauses.

“Critics may argue that these contracts were entered into voluntarily and that we are compelled to honor forced arbitration clauses or risk abolishing entirely the freedom to contract,” he said, adding that he hoped committee members could find some common ground.

“We may not all agree on the best ways to move forward and on which legislative proposals are needed, but I hope we can walk away with a few areas of agreement.”