Anti-Arbitration Bills Imperil The Universal Benefits Of Consumer Arbitration

Friday, August 1, 2008 - 01:00

Eighty-three years ago, Congress enacted the Federal Arbitration Act ("FAA"), giving Americans the right to contract to resolve their disputes through binding arbitration. The FAA established a strong federal policy favoring arbitration as an expeditious and cost-effective alternative to court. The full weight of this policy would not emerge until the 1980s and 1990s when the United States Supreme Court issued a series of decisions establishing the expansive reach of the FAA.1

In the wake of those Supreme Court decisions, parties have been able to contract for arbitration of nearly all types of disputes. This ability may be in peril. The current session of Congress has witnessed the introduction of several bills that would limit the scope of the FAA and, in turn, erode the strong federal policy favoring arbitration. These limitations on the FAA would deprive Americans of a full opportunity to choose arbitration.

Anti-Arbitration Bills Introduced In Congress

Of the anti-arbitration bills introduced in the current session, the most far-reaching proposal is the so-called Arbitration Fairness Act ("AFA"), which has been introduced in both houses of Congress.2This bill would amend the FAA to provide that a pre-dispute arbitration agreement is unenforceable "if it requires arbitration of (1) an employment, consumer, or franchise dispute; or (2) a dispute arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power." In other words, arbitration agreements would cease to be an option in at least three types of relationships: (1) employment; (2) consumer; and (3) franchise.

Most of the other anti-arbitration bills introduced this session have been focused on specific industries. The most recent bill, entitled the Fairness in Nursing Home Arbitration Act, would disallow pre-dispute arbitration agreements between nursing homes and their residents. Like the AFA, this bill has also been introduced in both houses of Congress.3

Another bill targets automobile dealerships. This bill, entitled the Automobile Arbitration Fairness Act, would disallow pre-dispute arbitration agreements between automobile dealerships and their customers. One industry-specific bill was enacted into law last May. Under this law, farmers must be given an opportunity to reject an arbitration provision in any livestock or poultry contract.5

In addition to the industry-specific bills, there is an anti-arbitration bill focused on the employment relationship. This bill, entitled the Civil Rights Act of 2008, would preclude the enforcement of any pre-dispute agreement that required an employee to arbitrate claims arising under federal law. Like the AFA and the nursing home bill, this bill has also been introduced in both houses of Congress.6

Some anti-arbitration bills reject an outright ban in favor of a more measured approach to regulating the use of arbitration. A bill entitled the Fair Arbitration Act7would impose requirements on both the formation of an arbitration agreement and any arbitration proceedings. More specifically, this bill sets forth disclosure requirements (e.g., conspicuous typeface) and calls for various procedural protections, including a requirement that the arbitrator(s) issue a written explanation for their decision.

With the exception of the livestock and poultry bill that has been enacted into law, all of these anti-arbitration bills are still in the early stages of the legislative process. However, on July 15, three of the bills - the AFA, the nursing home bill, and the automotive bill - received, by a slim margin, a favorable report from the House Subcommittee on Commercial and Administrative Law. Also, if the number of co-sponsors is any indication, these bills are gaining slight momentum. For example, as of July 15, the AFA had 100 co-sponsors in the House of Representatives and six in the Senate, while the nursing home bill had 12 co-sponsors in the House and four in the Senate.

Though still in the early stages of the legislative process, most of these bills have been the subject of a committee or subcommittee hearing. Unfortunately, those hearings were clouded by the myths and misinformation that are frequently used to bolster the anti-arbitration agenda. The remainder of this article is focused on dispelling those myths and outlining the universal benefits of consumer arbitration.

Myths And Misinformation About Consumer Arbitration

The arbitration debate should always begin with this central premise: Studies have consistently shown that where similar subject matter is at issue, arbitration produces the same outcomes as court but in less time and at less expense.8This empirical reality refutes the allegation that arbitrators are biased in favor of business entities because of the so-called "repeat player" effect.

When confronted with the reality of similar outcomes, the critics of arbitration often resort to the argument that post-dispute arbitration agreements are superior to pre-dispute arbitration agreements because after the dispute has arisen, the parties are supposedly better situated to choose between arbitration and litigation. Post-dispute arbitration agreements are not a viable alternative, however, because the occurrence of the dispute creates enmity between the parties and alters the strategic calculus such that one of the parties is likely to enjoy a tactical advantage by keeping the dispute in the court system.9

Another myth bandied about by critics of arbitration is the claim that arbitration shields wrongdoing from the public view. Arbitration proceedings are generally confidential. However, this confidentiality does not preclude public disclosure of the underlying dispute because confidentiality attaches to the arbitration proceeding, not to any injurious conduct. Moreover, the outcome of an arbitration proceeding necessarily becomes part of the public record whenever a party seeks judicial confirmation of an arbitration award.10

An especially popular myth among arbitration critics is the notion that the drafting party gets to choose the arbitrator. Typically, the drafting party will name an arbitration administrator within the arbitration agreement, but the administrator - akin to a court clerk - is not the decision maker. Moreover, leading arbitration administrators, including the National Arbitration Forum, have adopted rules that give both parties a say in the process of arbitrator selection.

If a drafting party reserved the right to select the arbitrator, the agreement would likely be unenforceable in the face of an unconscionability or public policy challenge11because the FAA allows courts to apply state contract law to protect parties from unfair or unreasonable arbitration agreements. These existing protections against unfair arbitration agreements often get lost in the debate over arbitration, as arbitration critics ignore these protections whenever they trumpet the mischief of far-flung venues12and one-sided arbitration agreements.13

The Universal Benefits Of Consumer Arbitration

Dispelling the myths about arbitration is necessary for an evenhanded debate, but it's equally important to have a full understanding of the benefits of arbitration. Arbitration is beneficial for the parties because the simplicity of the proceedings enables the parties to resolve a dispute with minimal attorney fees. The simplicity and informality is especially beneficial for consumers because it enables them to prosecute or defend a claim without the aid of an attorney, whereas court proceedings entail a labyrinth of rules and procedures that are essentially unnavigable for a pro se party. The flexibility of arbitration is also a boon for consumers. For example, arbitration allows for document hearings, which means that consumer parties can argue their case without missing work or incurring travel expenses.

These benefits to the parties can be thought of as direct benefits. Arbitration also has benefits that extend to non-parties, and these indirect benefits are often overlooked in the debate over arbitration. Both the court system and parties proceeding within the court system enjoy indirect benefits from the use of arbitration, because resolving disputes outside of the court system alleviates the burden on overcrowded dockets and frees up judicial resources for criminal matters and other proceedings of obvious public concern.

Similarly, the taxpayers enjoy indirect benefits from the use of arbitration because resolving disputes in a private forum (i.e., without the consumption of judicial resources) reduces the burden on the taxpayers. The aggregate savings to the taxpayers are substantial because studies have shown that, on average, court-based resolution of a civil dispute costs the taxpayers approximately $3,000.14

Finally, the marketplace is also an indirect beneficiary because the use of arbitration enables companies to reduce their attorney fees, and through the operation of market forces, these savings are necessarily passed along to consumers in the form of lower prices. Thus, consumers benefit from the use of arbitration not just as parties but also as non-parties.

Conclusion

With these anti-arbitration bills circulating through Congress, all of these benefits are in peril. It is in everyone's interest, if only as taxpayers, to oppose these bills and preserve arbitration as a viable alternative to court. Disallowing pre-dispute arbitration agreements, whatever the context, will only stifle innovation in the area of dispute resolution while depriving Americans of the far-reaching benefits of arbitration.

1See Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265 (1995); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985); Southland Corp. v. Keating, 465 U.S. 1 (1984).

2See S. 1782, 110th Cong. (2007); H.R. 3010, 110th Cong. (2007).

3See S. 2838, 110th Cong. (2008); H.R. 6126, 110th Cong. (2008).

4See H.R. 5312, 110th Cong. (2008).

5See H.R. 2419, 110th Cong. § 11005 (2007).

6See S. 2554, 110th Cong. (2008); H.R. 5129, 110th Cong. (2008).

7S. 1135, 110th Cong. (2007)

8 For information on these studies, please visit http://www.adrforum.com/BenefitsOfArbitration.

9 A recent article in the Washington Post illustrates these tactical advantages in claiming that "corporate defendants are routinely allowed to manipulate the judicial process with an endless stream of motions, depositions and appeals."Steven Pearlstein, Altering the Economics of Civil Litigation, Wash. Post, July 4, 2008, at D1.

10 Accordingly, Rule 4 of the National Arbitration Forum Code of Procedure expressly provides that arbitration awards are not confidential.

11See, e.g., Hooters of America, Inc. v. Phillips, 39 F.Supp.2d 582, 614 (D.S.C. 1998) (refusing to enforce an arbitration agreement that allowed the drafting party to control the pool of arbitrator candidates).

12See, e.g., Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1292 (9th Cir. 2006) (refusing to enforce an arbitration agreement based partly on its provision placing venue a far distance from the non-drafting party).

13See, e.g., Wisconsin Auto Title Loans, Inc. v. Jones, 714 N.W.2d 155, 173-74 (Wis. 2006) (refusing to enforce an arbitration agreement that allowed the drafting party to seek relief in court).

14See Mark Fellows, Limits on Arbitration Would Burden Courts and Taxpayers, Metropolitan Corporate Counsel, Dec. 2007, at 8.

Kirk Knutson is Senior Staff Attorney at Forthright, where much of his work is done on behalf of the National Arbitration Forum. He is based in Minneapolis, Minnesota.

Please email the author at kknutson@forthrightsolutions.com with questions about this article.