[Senate Hearing 106-1066]
[From the U.S. Government Publishing Office]
S. Hrg. 106-1066
OVERVIEW OF CONTRACTUAL MANDATORY BINDING ARBITRATION
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HEARING
before the
SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE COURTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
MARCH 1, 2000
__________
Serial No. J-106-68
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire
Manus Cooney, Chief Counsel and Staff Director
Bruce Cohen, Minority Chief Counsel
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Subcommittee on Administrative Oversight and the Courts
CHARLES E. GRASSLEY, Iowa, Chairman
JEFF SESSIONS, Alabama ROBERT G. TORRICELLI, New Jersey
STROM THURMOND, South Carolina RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan CHARLES E. SCHUMER, New York
Kolan Davis, Chief Counsel
Matt Tanielian, Minority Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Feingold, Hon. Russell D., a U.S. Senator from the State of
Wisconsin...................................................... 11
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa. 1
WITNESSES
Fondren, Gene, President, Texas Automobile Dealers Association,
Austin, TX, on behalf of Automotive Trade Association
Executives..................................................... 9
Holcomb, Richard D., Commissioner, Department of Motor Vehicles,
Commonwealth of Virginia, Richmond, VA......................... 4
Lajdziak, Jill, President, Saturn Distribution Corporation, and
Vice President, Sales, Service, and Marketing, Saturn
Corporation, Troy, MI.......................................... 30
Lorber, Lawrence Z., U.S. Chamber of Commerce, Washington, DC.... 62
MacDonald, Jill N., Alliance of Automobile Manufacturers,
Washington, DC................................................. 32
Maltby, Lewis L., President, National Workrights Institute,
Princeton, NJ.................................................. 77
Mogilnicki, Eric, Wilmer, Cutler, and Pickering, on behalf of the
American Bankers Association, American Financial Services
Association, and the National Retail Federation, Washington, DC 61
Shack, William, Automobile Dealer, Henderson, NV................. 25
Sturdevant, Patricia, Executive Director and General Counsel,
National Association of Consumer Advocates, Washington, DC..... 44
APPENDIX
Questions and Answers
Responses of Jill Lajdziak to Questions from the Committee....... 103
Response of Jill N. MacDonald to a Question from Senator Feingold 105
Responses of Jill N. MacDonald to Questions from Senator Grassley 105
Responses of Patricia Sturdevant to Questions from Senator
Grassley....................................................... 107
Responses of Lawrence Z. Lorber to Questions from Senator
Grassley....................................................... 119
Responses of Lewis L. Maltby to Questions from Senator Feingold.. 120
Additional Submissions for the Record
Consumers Union, Washington, DC, letter and attachment........... 86
National Partnership for Women and Families, Washington, DC...... 88
Volkswagen of America, Inc., Washington, DC, letter.............. 123
Washington Post, March 1, 2000, article.......................... 97
Wisconsin Automobile and Truck Dealers Association, Madison, WI.. 124
OVERVIEW OF CONTRACTUAL MANDATORY BINDING ARBITRATION
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WEDNESDAY, MARCH 1, 2000
U.S. Senate,
Subcommittee on Administrative Oversight
and the Courts,
Committee on the Judiciary,
Washington, D.C.
The subcommittee met, pursuant to notice, at 1:57 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Charles E.
Grassley, (chairman of the subcommittee) presiding.
Also present: Senators Sessions and Feingold.
OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR
FROM THE STATE OF IOWA
Senator Grassley. I am going to start early, and let me
explain why. Before my colleagues get here, I will take care of
some administrative stuff.
First of all, there will be three votes on the floor
starting at 2 p.m., and you know how votes are. They ought to
only take a half-hour, but they end up taking longer than that.
So I expect that we are going to be bothered by votes between
now and 3 p.m. But because we have had such a hard time working
this hearing into the hearing schedule of the Judiciary
Committee and I promised so many people I was going to have
this meeting, we are going to try to conduct the meeting this
way while the votes are going on. I will have colleagues
coming, I think, who have consented to chair the hearing while
I vote, and then I will run over and vote and come back. And
then they will go vote, and that we expect to hopefully get
through this without any interruption.
We will probably only have one round of questioning per
member per panel, and it also would help us then--each of you
probably have already been informed of the 5-minute limit on
testimony--if you make sure that you stay within that limit,
and if you haven't done that, maybe you can take some action
between now and your turn to testify to do that to that extent.
Then for my members who may be here and not be able to ask
all the questions they want to ask or for people who are on the
subcommittee who can't come at all, we are going to keep the
record open until close of business Friday for questions that
we want to ask of either panel on any of the bills that are
before the subcommittee to have those answers submitted to the
panelists for answer in writing.
So, with those less than very ideal conditions, we hope to,
between now and when the last word is said, get this meeting
done in as orderly of a fashion as we can.
If per chance we would have to adjourn, I would hope that
nobody will go very far. I shouldn't say adjourn, just recess
until somebody gets back, that none of the panels will go very
far so we don't lose any time.
I am going to start out by--everything that has been said
until now, for all those that just got in here, was strictly
administrative, but we are going to try to keep this meeting
going while we have these votes starting at 2 o'clock.
I welcome all of you and, of course, say good afternoon and
hope that when we are done we can still say it was a good
afternoon. We are having an overview of mandatory binding
arbitration. That includes S. 1020, the Motor Vehicle Franchise
Contract Arbitration Fairness Act of 2000, and it also includes
S. 121, a bill that has been introduced by Senator Feingold of
Wisconsin.
Some of you probably know that over the years I have been
kind of in the forefront of promoting alternative dispute
resolution, various mechanisms to encourage alternatives to
litigation when disputes arise. Such legislation that I have
gotten passed, I suppose, in the last decade and a half have
included permanent use of ADR by Federal agencies and court-
annexed arbitration. These statutes are based on the premise
that arbitration should be voluntary rather than mandatory.
Legislation before us today in this hearing does not limit the
use of arbitration. S. 1020 only stipulates that the
utilization of binding arbitration be based upon voluntary
agreement of both parties.
The intent of S. 1020 is to prevent automobile
manufacturers from forcing an automobile dealer to accept
mandatory arbitration as the sole remedy for settling all
disputes between a dealer and the manufacturer by including a
provision in the franchise contract, with little or no
negotiation.
In an effort to balance what appears to be a disparity in
bargaining power between automobile dealers and manufacturers,
many States have enacted statutes. A number of these statutes
prohibit a manufacturer from terminating a dealer without just
cause and protecting the rights of spouses and children to
continue ownership after a dealer's death. They also prevent a
manufacturer from using its controls to coerce or intimidate a
dealer.
However, the courts have often invalidated these State
laws, stating that they are preempted by the Federal
Arbitration Act, which declares arbitration agreements are
valid, irrevocable, enforceable, and provide procedures for the
enforcement of such agreements in the Federal courts.
In 1925, when the Federal Arbitration Act was enacted to
make arbitration agreements enforceable in the Federal courts,
it did not expressly provide for the preemption of State law,
nor is there any legislative history to indicate that Congress
intended the act to occupy the entire field of arbitration.
Congress certainly never intended that the Arbitration Act
be a tool that the stronger party use to contract and have the
effect of forcing the weaker party into binding arbitration.
With mandatory binding arbitration agreements becoming
prevalent in various contract agreements, now is the time to
address the preemption issue, and in doing so, we need to do
what we can in the process of protecting States' rights.
Parenthetically, I am kind of an advocate, and I don't know
whether a sweeping advocate or not, but I think that Congress
ought to be more intent with every statute we pass the extent
to which we want preemption or not have preemption and not
leave it to the courts to make that determination. That would
be true of any committee of the Congress. I would like to see
that be the case--not meaning that preemption wouldn't be used
as much as it has already been used, but, specifically state
that is congressional intent or not congressional intent, and
not let the courts assume or be in a quandary about it.
Now, in addition to the auto industry, there are a number
of other areas in which there is an increased trend of the
stronger party to contract forcing the weaker to accept
mandatory binding arbitration as the sole means of addressing
his or her grievances. That is where my colleague, Senator
Feingold, comes in, and he has introduced S. 121, the Civil
Rights Procedure Protection Act, whichbegins a discussion in
these areas.
It is my understanding that Senator Feingold's legislation
seeks to amend certain civil rights statutes to prevent the
involuntary application of arbitration to claims that arise
from unlawful employment discrimination and sexual harassment.
In addition, as we have seen in the Washington Post today,
the relatively new problems arising out of forced consumer
credit arbitration happen to be issues that need to be
addressed to make sure that consumers are protected.
The Motor Vehicle Franchise Contract Arbitration Fairness
Act of 2000 begins the process of addressing these kinds of
issues. I thank the witnesses for their participation, and I
look forward to their testimony.
I am now going to introduce the panel, and I would like to
have all of the first panel come while I am going through the
process of introduction.
First of all, we welcome you. We have five witnesses, and
this is to discuss S. 1020.
Our first witness, Richard Holcomb, is commissioner of the
Department of Motor Vehicles for the Commonwealth of Virginia.
In this capacity, he oversees the State of Virginia motor
vehicle franchise arbitration process.
Next we have Gene Fondren, president of the Texas
Automobile Dealers Association, and I happen to know you and
welcome you back.
Mr. Fondren. Thanks, Senator.
Senator Grassley. Our next witness, William Shack, is an
automobile dealer from Henderson, NV, and if that is too short
of an introduction, I will let you fill in details, which is
perfectly appropriate because we need to know all about you
that we can.
Our next witness is Jill Lajdziak. Ms. Lajdziak is
president of Saturn Distribution Corporation and vice president
of sales, service and marketing for Saturn Corporation.
And rounding out our panel is Jill MacDonald. Ms. MacDonald
is currently a consultant to the Alliance of Automobile
Manufacturers on franchise and related legislation.
I am going to start with Mr. Holcomb. Now, here is the way
it might work. I assume that by 2:20 p.m. somebody on the panel
will be over here to take over while I go vote. But if they
don't, then I am going to have to shut down about 2:18 p.m.
because it takes me about 2\1/2\ minutes to get over there.
Mr. Holcomb, would you please start out?
A PANEL CONSISTING OF RICHARD D. HOLCOMB, COMMISSIONER,
DEPARTMENT OF MOTOR VEHICLES, COMMONWEALTH OF VIRGINIA,
RICHMOND, VA; GENE FONDREN, PRESIDENT, TEXAS AUTOMOBILE DEALERS
ASSOCIATION, AUSTIN, TX, ON BEHALF OF AUTOMOTIVE TRADE
ASSOCIATION EXECUTIVES; WILLIAM SHACK, AUTOMOBILE DEALER,
HENDERSON, NV; JILL LAJDZIAK, PRESIDENT, SATURN DISTRIBUTION
CORPORATION, AND VICE PRESIDENT, SALES, SERVICE AND MARKETING,
SATURN CORPORATION, TROY, MI; AND JILL N. MacDONALD, ALLIANCE
OF AUTOMOBILE MANUFACTURERS, WASHINGTON, DC
STATEMENT OF RICHARD D. HOLCOMB
Mr. Holcomb. Thank you, Mr. Chairman. I appreciate the
opportunity to appear today in support of Senate bill 1020.
This is a bit of a homecoming for me because from October
of 1983 to January of 1987, I served as general counsel to
Senator Jeremiah Denton's Subcommittee on Security and
Terrorism. I think studying the issues of security and
terrorism have probably qualified me to deal with relationships
between dealers and manufacturers. [Laughter.]
Senator Grassley. Let me note that not everybody is
laughing.
Mr. Holcomb. I am sure you noted that for the record. Thank
you, Mr. Chairman.
Mr. Chairman, one of the inherent rights of the
Commonwealth of Virginia is to protect its citizens. In that
vein, we developed a dispute resolution process which we
codified into our statute which levels the playing field for
dealers and manufacturers. That procedure, that State
procedure, has been challenged, was challenged in the late
1980s by Saturn. And what happened was a franchise agreement
was filed which required the dealers only to go through binding
arbitration if there was a dispute.
My predecessor refused to approve that because our statute
allows for the freedom of choice for the dealers. But my
predecessor did say that they would approve that franchise
agreement if Saturn would agree to give the dealers an option
to either go to binding arbitration or the State system. Saturn
refused, filed a lawsuit. While we prevailed at the district
level, we lost on the Fourth Circuit by a vote of 2-1 with a
very strong dissent.
Mr. Chairman, I am not opposed to arbitration. I, like
Judge Wilder, who wrote the dissent in the opinion, as the
sponsor and cosponsor of this legislation, I just believe the
dealer should have freedom of choice.
Just very briefly, to compare arbitration to the Virginia
system, let me say the following: Under the Virginia system, at
my request, the executive secretary of the Virginia Supreme
Court appoints an active attorney to chair the hearing. That
attorney is bound by the rules of discovery and collects
evidence using those rules of discover. That is not the case
with an arbiter.
Also, that hearing officer is bound by the laws of
evidence. That is not the case when it comes to an arbiter.
Also, that hearing officer must render a written decision
which is based on suggested findings of facts and conclusions
of law by the parties. I then review that decision and decide
either to accept it, to modify it, or to remand it back to the
hearing officer for additional evidence.
I should also state that that decision becomes precedent. I
should also say that that decision has to be based on precedent
previously determined.
As an aside, I will say that since we started publishing a
synopsis of the decision, I think we are seeing less disputes
even being brought to my attention because once the
manufacturers and the dealers know the rulings that we have
had, I think that has an impact on future litigation.
Finally, those decisions by a hearing officer which I
incorporate are subject to judicial review. An aggrieved party
has an absolute right of appeal into the Virginia circuit
court. So those are just a comparison.
Certainly the article in the Washington Post this morning
said one of the benefits of arbitration is it would unclog the
courts. But let me give you just a snapshot of Virginia.
Over the last 4 years, I have had 46 requests for hearings.
Out of those 46, 35 have gone away; that is, once the dealer
exercised their right to a hearing, all of a sudden the
manufacturer came to the table, bargaining in good faith, and
resolved those issues to everyone's satisfactions.
Out of the remaining 11, I did grant a hearing in eight but
refused a hearing in three because they just did not quality.
Out of that eight, three were appealed into the circuit court.
One appeal was withdrawn prior to the time the circuit court
sat. Only two took up time of the circuit court. Both of those
decisions affirmed the decisions that we had made. So out of 46
decisions, only two clogged up the courts.
Mr. Chairman, in conclusion, I am not here talking as a
lawyer. I am not here talking about congressional intent. That
is up for the committee to determine what was meant by the FAA.
All I am asking you is to give the citizens of Virginia the
freedom of choice which our general assembly enacted.
I am more than happy to answer any questions of the Chair.
[The prepared statement of Mr. Holcomb follows:]
Prepared Statement of Richard D. Holcomb
EXECUTIVE SUMMARY
Currently, automobile and truck dealers have no choice but to
accept mandatory binding arbitration provisions in franchise agreements
provided by motor vehicle manufacturers. These ``take it or leave it''
contracts leave dealers with no alternative methods to resolve
disputes. This practice clearly violates the dealers' fundamental due
process rights and runs counter to basic principles of fairness.
Senate Bill 1020 proposes to make arbitration of dealer-
manufacturer disputes totally voluntary. The proposed legislation does
not prohibit arbitration; rather, it seeks to offer arbitration as one
of several avenues to problem resolution.
The majority of states have created their own alternative disputes
resolution mechanisms with access to auto industry expertise that
provide inexpensive, efficient and non-judicial resolution of disputes.
For example, Virginia Code, Sec. 46.2-1573 (a copy of which is
attached) establishes a standard hearing process and designates
specific time frames for each step in the process.
Clearly, the Virginia system quickly and efficiently resolves
manufacturer/dealer disputes while preserving all the remedies to which
dealers, and any small business owner, should have recourse. In short,
this bill will ensure that the decision to arbitrate is truly voluntary
and that the rights and remedies provided for by our judicial and
administrative system re not waived under coercion.
The Motor Vehicle Franchise Contract Arbitration Fairness Act of
2000 would allow each party to an auto or truck franchise contract to
choose the method of dispute resolution. This bill does not prohibit
arbitration. On the contrary, the bill makes it one of several fair
choices that both parties may willingly and knowingly select. In
conclusion, this bill will ensure that the decision to arbitrate is
truly voluntary and that both parties have equal bargaining power
concerning the method of dispute resolution.
INTRODUCTION
I personally wish to thank the Subcommittee on Administrative
Oversight and the Courts for giving me the opportunity to testify on
S.B. 1020. Since March 1994, I have served as the Commissioner of the
Virginia Department of Motor Vehicles. DMV administers the dispute
process between motor vehicle dealers and manufacturers, as well as
franchise laws. In 1995, the Motor Vehicle Dealer Board, which I serve
on as chairman, was created to license automobile and truck dealers in
Virginia. Today, I wish to speak in favor of S.B. 1020. The bill will
allow the creation of a level playing field for both motor vehicle
dealers and manufacturers to choose mutually acceptable forms of
dispute resolution.
PROBLEM
Motor vehicle manufacturers are forcing small business auto and
truck dealers into mandatory binding arbitration clauses by including
the clauses in non-negotiated dealer agreements. Legitimate state
protections, however, are unavailable for dealers with arbitration
contracts because of overly broad federal policy favoring arbitration.
In a landmark case, Southland Corporation v. Keating, 107 S.Ct. 852
(1884), the U.S. Supreme Court held that state laws that prohibit
mandatory binding arbitration in adhesion contracts or prohibit waiver
of judicial or administrative remedies as a contract are preempted.
Unfortunately, preemption prevents states from enforcing protective
laws that limit or regulate unfair arbitration practices in contacts,
despite the fact that enforceability of private contracts is ordinarily
a question of state law. These arbitration clauses substantially
deteriorate dealers' rights and remedies as provided under protective
state franchise laws.
PROPOSED REMEDY
Senate Bill 1020 proposes to make arbitration of dealer-
manufacturer disputes totally voluntary. This proposed legislation does
not prohibit arbitration but does seek to offer arbitration as one of
several possible avenues to problem resolution. It ensures that
arbitration is used only when both parties to a sales and service
contract voluntarily agree, thereby preventing manufacturers from
forcing dealers to prospectively waive protective state rights,
remedies and procedures otherwise available. In cases where the two
parties voluntarily elect arbitration to settle a dispute, the proposed
legislation provides for written explanation of the factual and legal
basis for the award.
BACKGROUND
Under current law, dealers have no choice but to accept a mandatory
binding arbitration provision in a franchise agreement. Automobile and
truck manufacturers present dealers with traditional adhesion
contracts. Since dealers cannot delete the mandatory binding
arbitration provision, the manufacturer is coercing the dealer into
binding arbitration as the only method of resolving disputes.
This practice forces dealers to submit their disputes with
manufacturers to arbitration. As a result, dealers are forced to waive
access to judicial or administrative forums, substantive contract
rights and statutorily provided protection. This practice clearly
violates the dealers' fundamental due process rights and runs counter
to basic principles of fairness.
Arbitration lacks several of the important safeguards and due
process offered by administrative procedures and the judicial system.
Arbitration lacks the formal court-supervised discovery process often
necessary to learn facts and gain documents. An arbitrator does not
need to follow the rules of evidence. Arbitrators generally have no
obligation to provide factual or legal discussion of the decision in a
written opinion. And, arbitration often does not allow for judicial
review. Thus, a dealer seeking to overturn an arbitration decision may
be unable to appeal the decision. Further, an arbitrator's
misinterpretation or misapplication of the law is not subject to court
review.
Dealers have clear and enforceable rights under state franchise
laws that protect small business dealers from a host of documented
manufacturer abuses. Generally, however, arbitrators are not bound by
state law in their decisions. As a result, arbitration allows
manufacturers to circumvent state laws and the protections they provide
to dealers.
ALTERNATIVE DISPUTE RESOLUTION MECHANISMS USED BY STATES
The majority of states have created their own alternative dispute
resolution mechanisms with access to auto industry expertise that
provide inexpensive, efficient and non-judicial resolution of disputes.
For example, Virginia Code, Sec. 46.2-1573 (a copy of which is
attached) establishes a standard hearing process and designates
specific time frames for each step in the process.
1. Upon receipt of the request for a hearing, DMV contacts the
executive secretary of the Virginia Supreme Court for the appointment
of a hearing officer. The hearing process commences within 90 days of
the dealer request. Certain types ofhearings require the appointment of
a three-member dealer board panel by the DMV Commissioner. The hearing
officer may hold a pre-hearing conference to establish procedural
dates, notify foreign attorneys of participation, prepare exhibits and
identify witnesses, identify issues and stipulations, determine the
order of presentation, make requests for admissions, depositions and
subpoenas.
2. The hearing officer must provide recommendations to the DMV
Commissioner within 90 days of the conclusion of the hearing.
3. The DMV Commissioner must render a decision within 60 days from
receipt of the hearing officer's recommendation. Under these statutory
provisions, a hearing should be completed within 240 days or eight
months.
4. Additionally, the Commissioner's decision may be appealed to an
appropriate Virginia Circuit Court within 33 days of the decision date.
Unlike arbitration, the hearing process provides written
documentation of the findings and decision. This documentation
establishes precedents for subsequent cases. Further, the Virginia
Motor Vehicle Dealer Board publishes the results of hearings in a
newsletter to Virginia's motor vehicle dealers.
EFFICACY OF THE VIRGINIA HEARING SYSTEM
The efficacy of Virginia's hearing system for equitably resolving
disputes between manufacturers and dealers can be demonstrated through
a review of the state's caseload between 1996 and 2000.
During that period, the Department of Motor Vehicles (DMV) received
46 requests for hearings. However, 35 of those requests were resolved
prior to a hearing. That is, the requests for a hearing were withdrawn
because both sides, working together, were able to negotiate a mutually
acceptable solution. In other words, when manufacturers realized that
they were facing an objective, standardized hearing process, they
decided to take the dealer's issue seriously and to negotiate a
mutually acceptable agreement.
Of the remaining requests, the Commissioner rendered a decision
eight times and three requests were denied. Since 1996, the
Commissioner's decision has been appealed five times. Of those, one was
withdrawn by the manufacturer, two were won by DMV and two appeals are
pending. Currently, seven hearing requests are in process.
Clearly, the Virginia system quickly and efficiently resolves
manufacturer/dealer disputes while preserving all the remedies to which
dealers, and any small business owner, should have recourse.
VIRGINIA BACKGROUND
All states except Alaska have enacted substantive law to balance
the enormous bargaining power enjoyed by manufacturers over dealers and
to safeguard small business dealers from unfair automobile and truck
manufacturer practices. Many states, recognizing that mandatory binding
arbitration provisions in contracts nullify their state statutes and
procedures, have enacted laws to prohibit inclusion of mandatory
binding clauses in certain agreements. As previously noted, the courts
have held that these state laws are preempted by the Federal
Arbitration Act (FAA). Courts have interpreted preemption in the FAA
provisions that declare arbitration agreements ``valid, irrevocable and
enforceable.''
Virginia has first-hand experience with the preemption issue. In
1989, Saturn Corporation, a General Motors subsidiary, challenged a
Virginia law prohibiting mandatory binding arbitration. Saturn filed
suit against the State of Virginia when Virginia refused to approve
Saturn's franchise agreement. The Saturn agreement was rejected because
it mandated binding arbitration and denied dealers access to the
procedures, forums and remedies provided in state law.
The federal district court ruled in favor of the State of Virginia,
Saturn Distribution Corp. v. Williams, 717 F. Supp. 1147 (E.D. VA.
1989). However, the Fourth Circuit reversed the district court, holding
that the Virginia dealer law prohibiting mandatory binding arbitration
conflicts with the FAA and is preempted by the Supremacy Clause of the
U.S. Constitution, Saturn Distribution Corp. v. Williams, 905 F.2d 719
(4th Cir. 1990). The Appellate Court relied on two Supreme Court
decisions, Southland Corporation v. Keating, 104 S.CT. 852 (1984) and
Perry v. Thomas, 107 S.CT. 2520 (1987).
When Congress enacted the FAA in 1925, the narrow intent of
Congress was to make arbitration awards enforceable in federal courts.
The purpose of the Act was to overrule the long-standing hostility to
arbitration and the failure of courts to enforce arbitration decisions
in arms-length transactions.
Legal commentators have argued that congress never intended the FAA
to apply arbitration agreements that would allow a stronger party to a
contract to force a weaker party to relinquish rights to a judicial
forum and other dispute resolution forums as a condition of entering
into a contract.
The FAA does not expressly provide for preemption of state law, nor
is there an explicit Congressional intent to occupy the entire field of
arbitration. However, in recent years, the Supreme Court has clearly
interpreted the FAA to preempt state law (refer to Southland). This
decision has had the effect of preempting state laws that protect the
weaker party from being forced to accept arbitration.
The Saturn decision further supported the Supreme Court's
interpretation and also frustrates Congressional intent as expressed by
the Dealer's Day in Court Act, 15 U.S.C. Sec. Sec. 1221-1225. Through
this legislation, Congress granted automobile dealers access to the
federal courts to seek relief against manufacturers. Recognizing the
disparity in bargaining power between manufacturers and dealers,
Congress sought to level the playing field by providing protection for
dealers.
CONCLUSION
The Motor Vehicle Franchise Contract Arbitration Fairness Act of
2000 provides that each party to an auto or truck franchise contract
will have the choice to select arbitration. This bill does not prohibit
arbitration. On the contrary, the bill encourages arbitration by making
it a fair choice that both parties to a franchise contract may
willingly and knowingly select. In short, this bill will ensure that
the decision to arbitrate is truly voluntary and that the rights and
remedies provided for by our judicial and administrative system are not
waived under coercion.
ACTION ITEM
I would therefore urge this subcommittee to favorably report S.B.
1020 to the Judiciary Committee for consideration. Again, thank you for
the opportunity to testify today. I will be glad to answer any of your
questions.
______
Sec. 46.2-1573--Hearings and Other Remedies
A. In every case of a hearing before the Commissioner authorized
under this article, the Commissioner shall give reasonable notice of
each hearing to all interested parties, and the Commissioner's decision
shall be binding on the parties, subject to the rights of judicial
review and appeal as provided in Chapter 1.1:1 (Sec. 9-6.14:1 et seq.)
of Title 9.
B. Hearings before the Commissioner under this article shall
commence within ninety days of the request for a hearing and the
Commissioner's decision shall be rendered within sixty days from the
receipt of the hearing officer's recommendation. Hearings authorized
under this article shall be presided over by a hearing officer selected
from a list prepared by the Executive Secretary of the Supreme Court of
Virginia. On request of the Commissioner, the Executive Secretary will
name a hearing officer from the list, selected on a rotation system
administered by the Executive Secretary. The hearing officer shall
provide recommendations to the Commissioner within ninety days of the
conclusion of the hearing.
C. Notwithstanding any contrary provision of this article, the
Commissioner shall initiate investigations, conduct hearings, and
determine the rights of parties under this article whenever he is
provided information by the Motor Vehicle Dealer Board or any other
person indicating a possible violation of any provision of this
article.
D. For purposes of any matter brought to the Commissioner under
subdivisions 3, 4, 5, 6 and 7b of Sec. 46.2-1569 with respect to which
the Commissioner is to determine whether there is good cause for a
proposed action or whether it would be unreasonable under the
circumstances, the Commissioner shall consider:
1. The Volume of the affected dealer's business in the relevant
market area;
2. The nature and extent of the dealer's investment in its
business;
3. The adequacy of the dealer's service facilities, equipment,
parts, supplies, and personnel;
4. The effect of the proposed action on the community;
5. The extent and quality of the dealer's service under motor
vehicle warranties;
6. The dealer's performance under the terms of its franchise;
7. Other economic and geographical factors reasonably associated
with the proposed action; and
8. The recommendations, if any, from a three-member panel composed
of members of the Board who are franchised dealers not of the same
line-make involved in the hearing and who are appointed to the panel by
the Commissioner.
With respect to subdivision 6 of this subsection, any performance
standard or program for measuring dealership performance that may have
a material effect on a dealer, and the application of any such standard
or program by a manufacturer or distributor, shall be fair, reasonable,
and equitable and, if based upon a survey, shall be based upon a
statistically valid sample. Upon the request of any dealer, a
manufacturer or distributor shall disclose in writing to the dealer a
description of how a performance standard or program is designed and
all relevant information used in the application of the performance
standard or program to that dealer.
Senator Grassley. We are going to wait until we hear from
all five panelists before we have questions.
Mr. Fondren, please.
STATEMENT OF GENE FONDREN
Mr. Fondren. Thank you, Mr. Chairman. I am delighted to be
here today. I am the president of the Texas Automobile Dealers
Association representing approximately 1,400 franchised new car
and truck dealers, and I also speak on behalf of colleagues in
the Automotive Trade Association Executives group who represent
Metro and State associations throughout the entire United
States. There are about 110 of us all told. We are here in
support today of S. 1020 and are very proud and very pleased to
do so.
Briefly, the Congress passed the Federal Arbitration Act in
1925, and in evaluating the history and the hearing record on
the Federal Arbitration Act, it appears to me that the sole
purpose of the passage of the Act at that time was to ensure
that the courts were willing to enforce, that the courts would
enforce arbitration in cases where the parties included it in
arm's-length contracts, arm's-length transactions, and that it
was not to apply to contracts of adhesion, which are the type
of contracts that motor vehicle manufacturers impose on
automobile dealers.
As a matter of fact, in response to questions by Senator
Walsh, supporters of the FAA in 1925 assured the Congress that
the bill was not intended to cover take-it-or-leave-it
contracts. However, over the years, the courts have greatly, in
my opinion, at least, expanded the original intent of the
Federal Arbitration Act. And, finally, in the Southland case
and again in the Mitsubishi case, the Supreme Court of the
United States held that the Act created substantive rules that
were applicable to State as well as Federal courts and that
Congress intended to foreclose State legislation, attempting to
undercut arbitration. So the courts have reached the outer
limits of the scope and the effect of the Federal Arbitration
Act.
If I might spend a moment or two about the history of the
dealer-manufacturer relationship, which is the subject of S.
1020. Professor Stewart Macauley stated in 1966, ``Franchised
automobile dealers have been trying to get help from the legal
system to give them enforceable rights,'' because the franchise
crafted by the manufacturers was to minimize dealers' rights.
The manufacturer-dealer contract is indeed a contract of
adhesion. It is not a negotiated contract.
The Congress recognized this first back in 1956 when it
passed the Dealer Day in Court Act, and then subsequent to the
Dealer Day in Court Act, which was well intended but turned out
to be insufficient to grant the kind of rights that dealers
needed in order to have a level playing field, legislatures in
49 of our States have adopted substantial codes and substantial
laws to govern and regulate the manufacturer-dealer
relationship.
Those laws granted by 49 States have been upheld in the
United States Supreme Court in the seminal case of New Motor
Vehicle Board of California v. Orrin W. Fox. This was in 1978,
22 years ago.
The Court, in upholding the California Franchise Act, which
is quite similar to laws in Virginia and laws in the State of
Texas, quoted the 1956 congressional committee findings on
disparity of bargaining power between manufacturers and
dealers, and this is what that congressional report says:
``This vast disparity in economic power and bargaining strength
has enabled the factory to determine * * * the rules by which
the parties conduct their business affairs * * * When the
dealer has invested, he becomes the economic captive of [the]
manufacturer.'' From the standpoint of the manufacturer, any
single dealer is expendable. True in 1956, true in 1978, true
today.
That is why Texas and Wisconsin and Iowa and New Jersey and
Pennsylvania and Utah and many other States have enacted
substantial bodies of law and administrative dispute resolution
procedures to regulate the dealer, manufacturer, and consumer
law.
There is an issue that has been raised in the testimony
filed with your committee, Mr. Chairman, as to the number of
bodies buried or to be buried by mandatory binding arbitration.
Opponents suggest that 1,891 dealers are covered by mandatory
binding arbitration and that, of those, 1,572 are either under
optional agreements, as is the case with some Chrysler dealers,
or under voluntary negotiated agreements which they claim is
the case in the Saturn arbitration provision.
I would respectfully suggest to the committee, Mr.
Chairman, based on the best evidence that is available to us--
and, obviously, we do not have in hand the dealer-manufacturer
agreements. But based on the best evidence available to us, it
appears to me that the number, the true number of dealers today
under some form of mandatory binding arbitration and
manufacturer agreements is between 5,700 and 5,800, a long way
from 1,871. There are side agreements, there are ancillary
agreements, there are credit-armed agreements, and there are
franchise agreements that include mandatory binding
arbitration.
Senator Grassley. Mr. Fondren, I am going to go vote now.
There are only 2 minutes left. So will you wait until either I
come back or Mr. Feingold comes before we start with the rest
of the panel?
Mr. Fondren. I would be pleased to wait, Mr. Chairman.
[Recess 2:18 p.m. to 2:21 p.m.]
Senator Feingold [presiding]. Let me continue the hearing.
Chairman Grassley has asked that at this point I give my
statement that I wanted to give at the beginning,and when he
gets back, he will continue. I believe Mr. Fondren was testifying, and
we will go on from there. I, of course, apologize for the votes that we
have at this point.
Mr. Fondren. Thanks, Senator.
STATEMENT OF HON. RUSSELL D. FEINGOLD, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Senator Feingold. But that is one of the things we do here.
Let me give my statement about these issues because I am
delighted that we are having these hearings. I want to thank
the chairman for holding the hearings. I want to commend him
for his commitment to working in a bipartisan way to address
the issues raised by the growing prevalence of pre-dispute
contractual agreements to substitute mandatory binding
arbitration for the right to take a claim to court.
As you know, these mandatory binding arbitration provisions
have shown up in many contractual settings, including auto
dealership franchise contracts, credit card and other consumer
loan agreements, and employment agreements. And I am honored to
work with the chairman on S. 1020, the Motor Vehicle Franchise
Contract Arbitration Fairness Act, and I want to especially
thank the chairman for agreeing to expand this hearing to
address the broad problem of contractual mandatory arbitration
in other areas where these provisions are becoming more and
more common.
One of the most important pillars of our justice system is
the right to take a dispute to court. Indeed, all Americans
have the constitutional right in both criminal and civil cases
to a trial by jury. The right to a jury trial in criminal cases
is contained in the Sixth Amendment to the Constitution. The
right to a jury trial in civil cases is contained in the
Seventh Amendment.
Of course, constitutional rights can be waived, and crowded
court dockets and the expense of litigation lead many litigants
in civil cases to, appropriately, seek alternative ways to
resolve their disputes. And I do believe we should encourage
arbitration and mediation in cases where they can be helpful.
At the same time we need to remember the constitutional
foundation of our civil justice system, and we need to remember
the important statutory and even constitutional rights and
policies that the courts are sometimes best suited to enforce.
I believe that arbitration can be a credible and legitimate
means of dispute resolution only when all parties know and
understand the full ramifications of agreeing to arbitration
and waive their right to go to court voluntarily. That is why
mandatory binding arbitration contracts are so troubling to me
in a whole variety of contexts. Parties with little bargaining
power are being forced, in effect, to waive their right to go
to court. That is not right. When people are essentially forced
to give up their constitutional rights in order to have a job,
conduct a business, or take out a loan, that is not right and
we have to do something about it.
So far, I have had a chance to pursue this issue in three
separate areas where I think there is a demonstrated need for
Federal legislation.
First, I have joined with the chairman, as I indicated, to
introduce the Motor Vehicle Franchise Contract Arbitration
Fairness Act of 1999. This bill will ensure that auto dealers
are not forced into arbitration to resolve their disputes with
auto manufacturers. Our bill enjoys wide bipartisan support,
including that of the Chair and the ranking member of the full
committee, Senators Hatch and Leahy.
I am looking forward to hearing from the first panel today
about this bill, and I hope we can move it through the full
committee promptly.
Also, similarly to the auto dealer franchise contract
situation, there is a growing and menacing trend of credit card
companies and consumer credit lenders slamming the courthouse
doors shut on consumers. Companies like First USA Bank, the
largest issuer of Visa cards with 58 million customers,
American Express, and Greentree Discount Company insert
mandatory binding arbitration clauses in their agreements with
consumers often without the consumer's knowledge or consent.
The most common way credit card companies have made these
contractual changes is through the use of bill stuffers. Bill
stuffers are the advertisements and other materials that the
credit card companies include with the customer's monthly
billing statements. The bill stuffers say that if the consumer
continues to use the card, it is bound by those contractual
provisions. And the effect of these provisions, which are often
set out in complex legal language and fine print, is that the
card holder cannot take a dispute with the credit card company
to court, not even to small claims court. The card holder must
use arbitration, and the arbitration decision is final. In the
case of American Express and First USA, the arbitration is
conducted by an organization selected by the company, the
National Arbitration Forum.
And, Mr. Chairman, the problem extends beyond creditors. It
is also a growing practice in the consumer loan industry.
Consumer credit lenders like Greentree Discount Company are
including mandatory binding arbitration clauses in their loan
agreements. Obviously, consumers seeking a loan for such a
company are not in a position to bargain to have the clause
removed. Some consumer borrowers may not fully understand
exactly what mandatory binding arbitration is, and they
certainly are not represented by counsel.
So yesterday I introduced a bill, the Consumer Credit Fair
Dispute Resolution Act, to prohibit mandatory arbitration
provisions in consumer credit agreements. This bill is
identical to the bill I offered but did not seek a vote on
during our consideration on the floor of the Senate of the
bankruptcy bill. And I am pleased to have Senator Leahy, the
ranking member of the full committee, as a cosponsor of the
bill, and I hope that other members from both sides of the
aisle will join us.
Finally, for many years--in fact, this is the issue of this
group that I first got interested in--I have been concerned
about the imposition of mandatory binding arbitration in the
employment context. There is a growing trend among employers to
require employees to agree to resolve employment discrimination
or sexual harassment claims through mandatory binding
arbitration before they can be hired or promoted. These
agreements effectively coerce individuals into relinquishing
fundamental legal protections that exist to address
discrimination in the workplace. Plain and simple, mandatory
arbitration provisions thwart the will of Congress by forcing
employees to waive their right to take their grievances to
court.
I have introduced legislation in the last threeCongresses
to address this trend. Senate bill 121, the Civil Rights Procedures
Protection Act, amends a number of Federal civil rights statutes to
specify that the statutory procedures for enforcement of those laws can
be superseded only by a voluntary agreement to engage in arbitration
after a claim arises.
On our committee, Senators Torricelli, Kennedy, and Leahy
have joined me as cosponsors of this important initiative. A
broad coalition of civil rights organizations as well as the
Department of Justice support this bill, and I would ask that a
copy of the letters in support of the bill from the Leadership
Conference on Civil Rights and the Department of Justice be
included in the record of this hearing. There is no objection.
[The letters follow:]
Leadership Conference
on Civil Rights,
Washington, DC, August 4, 1999.
Dear Senator: On behalf of the Leadership Conference of Civil
Rights' (LCCR) Employment Task Force, we write to urge your support for
the Civil Rights Procedures Protection Act (H.R. 872/S. 121). This
important civil rights legislation would prevent employers from forcing
workers to give up their right to go to court--and accompanying legal
protections--when they have job discrimination claims.
In a disturbing trend, more and more employers require workers to
agree--as a condition of hiring or promotion--that any and all future
employment disputes will be settled through mandatory, binding
arbitration. Mandatory arbitration undermines fundamental principles
established by the hard-fought civil rights battles of the last 30
years. It allows defendants to escape one of the key tenets of federal
civil rights law: the right of job discrimination victims to have their
claims heard in court by judges sworn to apply and uphold the law.
Instead, through a mandatory arbitration program, employers can bypass
some of the most important civil rights protections first established
in the Civil Rights Act of 1964 and later expanded by the Civil Rights
Act of 1991, such as access to jury trials and fuller remedies for
discrimination victims.
Mandatory arbitration seeks to replace our public system of justice
with a private system that has little accountability and few controls.
While courts have played a critical role in vindicating the civil
rights of bias victims--including, for example, developing the legal
standards against sexual harassment and publicly highlighting
employers' responsibility to maintain a discrimination-free workplace--
mandatory arbitration often allows employers to limit dramatically the
remedies and procedural protections available to discrimination
victims.
For example, some mandatory arbitration programs limit or deny
compensatory and punitive damages, denying the very remedies that the
Civil Rights Act of 1991 extended to victims of harassment and other
forms of discrimination. Moreover, the Federal Rules of Evidence, which
can be so important in protecting against intrusive inquiries into
harassment victims' private sexual histories, do not apply in
arbitration proceedings. Arbitrators also lack the authority to issue
the injunctive relief that is routinely available in the courts to end
discriminatory practices and prevent their recurrence. Arbitrators are
not even required to have a background in basic employment law,
including knowledge of legal protections against job discrimination.
While we believe that alternative dispute resolution, when fully
voluntary and properly designed, can in many cases helpfully resolve
employment disputes, mandatory arbitration forces workers to abandon
their access to the courts and accompanying legal safeguards. H.R. 872/
S. 121 would prevent such unfairness and restore the protections of our
civil rights laws. Please support the Civil Rights Procedures
Protection Act.
Sincerely,
AARP
American Civil Liberties Union
American Federation of Government Employees
Communications Workers of America/Coalition of Labor Union Women
Lawyers Committee for Civil Rights Under Law
Mexican American Legal Defense and Educational Fund
NAACP Legal Defense and Educational Fund, Inc.
National Asian Pacific American Legal Consortium
National Council of La Raza
National Employment Lawyers Association
National Partnership for Women & Families
National Women's Law Center
Women Employed
The Leadership Conference on Civil Rights is the nation's oldest,
largest and most diverse coalition of organizations committed to the
protection of civil and human rights in the United States. It is
comprised of more than 180 national organizations representing people
of color, women, children, labor unions, persons with disabilities,
older Americans, major religious groups, gays and lesbians and civil
liberties and human rights groups.
______
Department of Justice,
Office of Legislative Affairs,
Washington, DC, January 18, 2000.
Hon. Russell D. Feingold,
U.S. Senate,
Washington, DC.
Dear Senator Feingold: This letter responds to your letter of
September 30, 1999, requesting the views of the Department of Justice
on S. 121, the Civil Rights Procedures Protection Act of 1999. S. 121
would amend several Federal statutes to prohibit pre-dispute agreements
that mandate, as a condition of employment, binding arbitration of any
future job discrimination claims. The Department of Justice strongly
supports the goals of this proposal as furthering effective civil
rights enforcement.
The Department of Justice is firmly committed to the voluntary use
of alternative dispute resolution (``ADR'') methods, such as mediation
and arbitration, as extremely helpful tools in resolving employment and
other disputes. However, we share your concern that important civil
rights protections are undermined when employers require workers to
agree--as a condition of hiring or promotion--to give up their right to
pursue discrimination claims in court and instead submit such claims to
binding arbitration. We agree with the view of the Equal Employment
Opportunity Commission that such mandatory arbitration agreements are
``contrary to the fundamental principles'' of Federal
antidiscrimination law.
The private right of access to a judicial forum is central to our
Federal statutory enforcement scheme in job discrimination cases.
Indeed, mandatory arbitration of employment discrimination claims
undermines one of the primary legacies of the Civil Rights Act of 1964,
which first provided job discrimination victims with the right to have
their claims heard in court by Article III judges, who have lifetime
tenure and are sworn to apply and uphold the law. It also evades some
of the key protections of the Civil Rights Act of 1991, which provided
for the right to a jury trial when damages are at issue.
Furthermore, mandating that job discrimination claims be submitted
to a private arbitrator circumvents the development of a clear and
uniform civil rights jurisprudence through the decisions of an
independent judiciary. For example, Federal courts first established
the principle that sexual harassment is unlawful sex discrimination in
Meritor Savings Bank v. Vinson, 477 U.S. 57 (1986), and outlined the
structure for evaluating cases involving circumstantial evidence of
intentional discrimination in McDonnell Douglas Corp. v. Green, 411
U.S. 792 (1972). Such civil rights precedent gives valuable public
guidance regarding employers' and workers' rights and responsibilities
under Federal civil rights law, enhancing voluntary compliance. The
private nature of mandatory arbitration does not permit the realization
of these benefits.
Moreover, parties in discrimination cases often depend on judicial
enforcement of a range of protections that arbitrators may not be
required or empowered to respect. For example, the judicial power to
order injunctive relief where appropriate to redress injury and to
prevent future discrimination is central to meaningful civil rights
enforcement. Arbitrators' ability to fashion and enforce such relief is
often limited. Similarly, arbitrators are not bound by Federal rules of
evidence that generally prohibit the use of evidence of a victim's
private sexual behavior in harassment cases, discovery rules that allow
a party to develop and evaluate the strength of his or her case, and
fee-shifting provisions that recognize the public interest in asserting
equal employment opportunity by awarding attorney's fees to prevailing
plaintiffs. In short, prohibiting mandatory arbitration protects the
rights of individual claimants as well as the public interest in
effective civil rights enforcement.
Furthermore, as you know, the circumstances under which mandatory
arbitration agreements are permissible under current law have been the
subject of considerable litigation since the Supreme Court's decision
in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991).
Prohibiting mandatory arbitration would end any uncertainty about its
lawfulness in a manner consistent with effective civil rights
enforcement.
We look forward to working with you to accomplish the goal of
prohibiting mandatory arbitration, while allowing for the continued use
of more helpful means for addressing complaints of discrimination, such
as other alternative dispute resolution processes. Feel free to call on
us to assist you in evaluating the effect of your legislation and in
refining statutory language. We also encourage you to consult other
affected agencies such as the Equal Employment Opportunity Commission
and the Department of Labor, which also enforce civil rights statutes
that would be amended by this proposal.
Thank you for this opportunity to present our views. Please do not
hesitate to call upon us if we may be of further assistance. The Office
of Management and Budget has advised us that from the perspective of
the Administration's program, there is no objection to submission of
this letter.
Sincerely,
Robert Raben,
Assistant Attorney General.
______
Senator Feingold. Mr. Chairman, again, I thank you for
holding this hearing and for giving it such a wide scope. I
think the Senate and the public will benefit from the light we
are shining on this problem today.
At this point I would--has the second vote started? Well,
since the second vote hasn't even started, I think we should
proceed. Mr. Fondren, I understand you were making your
remarks?
Mr. Fondren. That is correct, Senator Feingold.
Senator Feingold. Please continue.
Mr. Fondren. Yes, I will. I think I am under the red light,
so I am going to coalesce my testimony as best I can.
We had reached the point in my discussion with respect to
the substantial number of automobile dealers who are under
mandatory binding arbitration provisions of one kind or another
from contracts from manufacturers. These include Chrysler and
Saturn, and I must say here, if I may, parenthetically, that I
disagree with the opponents who claim that the Saturn
arbitration agreement was negotiated with Saturn dealers. At
the time it was negotiated with a group of some 15 dealers who
are described in the testimony as retailers, there were no
Saturn dealers. And I will be glad to discuss that with the
committee at some length if the committee wishes me to do so.
Opponents also claim that the National Automobile Dealers
Association did not oppose the Saturn arbitration provision,
and we strongly disagree with that position because they did
oppose it in resolution and statements by Mr. McCarthy, their
president, and they oppose it still today.
I also would mention to you that when Sterling or Daimler-
Chrysler through Freightliner bought out Ford Motor Company
Truck Division and created the Sterling Division, they imposed
mandatory binding arbitration on all of those existing Ford
dealers.
Ford and General Motors both have mandatory binding
arbitration in minority contracts that they offer to dealers
who are in what we commonly call ``dealer development.''
Nissan in a notice dated November 30, 1999, effective
December 1, 1999, the next day, said please note we have made
some revisions and included mandatory binding arbitration in
the contract having to do with factory and dealer incentives.
Volkswagen Credit on October 11, 1999, effective November
1, 1999, applied the mandatory binding arbitration to prior
agreements with 825 dealers.
Action in State district court is pending now, one in
California and the other in Ohio. The Ohio court enjoined a
Texas dealer from attempting to or pursuing his rights under
Texas law in the State of Texas, and the district court in
California enjoined the State of Texas from proceeding on a
dealer complaint under Texas law.
On the issue of disparate bargaining power, opponents
suggest that it is no longer necessary because of the existence
of publicly held dealerships, and there are some of these.
There are a few.
In my written testimony, I outline the size and the
location of dealers throughout the State of Texas and
respectfully suggest that in other jurisdictions who have less
population, those figures are cogent and pertinent. Over half
the dealers in Texas reside in towns of less than 50,000, and
they are sole proprietorships and family-owned dealerships.
They are not mega-dealers and they are not publicly held
corporations. I suggest that in Wisconsin and Ohio and other
States the same will be true.
Finally, I would like to say, Mr. Chairman, if I might, and
Senator Feingold that S. 1020 addresses the significant motor
vehicle contract problem, serious problem, in a very simple and
a very straightforward way. It simply allows both parties to
agree or not agree to binding arbitration after the dispute
arises. S. 1020 simply makes arbitration voluntary. And the
U.S. Senate, the U.S. Congress, have indicated a strong desire,
a strong intent that arbitration should be voluntary.
S. 1020 solves the problem that it addresses, and it is a
good bill.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Fondren follows:]
Prepared Statement of Gene Fondren
SUMMARY
S. 1020, introduced by Senator Grassley and Senator Feingold, and
co-sponsored by twenty-six members of the Senate, amends the Federal
Arbitration Act, but in no way does violence to the public policy
interest favoring arbitration as an alternative dispute resolution
mechanism.
Pertinent elements of the testimony supporting S. 1020 include:
(1) under federal court decisions an arbitration clause is
enforceable on its face, regardless of state or federal law or
regulation to the contrary.
(2) the franchise agreement between a motor vehicle manufacturer
and franchised dealers is a contract of adhesion.
(3) agreements presented by motor vehicle manufacturers to
franchised dealers are inherently unfair and inequitable.
(4) provisions imposed by manufacturers are onerous, unreasonable
and oppressive. Examples are illustrated.
(5) every state except one has a regulatory scheme in place to
bring equity to this motor vehicle manufacturer-dealer relationship.
(6) an arbiter is not required to understand and enforce state or
federal law, he has no ability to enter injunctive relief, and there is
no appeal if state or federal law is misapplied or ignored.
(7) in a ``take it or leave it'' contract the stronger party may
impose mandatory binding arbitration and circumvent state and federal
law.
This is the problem. S. 1020 addresses the problem in a
straightforward and simple way. Under the term of S. 1020, an
arbitration clause may properly be included in a Motor Vehicle
Franchise Contract. However, the potential for abuse of such a clause
in a non-negotiable contract has been eliminated by Subsection (b) of
the new Section 17 that S. 1020 would add to the Federal Arbitration
Act. That provision expressly provides 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, each party to
the contract shall have the option, after the controversy arises and
before both parties commence an arbitration proceeding, to reject
arbitration as the means of settling the controversy. Any such
rejection shall be in writing.''
Thus, S. 1020 will remove the potential of these contracts to
deprive persons of statutory rights and remedies without doing violence
to the public policy interest served in encouraging arbitration as a
means of dispute resolution. S. 1020 simply makes arbitration
voluntary. It solves the problems it addresses.
INTRODUCTION
Mr. Chairman and members of the committee. My name is Gene Fondren.
I am the President of the Texas Automobile Dealers Association, a trade
association composed of approximately 1400 franchised new automobile
and truck dealers. I have held this position for almost 28 years. Prior
to that, I practiced law in Taylor, Texas, served in the Texas House of
Representatives and, immediately prior to assuming my current position,
represented the Texas Association of Railroads and the Missouri Pacific
Railroad here in Washington. I also speak for Automotive Trade
Association Executives who represent metro and state dealer
associations across the country.
I appear before you in support of S. 1020, introduced by Senator
Grassley and Senator Feingold and co-sponsored by twenty-six other
Senators. S. 1020 amends the Federal Arbitration Act, but in no way
does violence to the principle or the spirit of the doctrine favoring
arbitration. We support alternative dispute mechanisms, including
arbitration.
It is neither the intent nor the effect of the legislation to
restrict or interfere with the use of voluntary arbitration as an
alternative dispute resolution option.
HISTORICAL BACKGROUND: FEDERAL ARBITRATION ACT
In response to judicial hostility to the enforcement of arbitration
agreements, the Congress in 1925 enacted the Federal Arbitration Act
(FAA). In 1947, the Act was reenacted and codified as Title 9,
U.S.C.\1\ The stated purpose of the FAA is to ensure court enforcement
of a contractual provision specifying arbitration as the means of
settling a dispute. Since the issue presented by S. 1020 involves the
applicability of the FAA to contracts of adhesion, it may be important
to briefly examine congressional intent regarding such contracts. In
the Florida Law Review, Professor Atwood, discussing the intent of the
Congress in enacting the FAA said: ``* * * courts feared that
arbitration agreements could be coerced of unequal bargaining power
with the stronger party forcing the weaker party to relinquish the
right to a judicial forum.'' (Atwood, Issues in Federal-State Relations
Under the Federal Arbitration Act, 37 Fla. L. Rev. 61, 74)
---------------------------------------------------------------------------
\1\ 9 U.S.C. S1 et seq.
---------------------------------------------------------------------------
In the same article, Professor Atwood also made the following
cogent observation: ``The federal Act's opponents believed courts
should not compel arbitration of disputes unknown to parties at the
time of agreements since an individual might unwittingly sign away the
right to a judicial forum for an important claim. The federal Act's
legislative history does not reveal whether Congress was aware of such
controversy. Nevertheless, testimony suggests some members of Congress
were concerned about the related problem of the Act's applicability to
adhesion contracts. When Senator Walsh of Montana voiced that during
the 1923 hearing on the proposed legislation, the bill's supporters
assured Congress the bill was not intended to cover insurance contracts
or other ``take it or leave it'' arrangements. The proposed
legislation, its supporters argued, simply would empower courts to
enforce arbitration clauses in arms-length transactions * * *'' (37
Fla. L. Rev. at 75, citing the record hearings on the bill that enacted
the Federal Arbitration Act.)
Congress, in its more recent enactments affecting arbitration, has
shown a similar concern regarding the importance of voluntary consent
and agreement in the use of arbitration. The ``Administrative Dispute
Resolution Act'' enacted in 1990 amended Section 10 of the Act relating
to the grounds for vacating an arbitration award. It is interesting to
note that in Sec. 582 of the 1990 amendment, the Congress provided that
``[A]n agency may use a dispute resolution proceeding for resolving an
issue if the parties agree to that proceeding. (5 U.S.C. Sec. 582) \2\
Congress articulated the same view in adopting the Judicial
Improvements and Access to Justice Act.\3\
---------------------------------------------------------------------------
\2\ P.L. 101-522
\3\ Although it is not amendatory of the Federal Arbitration Act, a
1988 Act of Congress (The Judicial Improvements and Access to Justice
Act,'' 28 U.S.C. SS 651 et seq.) also provides insight into a more
recent Congressional approach to the issue of arbitration. In that law,
which allows a U.S. District Court to authority the use of arbitration
in a civil action under certain circumstances, the Congress expressly
provided that arbitration could not be ordered ``without the parties'
consent. The law further provides that such consent must be ``freely
and knowingly obtained.''
---------------------------------------------------------------------------
The concern expressed by Senator Walsh and the concerns implicit in
recent Congressional emphasis on voluntary arbitration are, based on
the interpretation given the FAA by the Supreme Court of the United
States, fully justified. Judicial interpretations of the Federal
Arbitration Act hold that, rather than being merely a benign tool for
the management of judicial dockets, mandatory binding arbitration may
be used as a hammer by which one party to a contract takes
unconscionable advantage of the other. At the same time, in the case of
the motor vehicle franchise agreements, arbitration can circumvent an
entire body of state substantive law enacted precisely to bring equity
to that specific relationship.
The principle that the Act is preemptive of state law emanates from
the Supreme Court's opinion in Southland Corporation v. Keating.\4\ The
issue in the case was the enforceability of a California statute,
upheld by the California Supreme Court, regulating the relationship
between franchisers and franchisees--this statute had the effect of
preempting contractual arbitration clauses in favor of the regulatory
structure created by the California Legislature to resolve disputes
arising from a franchise relationship.
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\4\ 104 S. Ct. 852 (1984).
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In the Southland case, the Chief Justice said: ``[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.'' (at 861, emphasis
added) It would seem that, with the quoted language, the court lays to
rest the supremacy issue and the issue of whether or not the FAA's
enforcement requirements are limited to actions brought in federal
court (an issue made the subject of a stinging dissent).
In 1985, the Supreme Court revisited the issue in the case of
Mitsubishi Motors Corporation v. Soler Chrysler-Plymouth,\5\ a case in
which 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
unimpressed by the argument that the vindication of substantive
statutory rights should not be left to mandatory binding arbitration,
even when the issues presented are complex and carry as many public
policy implications as a Sherman Act claim.\6\ For the court, Justice
Black simply stated that ``[B]y agreeing to arbitrate a statutory
claim, a party does not forego the substantive rights afforded by a
statute; it only submits to their resolution in an arbitral rather than
a judicial forum. * * *''
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\5\ 105 S.Ct. 3346 (1985).
\6\ Prior to this opinion the law on this precise issue had been
established by the Court of Appeals for the Second Circuit in 1968,
where the court held that, regardless of the terms of a contract, a
Sherman Act claim is not subject to arbitration. American Safety
Corporation v. J.P. Maguire & Co. 391 F.2d. 821 (1968). In a well-
reasoned opinion the court there provided four reasons not to compel
arbitration in a Sherman Act action: the importance of private
[judicial] enforcement; the possibility that a contract that results in
a Sherman Act claim might be adhesive; antitrust issues are too
complicated to be resolved by arbitration; and antitrust issues involve
business disputes that ought not be decided by an arbitration panel of
business people. As convincing as these arguments may be, however, the
court in Mitsubishi refuted them expressly, one by one.
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Thus, the court indicates that an arbitral forum is the same as a
judicial forum for the adjudication of statutory rights. Yet there is
at least one major distinction: the existence of an appellate procedure
to guarantee adherence to the principles of due process and other
important constitutional and statutory rights. It is difficult to
imagine the adjudication of substantive rights without the right to
appeal but the FAA offers no effective appeal from the award of an
arbitration panel. It is certainly worthy of note that, in his dissent,
Justice Stevens distinguishes between simple contract claims and those
arising as a result of a statutory right, stating that ``[N]othing in
the text of the 1925 Act, nor its legislative history, suggests that
Congress intended to authorize the arbitration of any statutory
claims.'' (Id. at 3364.) Had Justice Stevens' position been that of the
court, S. 1020 would not be necessary.
To summarize, the situation is this: the FAA, created to facilitate
the enforcement of arbitration agreements, has been interpreted
uniformly. It seems clear that:
(1) the FAA has been construed to be preemptive of state law;
(2) the FAA may be applied to require arbitration of a claim
arising under a statutory right;
(3) the courts are expected to enforce an arbitration clause
without regard to:
(A) the complexity of the issues presented;
(B) the public policy issues presented;
(C) the existence of a comprehensive body of state statute law
established for the sole purpose of adjudicating disputes arising under
the contract;
(D) the fact that an arbitration panel has no authority to invoke
injunctive relief; or
(E) the fact that the contract is a contract of adhesion.
With that background, let me turn to the history of the particular
contractual relationship that exists between the manufacturer of a
motor vehicle and its franchised dealer.
HISTORY OF CONTRACTUAL RELATIONSHIP BETWEEN MOTOR VEHICLE DEALER AND
MANUFACTURER
In the preface to his book Law and the Balance of Power (Stewart
Macauley, Russell Sage Foundation, New York, 1966) Professor Macauley
has the following to say: ``For over forty years [franchised automobile
dealers] have been trying to get help from the legal system to give
them enforceable rights against the manufacturers which would influence
the daily operation of their relationships with them. One can guess
why. The `franchise' which governed the arrangement was drafted by the
manufacturer to minimize the dealer's rights, and the dealers lacked
the bargaining power to gain a better contract.''
It is our position that a franchise contract between the
manufacturer of a motor vehicle and its franchised dealers is not a
proper one to be interpreted or enforced by arbitrators, unless the
arbitration route has been chosen voluntarily by both parties after the
controversy arises. This is so, because this contract is a classic
example of a contract of adhesion. It is not negotiated. It is handed
to a dealer who is expected to make, or already has made, a very
substantial investment, on a ``take it or leave it'' basis. It is
unilaterally renewed, modified or amended in the same way * * * on a
``take it or leave it'' basis.\7\ One need impute neither malice nor
avaricious intent to any party to such an agreement to note that a
Chevrolet dealer in a small town does not--and can never--enjoy equal
bargaining power with the largest corporation in the world.
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\7\ Obviously, the contractual inequity is particularly onerous in
a franchise renewal or modification where the dealer already has
millions of dollars invested in the dealership. At that point the
dealer truly has no choice but to renew or simply accept the agreement
regardless of its provisions.
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It was this very inequity that the Congress cited in 1956 as the
basis for the ``Automobile Dealers' Day in Court Act.'' \8\ In its 1956
report, the Congressional Committee made the following significant and
still relevant observations:
---------------------------------------------------------------------------
\8\ 439 U.S.C. 96 (1978)
---------------------------------------------------------------------------
``* * * This vast disparity in economic power and bargaining
strength has enabled the factory to determine arbitrarily the rules by
which the two parties conduct their business affairs. These rules are
incorporated in the sales agreement or franchise which the manufacturer
has prepared for the dealer's signature.
``Dealers are with few exceptions completely dependent on the
manufacturer for their supply of cars. When the dealer has invested to
the extent required to secure a franchise, he becomes in a real sense
the economic captive of his manufacturer. The substantial investment of
his own personal funds by the dealer in the business, the inability to
convert easily the facilities to other uses, the dependence upon a
single manufacturer for supply of automobiles, and the difficulty of
obtaining a franchise from another manufacturer all contribute toward
making the dealer an easy prey for domination by the factory. On the
other hand, from the standpoint of the automobile manufacturer, any
single dealer is expendable. The faults of the factory-dealer system
are directly attributable to the superior market position of the
manufacturer.'' S. Rep. No. 2073, 84th Congress, 2nd Sess., 2 (1956).
Although the Automobile Dealers Day in Court Act was well-intended,
it has proved to be insufficient to level the playing field. The Act
provides no equitable relief; it requires that a dealer prove coercion;
and it fails to address the real problem inherent in this contractual
relationship: the coerciveness and ``one sidedness'' of the franchise
agreement itself.
Thus it has fallen on the various state legislatures to provide the
kind of equitable statutory redress necessary to protect the public and
the dealer/citizens of the states and, since 1937, state legislatures
have been doing just that. Typically that regulations has taken the
form of a comprehensive body of statute law that regulates the
relationship between dealers and manufacturers and provides specific
remedies available only to the parties to these agreements. Today, all
states, except Alaska, have some sort of statutory plan in place to
regulate this contractual relationship. While manufacturers may allege
that these statutes are too protective of dealers, in truth and in
fact, they are merely reactive to the onerous, oppressive and unfair
burdens imposed by the manufacturers in the franchise agreement.
In this context, I think it is helpful to hear what the Supreme
Court of the United States has to say about such regulatory enactments.
In its seminal opinion in the case of New Motor Vehicle Board of
California v. Orrin W. Fox Co.\9\ the court said: ``In particular, the
California Legislature was empowered to subordinate the franchise
rights of automobile manufacturers to the conflicting rights of their
franchisees where necessary to prevent unfair or oppressive trade
practices. `[S]tates have power to legislate against what are found to
be injurious practices in their internal commercial and business
affairs, so long as their laws do not run afoul of some specific
federal constitutional prohibition, or of some valid federal law * * *
[T]he due process clause is [not] to be so broadly construed that the
Congress and state legislatures are put in a strait jacket when they
attempt to suppress business and industrial conditions which they
regard as offensive to the public welfare,'' 9439 U.S. 409, 411, citing
and quoting from Lincoln Union v. Northwestern Co. 335 U.S. 525, 536-
537.)
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\9\ 15 U.S.C. Sec. 1221-1225
\10\ 439 U.S. 96 (1978)
---------------------------------------------------------------------------
The court went on to hold that: ``Further, the California
Legislature had the authority to protect the conflicting rights of the
motor vehicle franchises through customary and reasonable procedural
safeguards, i.e., by providing existing dealers with notice and an
opportunity to be heard by an impartial tribunal--the New Motor Vehicle
Board--before their franchiser is permitted to inflict upon them
grievous loss. Such procedural safeguards cannot be said to deprive the
franchisor of due process. States may, as California has done here,
require businesses to secure regulatory approval before engaging in
specified practices.'' (439 U.S. 409, 411. Emphasis in original)
In my own state, in response to these problems, the legislature in
1971 enacted the Texas Motor Vehicle Commission Code \10\ which created
the Texas Motor Vehicle Commission and, with it, valuable property
rights and other protections for the dealer/citizens of Texas. That
body of law provides a comprehensive structure whose only purpose is to
regulate the relations between and among consumers, dealers and motor
vehicle manufacturers. Section 1.02 of the Code provides the following.
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\10\ Texas Motor Vehicle Commission Code (Article 4413(36),
Vernon's Texas Civil Statutes.
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``Section 1.02 Policy and Purpose. The distribution and sale of new
motor vehicles in this State vitally affects the general economy of the
State and the public interest and welfare of its citizens. It is the
policy of this State and the purpose of this Act to exercise the
State's police power to insure a sound system of distributing and
selling new motor vehicles through licensing and regulating
manufacturers, distributors, converters, and dealers of those vehicles,
and enforcing this Act as to other persons, in order to provide for
compliance with manufacturer's warranties and to prevent frauds, unfair
practices, discriminations, impositions, and other abuses of our
citizens.''
As with other such state laws that have proven successful in
serving the interests of the public generally, consumers and the
regulated industry, the key to the Texas law is that it expressly
preempts specific terms of the franchise agreement if the terms are in
conflict with the law. Thus, the Texas Legislature has, as it has in a
substantial number of other areas of contract law, determined that
public policy favoring comprehensive regulation of the industry is more
important than upholding specific provisions of a franchise agreement.
I submit that that kind of regulation is a sound and proper exercise of
the power of the state legislature and should not be over-ridden by the
power of a party to impose mandatory binding arbitration. Indeed, the
courts have agreed. Our state law has withstood all challenges,
constitutional or otherwise.
As is the case in most state jurisdictions, this law is designed to
regulate:
(1) termination of a franchise;
(2) contractual provisions prohibiting or limiting the right of a
dealer to dispose of his/her interest in the dealership on his/her
death;
(3) contractual provisions limiting the right of inter vivos
transfer;
(4) placing of unreasonable performance requirements on a dealer;
(5) the unreasonable use of a manufacturer-related finance arm to
bring financial pressure on a dealer;
(6) the obligations of the dealer and manufacturer in providing
warranty and product performance standards for consumers.
Each of these issues, along with others, is addressed very
specifically and very thoroughly in the law. A state agency, created in
1971, is in place to administer and enforce the law. It is an agency
bound by law to follow precedent and to adhere scrupulously to
principles of due process. It is an agency whose official acts are
subject to judicial review. And let me emphasize that the law works. It
works because its provisions exist to regulate unreasonable, oppressive
and unfair terms of the franchise agreement and unreasonable,
oppressive and unfair practices. Manufacturers prevail as often,
perhaps more often, than dealers. For these reasons, the law works and
works well.
If parties are required to resolve their disputes outside these
long-standing regulatory frameworks; if they are forced into a forum
that must interpret a franchise agreement within the four corners of
the agreement, without regard to the unreasonableness or unfairness of
its provisions and without appeal, if they are forced to go to a forum
that lacks the specific expertise that can only come after years of
experience and precedent, there is no reason to think that provisions
of the law will be observed at all. It is inconceivable to me that any
arbitrator or arbitration panel could develop the kind of expertise
that this agency has developed over nearly three decades of regulating
this contractual relationship. In effect, we have (and have had for
these nearly three decades) a very effective alternative dispute
resolution system, a system specifically created, and uniquely suited,
to enforce these important substantive statutory rights.
Yet the effect of the FAA, as interpreted by the Supreme Court, is
to allow a party to a franchise agreement, through the imposition of a
pre-dispute mandatory binding arbitration provision, to circumvent
these substantive statutory rights as if they do not exist.
USE OF MANDATORY BINDING ARBITRATION BY MOTOR VEHICLE MANUFACTURERS AND
DISTRIBUTORS
Although opponents to S. 1020 claim that mandatory binding
arbitration is little used, the facts indicate otherwise. According to
a document produced by representatives of manufacturers in November,
1999, approximately 1875 dealers are covered by mandatory binding
arbitration. The document is designated on its face as a ``work in
progress''--as indeed it must be. None of the nation's heavy duty truck
dealers are listed and there is evidence that approximately 1,000 are
covered by mandatory binding arbitration.
In addition to the manufacturer's list and the truck dealers, there
are others. Both Ford and General Motors impose mandatory binding
arbitration in some of their dealer agreements. On November 30, 1999
Nissan notified its dealers, 1,230 in number, that mandatory binding
arbitration is now the exclusive remedy for dealer manufacturer
disputes involving incentives. On October 11, 1999, Volkswagen Credit,
Audi Financial Services and Bentley Financial Services notified dealers
that all disputes, including tort, would be resolved by binding
arbitration and that the laws of the state of Michigan would govern.
There are 567 Volkswagen and 258 Audi dealers.
The first major imposition of mandatory binding arbitration by a
member of the ``big three'' occurred when Chrysler Motors Corporation
acquired American Motors. Although Chrysler subsequently offered an
``opt out'' addendum on arbitration, the following is reflective of
classic examples of terms and conditions unilaterally imposed on
existing dealers along with mandatory binding arbitration. At least
1,321 Daimler-Chrysler dealers are still covered by these provisions.
Following its acquisition of American Motors (AMC) in 1987,
Chrysler Motors Corporation (CMC) submitted a ``new Franchise Agreement
(also referred to as a sales and service agreement) to existing
dealers, both AMC dealers and CMC dealers. Its directive toAMC dealers
stated ``* * * you will be visited by a Zone Sales Representative who
will present you with a new form of Agreement for your signature * * *
.''
The Chrysler Franchise (sales and service) Agreement was submitted
to the dealers in two parts. The first was a basic signatory document
describing the parties, products, etc. This was followed by a separate
``Sales and Service'' Agreement document containing ``Additional Terms
and Provisions''--thirty four in number--plus a Motor Vehicle Addendum.
The basic document has a global Mandatory Binding Arbitration
provision which contains the following: ``Any and all disputes * * *
including but not limited to * * * disputes under rights granted
pursuant to the statutes of the state in which dealer is licensed shall
be finally and completely resolved by arbitration pursuant to the
arbitration laws of the United States of America as codified in Title 9
of the United States Code * * *'' (Emphasis added)
The ``Additional Terms and Provisions,'' ``Sales and Service''
Agreement document, containing operative provisions covered by the
mandatory binding arbitration clause, included among its more onerous
provisions the following impositions:
A requirement that the dealer maintain a rating ``equal to or
greater than the average of Customer Satisfaction Index * * * for the
Sales Level Group in which dealer is included.'' Failure to do so would
subject dealer to termination.
Automatic termination without notice on the death of dealer in a
sole proprietorship.
Automatic termination when the manufacturer offers a new Sales and
Service Agreement to all dealers of the same line make.
A prohibition against a surviving spouse retaining a financial
interest in a successor dealership unless (a) prior to death, dealer
had delivered notice in writing naming surviving spouse as person to
hold a financial interest and (b) the surviving spouse, within 60 days
after death, agreed in writing not to participate in any way in the
management of the dealership.
A provision that venue and jurisdiction lay in Michigan.
All of the above-cited terms and conditions are contrary to the
laws of many states, and the arbitration provision clearly was included
with the intent to circumvent such state statutes. Through the
utilization of an arbitration mechanism in a ``take it or leave it''
contract offered to existing, invested dealers, the manufacturer
intended to deprive its dealers of statutory rights and remedies under
state laws.
NON-NEGOTIABLE AGREEMENTS
Some opponents to S. 1020 may argue that contracts between
manufacturers and dealers are negotiated. The overwhelming evidence
proves the contrary. It is also sometimes argued that an arbitration
provision has been negotiated with dealers. This is the claim made by
factory representatives when discussing the Saturn arbitration
provision.
During the formative stages of Saturn, discussions were held with a
few selected General Motors dealers * * * I believe there was an
initial group of five and then a second group of ten. However, these
were only prospective Saturn dealers: General Motors dealers who may
have been hoping to obtain a Saturn franchise. I am told that only two
of the original five actually became Saturn dealers. Securing an
understanding or agreement with a prospect who represents no one but
himself is not a ``negotiation'' with an existing or invested
automobile or truck dealer.
Within the past two years, Saturn dealers in different
jurisdictions attempted to enter into agreements with a third party.
Saturn refused to approve the transactions, and insisted on mandatory
binding arbitration. After attempting to exercise their rights and
remedies under state laws and administration procedures which would
have likely allowed them to proceed with plans, and after a very
considerable amount of time and expense, the dealers finally
capitulated and sold their dealerships to Saturn.
You may well ask why these dealers did not take their chances with
Saturn arbitration. A look at the Saturn arbitration scheme provides an
answer. The Saturn arbitration plan has a panel of four arbiters--two
employees of Saturn and two Saturn dealers chosen from a pre-selected
list. Sounds reasonably fair except--Saturn picks all four and all four
must reach a unanimous decision to achieve an outcome. If a unanimous
decision is not reached, the parties must rearbitrate their dispute
before a different Saturn arbitration panel. Although it seems obvious
that this creates opportunity for inherent ``bias,'' a court has
rejected any such notion.
Again, on the issue of negotiation and on the point of convenience
and expense of arbitration, the Sterling Truck saga offers telling
insight. Freightliner, a subsidiary of Daimler-Chrysler, purchased HN-
80 and cargo product lines from Ford Motor Company. In its notice to
existing Ford dealers and its offer of a franchise agreement, HN-80
Corporation (now Sterling) included mandatory binding arbitration of
all disputes and added a requirement that the dealer personally
guarantee payment for all purchases, including vehicles, from the
manufacturer.
Because there was a substantial number of dealers involved (rather
than the typical case where there is a manufacturer vs. one dealer) a
proposal that the manufacturer perceived to be a compromise was
offered. In lieu of the personal guarantee, ``it was agreed that
invoicing and payment terms for new trucks will be the day trucks are
ready for delivery to the transporter (Day 1).'' Apparently, instead of
guaranteeing payment, the dealers pay in advance of delivery.
On the issue of mandatory binding arbitration the manufacturers
provided: ``Binding arbitration will be required of all qualified
current Ford HN-80 dealers * * * for three years. Any HN-80 dealer
signed with this provision will be offered an ``Opt Out'' after the
three year period,providing that the dealership is meeting all HN-80
requirements and is not on termination notice.'' (Emphasis added) All
other/subsequent HN-80 dealers signed will be bound by Binding
Arbitration and will not be offered an ``Opt Out.'' As anyone with any
experience in the industry knows it is virtually impossible for a
dealer to meet ``all requirements'' of the factory. So there is a
serious question as to whether there will really be an ``Opt Out'' for
any Sterling dealers. The manufacturer clearly controls that final
decision.
Recently an issue has risen between Sterling and a number of its
dealers regarding a medium duty truck called the Acterra. Sterling
insists that it is a new line-make and is attempting to require dealers
to sign a separate agreement and meet certain other criteria. Dealers
maintain that it is merely a new model covered by the existing
franchise agreement.
Knowing that their agreements require mandatory binding
arbitration, approximately forty Sterling dealers filed for
consolidated arbitration in Cleveland, Ohio, the situs of Sterling's
home office. Sterling objects and argues: ``Because the arbitration
agreements between the claimants do not contain a provision for
consolidating arbitration, Sterling cannot be forced to proceed with
the consolidated arbitration * * *'' Counsel for the dealers responds:
``Having once touted binding arbitration as `the most expeditious and
least costly method of resolving disputes,' Sterling now seeks to
undermine the essential advantage of arbitration, as advertised by it
and compel the resolution of more than forty virtually identical claims
in at least twenty different venues.'' Sterling, in its pleadings, also
complains that the dealers ``paid only a single filing fee'' for
arbitration. Although the American Arbitration Association (AAA) is
apparently satisfied, Sterling insists on a separate fee from each
dealer.
The extent to which manufacturers will overreach the dealer on this
issue is illustrated in both Ford Motor Company's Stock Redemption
Plan/Dealer Development Agreement and in General Motor's Motors Holding
Investment Plan. These are the agreements Ford and General Motors offer
in dealer development programs, principally with minority dealers.
In the Ford Dealer Development Agreement we find the following:
``If appeal to the Policy Board fails to resolve any dispute covered by
this Article 10 within 180 days after it was submitted to the Policy
Board, the dispute shall be finally settled by arbitration in
accordance with the rules of the CPR Institute for Dispute Resolution
(the `CPR') for Non-Administered Arbitration for Business Disputes, by
a sole arbitrator, but no arbitration proceeding may consider a matter
designated by this Agreement to be within the sole discretion of one
party (including without limitation, a decision by such party to make
an additional investment in or loan or contribution to the Dealer), and
the arbitration proceeding may not revoke or revise any provisions of
this Agreement. Arbitration shall be the sole and exclusive remedy
between the parties with respect to any dispute, protest, controversy
or claim arising out of or relating to this Agreement.''
In the General Motors Investment Plan the dealer, referred to as
the Operator, is required to agree to the following provision: ``The
Operator will not be allowed to bring a lawsuit against General Motors
for claims arising before and during the time Motors Holding is an
investor in the Dealer Company. Instead, the Operator, General Motors
and the Dealer Company agree to submit any and all unresolved claims,
including those pertaining to any dealer sales & service agreement, to
mandatory and binding arbitration. The results of the arbitration will
be binding on the Operator, the Dealer Company and General Motors.''
Nissan, in its recent Revised Incentive Program Rules, provides for
mandatory Binding Arbitration and attempts to foreclose any remedies
otherwise available to dealer under state or federal law. ``By
receiving incentive payments, Dealer agrees to resolve disputes
involving incentives payments by this Dispute Resolution Process.
Furthermore, Dealer acknowledges that at the state and federal level,
various courts and agencies would, in the absence of the agreement, be
available to them to resolve claims or controversies which might arise
between NNA and Dealer (NNA and Dealer collective referred to as
`Parties'). The Parties agree that it is inconsistent with their
relationship for either to use courts or governmental agencies to
resolve such claims or controversies.''
In its October 11, 1999 notice to its dealers, Volkswagen Credit
imposes Mandatory Binding Arbitration with the following language:
``The parties will attempt first to resolve each and every dispute
or claim, whether based in contract, tort, statute, fraud,
misrepresentation or any other legal theory, whether pre-existing,
present or future arising out of or relating to this Agreement
(`Dispute') through good faith negotiations. Any Dispute that is not
resolved within 180 days, or any other period of time that the parties
may agree in writing, will be settled by final and binding arbitration
by either party making a demand to the other for arbitration of the
Dispute. Such demand must be made pursuant to the filing procedures of
the American Arbitration Association (`AAA') for the arbitration of
commercial disputes.''
DISPARATE BARGAINING POWER
It has been suggested by opponents that S. 1020 is unnecessary
because there is no longer disparate bargaining power between
manufacturers and dealers--and cite for you the existence of large
publicly-held dealer companies, mega-dealers etc. There are, of course,
a few of these. But it is the vast majority of independent dealers who
need the relief granted by the passage of S. 1020.
Texas is a fairly populous state with approximately eighteen
million people. Many other jurisdiction represented here today are far
less populous, but I believe that the Texas numbers will be helpful in
revealing the relative size and resources of the dealer body. In Texas,
we have a count of about 1500 franchised dealers. Of these, 184 are in
towns of fewer than 5,000; 238 in towns of 5,000 to 15,000; 246 in
towns of 15,000 to 50,000; 294 in towns of 50,000 to 250,000; and 352
in cities of 250,000 plus. The vast majority of dealers reside and do
business in the small and medium size towns. These are not mega-
dealers, but rather are small, sole proprietor or family-owned
businesses.
Are these dealers in these small and medium sized cities important?
They're important to their employees and the communities they serve--
and they should be important to the manufacturers. In 1996, 23% of the
vehicles sold by General Motors in Texas were sold in towns of not more
than 15,000 population. If you add the towns of not more than 50,000
population, it's 41%.
These dealers, many of whom have received ``stay-with-you'' letters
from their manufacturers, represent the vast majority of the dealers
across the nation affected by S. 1020. The so-called ``stay-with-you''
letters told the dealer that he or she could continue to operate the
dealership, but that in the event of the dealer's death or attempt to
sell the dealership, it (the dealership) would be declared non-viable.
SUMMARY
From the foregoing, the following may be concluded:
(1) The franchise agreement that exists between a motor vehicle
manufacturer, importer, or distributor and its franchise dealers is not
a negotiated agreement; it is a classic contract of adhesion, presented
to the dealer on a ``take it or leave it'' basis;
(2) historically and currently, the agreement offered by a
manufacturer, importer, or distributor of motor vehicles to its
franchised dealers is inherently unfair and inequitable;
(3) every state except one has a regulatory scheme in place to
bring equity to this inherently inequitable relationship;
(4) an arbitration clause in a contract is enforceable on its face,
regardless of the existence of state law or regulation to the contrary;
(5) although an arbitration panel may attempt to understand and
enforce the terms of a state regulatory scheme, nothing requires it to
do so, it has no ability to enter injunctive relief, and there is no
appeal if the panel misapplies or ignores state or federal law; and
(6) by placing an arbitration clause in this ``take it or leave
it'' contract, the stronger party may impose mandatory binding
arbitration on an unwitting or unwilling dealer and circumvent state
and federal law designed specifically to regulate the relationship that
is the subject of the agreement.
Thus is the problem S. 1020 addresses the problem in a
straightforward and simple way. Under the terms of S. 1020, an
arbitration clause may properly be included in a Motor Vehicle
Franchise Contract. However, the potential for abuse of such a clause
in a non-negotiated contract has been eliminated by Subsection (b) of
the new Section 17 that S. 1020 would add to the Federal Arbitration
Act. That provision expressly provides 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, each party to
the contract shall have the option, after the controversy arises and
before both parties commence an arbitration proceeding, to reject
arbitration as the means of settling the controversy. Any such
rejection shall be in writing.''
Thus, S. 1020 will remove the potential of these contracts to
deprive persons of statutory rights and remedies without doing violence
to the public policy interest served in encouraging arbitration as a
means of dispute resolution. S. 1020 simply makes a arbitration
voluntary. It solves the problems it addresses.
Senator Feingold. Thank you for that, Mr. Fondren.
It is my understanding we have already heard from Mr.
Holcomb. Then we look forward to the comments of Mr. Shack. Go
ahead.
STATEMENT OF WILLIAM SHACK
Mr. Shack. Senator Feingold and members of the
subcommittee, my name is William Shack, and I commend you for
holding this hearing and appreciate the opportunity to explain
why Congress should pass S. 1020 as soon as possible.
I speak to you from a different perspective because I was a
Saturn retailer, and we feel that we are victims at this point.
I am currently a Honda dealer in Las Vegas and Henderson,
Nevada. I am a member and founder of the National Association
of Minority Auto Dealers, representing over 600 minority
dealers. I have been a franchise automobile dealer since 1977,
and over the years I have owned several different automobile
dealerships with many different manufacturers.
In many ways, I have lived the American dream because
through hard work and determination I built a successful
business. We have traveled here today, however, to discuss
events that occurred between 1989 and 1995 when my partner,
Timothy Woods, and I were seeking a Saturn dealership. After
much time and substantial financial investment, Saturn
unilaterally terminated our agreement, contrary to our wishes.
Our dispute was resolved by mandatory binding arbitration. We
attempted remedy through the State's Motor Vehicle Board and
through State court, but we were rejected because of the
Arbitration Act.
There is one important limitation to my testimony today. As
part of our settlement from the arbitration case, my partner
and I had to agree not to publicize certain aspects of the
dispute and negotiation.
Senator Feingold. I am sorry. I am going to have to
interrupt you in the middle. I have to go vote now, and I have
two votes in a row, but they are 10-minute votes. So it will be
quicker, and when the chairman gets back, we will continue with
your comments.
I apologize. We will go in recess.
[Recess 2:34 p.m. to 2:39 p.m.]
Senator Grassley [presiding]. We will continue where Mr.
Shack left off.
Mr. Shack. We have traveled here today, however, to discuss
events that occurred between 1989 and 1995, when my partner,
Timothy Woods, and I were seeking a Saturn dealership. After
much time and substantial financial investment, Saturn
unilaterally terminated our agreement. Contrary to our wishes,
our dispute was resolved by mandatory binding arbitration. We
attempted remedy through the Motor Vehicle Board and through
State courts, but we were rejected because of the Arbitration
Act.
There is one important limitation to my testimony today. As
part of our settlement from the arbitration case, my partner
and I had to agree not to publicize certain aspects of the
dispute and negotiations. I am confident that my written
testimony and oral testimony are consistent with our obligation
under that confidentiality agreement.
But the very fact that we cannot tell our complete story
highlights one of the oppressive aspects of this type of case.
If we had been permitted to exercise our rights under State
law, there would have been a public record of the proceedings.
The terms of the dealer agreement severely restrict the
opportunity to present our case under California law. The forum
for addressing this type of dispute is the California Motor
Vehicle Board and governing laws would be California law. We
could not rely on that law.
With the arbitration panel's characterization of their
decision as a victory for us, we were awarded only $66,000,
plus reimbursements of a franchise fee in an amount not to
exceed $25,000.
This amount was grossly unfair. Our total investment at
that time exceeded $400,000. We suffered other financial losses
because of Saturn's termination. We could not use a $1.2
million sales tax subsidy which would have helped offset the
cost of our property. Also, if our Saturn dealership had become
operational, we believe that the franchise itself, not
including the real property, would have been worth at least $3
million. As you can see, Saturn's termination cost us several
million dollars.
We had no opportunity to negotiate any material terms of
the dealer agreement. As potential franchisees, we had no
opportunity at all. We reject categorically--again, we reject
categorically the idea that we voluntarily agreed to submit to
mandatory binding arbitration or that Saturn dealers somehow
have agreed to this procedure on our behalf.
The truth is simple. Every franchise application or renewal
is a ``take it or leave it'' transaction.
The fact that the manufacturers are fighting so hard to
retain their ability to compel dealers to relinquish their
rights under State law is within itself very telling. It is
understandable that they would like to be able to take a
dealer's franchise--his livelihood--without adequate or fair
compensation and that they have also found a method of doing so
through forced arbitration.
This problem is a ticking time bomb. Every car or truck
dealer that has signed a franchise agreement with mandatory
binding arbitration clauses could be subjected to the same
treatment that we received. Since manufacturers can
unilaterally amend a franchise agreement by merely mailing to
the dealer an addendum to the agreement, a manufacturer can
insert these clauses in existing franchises at any time.
Nothing prevents the manufacturer from circumventing State law
through these types of clauses. That is why the enactment of S.
1020 is so critical. The bill is necessary to restore
fundamental fairness.
Again, there is nothing fair about the process. We are not
able to really tell the true story. We also risk the wrath of
General Motors and Saturn in doing so. We welcome that because
finally maybe we will get an opportunity to deal with this in
an open forum.
Thank you for your time, and we look forward to your
questions. Thank you.
[The prepared statement of Mr. Shack follows:]
Prepared Statement of William Shack
EXECUTIVE SUMMARY
My name is William Shack, and I have been a franchised automobile
dealer since 1977 and am a member of the National Association of
Minority Automobile Dealers. Between 1989 and 1995, my partner and I
sought a Saturn dealership. After a substantial financial investment,
Saturn unilaterally terminated our dealer agreement and forced us into
mandatory binding arbitration. The arbitration panel's award was
grossly unfair and inadequate when considering our total acquisition-
related expenses, all incurred to comply with Saturn's terms and
conditions.
As a result of the mandatory and binding arbitration clause
unilaterally inserted in the franchise contract by the manufacturer, we
never received a fair hearing on the merits, even though we appealed
our case all the way to the U.S. Supreme Court. It is my understanding
that only Congress can provide dealers relief from the system that we
had to deal with. Federal legislation, like S. 1020, which gives
parties to motor vehicle franchise contract a choice to accept
arbitration after a dispute arises, is the only remedy available to
protect auto and truck dealers from the imposition of mandatory binding
arbitration, a process which denies dealers of important state
procedural and substantive protections.
As potential franchisees, we had no opportunity to negotiate any
material terms in the Dealer Agreement. We reject categorically the
idea that we ``voluntarily'' agreed to submit to mandatory binding
arbitration or that Saturn dealers somehow have agreed to this
procedure on our behalf. The truth is simple--every franchise
application or renewal is a ``take it or leave it'' transaction.
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. I was forced to forfeit these fundamental
protections--all available under state law--when I signed an agreement
drafted by the manufacturer containing a mandatory binding arbitration
clause.
With the overwhelming leverage that the manufacturers enjoy,
mandatory binding arbitration serves only one purpose--to strengthen
the manufacturer and weaken the dealer. Every car or truck dealer that
has entered into a franchise agreement with a mandatory binding
arbitration clause could be subjected to the same treatment that I
received. Also, nothing under current law prevents a manufacturer from
unilaterally inserting these clauses in existing franchise agreements
at any time. As a result, the manufacturers have the complete freedom
to circumvent the law of every state in the country. That is why
Congress should enact S. 1020. Balance and fairness must be restored.
Chairman Grassley and Members of the Subcommitte, my name is
William Shack. I commend you for holding this hearing and appreciate
the opportunity to explain why Congress should pass S. 1020 as soon as
possible. At the conclusion of this hearing, I hope that you will agree
that the use of mandatory arbitration clauses in automobile sales and
service agreements is inherently unfair.
I am currently a Honda Dealer in Las Vegas, Nevada and a member of
the National Association of Minority Automobile Dealers. I have been a
franchised automobile dealer since 1977, and over the years I have
owned several different dealerships. In many ways I have lived the
American Dream, because through hard work and determination I have
built a successful business.
I have traveled here today, however, to discuss events that
occurred between 1989 and 1995, when my partner, Mr. Timothy L. Woods,
and I were seeking a Saturn dealership. After much time and substantial
financial investment, our effort to finalize plans for a Saturn
dealership ended with a dispute that, contrary to our wishes, was
resolved by mandatory binding arbitration. That dispute drove home to
us in a drastic fashion just how one-sided the mandatory binding
arbitration process can be for dealers. We were surprised to learn
that, despite the great system of justice that we have in this country,
we could be deprived of the basic right to an impartial decision on the
merits of our case. That is a grave injustice.
There is one important limitation to my testimony today. As part of
our settlement from the arbitration case, my partner and I had to agree
not to publicize certain aspects of the dispute and negotiations. I am
confident that my written statement and oral testimony are consistent
with our obligations under that confidentiality agreement, but the very
fact that we cannot tell our complete story highlights one of the
oppressive aspects of this type of case. If we had been permitted to
exercise our rights under state law, there would have been a public
record of the proceeding.
A few comments about Saturn are necessary to put our case in the
proper context. General Motors established Saturn purportedly to create
a new way of doing business. As part of that effort, the Saturn
franchise agreement included a mandatory binding arbitration clause.
While Saturn likes to characterize the clause as ``supported by the
dealers,'' the clause was a non-negotiable condition to becoming a
franchised Saturn dealer.
Now, I would like to turn to our specific case. On September 9,
1989 my partner Mr. Woods signed a Dealer Agreement with Saturn, which
originally called for a dealership in Montclair, California. This
contract set forth what we needed to do to obtain a dealership. If
Saturn had not terminated this agreement, this contract would also have
controlled how we operated the dealership.
To comply with the terms and conditions of the agreement, we took
the steps necessary to acquire the land and develop the site for use as
an automobile dealership.After completing a six-month study (that we
paid for), Saturn agreed that two dealerships were warranted--one in
Ontario and one in Pomona. Next, we identified property in Ontario and
started the acquisition process, but Saturn decided that the first
dealership should be in Pomona. Although the city of Pomona had offered
us five acres of land free of charge, we identified several problems
with the location and resisted the decision that Pomona be the site of
the dealership. After we requested mediation on the location decision,
Saturn agreed with our assessment, and it was decided that the location
of the first dealership should be in Chino. Although the Chino site
cost approximately $4 million, we simply wanted the best location for
the Saturn franchise. We then finalized negotiations with the City of
Chino to obtain a sales tax subsidy of $1.2 million.
During the negotiations for the property in Chino, Saturn became
very impatient and imposed new cut off dates. By 1993, we had secured
the land, received economic development support, finalized the physical
plans and were arranging financing. We sought a loan from General
Motors Acceptance Corporation, which is a wholly-owned subsidiary of
GM. The loan package was complete, pending an appraisal. An appraiser,
recommended by GMAC, delayed sending the final report. Even so, the
appraised amount was higher than expected and the loan was eventually
approved. However, because of the delay in the appraisal, the loan
documentation was not completed within Saturn's deadline.
Saturn's final deadline was August 2, 1993, and we were supposed to
have financing and break ground on the Chino facility by that date.
Saturn refused to recognize the financing approval that we had in hand,
because of the late appraisal. Therefore, on August 11, 1993, Saturn
terminated the Dealer Agreement. On September 15, 1993, Saturn
rescinded the termination for the Chino location, but restated its
termination of the Ontario location. On September 21, 1993 we offered
an alternative that would have allowed us to maintain the Ontario
location based on very strict guidelines. Saturn rejected that proposal
on September 29 and terminated our agreement for both locations.
To protect our investment we challenged Saturn's termination. The
terms of the Dealer Agreement, however, severely restricted the
opportunity to present our case. Under California law, the forum for
addressing this type of dispute is the California Motor Vehicle Board
and the governing law would be California law. We could not rely on
state law, however, because Saturn's contract mandated that the Federal
Arbitration Act (FAA) would govern disputes arising under the franchise
agreement. The dispute resolution process as set forth in our ``take it
or leave it'' contract consisted first of mediation and then mandatory
binding arbitration. The mediation ended with the panel recommending
that Saturn agree to an equitable settlement with us. Saturn rejected
that idea, and arbitration was scheduled.
We challenged the arbitration procedure in state court in
California on April 5, 1994. We alleged breach of contract and asked
for an injunction to prevent the arbitration from proceeding. Saturn
removed the case to Federal court the next day, and we agreed to delay
the Federal case pending the outcome of the arbitration. We conducted
the arbitration on April 7 and 8, and the panel issued a decision on
April 9, 1994. While the arbitration panel characterized their decision
as a victory for us, we were awarded only $66,754, plus a reimbursement
of franchise fees in an amount not to exceed $25,000.
This amount was grossly unfair. Our out-of-pocket expenses alone
were far in excess of the arbitrator's award. Our total investment in
acquisition related expenses, all incurred to comply with Saturn's
terms and conditions, exceeded $400,000. We suffered other financial
losses because of Saturn's termination. We could not use the $1.2
million sales tax subsidy that would have helped offset the cost of the
property. Also, if our Saturn dealership had become operational, we
believe that the franchise itself, not including the real property,
would have been worth $3 million. As you can see, Saturn's termination
cost us several million dollars.
One of the beauties of mandatory binding arbitration from the
manufacturer's perspective is the very limited right that a dealer has
to appeal the decision. We challenged the arbitrator's decision in
Federal court, and all the way to the United States Supreme Court. The
legal fees associated with this challenge were substantial. We
undertook this fight to address the abuses that occurred as the result
of having been forced to relinquish both procedural and substantive
rights under state law. We are here today because only Congress can
provide dealers relief from the system that we had to deal with.
Federal legislation, like S. 1020, is the only remedy available to auto
and truck dealers faced with mandatory binding arbitration.
We had no opportunity to negotiate any material terms in the Dealer
Agreement. Our discussions could not be called negotiations. This was a
``take it or leave it'' transaction. If there had been an attempt to
delete the mandatory binding arbitration clause from our contract, we
have no doubt that Saturn would have terminated all discussions
immediately. There were actually only two options: sign the agreement
that forces you to give up your statutory rights; or walk away from the
deal.
Moreover, we want to reject the argument that Saturn dealers
somehow have agreed to this procedure through a negotiation. This
procedure originated during discussions with approximately 16
individuals, all hand picked by GM to discuss the formation of Saturn.
There were no Saturn dealers at the time. Based on the limited input
from these individuals, Saturn inserted the mandatory binding
arbitration clause as a standard provision in the franchise agreement.
Aside from the fundamental unfairness of forced arbitration, the
administration of Saturn's mandatory binding arbitration is clearly not
a model of fairness. All of the people involved in the actual decision
making or the administration of the mandatory binding arbitration
procedure owe their economic well being to Saturn. Saturn's process
involves a panel of two Saturn dealers and two Saturn employees. These
four individuals are selected by Saturn from a pool which includes 10
Saturn employees and 10 Saturn dealers. The process also includes an
administrative officer, who is under contract toSaturn. The
administrative officer rules on discovery motions and ``for cause''
challenges to panel membership and advises the panel on questions of
law.
The imposition of mandatory binding arbitration will almost always
be to the detriment of the dealer. It forces the dealer to forfeit
important protections under state law for the uncertain outcome of
arbitration. This is truly a one-way street. All arbitration awards are
binding and awards may not be appealed absent fraud and collusion. We
suffered extreme hardship and are absolutely convinced that we lost
hundreds of thousands of dollars as a result of being forced into
arbitration. We are passionately opposed to this procedure because it
was, and continues to be, so inherently biased against the dealer.
This is not to say that I am totally opposed to arbitration. In
fact, under the right circumstances, and if I thought the process would
be fair, I would agree to this form of dispute resolution. First, it
would depend on the nature of the dispute. Also, I would never choose
mandatory binding arbitration when there is any hint of the bias so
evident in Saturn's process. And certainly, I would never choose
arbitration in a situation where the manufacturer is trying to
terminate my very right to continue operating my business and the
arbiters are hand picked by the manufacturers.
The fact that the manufacturers are fighting so hard to retain
their ability to compel dealers to relinquish their rights under state
law is in itself very telling. It is understandable that they would
like to be able to take a dealer's franchise--his livelihood--without
adequate and fair compensation, and they have found a method of doing
this through forced arbitration.
I understand that the manufacturers are able to engage in this
unfairness because of the Federal Arbitration Act which the courts have
held prevents states from stopping this type of abuse. I believe that a
number of states have enacted laws which prohibit this practice and
other states even have constitutional provisions that protect a
citizen's right to go to court. Unfortunately, this Federal law makes
such state laws unenforceable. The reason we are here is to try and
correct the inequity that allows manufacturers to circumvent
protections of state law. I am sure Congress never intended this result
in the first place.
This problem is a ticking time bomb. Every car or truck dealer that
has signed a franchise agreement with a mandatory binding arbitration
clause could be subjected to the same treatment that we received. Since
a manufacturer can unilaterally amend a franchise agreement by merely
mailing to the dealer an addendum to the agreement, a manufacturer can
insert these clauses in existing franchises at any time. Nothing
prevents the manufacturers from circumventing state law through these
types of clauses. That is why the enactment of S. 1020 is so critical.
The bill is necessary to restore fundamental fairness.
Thank you for your time and I look forward to your questions.
Senator Grassley. Thank you very much, and before you go
ahead, all of your testimony will be printed in the record as
written. I didn't make that clear, but I wanted to say that.
Regardless of how short your testimony might be, your entire
statement will be in the record.
Ms. Lajdziaka.
STATEMENT OF JILL LAJDZIAK
Ms. Lajdziak. Thank you. Good afternoon, Chairman Grassley.
My name is Jill Lajdziak, and I am president of Saturn
Distribution Corporation and vice president of Sales, Service
and Marketing for Saturn Corporation. I want to thank you for
the opportunity to testify today on the importance of mandatory
binding arbitration clauses in franchise agreements between
Saturn and its 227 Saturn retailers. And I also want to state
right up front that Saturn opposes S. 1020, the Motor Vehicle
Franchise Contract Arbitration Fairness Act.
I want to spend a minute and talk a little bit about Saturn
and what we tried to create when we entered the industry in the
mid-1980's. From the very beginning, we recognized that there
was a different way to do business, and that was in
collaboration with retailers and involved retailers in
decisions that affect them. We wanted to have joint
decisionmaking. Even before we knew what kind of car we were
going to produce, we pulled 15 retailers together. They have
been referred to in my document and in my testimony, my written
testimony, at the MPT. They represented over 50 different
franchises. Many of them have sat on State associations and
boards.
Now, contrary to how they have been portrayed, they have
been and were and still are highly successful business people.
Some are Saturn retailers. Some chose not to become Saturn
retailers. We sought their input on how we could make change in
the industry, and they gave willingly of their time to think
through how we should do business in the future. And I might
add that two of them were lawyers.
The House Judiciary Committee recently had a meeting with
dealers. Hank Faulkner was one retailer that testified in that
session just a few short weeks ago. He is also a lawyer by
profession. And his comment, to remind everybody, was that he
really wanted fellow Saturn retailers to make judgment on
issues; and, secondly, because we were going to have joint
decisionmaking within the Saturn family on items that affect
the network that arbitration--mandatory arbitration was the
right thing to do, that we should solve problems within the
family.
The development of Saturn's franchise agreement by the MPT
is probably the best example of Saturn's collaborative approach
with its retailers. The team wrote the agreement, draft by
draft, word by word. They took red pens and rewrote it. The
result is a document that focuses on working together towards
common goals.
The agreement developed by this team has three key pillars:
joint decisionmaking, joint business planning, and joint
dispute resolution.
To ensure that Saturn continues to work in partnership with
retailers and receive meaningful input, mechanisms were put in
place to ensure that the network would continue to be guided by
retailers, and that governing body of the network is known at
the FOT. It exists today, and they look at the agreement as
necessary, and it is rewritten every 5 years.
The franchise operations team is the main decisionmaking
body for Saturn and the retail partnership. It is combined of
eight Saturn retailers and eight Saturn leaders. With the FOT,
Saturn retailers are represented in all major decisions that
affect their business. The primary focus is on anything that
touches the retail network.
The MPT felt that it was absolutely critical to take a
collaborative approach in resolving any disputes between Saturn
and the retailers. It was the consensus opinion of that group--
and it has been further endorsed by the FOT over the past few
years--that it was in the mutual best interest to solve our
problems jointly rather than resort to litigation that could
jeopardize a long-term relationship. Our relationship is based
on the covenantal agreement.
The group also concluded that it was essential for the
entire retail body to operate under the same agreement so that
there was consistency. Consistency ultimately leads to doing
what is right for the consumer in the marketplace.
It was with this background that the team developed
Saturn's mediation and arbitration process. Further, it was the
very strong belief that disputes should be solved within the
family. It was so strongly felt that retailers and Saturn
brought this position to NADA to explain why mandatory
arbitration we believed was a right thing for the Saturn
retailer agreement. And because of our joint decisionmaking and
because of the retailers' positioning it, as this is what they
wanted to do and it was the recommendation of the retailers,
NADA at the time did not oppose the provision.
Now I would like to briefly describe how the process works.
The process being with either Saturn or a dealer filing a
request for mediation. The dispute is then forwarded to the
mediation panel, which is required to recommend a consensus
decisionmaking, like all decisions are made within Saturn. If
either party rejects the mediated solution or if both parties
choose to waive mediation, they may proceed to binding
arbitration. The arbitration process provides for document
discovery and a hearing. And the hearing is designed to fully
air the dispute so that the arbitration panel can make a very
informed and fair decision. The decision of the arbitration
panel is final and unappealable, except as otherwise provided
by the Federal Arbitration Act.
The mediation and the arbitration panels are comprised of
two dealers and two Saturn representatives. These panelists are
selected by a consensus decision of the retailers who sit on
the FOT from a pool of dealers who have expressed interest and
of company representatives. The panelists are trained by
Endisputes, which moderates the process as well. The dispute
resolution process provides for the removal of prospective
panel members peremptorily or for cause. These safeguards were
designed to eliminate not just the existence but also the
appearance of partiality.
In the nearly 10 years since our inception, the process has
been invoked only five times. Two matters were solved at
mediation, one was solved after mediation, and the fourth was
heard initially at the arbitration step and upheld by the
Federal district court, and the final matter was withdrawn
after mediation.
In conclusion, our dispute resolution process was born of
the unique relationship between those that created the
company--retailers and Saturn--and their desire to have
problems solved within the family. The dispute resolution
process falls in the oversight of the FOT, which includes, as I
mentioned, retailers, and to date, that body has not asked for
that provision to be changed.
Under these circumstances, the Saturn management and the
retail body, as represented by the Franchise Operations Team,
do not understand why Congress would take a step contemplated
in this bill--to effectively eliminate animportant tool in the
approach that Saturn retailers have agreed to in managing disputes.
We have achieved many things since we have entered the
marketplace in the mid-1980's. We set out as a company to do
business a different way, and that was in cooperation with our
retailers in a relationship where we would have joint
decisionmaking.
I believe it is a single reason why we are successful today
as a company, and that is the relationship that we have with
our retailers and the decisionmaking that they have with us in
anything that affects the retailer network. This bill has the
potential to destroy what has been created.
Thank you.
Senator Grassley. Thank you, Ms. Lajdziak.
Ms. MacDonald.
STATEMENT OF JILL N. MacDONALD
Ms. MacDonald. Thank you, Mr. Chairman and Senator
Feingold. My name is Jill MacDonald. I am here today
representing the Alliance of Auto Manufacturers. Our members
include BMW, Daimler-Chrysler, Fiat, Ford, General Motors,
Isuzu, Mazda, Nissan, Toyota, VW, and Volvo.
Prior to my association with the alliance, I was an
attorney at Ford Motor Company for 18 years, the past 14 as
counsel to the sales operations.
I appreciate the opportunity to share the alliance members'
views on the utility of alternative dispute resolution as well
as to explain our opposition to Senate bill 1020.
Manufacturers do not view mandatory binding arbitration as
an opportunity to take advantage of their dealers. Their very
success depends on having a strong, profitable dealer network.
It is counterintuitive for the manufacturers to want to harm
and take actions to harm their dealers.
Currently, the manufacturers win the vast majority of cases
in which they litigate with their dealers. We are not seeking
to tip the scales in the manufacturers' favor through
arbitration, but we need prompt resolution of disputes. The
cost of delay in the court process often exceeds the cost of
the litigation to the manufacturers.
Almost all manufacturers offer some form of dispute
resolution to their dealers through their sales and service
agreements. Less than 7 percent have mandatory binding
arbitration, and these are not imposed. Daimler-Chrysler offers
their dealers at the inception of the relationship the
opportunity to either adopt mandatory binding arbitration or
not. As the witness that preceded me indicated, Saturn's
dispute resolution process, which dealers agree to at the
inception of their relationship, is part of their philosophy of
doing business, of shared decisionmaking as well as shared
dispute resolution.
These are fair processes. Arbitration programs are required
to satisfy due process concerns. Arbitration rules are
specifically designed to protect all parties, provide for
necessary discovery, and are fair to both sides.
Mandatory binding arbitration has become the preferred way
of resolving commercial disputes, and there are good reasons
for that. It promotes and expedites resolution of disputes. It
promotes harmonious resolution of disputes, preserving
relationships, and this is perhaps a key reason why it is an
important thing. It ends up with a fair decision, not
necessarily a winner and a loser.
It also provides certainty of forum in which you are going
to resolve disputes. It is more cost-efficient, eliminates
bias, and provides finality.
Resort to courts or State agencies do not result in prompt
resolution of disputes. The Texas Motor Vehicle Commission can
take a year to issue a decision after the hearing is completed,
and that is before you have process of appeals. In Virginia,
while the administrative decision may be issued in less than a
year, appeals can stretch the time for final decision out for
many years.
Arbitration by manufacturers is not being pursued to avoid
State law. In fact, Iowa, Arizona, New York, South Carolina,
and Texas, to name a few, require the application of their
State law in arbitration proceedings. Nor is mandatory
arbitration being imposed on dealers with existing agreements.
In fact, it simply could not be imposed without the dealer's
voluntary agreement, or it would be unenforceable in the
courts.
Moreover, modification of existing sales and service
agreements can be challenged in most States. In Wisconsin, for
example, a manufacturer may not modify an existing agreement
which substantially and adversely affects the dealership's
rights, obligations, investment, return on investment, without
notice to the dealer and opportunity to protect and a showing
of good cause by the manufacturer for the modification.
Dealers themselves are using mandatory binding arbitration
in their relationships with their customers. In Alabama, the
dealers there use binding arbitration in theircontracts with
their customers in a way to help preserve their dealerships from an
avaricious trial bar in that State. Legislation is pending there, which
the Dealer Association opposes, that would prohibit mandatory binding
arbitration in certain contracts. If passed, is this the next group
that will come before Congress seeking a similar exception that the
automobile and truck dealers are currently seeking through Senate bill
1020?
We firmly believe there is simply no justification for
departing from longstanding policy to encourage arbitration for
commercial disputes, relieving courts of congestion and saving
precious State resources with a proscriptive ban on the use of
mandatory binding arbitration in the automobile industry.
I will be happy to answer questions that the committee may
have for me.
[The prepared statement of Ms. MacDonald follows:]
Prepared Statement of Jill N. MacDonald
INTRODUCTION
Good Afternoon Chairman Grassley and Members of the Subcommittee.
I'm Jill MacDonald, representing the Alliance of Automobile
Manufacturers (``Alliance'').\1\ The members of the Alliance include
BMW Group, DaimlerChrysler Corporation, Fiat Auto S.p.A., Ford Motor
Company, General Motors Corporation, Isuzu Motors America, Inc., Mazda
North American Operations, Nissan North America, Inc., Toyota Motor
North America, Inc., Volkswagen of America, Inc., and Volvo Cars of
North America, Inc. I am pleased to have the opportunity to appear
before you today to testify on behalf of the Alliance regarding S.
1020, the ``Motor Vehicle Franchise Contract Arbitration Fairness Act
of 1999.''
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\1\ Alliance members are 11 car and light truck manufacturers
representing more than 90% of U.S. vehicle sales. Alliance member
companies have approximately 600,000 employees in the United States,
with more than 250 facilities in 35 states.
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Federal Arbitration Act
The Federal Arbitration Act (FAA) was passed in 1947 to promote
alternatives to the delays, complexities and costs of litigation. Time
and again, courts and Congress have affirmed the validity and wisdom of
that legislation, which has effectively and efficiently resolved
disputes between business entities, lessening the strain on our courts.
Mandatory binding arbitration has become the preferred way of
resolving commercial disputes for the following reasons:
It expedites settlement of disputes;
It promotes harmonious resolution of disputes preserving
relationships;
It provides certainty of forum for resolving disputes;
It is more cost efficient;
It eliminates biased results; and
It provides finality.
Automobile manufacturers want a good working relationship with
their dealers and resolving disputes without litigation certainly
strengthens that relationship. In this very competitive industry, it is
also important to resolve any disputes in a timely and cost efficient
way. Therefore, many manufacturers have a procedure for resolving
disputes and a few companies use mandatory binding arbitration.
The Alliance fully supports maintaining the FAA as currently
written. The rationale for passing the Act in 1947 has not changed. In
fact with the demands on our courts today, it is even more important to
preserve alternative dispute resolution, including mandatory binding
arbitration. Dealers and manufacturers who participate in alternative
dispute resolution mechanisms have been satisfied with the process.
Therefore, the Alliance sees no basis for Congress to single out the
automobile industry with a proscriptive ban on the use of mandatory
binding arbitration.
S. 1020: A solution in search of a problem
Motor vehicle franchise agreements are, in general, national
agreements, with standard terms and conditions, which have been
negotiated between each manufacturer and representatives of their
dealers. They define the working relationship between the dealers and
the manufacturer and enhance product distribution. While mandatory
arbitration clauses are not extensively included in manufacturer/dealer
contracts, they provide a useful approach to resolving disputes.
There is no evidence at all to suggest that these clauses are
unfair or have have been abused, and there is no reasonable
justification to prevent their use in motor vehicle dealer agreements.
When these provisions are used, they are generally included after there
is agreement to include them by both--the dealer and manufacturer. In
fact, in one instance the clause was included at the specific request
of the dealers. They encourage the parties to talk and attempt to
resolve issues in advance. They were designed to encourage a better
working relationship between the parties, rather than encouraging
litigation.
Attachment 1 is a current chart showing the limited number of
franchise agreements with mandatory binding arbitration clauses
(MBACs). The chart shows that of the 27,274 dealers only 1,891 have
MBAC in their franchise agreements. Of the 1,891 dealers that have
MBAC, 1,572 of the dealers (DaimlerChrysler and Saturn dealers) either
opted to have MBAC in their franchise agreement or supported the
inclusion of MBAC during the founding of the company.
S. 1020 would ban the enforcement of MBACs in dealer franchise
agreements if either party objects. This legislation for some reason
solely applies to motor vehicle manufacturers and dealers. This is
particularly ironic given the fact that a growing number of businesses
including auto dealers are using MBACs with their customers.
Ifarbitration is an appropriate forum for automobile dealers (many of
which are multimillion/billion dollar corporations) to resolve disputes
with ordinary citizens and other small businesses, then it is equally
appropriate as a means of resolving disputes with their manufacturers.
There is simply no reason for Congress to carve out an exemption for a
specified class and as a result to interfere with existing agreements
and potentially prohibit parties from pursuing or being protected by
their established rights under the terms of these contracts.
Proponents of S. 1020 argue that MBAC allows manufacturers to
circumvent laws specifically enacted to safeguard small business
dealers from unfair automobile manufacturer practices. This is simply
not the case. Arbitration is a fair process for resolving disputes and
maintaining business relationships. Moreover, state law is just as
likely to be applied by arbitrator as it is by the state and federal
courts. Some states including Wisconsin and Texas, specifically require
that state law be applied in arbitration.
Constantly changing competitive industry
The automobile industry has changed dramatically in last few years.
Manufacturers are very competitive and constantly looking for market-
based, cost-effective solutions. Most dealers are sophisticated
businesses which now include large public companies openly traded on
the stock exchanges. The future of the industry will undoubtedly
involve further dramatic changes.
Legislation like S. 1020 would have serious implications for the
future use of arbitration as well as on the judicial system. It would
weaken arbitration as an effective means of resolving disputes between
motor vehicle manufacturers and dealers. And it will not make those
disputes between motor vehicle manufacturers and dealers. And it will
not make those disputes disappear; instead, they will be pushed into
courts and state agencies. And, passage of this bill would also
encourage other special interest groups to seek special treatment at a
time when court dockets are becoming more congested and judges are
overworked.
In light of federal preference for arbitration, and in the absence
of any indication of abuse, precluding mandatory binding arbitration
clauses in business-to-business contracts is unwarranted. The FAA has
worked effectively for 40 years and this remedy for dispute resolution
should continue to be a viable tool for the future.
[GRAPHIC] [TIFF OMITTED] T2661A.001
Senator Grassley. Thank you.
Senator Feingold, I think we will go with 5-minute rounds,
and I will start. I think I will start with Ms. MacDonald and
Ms. Lajdziak. And, Mr. Fondren, you might want to listen to
their answers because I might want you to respond.
Auto manufacturers argue that S. 1020 is unnecessary
because most dealer franchise agreements do not contain
mandatory arbitration and binding clauses. If that is the case,
this legislation should have limited impact and, contrary to
what some may argue, ``interfere with few existing
agreements.'' If most dealer franchise agreements don't contain
these clauses, how would prohibiting their inclusion in these
franchise agreements have any significant impact on existing
agreements beyond those few that currently contain the clauses?
Ms. MacDonald. Well, if I may, with respect to Saturn, it
is 100 percent of their dealers; therefore, it is going to have
a significant impact in the way that they currently do business
and have chosen to do business, the same thing with respect to
nearly half the Daimler-Chrysler dealers in the United States.
So there are going to be significant impacts on those existing
agreements.
We also don't think that down the road there should be an
absolute foreclosure of the use of mandatory binding
arbitration. Voluntary arbitration at the time the dispute
arises is not likely to end up in the use of arbitration very
often. So I think long term there is a concern, even though
today you are correct, 93 percent of the agreements don't have
it. But it is of significant importance. And, Jill, you may
want to----
Ms. Lajdziak. Chairman Grassley, if I may make a comment,
we really believe that it would change the relationship that we
have with our retailers. When you know that you are going to
solve problems within your family, you continue to work through
to find win/win resolutions. And we believe such a change in
our agreement changes the relationship with our retailers.
Senator Grassley. The purpose of my question was that this
was a statement that was made by manufacturers as we were doing
preliminary work for this hearing. Mr. Fondren?
Mr. Fondren. Mr. Chairman, I agree with the premise that if
they are correct and there are not many covered and there is no
intent to do so, certainly it would not have an impact on those
that have not. It certainly would in the future--as you know
from my testimony, sir, I think substantially more dealers are
covered than as indicated by representatives of the
manufacturers.
Consistently over the last several years, more and more
manufacturers have invoked mandatory binding arbitration. Ms.
MacDonald in her testimony pointed out that Wisconsin and
Texas, for example, have laws that require the application of
State law. Manufacturers in many instances have agreed to those
laws, and yet are willing and able to avoid their circumstances
and to circumvent those laws by mandatory binding arbitration.
The trend has been steadily on the part of manufacturers to
add those to the agreements to deny the rights granted by
States like Texas, Wisconsin, and other States throughout the
country.
Senator Grassley. Mr. Holcomb, do you believe that States
should be allowed to fashion their own mechanisms of addressing
alternative dispute resolution without a Federal mandate? And
then, secondly--so I don't interrupt you--how well has the
Virginia alternative dispute resolution process worked,
especially in relationship to the Saturn dealerships?
Mr. Holcomb. Mr. Chairman, one thing that I learned when I
was staff for the committee up here under Senator Thurmond, a
strong believer in States' rights. Yes, sir, I believe that the
States should be allowed to protect their citizens through
promulgating of regulations and laws.
As I stated in my testimony, I think our system has worked
tremendously well.
Senator Grassley. You say that for Saturn, too, Saturn
dealerships? Or don't you have a focus just on that segment?
Mr. Holcomb. Well, Mr. Chairman, we have no--we can't
testify on the Saturn dealers because, since they have binding
arbitration, their dealers cannot exercise the statutory rights
given to other dealers in Virginia.
As I stated in my testimony, 46 dealers filed a complaint
with us; only two of those--or eight of those led to hearings,
and two of them led to circuit court. So the testimony that
appeals can go on for years and years and years, I would state
that the witness may want to check her facts a little bit
better, because we have only had two appeals in 4 years.
Senator Grassley. Back to Ms. Lajdziak and Ms. MacDonald, I
hope that we can all kind of agree as a common-sense approach
that arbitration is a very cost-effective way to resolve
disputes. Why would providing a mechanism that allows each
party to choose this clearly more efficient method after a
dispute arises weaken arbitration? And if the advantages of
arbitrating disputes between auto dealers and manufacturers
over litigation are obvious and numerous, shouldn't these
advantages be just as obvious after the dispute arises as
before the dispute? And then, lastly, with the advantages of
arbitration over litigation, why are auto manufacturers opposed
to allowing a dealer to make a post-dispute choice between
whether to arbitrate that dispute?
Then, Mr. Shack, you may want to listen and comment.
Ms. MacDonald. If I can put this in the context, I think
the concern with respect to permitting the choice of going to
arbitration or using some other mechanism or go to court at the
time the dispute arises sets up two things. First of all, there
is never any clear understanding precisely what form you are
going to resolve your disputes in or how you are going to do
it.
Secondly, there may be a perception--and I think there
frequently is a perception--that the State forum may be a
friendlier place, in other words, may be more predisposed to
the dealer's position than to the manufacturer's position. The
reason why we have diversity laws, permit diversity in things
to be moved to Federal court.
I can say from my experience at Ford Motor Company that
with voluntary binding arbitration for termination cases in the
Ford sales and service agreement that has existed since 1972,
and over the last 28 years it has been selected by the dealers
three times, I can categorically say we have had--Ford had more
issues with dealers than three, and they ended up in State
courts and before State agencies.
I think the fact of the matter is, if it is at the time
that there may not be an understanding among a broad groupof
dealers that arbitration really does work in everybody's favor, and
that it just would not be selected. I think that is a strong issue. And
if it is not going to be utilized, then we are back to the same issue
of crowded court dockets and delays, and that is particularly important
because the State laws enjoin the manufacturer without any of the
safeguards that you normally see when a mandatory injunction is issued
until after the processes have been completed so that you may not be
able to terminate a dealer who was engaged in some kind of consumer
fraud for years and have to continue to do business with them.
But I would like to give Ms. Lajdziak an opportunity just
to respond with respect to Saturn.
Ms. Lajdziak. With respect to Saturn, Chairman Grassley, it
was the desire of Saturn and the retailers to have the bounds
of our agreement applied consistently for all retailers. And
mediation and binding arbitration consistently applied, it was
the right thing to do, again, to solve problems within the
family when all of the decisions were jointly made to begin
with in the bounds of our agreement.
We also believe that it would jeopardize, if we went down
another path, the long-term relationship that we have, and we
want to stay focused on bringing quick resolve to our issues,
to work very hard to bring resolve to them--if we can't, we
would proceed to mediation and arbitration--but to bring
resolve to issues because, at the end of the day what we want
to do is continue to take care of the consumer in the best
possible way in the marketplace. That is our end game, not
being tied up in a court system.
Senator Grassley. Mr. Shack, would you like to comment?
Mr. Shack. I would like to comment on two of the--
fortunately, I have been on both sides of it. I was a Ford
dealer, Ms. MacDonald, for 22 years, and I have had the
opportunity to be involved in the process. The difference is
with the court system with Ford, there was a choice for me, and
whenever I had a dispute, I was able to settle it.
With Saturn, there is no choice. You are forced into the
binding arbitration. It is a ``take it or leave it'' deal, and
once you are in, there is no further remedy.
What I am most concerned about with the Saturn agreement is
that all of the people that are involved in the decisionmaking
process have economic ties to Saturn. There are two Saturn
employees. Well, their impartiality should be very obvious.
Then there are two Saturn retailers that are hand-picked by
them in a pool. If I am picking a pool, I am certainly not
going to pick anyone that is going to be contrary to my wishes
as a manufacturer.
And this family relationship thing that Ms. Lajdziak
describes simply isn't so. Either you want to be a profitable
Saturn dealer, you sign the agreement, or you don't. It is as
simple as that. And most of the people that sign the agreement
chose to do so on that basis. And, again, there were no
retailers when these agreements were put together. That was a
select group of people put together to put an agreement
together that really did not understand the effects of it. And
Mr. Woods and I are the people that challenged it all the way
through the system, so we know full well the inequities
involved in the way that it is done.
Senator Grassley. Thank you.
Senator Feingold.
Senator Feingold. Thank you, Mr. Chairman.
Senator Grassley. Did you get a chance to make your opening
statement?
Senator Feingold. I did, and I thanked you many times
during that statement for holding this hearing. I sincerely
believe that this is a great step forward on this issue, and I
am grateful for your leadership on it. And this proves that we
are not the same person because we are in the room at the same
time at this point.
[Laughter.]
Let me first also thank all the witnesses. I think this is
an ideal way to talk about this, to have the different sides
here. And I would like to just make one quick comment on
something Ms. MacDonald said. The fact that only three times
since 1972 did the dealers voluntarily opt for arbitration is
an awful strong testament to just what a big thing it is to
give up that option. So I think that is something that could be
interpreted either way.
But I would like to follow up on what both Ms. MacDonald
and Ms. Lajdziak said about the problems of having a voluntary
arbitration system. You mentioned issues of consistency, of
being sure what the forum of procedure would be, I believe, and
the time frame. Why couldn't all those issues be set forth in a
voluntary arbitration mechanism in your agreements where all
that is laid out, if you seek the arbitration approach, these
are the rules, if you don't, you go to court? It seems to me
that perhaps all of those concerns could be addressed in the
context of voluntary arbitration.
Ms. Lajdziak. Again, Senator, if I may make a comment, we
really believe that you are not going to work as hard to
resolve your problems and it will ultimately change your
relationship in your partnership, and that is why we have
chosen--when you are creating the business together, when
anything that affects the retail network is jointly made with
Saturn retailers, then we think that you can solve the problems
together, and you will work very hard to bring resolution to
problems.
Senator Feingold. Ms. MacDonald.
Ms. MacDonald. Maybe I can answer that question best by
talking about a process that we put together in the State of
Wisconsin with working with the Wisconsin Auto Dealers
Association, and that is, we came together a number of years
ago and agreed on legislation that included a special Wisconsin
arbitration plan, and we worked very hard at putting that
together. And the ideal was to have dealers and the State
manufacturer representatives be the arbiters and be trained to,
in fact, pursue the arbitration.
Unfortunately, there has not been--it has not, even though
it was decided by both parties, proved to be popular at the
time that disputes arise. And as a consequence, there was a
great deal of effort put forward, and it just has not been
utilized. And I can't indicate to you any way, shape, or form
why or why not, but I think that if these are all left to be
voluntary, it is a situation in which they probably in the
context of auto manufacturer relationships will not be used.
Senator Feingold. Maybe Mr. Fondren would like to respond
to these concerns.
Mr. Fondren. Senator, I think that one of the most
significant problems underlying the attitudes that have
beenexpressed is the fact that the agreements themselves are so one-
sided, so skewed in favor of the manufacturer and against the dealer,
provisions like automatic termination without notice at time of death,
inability to sell or buy a dealership either to or by a qualified
person, the right to unilaterally modify or change the agreement.
Certainly there is a law in Wisconsin and there is a law in
Texas that prohibits that, but under mandatory binding
arbitration, looking at the four corners of the agreement
itself, which is what an arbitrator typically does, and if he
is ordered by law to follow the law of Wisconsin or Texas,
fine. But if he doesn't, there is no appeal.
Senator Feingold. Fair enough. Let me switch gears and ask
Mr. Fondren or Mr. Shack a question about some other aspects of
this question. Today you have expressed your concerns about the
mandatory arbitration clauses that are included in dealer
franchise agreements. Do you include such clauses in your sales
agreements with customers?
Mr. Fondren. In Texas we do not. We very strongly encourage
and urge our dealers not to do so.
Senator Feingold. So would you agree that some of the same
concerns that you express about these clauses would apply on
the other side of the transaction, in car sales by dealers to
consumers, and that sales contracts with consumers should not
contain mandatory binding arbitration clauses?
Mr. Fondren. I personally agree with that, sir. The
National Automobile Dealers Association has adopted a
resolution--not having all of the facts about all of the
legislation we are talking about, but already in advance
agreeing that they would not oppose legislation in other pre-
dispute adhesion contracts. It is just wrong.
Senator Feingold. Do you know how prevalent this practice
is with regard to customers and dealers?
Mr. Fondren. So far as I know, sir, it is limited. It does
happen in some jurisdictions. I think the primary reason that
it has developed in some areas is because of the fear and the
immediacy of class action lawsuits over small claims, and I
think that that has been the driving factor.
I know that in some employment contracts it is also
included, but as a general rule throughout the United States,
it is not a major factor. That doesn't mean it shouldn't be
dealt with, but it is not a major factor in my opinion.
Senator Feingold. Mr. Shack, any comments on that?
Mr. Shack. Yes; in my dealership contracts, the answer is
no. As it relates to my opinion of the relationship between the
dealer and the customer, I think there should be choice in that
matter where they are not forced into the same situation. So I
would not seek a different remedy for my customers as I do for
myself.
Senator Feingold. I appreciate that answer very much from
both of you because I think one of the themes of this entire
hearing is that, generally speaking, mandatory arbitration
agreements between parties with unequal economic power is just
something we ought to get away from. And with that I see my
time has expired.
Senator Grassley. OK; Senator Session? And then if it is
all right with my colleagues, I am going to go on to the second
panel after Senator Sessions is done.
Senator Sessions. Mr. Chairman, I think Senator Feingold is
raising a very important point. I think there is a place for
arbitration clauses, and I think maybe the Federal law needs to
be looked at some more to see whether it is appropriate--as a
matter of fact, I have some serious reservations about the
present state of Federal law, and I think it can be improved.
It certainly is question--it is most questionable when you have
uneven bargaining positions such as perhaps an illiterate car
buyer and a car dealer. But most of these automobile
dealerships now, some if not all, most, many are multi-million-
dollar organizations that have high-paid attorneys when you
entered into those contracts, and they want you and you want
them, or you wouldn't make the deal, presumably. And I find it
difficult to justify a special exemption for dealers.
Now, I know you can have some adverse bargaining position
there. My father made the mistake, when I was in junior high
school, of selling his country store and buying an
International Harvester dealership in a small town. I was the
parts man and worked in the shop and that kind of thing, every
hour I had a chance to do that. But International Harvester
decided to close all these small dealerships, and it was a bad
time. It was not good. He did not have an economic equal
footing. But I don't think he ever thought about suing anybody.
If they didn't want him, then that was the way life was, I
guess. And we took it and went on with our business.
But I would just say that I am real troubled about this,
Mr. Chairman. I think we have got to go very carefully before
we would do this rapidly. As a matter of fact, a number of
automobile dealers in my State talked to me about it, and I
said, Well, you are the same people that are asking me to
protect you from plaintiff lawyers and that kind of thing, and
now you want to sue the manufacturers.
And I have a letter here from Mr. Jerry Beasley, Alabama's
most well-known trial lawyer, former lieutenant governor, one
of the Nation's--ranked by Forbes as one of the top-earning
lawyers in America. And he wrote in his newsletter recently
that he calls the National Automobile Dealers special alert
that encourages all dealers to support 1020 ``mind-boggling.''
He goes on to say that it is shocking that NADA opposes
arbitration in Congress but has pushed binding arbitration down
the throats of customers of these very dealers throughout the
country.
Now, whether he is biased or not--and maybe that is not a
totally accurate summation of it, but I do think we are in a
situation in which I believe there is a place for arbitration.
I find it less defensible when you are talking about an
automobile dealer dealing with a manufacturer.
Does anybody want to comment on my comments?
Mr. Fondren. I would first say, Senator, that Mr. Beasley
is in error on two counts. The notion that the National
Automobile Dealers Association--and they certainly can speak
for themselves, but the notion they have crammed or even
supported the inclusion of mandatory binding arbitration in
consumer contracts is just an error. He is wrong.
Senator Sessions. Well, it is being done in a lot of
States, don't you agree?
Mr. Fondren. It is being done in Alabama, as I understand
it. It is not done in many jurisdictions, in my opinion.
Senator Sessions. Are you saying--I think, wouldn't you
agree that there are a number of States where
automobiledealers--maybe not all--that use the arbitration clauses in
their contracts?
Mr. Fondren. Well, speaking from the only jurisdiction of
which I have intimate knowledge, we do not use it in Texas.
There may be a few dealers, but it is discouraged strongly by
the dealer body and by the association in the State of Texas.
That is the one, of course, that I am familiar with.
Senator Sessions. Well, I would just say, Mr. Chairman, I
understand your concerns. I have talked with automobile dealers
who are concerned about the big manufacturers and their
leveraged position. But I think the issue is a big one. My
concern is dealing with it one issue at a time. We probably
ought to deal with it in an overall piece of legislation.
But I won't belabor the point. I am sorry to be late, Mr.
Chairman.
Senator Grassley. Thank you very much, Senator Sessions.
Thanks each of you on the first panel for participating. We
appreciate it very much, and you may expect some questions. I
had a couple that I wasn't able to ask that I may submit for
answer in writing. Thank you all very much.
Ms. MacDonald. Thank you, Mr. Chairman.
Ms. Lajdziak. Thank you, Mr. Chairman.
Mr. Holcomb. Thank you, Mr. Chairman.
Mr. Fondren. Thank you, Mr. Chairman, Senator Feingold,
Senator Sessions.
Senator Grassley. Thank you.
I would now ask our second panel and last panel to come to
the table. The first two witnesses that we are going to hear
from will be discussing mandatory binding arbitration and
consumer credit. Our final two witnesses will be discussing S.
121, which deals with arbitration in cases of employment
discrimination.
Our first witness is Patricia Sturdevant. Ms. Sturdevant is
executive director and general counsel of the National
Association of Consumer Advocates.
Next we will hear from Eric Mogilnicki. Mr. Mogilnicki is
testifying on behalf of the American Bankers Association,
Consumer Bankers Association, the American Financial Services
Association, and the National Retail Federation.
Our next witness is Lawrence Lorber. Mr. Lorber represents
the U.S. Chamber of Commerce, and he is also a partner in the
Sonnenschein, Nath and Rosenthal firm.
And our last panelist, Lewis Maltby, is president of the
National Workrights Institute, Inc., and the director of the
American Civil Liberties Union National Task Force on Civil
Liberties in the Workplace.
We will start with Ms. Sturdevant.
PANEL CONSISTING OF PATRICIA STURDEVANT, EXECUTIVE DIRECTOR AND
GENERAL COUNSEL, NATIONAL ASSOCIATION OF CONSUMER ADVOCATES,
WASHINGTON, DC; ERIC MOGILNICKI, WILMER, CUTLER, AND PICKERING,
ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION, CONSUMER BANKERS
ASSOCIATION, AMERICAN FINANCIAL SERVICES ASSOCIATION, AND THE
NATIONAL RETAIL FEDERATION, WASHINGTON, DC; LAWRENCE Z. LORBER,
U.S. CHAMBER OF COMMERCE, WASHINGTON, DC; AND LEWIS L. MALTBY,
PRESIDENT, NATIONAL WORKRIGHTS INSTITUTE, PRINCETON, NJ
STATEMENT OF PATRICIA STURDEVANT
Ms. Sturdevant. Thank you, Senator Grassley.
From our perspective, consumer protection in this country
is in jeopardy, particularly in the important areas of credit
and finance. Consumers' ability to enforce the rights which are
afforded them under Federal and State consumer protection laws
is seriously threatened by the proliferation of arbitration
clauses in contracts of adhesion. All across the country,
financial institutions are unilaterally drafting and inserting
in their form contracts standardized clauses which provide that
consumers agree to resolve any disputes by arbitration and to
waive their rights to trial by judge or jury and their right to
participate in a class action.
The purpose of these clauses very simply is to insulate
unlawful, unfair, or deceptive practices from any meaningful
review by eliminating the remedies that deter wrongful conduct.
Arbitration does not merely substitute an alternative forum,
but it limits the availability of substantive rights and
statutory remedies. By requiring arbitration, the financial
institutions would make it impossible for consumers to
challenge lucrative, unlawful business conduct and relegate
them to a forum where they cannot obtain discovery, they cannot
secure injunctive relief against unlawful practices, they
cannot receive awards of punitive damages, and they cannot
proceed on behalf of a class.
These clauses are being used as a license to gouge
consumers and exclude lucrative practices from oversight and
review. Two recent examples are illustrative. First, American
Express recently notified its card holders by a statement
stuffer of numerous changes in their account agreement which
would increase the charges imposed on consumers. First, they
increased the annual percentage rate on any payment which is
past due to 23.99 percent. That is about triple the prevailing
rate for home mortgage. They also increased the fees for stop-
payment orders and returned checks to $25 each. They increased
the cash transaction fee to 3 percent of the amount advanced
with the $3 minimum and no maximum so that getting an advance
of $500 would cost thecard hold $15. Finally, they imposed a 2
percent charge above the prevailing exchange rate for any transactions
made in foreign currencies.
At the same time that it imposed all these additional
charges on card holders, American Express imposed an
arbitration requirement. This deprives consumers of any access
to the courts. The arbitration clause is retroactive, and it
purports to cover claims arising even from prior agreements. In
addition, it applies to claims of every kind, including those
based on fraud or on deception in the solicitation and the
advertising of accounts. It also covers conduct by third
parties, like credit insurance providers or debt collectors,
insulating the conduct of those parties from any meaningful
review. The clause further provides that there will be no
discovery and no class actions are allowed. Plainly put, the
clause allows American Express and related companies to lie to
and cheat their customers and violate consumer protection laws
with impunity.
Saks Fifth Avenue also recently notified its customers by a
statement stuffer of changes to their accounts. Saks imposed
similar additional charges, increasing the finance charge,
increasing the late charge, shortening the grace period before
a charge is imposed, and increasing the returned-check fee to
$25. Again, the Saks clause provides that there will be no
discovery, so the consumers have no ability to obtain the facts
necessary to prove their claim and no right to participate as a
representative or a member of the class. Use of the card after
receiving the statement stuffer is said to indicate the
consumer's consent to these new terms, including the
arbitration clause. Yet the evidence in the only case that I
have tried involving in an arbitration clause sent out by
statement stuffer is that the bank--in that case, the Bank of
America--knew that no more than 4 percent of the card holders
would read these statement stuffers, let alone understand the
provisions.
Consumer advocates are very concerned about the potential
for injustice in the arbitral forum which can be very unfair to
consumers and is deficient in a number of very significant
ways.
First, discovery is discretionary, not a matter of right,
so consumers may not be able to obtain the documents they need
to prove their claim that a company has violated the law.
Second, arbitrators do not need to explain the basis for
their decisions, and they don't need to follow the law, so
consumer protection statutes and case law can be simply
ignored.
Third, the proceedings are secret, not public, so
challenged practices won't be brought to the attention of the
public generally or to regulatory authorities, which allows
wrongful conduct to continue unchecked.
Additionally, an arbitrator does not have the power to
order injunctive relief, so that a consumer who is victimized
by a widespread business practice will not be able to obtain an
order that the company cease engaging in its wrongful conduct.
Finally, an arbitrator's decision is immune from judicial
review, except on very narrow grounds, such as fraud by the
arbitrator, and decisions are final and binding even if they
are wrongly decided on the facts or incorrect as a matter of
law and they result in manifest injustice.
The simple fact is that arbitration is being used to give
financial institutions an unfair advantage, and that is a
powerful argument why they should not be allowed in pre-dispute
contracts between parties of unequal bargaining power. While it
may be true that arbitration is speedier on some occasions, we
in this country do not need a system that results in speedy
injustice.
Thank you.
[The prepared statement of Ms. Sturdevant follows:]
Prepared Statement of Patricia Sturdevant
MANDATORY ARBITRATION: A THREAT TO ACCESS TO JUSTICE
Consumer protection in this country is in jeopardy, particularly in
the extremely important areas of credit and finance. Consumers' ability
to enforce the rights afforded them under federal and state consumer
protection laws is seriously threatened by the proliferation of
arbitration clauses in contracts of adhesion. All across the country,
financial institutions are unilaterally drafting and inserting in their
form contracts standardized mandatory, binding arbitration clauses
which provide that consumers agree to resolve any disputes by
arbitration, and to waive their rights to trial by judge or jury, and
their right to participate in a class case. Arbitration clauses have
been adopted by a number of financing entities, including credit card
issuers such as American Express, First USA, and the Discover Card;
retail stores such as Saks Fifth Avenue and Sears; finance companies
such as ITT, Beneficial, Thorpe, and Greentree; and by sellers and
financers of manufactured homes and automobiles.
The purpose and intent of such clauses is to insulate unlawful,
unfair, or deceptive practices from any meaningful review by
eliminating the remedies that deter wrongful conduct. As these
financial institutions well know, arbitration does not merely
substitute a different or alternative forum for a court, judge, and
jury, but limits the availability of substantive rights and statutory
remedies. By requiring arbitration, the financial institutions intend
to make it impossible for consumers to challenge lucrative business
misconduct by relegating consumers to a forum where they cannot obtain
discovery, secure injunctive relief against unlawful practices, receive
awards of punitive damages, or proceed on behalf of a class.
These clauses are being used as a license to gouge consumers and
exclude lucrative business practices from regulation, oversight, or
effective review. Two recent examples illustrate the point.
I. American Express notified its cardholders of a number of costly
changes to their agreements by statement stuffers, effective June 1,
1999. American Express:
Increased the annual percentage rate of interest on accounts where
any amount is past due to 23.99%, about triple the prevailing rate for
home mortgages.
Increasd the fee for stop payment orders to $25.00.
Increased the fee for returned Optima checks to $25.00.
Increased the cash transaction fee to 3% of the amount of each
transaction, with a minimum of $3.00, and no maximum, so that a cash
advance of $250 would cost $7.50, and a $500 advance, $15.00.
Imposed a 2% charge above the prevailing exchange rate on
transactions made in foreign currencies.
At the same time, in an attempt to ensure that no effective
challenge could be made to the legality of these increased charges,
American Express imposed an arbitration requirement for consumer
disputes that deprives consumers of access to the courts. Its
arbitration clause is retroactive and purports to cover claims arising
from prior agreements. Moreover, it applies to claims of every kind,
including those based on deception or fraud in advertising or
describing the account and those based on intentional torts, statutes,
common law, or equity. The clause also covers the conduct of third
parties providing products or services on the account, such as credit
insurance companies and debt collectors, thereby preventing the
legality of their conduct from being effectively challenged. Plainly
put, the clause allows American Express and the companies who sell
credit insurance to lie to and cheat their customers and violate
consumer protection laws with impunity.
The clause further provides that all claims will be decided by the
National Arbitration Forum, the there will be no discovery, and that no
class actions will be allowed. As further insurance that the clause
will be used as it is intended, to protect only American Express, it
provides that an artibrator's award will be final and binding, with the
exception that if an award exceeds $100,000, any party can appeal to a
panel of three arbitrators. So if a consumer does prevail, the company
gets a second bite at the apple.
II. Saks Fifth Avenue, a major national retail chain, notified its
customers of changes to their accounts, effective July 1, 1999. Saks,
like American Express, also took the opportunity to increase its
charges, in the following ways:
Increased the finance charge to 21.6%, again nearly three times the
current prevailing rate for home mortgages.
Increased the late fee to $15.00. Because this fee is imposed in
addition to finance charges at 21.6% until the payment is received, it
is a double charge and pure profit.
Reduced the grace period to avoid a late charge to five days.
Increased the returned check fee to $25.00, even though it
continues to receive finance charges until the check is made good. The
bank will impose its own charges for a check drawn on insufficient
funds.
Increased the minimum finance charge to $0.50, even when it is
actually less than that.
The Saks clause specifies that either party may elect arbitration,
and that there will be ``no discovery (i.e., the pre-trial fact finding
process) for the dispute,'' no classactions, and no right to
participate as a representative or member of a class. The provision
goes on to state that the clause requires arbitration at Saks'
election, that it intends to request arbitration for all disputes, and
when it does so that the dispute will be arbitrated even if the
customer does not want arbitration. Use of the card after this stuffer
is sent to said to indicate the customer's consent to these new terms,
including the arbitration clause.
Consumer advocates are concerned about the potential for injustice
in the arbitral forum, which can be very unfair to consumers and is
deficient in a number of ways:
Discovery is discretionary, not a matter of right, so consumers may
not be able to obtain the documents they need in order to challenge a
company's misconduct.
Arbitrators need not explain the basis for their decisions or
follow the law, so consumer protection statutes and case law can be
ignored.
The proceedings are secret, rather than public, so challenged
practices will not be brought to the attention of the public generally
or to regulatory authorities, making it more difficult for abusive
practices to be uncovered or eliminated.
An arbitrator does not have the power to order injunctive relief,
so that a consumer victimized by a widespread business practice will
not be able to obtain an order requiring that the wrongful practice
cease.
An arbitrator's decision is immune from judicial review, except on
very narrow grounds, such as fraud by the arbitrator, and decisions are
final and binding even if they are wrong on the facts, incorrect as a
matter of law, and result in manifest injustice.
Another troubling aspect of arbitration is its undue expense.
Unlike the court system, arbitration requires that the parties pay high
filing fees, which escalate based on the amount of recovery sought, as
well as daily fees to the arbitrator(s), and fees for hearings,
processing, and administration. The costs of arbitrating may exceed the
costs of litigation, and in consumer cases are often in excess of the
amount in dispute. The arbitration clauses described above do not allow
consumers to sue even in small claims court and significantly increase
the expense of proceeding to challenge a charge or practice they
correctly believe is illegal and unfair.
The simple but unpleasant fact is that arbitration is being used to
give financial institutions an advantage over consumers. It is marketed
as a way to avoid the costs and risks of the jury system, meaning that
class action lawsuits and punitive damage awards can be avoided.
Indeed, some providers of arbitration services offer an unlevel playing
field as an inducement to financial institutions to utilize their
services. The National Arbitration Forum, which was established as a
mechanism for resolving ITT Consumer Financial Services' claims against
its consumer borrowers across the country by default judgments in
Minnesota, has widely distributed a Legal Memorandum which concludes
that arbitrations under its Forum rules may not be consolidated into
class actions unless all parties consent.
These mandatory arbitration clauses are imposed on unsuspecting
consumers, without their knowledge, negotiation, or consent. This use
of arbitration clauses infringes consumers' constitutionally protected
rights. Recently, a California appellate court held in Badie v. Bank of
America (1998) 67 Cal. App. 45th 779,806, rev den (Feb. 1999) that,
because the right to a jury trail is a substantial fundamental right,
it cannot lightly be deemed waived, and waiver requires a ``clear and
unmistakable'' or an ``unambiguous and unequivocal waiver'' of that
right. A statement stuffer purporting to change contract terms was
found inconsistent with that requirement and therefore unenforceable.
Applying fictional concepts of consent to adhesionary contracts between
financial institutions and consumers, like Saks is attempting to do,
distorts the law of contract and the arbitration mechanism beyond
recognition.
Arbitration is supposedly favored as a method of resolving
disputes. But that preference is derived from a series of Supreme Court
cases between commercial entities that had bargained for the speed and
efficiency of arbitration, so the court was merely enforcing their
contractual agreement. Arbitration as a method of resolving disputes is
a creature of contract premised on the ability of parties of equal
bargaining power to choose what method of resolving disputes will best
serve their mutual needs. Free choice, meaning actual agreement, is the
foundation of arbitration, and the reason such clauses are enforceable
is because they reflect the bargain between the parties. There simply
is no public policy favoring arbitration as a mechanism of dispute
resolution but only a policy favoring the enforcement of the parties'
freely negotiated agreements. Unilateral imposition of mandatory,
binding arbitration in adhesionary contracts has none of the indicia of
choice, consent, or bargaining. Moreover, unilaterally imposing
arbitration raises troublesome issues for consumer advocates because of
the potential for abuse by institutional interests and the consequent
denial to consumers to access to the courts and to justice.
All of these factors are powerful arguments against the use of
mandatory, pre-dispute arbitration clauses in contracts between
financial institutions and consumers, to which the National Association
of Consumer Advocates is adamantly opposed for the reasons set out in
the Position Paper, which is attached. Although arbitration may, in
some instances, be faster than litigation, there is no public policy
served by a process that results in speedy injustice.
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Senator Grassley. Thank you, Ms. Sturdevant.
Now, Mr. Mogilnicki.
STATEMENT OF ERIC MOGILNICKI
Mr. Mogilnicki. Good afternoon, Mr. Chairman and members of
the subcommittee. My name is Eric Mogilnicki, and I am a
partner at the law firm of Wilmer, Cutler and Pickering. I
appear today on behalf of the American Bankers Association, the
Consumer Bankers Association, the American Financial Services
Association, and the National Retail Federation. Each of these
groups deeply appreciates this opportunity to provide the
subcommittee with information regarding the enormous benefits
of using arbitration to resolve consumer disputes.
For over 75 years, there has been a strong Federal policy
in favor of arbitration. That policy was embodied in the
Federal Arbitration Act because it was clear, even in 1924,
that litigation was consuming too much of the time, effort, and
money of businesses and individuals alike. The Senate Judiciary
Committee report that was prepared in connection with the
Arbitration Act noted that, ``[t]he desire to avoid the delay
and expense of litigation persists. The desire grows with time
and as delays and expenses increase. The settlement of disputes
by absolutely appeals to * * * business * * * as well as to
individuals.''
That report went on to document the fact that arbitration
took weeks, where litigation took years; that the costs of
arbitration were ``trifling'' compared to the expense of
litigation, and that the participants in arbitration--``winners
and losers alike''--were satisfied with the arbitration
process.
All of those conclusions are even more valid today. The
delays and expenses of litigation are enormous. Indeed, this
Congress recently noted in the Y2K Act that there are
individuals who already find the legal system inaccessible
because of its complexity and its expense.
Arbitration is still faster and less expensive than
litigation. Today, arbitration takes less than half the time of
litigation. Arbitration also allows individuals to pursue their
claims without having to pay a lawyer to shepherd them through
the complexities of our court system.
And arbitration still satisfies the individuals whose
claims are resolved. One recent study of securities arbitration
indicated that well over 90 percent of the participants in
arbitration believed their case was handled fairly.
For all of these reasons, the Supreme Court has
consistently upheld the use of arbitration clauses in consumer
contracts. In 1989, the Court explained that ``suspicion of
arbitration * * * has fallen far out of step with our current
strong endorsement of the federal statutes favoring this method
of resolving disputes.''
There are other substantial benefits to arbitration in the
consumer credit context.
First, arbitration agreements give consumers a valuable
right: the right to take financial institutions to arbitration,
and so to have their dispute resolved quickly and
inexpensively. Consumers do not have that right without an
arbitration agreement. For its part, a bank or business that
has agreed to arbitration has forfeited its right to litigate
the consumer's claim. Instead, the financial institution must
accept arbitration and abide by the arbitrator's decision.
Second, consumers who do not want arbitration can avoid it
simply by choosing to do business with one of the many
financial service providers that does not offer an arbitration
clause in their contracts. Dispute resolution is one of the
many areas in which different financial service providers offer
different products and compete for business. A ban on
arbitration agreements would limit the choices available to
consumers.
This issue of choice is a significant difference between
consumer credit contracts and arbitration agreements with auto
dealers and employees who cannot easily avoid the agreement
that is offered to them.
Third, certain disputes will never be heard unless they are
arbitrated. To be sure, some claims are large enough to justify
the costs of litigation. But the vast majority of claims are
not large enough for litigation--even though they involve
disputes that are important to consumers. For such individual
cases, only arbitration offers a cost-effective way of having
the dispute resolved by a neutral third party.
Finally, the Federal Arbitration Act already prevents
abuses of arbitration. If an individual arbitrator proves
biased or improperly excludes evidence, the Federal Arbitration
Act provides for judicial review. The Federal Arbitration Act
similarly permits courts to review and reallocate fees that are
excessive, as is appropriate, and the courts have reallocated
costs when the costs have been deemed to be excessive.
For all of these reasons, and others, the American Bankers
Association, the Consumer Bankers Association, the American
Financial Services Association, and the National Retail
Federation believe that arbitration offers an important way by
which their members can resolve customer disputes fairly and
expeditiously. Each of these organizations welcomes the
opportunity to be heard on this important issue and would
welcome the opportunity to work with the subcommittee and its
staff as its consideration of arbitration continues. We also
ask at this time for an opportunity to supply additional
materials for the record.
Senator Grassley. Is that material available?
Mr. Mogilnicki. No, not presently. No.
Senator Grassley. OK; can you get it to us in just a few
days?
Mr. Mogilnicki. Yes, I will.
Senator Grassley. OK.
And, by the way, the same as for the first panel, your
entire statement beyond your 5-minute summary will be included
in the record, if you submit it.
Mr. Lorber.
STATEMENT OF LAWRENCE LORBER
Mr. Lorber. Thank you, Mr. Chairman. I am Lawrence Lorber.
I am partner in Sonnenschein, Nath and Rosenthal, and I appear
today on behalf of the U.S. Chamber of Commerce, and we greatly
appreciate the opportunity to address this committee and
specifically to address S. 121.
Let me begin by stating a simple proposition: The U.S.
Chamber of Commerce vigorously opposes S. 121. In our view, S.
121 provides a remedy to a now non-existing problem.
In the year 2000, after 9 years of experience with the
Supreme Court's decision in the Gilmer case, we have learned
several things: first, that the courts are almost unanimously
in favor of arbitration and have almost unanimously upheld
mandatory pre-employment arbitration agreements. They have done
so for sound legal and policy reasons, understanding, as they
do, that arbitration, at least in the employment context, is
not foreign but is typical, indeed has existed in employment
for over 40 years.
Second, I think it is important to understand what the
employment context is. As the Congress now knows after the
Congressional Accountability Act was passed, employers are
faced with a multitude of legal proscriptions. It is very
difficult both for employers and employees to understand their
rights. These tend to be overlapping and sometimes confusing,
both with statutory and regulatory impositions upon the system.
However, the employment relationship is an ancient one, and
it consists of an agreement between an employee and an employer
to join together to provide work and to provide a product or a
service. Why should mandatory arbitration be applied to this
system?
First of all, I think it is important to go back to the
Supreme Court's Gilmer decision to understand certain precepts
which the Court stated then and which, as I said, except in one
instance, every court has adopted. The Supreme Court in Gilmer
stated that it is now clear that statutory claims may be the
subject of an arbitration agreement, and we are talking about
both statutory and contractual agreements between employees and
employers.
Secondly, the Supreme Court in Gilmer reiterated the
Supreme Court's prior holding in Mitsubishi and stated that by
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. That is what the law of arbitration stands for
today in the employment context.
Furthermore, the Congress recognized the Gilmer decision
because after Gilmer was issued in March of 1991, the Congress
in October of 1991 enacted the Civil Rights Act of 1991, and
within that Act was Section 118 in which the Congress stated
that, where appropriate and to the extent authorized by law,
the use of alternative means of dispute resolution, including
arbitration, is encouraged to resolve disputes.
Again, every court which has addressed Section 118 has
found that mandatory preemployment arbitration agreements are
consistent with law.
Let me address, however, perhaps the issue of arbitration
and raise questions, at least in the employment context, as to
why arbitration has apparently in some instances been viewed as
a negative and detrimental to the employer's rights.
Well, the notion that employees always lose in arbitration
is simply not so. Data produced by the Securities Industry
Association showed that, for example, from the period 1992
through 1998 in arbitrations conducted under the stock exchange
rules, employees prevailed 41 percent of the time. In
arbitrations conducted under the NASD rules, employees
prevailed 26 percent of the time. In cases that were tried to
the jury in the Southern District of New York, employees
prevailed only 19 percent of the time.
So the notion that this is a system stacked against
employees is simply not true. But more to the point, I think it
has been stated today--and, Mr. Chairman, you havestated it--
that arbitration is, in fact, an expeditious and economical way of
dispute resolution.
Data that we have submitted with our testimony showed that
at least in 1998 there were some 24,000 new filings in Federal
courts involving employment matters, and that doesn't count
State courts. The same data that I cited earlier showed that
resolution from filing to conclusion in the arbitrable forums
took approximately 15 months. A case from start to finish in
the Southern District of New York took approximately 29 months.
Furthermore, let me address the issue, as has been stated,
the employee's right to a day in court. As we all know, in
judicial proceedings employers often and the courts recognize
such things as motions to dismiss and summary judgment. Many
cases, a vast preponderance of the cases that are brought under
those systems, are resolved prior to the employee, in fact,
getting his or her day in court. That system does not pertain
in an arbitration. Employees do get their right to adjudicate
their grievance and have their grievance resolved.
Furthermore, I think it is fair to say that in most
instances, certainly in the employment context, employees don't
wish to spend months and years and thousands and tens of
thousands of dollars waiting for their grievance to be
resolved. They want to get on with their career, and employers,
too, have the same interest in resolving the grievance so that
it can conduct its workplace in an efficient and productive
manner.
For all of these reasons, arbitration is a preferred means
of dispute resolution. It is a means that is growing in
importance, and I think that legislation such as S. 121 would
serve to dramatically stop that growth and place into the court
system some 24,000 new cases a year, which I don't believe the
court system can handle.
Thank you.
[The prepared statement of Mr. Lorber follows:]
Prepared Statement of Lawrence Z. Lorber
The U.S. Chamber of Commerce is the world's largest business
federation, representing more than three million businesses and
organizations of every size, sector, and region.
More than 96 percent of the Chamber's members are small businesses
with 100 or fewer employees, 71 percent of which have 10 or fewer
employees. Yet, virtually all of the nation's largest companies are
also active members. We are particularly cognizant of the problems of
smaller businesses, as well as issues facing the business community at
large.
Besides representing a cross-section of the American business
community in terms of the number of employees, the Chamber represents a
wide management spectrum by type of business and location. Each major
classification of American business--manufacturing, retailing,
services, construction, wholesaling, and finance--numbers more than
10,000 members. Also, the Chamber has substantial membership in all 50
states.
The Chamber's international reach is substantial as well. It
believes that global interdependence provides an opportunity, not a
threat. In addition to the U.S. Chamber of Commerce's 83 American
Chambers of Commerce abroad, an increasing number of members are
engaged in the export and import of both goods and services and have
ongoing investment activities. The chamber favors strengthened
international competitiveness and opposes artificial U.S. and foreign
barriers to international business.
Positions on national issues are developed by a cross-section of
Chamber members serving on committees, subcommittees, and task forces.
Currently, some 1,800 business people participate in this process.
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Senator Grassley. Thank you, Mr. Lorber.
Now, Mr. Maltby.
STATEMENT OF LEWIS L. MALTBY
Mr. Maltby. Good afternoon, Mr. Chairman. Thank you for
inviting me to be here.
I have to admit, uncharacteristic as it may be, that Mr.
Lorber makes a very good point. Arbitration of statutory
employment disputes is not necessarily a bad thing. It is not
necessarily unfair, and it is something that we probably need.
The simple fact of the matter is that most employees cannot
afford to go to court when they have an employment dispute with
their employer. It costs at least $50,000 today to take an
employment case to court, and most employees just don't have
that kind of money even when they have a job, much less when
they just lost their job and are struggling to put the roof
over the head of their children.
But for arbitration to be as useful as it could be, it has
to be fair. I think we could all agree on that. At least, I
hope we can.
Now, sometimes it is said that fairness is like beauty. It
is in the eye of the beholder. But that is not really the case
here. We know what arbitral fairness means. The American Bar
Association has published a point-by-point protocol of due
process standards for employment arbitration. It has been
blessed and reviewed by everyone from manufacturers and
employers' groups to the National Employment Lawyers
Association and the ACLU. There isn't anybody who disagrees
that the protocol is a fair and workable due process standard.
We also know that that standard is generally not being met.
The United States General Accounting Office reviewed existing
employer arbitration systems relatively recently, and what they
found is the majority--the majority--of employers' arbitration
systems did not meet the standards called for by the ABA. And
in some cases, the abuses that creates are absolutely
staggering. Let me just give you one example, not necessarily a
typical one but to show you how bad it can be.
Helen Walters was a legal secretary in a brokerage firm in
California. Her boss called her--and I am sorry for the
profanity, but I have to quote the record. He called her a
``bitch,'' he called her a ``streetwalker,'' he called her a
``hooker.'' He brandished a riding crop in her face in front of
her coworkers. When he wanted to talk to her, he would call
across the crowded trading floor in front of hundreds of
people, ``Hey, bitch, drag your ass over here.'' And he threw
condoms on her desk, knowing as a conservative religious woman
that she would be deeply offended by this. I can't imagine a
more blatant case of sexual harassment. But when she took her
case to the New York Stock Exchange arbitration system, those
arbitrators found that nothing that those employers had done to
her was sexual harassment. They totally exonerated the employer
of any responsibility or liability under those circumstances.
That is simply not the way it has to be.
And what is at stake here is more than just injustice done
to a large number of individuals, although that is extremely
important. What is at stake here is nothing less than the
survival and long-term viability of our employment
discrimination laws. This Congress and the rest of the country
have worked for 40 years to create a workplace free of
discrimination. We passed laws to prevent racial
discrimination. We passed laws to prevent gender discrimination
and sexual harassment, and also disability discrimination and
age discrimination.
But all of that depends upon a workable enforcement
mechanism to mean anything. If those laws can only be enforced
in arbitration systems where the due process rules are not
being applied or the forums are stacked against the employee,
then it is highly questionable whether Title VII and the ADA
and ADEA mean much of anything anymore. We have all invested
far too much in creating a just, discrimination-free workplace
to have it jeopardized by taking away an efficient enforcement
mechanism.
The answer to this dilemma is actually quite simple. All we
have to do is make arbitration voluntary. It is easy to see why
employers so frequently don't make the system fair. They have
no incentive to make the system fair. If the employer stacks
the deck, it can reap substantial financial advantages, and if
it stacks the deck, there is no downside. The employees can't
walk away from the system. You almost have to be crazy not to
stack the deck as an employer under today's law.
But if it were voluntary, everything changes. The only way
the employer can get the employees into the program as it wants
and needs to do is to make it fair enough that the employees
will choose it voluntarily.
Voluntariness is not some sort of ivory-tower impractical
idea. The American Arbitration Association, the oldest and
largest organization of arbitration providing in this country
and in the world, recommends that arbitration be voluntary, not
a condition of employment. At least 12 major American
corporations have voluntarily chosen voluntary arbitration
agreements. Every one of those 12 programs is a success, and by
that I mean a success in the eyes of the management that set it
up.
And voluntariness is also the right thing to do. Obviously,
most conditions of employment can and should be negotiated
between the employer and the employee. But there are some
things that are just too important to leave up to that kind of
process. It is simply wrong--and we all know it is wrong--to
say that your boss could require you to sleep with him or her
to get a job. Your boss can't make you change your religion or
tell you how to vote to get your job. And the right to go to
court is just too important to leave to unequal negotiations.
It has to be beyond the realm like the other important values I
have talked about.
Employment arbitration is here to stay. It is real. It is
the wave of the future. And it could be extremely beneficial.
But it is only going to be beneficial if it is fair, and it is
only going to be fair if it is voluntary.
Thank you.
[The prepared statement of Mr. Maltby follows:]
Prepared Statement of Lewis L. Maltby
Americans need better access to justice. It is no secret that our
courts have become so complex and expensive that it is difficult for
the average citizen to achieve justice through litigation. Alternative
dispute resolution, including arbitration, holds the potential to make
justice more affordable and more available.
This is especially true of workplace disputes, which frequently
involve complex factual and statutory issues. The cost of bringing a
statutory employment dispute to court is at least $50,000. This is far
beyond the financial resources of most people, even when they are
employed. To raise such a sum when one has just been fired and has no
income is virtually impossible. A few people circumvent this economic
hurdle by obtaining counsel on a contingency fee basis. But an attorney
can only afford to accept a case on contingency if the probability of
success is very high and the amount of damages is large enough for the
attorney's share of the final award (generally 35-40%) to compensate
for the substantial number of hours he or she will have to work. Paul
Tobias, founder and past president of the National Employment Lawyer's
Association, testified before the Dunlop Commission that the private
bar rejects at least 95% of those who come to it seeking help. Nor can
federal agencies meet the need for representation. The EEOC, for
example, is able to litigate only 1 out every 200 complaints it
receives. Under these circumstances, the need for additional avenues to
justice in employment disputes is clear.
But it is equally clear that these new methods of access to justice
must be fair. Systematic access to injustice cannot be the goal or the
result of our efforts.
It has been said that fairness, like beauty, lies in the eye of the
beholder. But, fortunately, we now have an objective standard for due
process in employment arbitration. In 1994, the American Bar
Association assembled a national blue ribbon panel to discuss due
process in arbitration and attempt to find common ground. This panel
included representatives of all concerned groups, including management,
labor, the dispute resolution community, and civil rights groups. I was
privileged to serve on this panel representing the American Civil
Liberties Union. In 1995, this group unanimously endorsed a set of due
process principles, known collectively as the ADR Protocol.
The Protocol includes the following requirements:
1. A neutral and unbiased arbitrator
2. Right of the employee to an equal role in selecting the
arbitrator
3. Right to counsel
4. Reasonable discovery
5. Identical remedies to those available in court
6. A written opinion.
These requirements are not difficult to meet. The American
Arbitration Association, the world's largest provider of arbitration
services, modified its rules to make these six points part of its
mandatory operating procedures in 1996. After 4 years of experience,
AAA has reported no difficulties with complying with these rules.
But many employers' ADR systems do not meet these requirements.
When the U.S. General Accounting Office examined existing employment
arbitration systems, they found that the majority did not provide the
due process called for in the Protocol. A more recent survey published
in the Dispute Resolution Journal reached the same conclusion. For
example, 50% of the plans studied did not authorize the arbitrator to
award the full range of legally authorized remedies.
There seems to be no limit to the injustice that is produced when
due process standards are absent. Helen Walters was a trading room
secretary at a California brokerage firm. Her boss called her a
``bitch'', a ``hooker'', and a ``streetwalker'', and a ``f---ing
idiot''. When he wanted to talk to her, he told her to ``drag your
ass'' over to him. He brandished a riding crop at her and threw condoms
on her desk. It would be hard to imagine a more blatant case of sexual
harassment. Yet when Walters took her case to arbitration, the
arbitrators ruled in favor of her employer.
But the harm to individual employees, as bad as it is, does not
reveal the true extent of the damage we face if the problem remains
unaddressed. Our entire national effort toward a workplace free of
discrimination is at risk. As every lawmaker knows, in order for a
statute to be effective it must have a clear statement of the rules it
establishes and an effective enforcement mechanism. Without a method of
enforcement, a statute is merely an empty admonition which people are
free to disregard.
This is the situation we face regarding our carefully constructed
and vitally important civil rights laws, including Title VII, ADEA, and
the ADA. If employees are required to surrender their right to take
violations of civil rights laws to court and the arbitration systems to
which they must turn do not provide due process, our nation's four
decade struggle to create a workplace free of discrimination will be
severely compromised.
This risk is especially great in light of the number of employers
turning to arbitration. Private arbitration was virtually unknown
outside the realm of collective bargaining until the 1980's. By 1995,
the U.S. General Accounting Office found that 8.4% of all employers had
established an arbitration system, and that 10% more were actively
considering it. Only 2years later, the GAO found that the use of
arbitration had more than doubled; 19% of all employers were now using
it. All the available evidence indicates that employment arbitration
has continued its spectacular growth. At this rate of increase, the
majority of employers have either already adopted arbitration programs
or soon will have. Employment arbitration is well on its way to
replacing the courts as the primary method of resolving statutory
employment disputes. If arbitration does not provide justice to those
who have been victims of racial discrimination or sexual harassment,
our civil rights laws are in great danger.
The issue we face is how to encourage the growth of this
potentially valuable new source of access to justice while ensuring
that it is fair. The answer is to make arbitration voluntary. The
courts should enforce agreements to arbitrate only when they represent
the voluntary choice of both parties.
This is not the law today. Following the Supreme Court's decision
in Gilmer v. Interstate/Johnson Lane Corp., federal courts have
consistently held that employers may require all employees to sign an
agreement to arbitrate as a condition of employment. While a few highly
marketable employees may be able to accept another offer if they object
to this provision, for most people this is no choice at all. They have
rent to pay and children to feed and must accept whatever terms a
prospective employer offers. Even employees who are in high demand lose
their ability to exercise meaningful choice as arbitration becomes
standard industry practice.
The reason so many arbitration systems fail to provide due process
is because employers have little incentive to make them fair. In fact,
it is in an employer's best financial interest to make the system
unfair. By failing to provide an impartial arbitrator, or eliminating
discovery, an employer can win many cases in which it broke the law and
would have lost in court. By restricting the damages an arbitrator can
award an employer often reduces the size of the award it must pay in
the cases it loses. These financial incentives are substantial.
There are no offsetting financial incentives encouraging employers
to be fair. The employer's objective in setting up an ADR program is to
get as many as possible of its employees to enroll. When employees have
no choice about enrolling, the employer can reap the financial rewards
of stacking the deck with no loss in enrollment.
But if the agreement to arbitrate had to be a voluntary choice on
the employee's part, the entire system of incentives would change. An
employer who chose to cut corners on due process would pay the price of
having employees opt out of the arbitration system entirely. The only
manner in which employers could achieve the widespread participation
they desire in order to avoid the costs of litigation would be to make
the arbitration system fair.
Making the decision to arbitrate voluntary is also the right thing
to do. The right to take legal disputes to court is a fundamental part
of our democratic society. It is enshrined in our Constitution. Without
an independent court system (and the ability of citizens to use it),
the rule of law itself is undermined. Employers have every right to
establish the terms on which they offer employment. But some rights are
too fundamental to allow employers to tamper with. Employers may not
require prospective employees to have sex with them as a condition of
employment. Employers may not require employees to change their
religion or tell them how to vote. Employers should also be prohibited
from requiring employees to give up their right to go to court.
Making employment arbitration voluntary is not only right in
principle, but feasible in practice. The American Arbitration
Association, the world's oldest and largest provider of arbitration
services, recommends that employment arbitration be voluntary. At least
12 major corporations have heeded AAA's advice and established
voluntary arbitration programs. Every one of these programs has been
successful.
The question facing us is not whether employment disputes will be
arbitrated, but under what conditions this will take place. Under the
present system, employers have the ability to establish arbitration
systems that deny due process and force employees to use them.
Employers have substantial financial incentives to take this low road,
and many do. Surely this is intolerable. The solution is to make
arbitration voluntary. This is right in principle and would ensure that
arbitration provides the fairness and justice that all Americans
deserve.
The Civil Rights Procedures Protection Act (S. 121) would
accomplish this crucial goal. I urge the members of this subcommittee
to support it.
Senator Grassley. This is how we are going to handle the
questioning. I am going to take 5 minutes now, and then Senator
Sessions will take 5 minutes, and then we have to go to
meetings at 4 p.m. or a little after 4 p.m., and Senator
Feingold has consented to finish up the questioning and to
adjourn the meeting.
So before I ask questions, I want to, as Chairman of the
subcommittee, thank my members for being here and giving
attention to these important issues of these three bills, as
well as the second panel, I thank you for your participation. I
want to thank you in advance.
Ms. Sturdevant, I would like to ask you the first question.
You argue that each party should have the option of choosing to
arbitrate after the dispute arises in order to ensure that the
decision to arbitrate is based on consent and not coercion.
Couldn't this proposal be somewhat a double-edged sword
because businesses and creditors could force consumers to
resolve grievances through costly litigation rather than
arbitration? Do you advocate that both businesses and consumers
should have the option to choose to resolve disputes through
the courts rather than arbitration?
Ms. Sturdevant. I thank that both parties should have the
right to choose, and I do not see it as a problem for consumers
if there is no predispute agreement because, for one thing, a
consumer with a small claim against the bank, under the present
system, can go to small claims court, which costs just a few
dollars and have a judge resolve that issue speedily and fairly
following the law and applying consumer protection statutes.
Secondly, I do not fear that consumers will be prevented
from going to their favored arbitral forum, absent companies'
agreement because I have seen too many companies adopt
arbitration requirements thinking that that will give them an
unfair advantage, and it is not an advantage to a consumer who
is challenging an unlawful business practice of a major
national corporation to go to arbitration with no discovery,
high costs, no rules of law and no adequate remedy. So I do not
see the harm, and I see the benefits of requiring consent after
the dispute has been arisen.
Senator Grassley. How would you keep businesses then and
consumers then from threatening consumers with--maybe I said
that wrong--business and creditors from threatening consumers
with costly and time-consuming litigation?
Ms. Sturdevant. Well, the consumer can elect to file in
municipal court, can file in superior court, if that is
appropriate, and can seek the advice and the involvement of the
trial judge in minimizing that danger. So I see that there is a
problem potentially of abuse in the system that you posed, but
I have seen the actuality of abuse in mandatory binding
arbitration. It is intended to be unfair, it is intended to
preserve banks' financial well-being. It is intended to prevent
runaway jury verdicts, punitive damages, injunctive relief and
class litigation. It is intended to be unfair, and that is how
it is operating.
Senator Grassley. Now, I am going to go to Mr. Mogilnicki.
There was some reference, allusion to this in the Post article
that I have referred to. One of the most problematic aspects of
many arbitration services is the degree to which they appear to
be dependent upon a few large clients for virtually all of
their income. There seems to be a distinct conflict of interest
when many arbitration services actively solicit business from a
party that might come before it with strong hints that the
solicited party would get favorable treatment in its forum.
Could you comment on how an arbitration service that has a
vested interest in ensuring one of the parties coming before it
is satisfied, and moreover, whether the services who relies on
that party's continued business for its financial solvency can
function as a nonbiased mediator?
Mr. Mogilnicki. Thank you, Mr. Chairman. That is obviously
an important issue and one that financial institutions wrestle
with as they determine which arbitration forum to use.
There are at least two ways of guaranteeing that the
process that an individual encounters in arbitration forum is
fair, and they both exist presently. The first is to rely upon
the fairness of the individual arbitrator or the panel of
arbitrators that is hearing the case. Now, in the case of the
arbitration forum that is featured in the Washington Post
article, there are detailed rules that require the arbitrator
to disclose to the consumer his or her background and
qualifications as an arbitrator and allows the individual to
strike that arbitrator for cause or to employ a preemptory
challenge to the arbitrator because even though there is not
cause, the consumer does not feel comfortable with that
particular arbitrator.
So there are detailed rules at the arbitration forum.
Similarly, the same forum has recusal rules for arbitrators,
and those recusal rules look just like the rules for recusal in
Federal court. So, again, another safeguard within the rules of
the arbitration forum, to make certain that the arbitrator is
fair.
The second protection that I just want to touch upon
briefly is that there is, in fact, judicial review of
arbitration awards, where there appears to have been partiality
or bias in the arbitration forum so that there is always the
safety net of judicial review should the internal processes of
the arbitration forum not succeed in weeding out any potential
for bias.
Senator Grassley. Ms. Sturdevant, you argue that if
businesses require arbitration by contract, they should also
allow a consumer, dissatisfied with the results, to also have
the option of litigation. Should businesses, dissatisfied with
the result of arbitration, also be accorded the same option of
litigation? And if you would disagree with that, why not?
Ms. Sturdevant. Well, Senator Grassley, that is the way the
system works now in judicially supervised arbitration. I think
arbitration and mediation can be very useful as ways of
resolving disputes and of clearing court calendars, but the
harm is that if it is coerced on one party and there is no
safety net so that an unfair or wrong result remains. I think
if the company agrees to be bound to arbitration and the
consumer is brought into it, the only possible way to make it
fair, if the consumer does not consent, is to have the safety
valve that the consumer can appeal to the court. I would not
make it both ways. My preference would be not to require or
impose arbitration, but make it voluntary on both parties.
Senator Grassley. Mr. Lorber and Mr. Maltby, I am going to
have to submit my questions to you for answer in writing. I
have several.
[The prepared questions of Senator Grassley are located in
the appendix.]
Senator Grassley. Senator Sessions.
Senator Sessions. Thank you very much.
Well, this is a big, big deal in America. We believe in due
process. We believe in people having rights. But what we are
learning, as Mr. Maltby said, we are talking about $50,000 a
lawsuit. That is a big deal, and the system figures ways to
reduce those lawsuits and contain them, and it is harder to get
an expeditious and fair day in court. So I tend to believe that
arbitration is something to be encouraged, and I tend to
believe that in some circumstances, it can be required as a
condition of doing business with somebody.
However, if we do that, particularly I would say to the
business community, we have got to be sure that it is perceived
over a period of time as working fairly, and justly and
expeditiously getting their claims. I do note, Ms. Sturdevant,
that the American Bar Association, which is a lawyer group,
found that consumers prevailed in 80 percent of their claims in
arbitration, compared to 71 percent in court that they did, and
that nonunion employment arbitration, employees win between 63
and 74 percent of their claims in arbitration, compared to 15
to 17 percent in court. There is a Law Week article on that. I
do not know, Mr. Maltby, how good those numbers are. But I
would not be surprised that arbitrators tend to be a little
more ``split the baby,'' so to speak, and split the difference
and not attempt to all or nothing, some particular phrase of
law or clause or you get nothing because you did not quite
qualify. So I think it has something good to be said for it.
Fifty-nine percent, according to a Roper survey recently,
said that Americans would choose arbitration over a lawsuit to
resolve claims for money. And the American Bar Association
calculates 100 million Americans are locked out of court by
high legal fees. They cannot afford justice. An American Bar
Journal reports that most lawyers will not begin a lawsuit
worth less than $20,000. So I do not know. And Mr. Lorber, I am
sure the automobile dealers are members of your Chamber of
Commerce, are they not?
Mr. Lorber. I suppose they are.
Senator Sessions. Many good members, I assume. Is it not a
fact that you are troubled by the position they are taking on
this deal with the manufacturers?
Mr. Lorber. Well, I do not know what the Chamber's position
on that is. As I said, it is in our view that employment simply
stands in its own stead. There is mandatory arbitration now in
employment. Any employee who goes to work for a company which
is organized by a union has mandatory arbitration without any
choice. So that, at least insofar as the employment posture is
concerned, the Chamber simply does not believe that impeding,
which we believe S. 121 will do to the arbitration system, is
going to help anybody. It certainly is not going to help the
employees, and we think it is going to put significant costs
and disruption into the business process.
Senator Sessions. Well, I have a letter of February 28th
this year, a few days ago, in which Mr. Josten, Bruce Josten,
you know him----
Mr. Lorber. Uh-huh.
Senator Sessions. Your president, wrote that, ``I am
writing on behalf of the Chamber of Commerce, representing
businesses of every size, sector and region, to express our
opposition to S. 1020.''
Do you oppose S. 1020?
Mr. Lorber. Well, if Mr. Josten does, then the Chamber
does. Any bills which will interfere in the arbitration system,
I mean, 121 prohibits mandatory arbitration; the other bill
does as well.
Senator Sessions. We cannot have it both ways. I am just
telling you. I think there is a conflict there between my
friends, the automobile dealers, and these big corporations
that I do not know anything about. We did have a lawsuit. I can
understand the manufacturers' problems. Spro v. Ford Motor
Company in Alabama, in which a dealer was given a dealership
under a minority recruitment program, an African-American
minority dealership, and they wanted to encourage minority
dealerships. It subsequently failed, and he sued alleging that
he was not told that more minority dealerships failed than
nonminority dealerships and won $10 million against Ford, who
apparently had an affirmative action program that they were
working on to try to do that.
So, Ms. Sturdevant, I think the thing that concerns
business is that an error or disagreement over a certain matter
in a contract can all of a sudden get before a jury and turn
into $10 million. And if they made a mistake, most of the time
they are willing to pay it, I think, and I think that is a
legitimate concern. So how we can protect people against fraud,
clear manipulation of innocent consumers beyond arbitration, I
am open to that. But I think most disputes would be better off
settled through arbitration.
My time is expired. Would any of you want to comment on the
present state of Federal arbitration law briefly? And does it
need any changes or improvements?
Mr. Maltby. Senator Sessions, I would like to make two
comments about the state of the Federal law. The first is that
Mr. Lorber and other witnesses are correct, the Supreme Court
and the Federal judiciary have almost uniformly held that it is
legal for an employer to insist upon an arbitration agreement
as a condition of employment. However, that does not mean what
certain people seem to think it means. It does not mean that
the Supreme Court thinks it is the right way to go, it does not
even think that the Supreme Court thinks that it is a good way
to do business or that it is fair. All it means is that the
Supreme Court has interpreted the extremely difficult to
understand Federal Arbitration Act, which was drawn up long
before anyone contemplated the issues we face today, to require
it to allow situations like the case in Gilmer. The law is on
Mr. Lorber's side in this case. But the Supreme Court has not
said that these contracts of adhesion are a good thing. All it
said is that they are allowable by the Federal Arbitration Act.
Senator Sessions. But you do not disagree that in union
contracts, there is arbitration and that other nonunion
employees win far more often in arbitration than in litigation?
Mr. Maltby. Senator, you are absolutely correct.
Senator Sessions. And at less expense, obviously.
Mr. Maltby. You are absolutely correct, Senator, that that
is the way things work in every union shop in America.
Senator Sessions. It sounds like the kind of thing we ought
to do more of.
Mr. Maltby. But there is a critical difference. In the
union shop, the employees collectively get to look at the
arbitration system and the arbitrators that get used, and if
they do not think the system is fair or thearbitrators are
fair, they can walk. That is not the situation when a lone employee
walks into General Motors. They have got no ability to walk away from
the system if it is not fair, no ability to influence it if it is
unfair. That is a very big difference.
Senator Sessions. Mr. Lorber.
Mr. Lorber. That is simply not true. Let me just very
briefly, you do not need a debate among lawyers here. I know
time is short, but I would just point out, for example, the
Rosenberg case, the First Circuit case I cite, which talked at
length about analyzing how the courts have accepted mandatory
arbitration, in that case that First Circuit said on its own,
it was not litigated at the District Court, that because it
believed there was not proper notice to Ms. Rosenberg, it did
not enforce the arbitration agreement. There are lots of cases
now, as I said, since Gilmer, since Gilmer, the Federal law of
employment arbitration, I think the Courts of Appeals have
established a fairly well-understood body of law as to what is
fairness. This is not 1991. It is 2000.
And the question, Senator Sessions, what is the law today?
Today, the law is there has to be notice, it has to be fair.
One Circuit said the employer has to pay the cost of the
arbitration. The fourth circuit said arbitration must be
binding on both sides. The employer cannot opt out of
arbitration. So that there are now I think a very substantial
body of law, which has established the fairness that Mr. Maltby
suggests. I do not quite understand him saying, on one hand,
arbitration is a good way to go; on the other hand, in one
case, somebody lost. I mean, I know a case where an arbitrator
held that reinstated individual who threatened the life of
somebody else, the arbitrator felt that that individual was
protected by the Americans with Disabilities Act. I mean, one
could differ with that result, but that was binding.
So all I would simply submit again is now we have not the
Federal Arbitration Act, but we have a body of law since
Gilmer, and that body of law I think has established very well
understood predicates for fairness.
Senator Sessions. I just think we need to be careful before
we dump a whole host of cases that are being arbitrated today
back onto the court system. They are already overworked and too
expensive.
Mr. Maltby. If I could make one very brief comment,
Senator. I knew Mr. Lorber and I would find something to
totally disagree about, and we finally found it. We do not have
the time or the right forum for a long legal debate here, but I
would welcome the opportunity to submit written materials to
this subcommittee talking about how totally lacking and almost
nonexistent the Federal appellate review standards on due
process are concerned.
Senator Feingold.
Senator Feingold [presiding]. This has been an excellent
hearing, and when a hearing allows a long-suffering member of
the minority party to chair the hearing, it gets even better.
[Laughter.]
So I appreciate this opportunity.
Senator Sessions. You are very able.
Senator Feingold. Thank you. And actually as Senator
Sessions is leaving, I just want to indicate that I am pleased
that he asked the question on the motor vehicle contracts about
whether or not dealers and consumers had a practice of
requiring these agreements. And I just want to note for the
record, again, what our witnesses said; is that if it exists,
it is a limited practice and that they are prepared to say that
it should not be the practice. That is the kind of consistency
that I am looking for in having these different issues brought
together. And all I can say to my friend from Alabama who has
left, but I am sure his staff will convey it to him, there is
no reason why we cannot expand our legislation to include
banning mandatory binding arbitration in those contexts as
well.
He said it well. He said you cannot have it both ways--
Senator Sessions did. And that is why it was so important to
me, that when the auto dealer representatives answered that
question, they were not trying to have it both ways. I think
that is very important when we are looking at mandatory binding
arbitration.
Before I begin my questions, I just want to ask that a
couple of statements be entered into the record; a statement by
the Consumers Union, a statement by the National Partnership
for Women and Families and written testimony by a Public
Citizen. Each of these statements address the problems that
arise from predispute contractual agreements to enter mandatory
arbitration.
[The statements follow:]
Consumers Union, Publisher of Consumer Reports,
Washington, DC, February 29, 2000.
Subject: Hearing on arbitration clauses.
Hon. Russ Feingold,
U.S. Senate,
Washington, DC.
Dear Senator Feingold: Thank you for your leadership in raising the
alarm about the increasing creep of mandatory and binding arbitration
clauses into consumer contracts. Often times consumers are unaware that
they are agreeing to be bound by arbitration at the time they sign the
contract. In some cases, credit card and charge card companies
unilaterally changed the terms of the agreement by adding a new
provision requiring the consumer resolve any disputes solely through
mandatory and binding arbitration. Unilateral changes in contract terms
often without the consumers prior knowledge or ability to consent docs
little to assure that consumers will benefit from a fair process when
trying to resolve a dispute. Likewise, an arbitration provision should
not be required as part of the contract unless both parties agree and
are fully informed. Although arbitration can be useful to consumers, it
is not always preferable to litigation, especially if the arbitration
process is costly to consumers or where the consumer is faced with a
decision-maker who depends on the business involved in the arbitration
for a large share of business.
Consumers Union is concerned that these mandatory and binding
arbitration clauses prevent consumers from having their claims heard in
court. Such a backstop is necessary to ensure that the process is fair
for all parties and may be necessary to rectify any unfairness in the
arbitration process. Fair procedures in the implementation of dispute
resolution clauses are vital to ensure a just result for both the
consumer and business. Additionally, any form of arbitration must not
be costly to the consumer seeking redress and avoid potential conflicts
of interest between the parties and the entity serving as the
arbitrator.
Attached please find a copy of Consumers Union's Policy on
Arbitration. Should you have any questions or comments, please let us
know.
Frank Torres,
Legislative Counsel.
Attachment.
Consumers Union Policy on Arbitration and Other ADR Clauses in Standard
Form Consumer Contracts
Standard form contracts offered to consumers by commercial parties
are increasingly likely to contain clauses requiring the consumer to
participate in arbitration or another form of alternative dispute
resolution (ADR). These clauses have the potential to prevent consumers
from having their claims heard in court. Consumers Union's policy on
mandatory arbitration and ADR clauses is designed to promote standards
for when these clauses should be permitted to be placed in consumer
form contracts, or enforced if found in such contracts, and to promote
fair procedures in the implementation of ADR clauses.
A. ADR, including arbitration, should not be required in consumer
form contracts unless the consumer has the option either to decline to
engage in the ADR process after the dispute arises or to reject the
results of the ADR process. In other words, ADR clauses should be
permitted and enforceable in consumer contracts only if the ADR process
is: (1) contractually mandated with non-binding results, (2) optional
with binding results, or (3) optional with non-binding results.
B. The ADR process must be fair. The overall fairness of a
contractually imposed ADR process should be judged by compliance with
the following criteria.
a. ADR clauses imposed in a consumer form contract must not select
an ADR provider if the location of that provider would impose
unreasonable travel costs upon the consumer in order to fully
participate in the hearing of the claim.
b. Any consumer contract requiring the consumer to submit to ADR
should contain a clear, conspicuous, and understandable disclosure
describing the degree to which the consumer gives up any rights he or
she otherwise possesses to go to court. Whenever the parties or their
agents engage in face-to-face discussions leading to formation of the
contract, there should also be a clear oral disclosure.
c. ADR clauses should not apply to cases where a consumer is
seeking injunctive relief unless, after the dispute arises, the
consumer agrees to the ADR process and the ADR decisions maker has the
power to order injunctive relief.
d. In order for any ADR provider to be preselected in a consumer
form contract, that provider must maintain an index of actions which is
open to the public. The index must identify the parties to the disputes
it has pending and has resolved in the past five years. The results of
its ADR procedures involving individual consumers should also be
available, unless the ADR decision maker has found that there is a
special need to seal the results of the ADR proceeding.
e. Whenever the result of ADR will be binding or subject only to
limited review, all parties should have access to civil discovery to
the degree necessary to the claims and defenses presented. In
particular, consumers should always have access to the complete file,
if any exists, about their claim or dispute, and to evidence indicating
that any problem they allege is part of a larger pattern or practice of
the business.
f. Standard form consumer contract ADR clauses should be invalid if
the preselected ADR provider does not require that the officer who
presides at the ADR proceeding must swear all the witnesses to tell the
truth.
g. Standard form contract ADR clauses in consumer contracts should
be disallowed unless they provide that the consumer may appeal for
review of alleged errors.
h. ADR providers selected in consumer form contracts must provide
for waiver of fees and costs for indigent individuals.
i. ADR clauses in consumer form contracts should be invalid if they
select an ADR provider which does not have an effective method of
internal review to reduce the risk of selection bias. This is of
critical importance. State licensing of ADR providers may also be
necessary.
j. ADR providers selected in consumer form contracts must provide a
written statement of the basis for any decision which is binding when
issued.
k. Conflict of interest disclosures should be made by all proposed
single ADR decision makers and all who are proposed to serve as a so-
called ``neutral third.'' At least the following should be disclosed:
Names of prior or pending cases involving any party to the ADR
agreement or any attorney for any of the parties in which that person
is serving or has served as an arbitrator, party or attorney.
The results of each concluded case involving any of the parties or
attorneys for the current case, including the identity of the
prevailing party and the date and amount of any award.
After disclosure, the consumer should have the right to reject the
proposed decision maker.
l. ADR should never be used to eliminate or delay a consumer's
access to a small claims court action, licensing or other
administrative proceeding, or a consumer class action.
______
National Partnership
for Women & Families,
Washington, DC, March 1, 2000.
Hon. Charles Grassley,
Chairman, Administrative Oversight and the Courts Subcommittee, U.S.
Senate, Washington, DC.
Dear Senator Grassley: As the Senate Subcommittee on Administrative
Oversight and the Courts considers S. 121, the Civil Rights Procedures
Protection Act of 1999, we write to urge that the Senate pass this
important civil rights legislation. S. 121 would prevent employers from
forcing workers to give up their right to go to court--and accompanying
legal protections--when they have employment discrimination claims.
In a troubling trend, an increasing number of employers require
workers to agree--as a condition of hiring or promotion--to settle any
and all future employment disputes through mandatory, binding
arbitration. Such mandatory arbitration undermines fundamental
principles established by the hard-fought civil rights battles of the
last 30 years. It enables defendants to circumvent a key federal civil
protection: the right of job discrimination victims to present their
claims in court to judges who have sworn to apply and uphold the law.
Instead, a mandatory arbitration program allows employers to bypass
some of the most important civil rights protections first established
in the Civil Rights Act of 1964 and later expanded by the Civil Rights
Act of 1991, such as access to jury trials and fuller remedies for
discrimination victims.
In place of this public system of justice, mandatory arbitration
offers a private system with little accountability and few controls.
Courts have played a critical role in vindicating the civil rights of
bias victims--including, for example, developing the legal standards
prohibiting sexual harassment and emphasizing employers' responsibility
to maintain a workplace free of discrimination. In contrast, mandatory
arbitration often allows employers to curtail dramatically the remedies
and procedural protections available to discrimination victims. For
instance, some mandatory arbitration programs limit or deny
compensatory and punitive damages--thus denying workers the very
remedies that the Civil Rights Act of 1991 gave to victims of
harassment and other forms of discrimination. Arbitrators also lack the
authority to issue the injunctive relief that is routinely available in
the courts to end discriminatory practices and prevent their
recurrence. Arbitrators are not even required to have a background in
basic employment law, including knowledge of legal protections against
job discrimination. Finally, the Federal Rules of Evidence, which can
be so important in protecting against intrusive inquiries into
harassment victims' private sexual histories, do not apply in
arbitration proceedings.
Although we believe that alternative dispute resolution, when fully
voluntary and properly designed, can in many cases helpfully resolve
employment disputes, mandatory arbitration forces workers to abandon
their access to the courts and accompanying legal safeguards. S. 121
would prevent such unfairness and preserve the protections of our civil
rights laws. Please support the Civil Rights Procedures Protection Act.
Sincerely,
Donna R. Lenhoff,
General Counsel.
Jocelyn C. Frye,
Director of Legal and Public
Policy.
Sandhya L. Subramanian,
Policy Counsel.
______
Prepared Statement of Joan Claybrook
Chairman Grassley and Members of the Subcommittee Committee: We
commend you for holding today's hearing. We believe this may be the
first congressional hearing to examine the growing problem of mandatory
pre-dispute arbitration. Your foresight and leadership on this issue is
greatly appreciated.
Public Citizen is a nonprofit, national consumer advocacy
organization with approximately 150,000 members nationwide. One of our
primary goals is to assure that injured consumers and workers have the
ability to hold responsible and receive fair compensation from the
wrongdoers that injured them.
On behalf of consumers and small businesses, Public Citizen's
Litigation Group has argued two cases in the U.S. Supreme Court on
arbitration issues and many more in lower courts. In Barrentine v.
Arkansas-Best Freight System, 450 U.S. 728 (1981), the Supreme Court
upheld Public Citizen's contention that a union contract arbitration
clause did not preempt the drivers' right to sue with regard to a
statutory claim under the Fair Labor Standards Act. In Doctor's
Associates v. Casarotto, 517 U.S. 681 (1996), Public Citizen argued
before the Supreme Court that states had an inherent interest in
ensuring the fairness of arbitration agreements in all contracts.
Unfortunately, the Court ruled that the Federal Arbitration Act
preempted state protections, helping create the problem this hearing is
exploring: the injustices that occur when the weaker parties to a
contract are forced involuntarily into arbitration proceedings stacked
against them.
part i--congress should review the injustice of pre-dispute, mandatory
arbitration and restore the constitutional right to fair dispute
resolution
Today's hearing focuses on three specific bills that address
specific situations in which mandatory pre-dispute arbitration has
proved to be unfair to the less powerful party to a contract. The
hearing is particularly revealing in its demonstration of the abuses of
mandatory, pre-dispute arbitration by the more powerful party in a
contract. For instance, the auto dealers are seeking to be relieved
from mandatory, pre-dispute arbitration contractually imposed upon them
by the much more powerful auto companies. The dealers feel they have
little ability to stand up to the auto manufacturers and distributors
who use their power to impose these unfair clauses in the contracts
vital to the dealers continued existence.
At least the dealers have some leverage as the auto companies need
them to sell their cars. Imagine the fate of individual consumers or
employees in such unbalanced situations.
Ironically, many of these same auto dealers are at the forefront of
a trend to impose mandatory pre-dispute requirements on the consumers
who purchase their cars. Auto purchase and repair consumers suffer from
the same or greater disparity in bargaining power with the dealers as
the dealers do with the manufacturers. Perhaps the subcommittee can
provide protection for all those without the power to actually
negotiate contract provisions and thereby restore all their rights to
just dispute resolution.
Public Citizen supports both S. 121, the Civil Rights Procedures
Protection Act of 1999, and S. 2117, the Consumer Credit Fair Dispute
Resolution Act. Both bills are excellent steps forward in addressing
the serious inequities caused by mandatory, pre-disputes arbitration
clauses. We especially appreciate the leadership of Senator Feingold in
this effort on behalf of workers and consumers. However, Public Citizen
believes that Congress must go beyond these bills and address the issue
of unfair arbitration more broadly.
Public Citizen is not opposed to arbitration per se. There is
social benefit in voluntary arbitration as a fair and expeditious
alternative to litigation. However, an arbitration agreement must be
entered into voluntarily after the dispute arises and the consumer,
employee--or even the small business owner such as an auto dealer--
knows which rights she is waiving, who will arbitrate the dispute, who
will bear the costs of arbitration, whether discovery will be allowed,
what law will be applied, what information will be public, and whether
she will have recourse following the award. Without a fully-informed
voluntary consent, arbitration loses all credibility as a just
alternative to litigation.
In the real world, most contracts are not made by equally powerful
and knowledgeable parties. While this is certainly true of employment
and consumer credit contracts, it is equally true for virtually all
consumer contracts, as well as business-to-business contracts between
disparately-sized companies. As Part II of this testimony reviews in
detail, mandatory, pre-dispute arbitration clauses can never be fair,
when the parties do not have: Equal bargaining power, equal experience
in arbitration, equal ability to understand the consequences of
contract language, particularly the ramifications of the rights being
waived, and an equal ability to insist on clauses being included or
excluded in the contract.
Without this balance of power, there can be no effective voluntary
consent to mandatory, pre-dispute arbitration clauses.
Public Citizen believes that the escalating use of mandatory, pre-
dispute arbitration clauses in contracts between unequal parties is
impinging on individuals' basic rights as guaranteed by the
Constitution's Bill of Rights. The Seventh Amendment to the U.S.
Constitution states, ``In suits atcommon law, where the value in
controversy shall exceed $20, the right of trial by jury shall be
preserved * * *'' When the Bill of Rights was passed, the right to a
jury trial was the only Amendment of the 10 proposed that was approved
by all 13 states. The right to a civil trial was included in the
Constitution because that right was a critical issue in the decision of
the colonies to revolt against the arbitrary decision of King George
III. More than giving individuals a right to a particular procedure,
the Bill of Rights guarantees public legal proceedings where the lowly
and the mighty are equal and have the same ability to receive justice.
The escalating use of mandatory, pre-dispute arbitration clauses
threatens that fundamental freedom. These clauses are designed to give
businesses significant advantages in their disputes with consumers,
employees, and small businesses. They threaten the very basis of our
justice system--equal justice under the law.
The profundity of this rising tide of mandatory, pre-dispute
arbitration agreements and its effect on the right to trial by jury has
not yet full been felt. But the reality is that too many of America's
businesses are trying to opt out the American judicial system--by
exempting themselves from the rules of conduct and responsibility to
which the rest of us are held. By insisting that consumers and
employees waive their right to their day in court as a precondition to
doing business, corporate America is trying to insulate itself from the
consequences of doing business negligently, recklessly and in violation
of the law.
The result will be the creation of a massive system of arbitrators
parallel to, but untouchable by, the courts. Consumer and employee
rights, public safety and public policy will be weighed by arbitrators
neither elected nor appointed under any legal system. We may be
witnessing the birth of a private judicial system--created by
corporations seeking to avoid legal responsibility for their actions.
As Judge Harry Edwards put it, an arbitrator ``serves simply as a
private judge * * * yet unlike a judge, an arbitrator is neither
publicly chosen nor publicly accountable.'' Cole v. Burns International
Sec. Servs., 105 F.3d 1465, 1476 (D.C. Cir. 1997).
We now have 75 years of experience under the Federal Arbitration
Act. In its present form, the Act is fostering arbitration procedures
that severely weight the scales of justice toward large businesses and
away from consumers, employees and small businesses.
Public Citizen believes that this threat to fundamental concepts of
American justice is so significant that the U.S. Congress and the
states' legislatures should work together to adopt policies that
restore citizens' fundamental rights to impartial, unbiased and public
adjudication of disputes. Without such a system of fair redress in a
civil society, citizens will start to take the settlement of disputes
into their own hands with potentially disastrous results. We propose a
comprehensive federal-state legislative initiative to achieve that
goal:
First, both State and Federal legislators should pass legislation
to ensure that parties with weaker bargaining positions are not forced
into unfair arbitration. This legislation should take the form of an
absolute ban on mandatory, pre-dispute arbitration clauses.
Alternatively, legislation could make all such clauses in contracts
between unequally powerful parties unenforceable. At a minimum,
mandatory, pre-dispute arbitration clauses should be unenforceable in
all consumer and employee contracts. This would expand the approach
used in the bills that are the subject of today's hearing.
Eliminating the ability of the more powerful party to force the
weaker party into unfair arbitration would go far toward eradicating
the problems detailed in Part II of this testimony. Consumers and
employees would make a choice whether to go to arbitration only after
the controversy arose. At that time they would have the proper
incentive to carefully assess the pro and cons of the proposed
arbitration and determine whether it would be a fair dispute resolution
mechanism. Essentially this would institute a market-oriented system
where parties who believe arbitration is the best forum would have to
design arbitration systems that are attractive--fair--to the other
party.
Secondly, Congress and the States could promote fair arbitration by
passing an Arbitration Bill of Rights. The Bill of Rights would be
designed to make arbitration an attractive alternative that a fully-
informed consumer would voluntarily choose to resolve a pending dispute
by ensuring fair selection of arbitrators, fair distribution of
arbitration costs, full and fair discovery and appealability of awards.
An Arbitration Bill of Rights should include:
A mutuality requirement--parties should have identical
opportunities to access the courts. One-away ``agreements'' favoring
corporations should be prohibited.
Proof that both parties are actually aware of any arbitration
provision in a contract.
Full disclosure about the arbitration process, including specific
information about what kind of claims and rights are being waived and
about the costs of pursuing arbitration.
True choice--the ability to reject the arbitration clause without
jeopardizing the employment opportunity or consumer transaction.
Judicial review of awards on the merits.
Availability of all judicial remedies, such as injunctions and
punitive damages.
A fair system of cost allocation that does not deter or preclude
valid claims from being made.
A choice of venue that is convenient to the party less able to bear
the costs of travel.
Discovery to ensure the ability to pursue and prove the claim.
A requirement for a written opinion by the arbitrator explaining
bases of findings of fact and applications of law.
Public records of arbitration awards so that consumers as well as
corporations can learn about the arbitrators' past decisions and any
previous awards on similar disputes.
Lastly, states should have the ability to regulate arbitration
procedures if they desire to better protect consumers and employees or
to deal with specific local problems. To accomplish this, Congress
should amend the FAA to remove the judicially-imposed federal
preemption of state regulation of arbitration agreements. While federal
legislation should establish basicminimum standards to guarantee
arbitration fairness, states should be able to give consumers
additional protections such as deciding whether arbitration is
appropriate in a given situation or whether notice provisions or
arbitration procedures are necessary to protect their citizens. Federal
law should provide a foundation upon which the states could build
greater consumer protection.
part ii: mandatory arbitration abuses
The scope of the problem
Over the past several years, more and more consumer creditors have
inserted mandatory pre-dispute arbitration clauses in the fine print of
their consumer credit contracts. You may not know it, but if you have a
credit card, mortgage or other credit account with BancOne, First USA,
GE Capital, Discover, American Express, Household Financial or
Beneficial Financial Services; if you belong to an HMO or investment
group; if you recently bought a personal computer, cell phone, mobile
home, or product over an Internet site such as eBay, or if you bought a
new home from a fly-by-night contractor, you have probably waived your
rights to take those corporations to court if they harm you by
breaching their contract or even by defrauding you.
You might be blissfully unaware that you have forfeited your right
to a day in court, because the mandatory arbitration agreement was
lurking in the fine print of your car lease or tucked in with the
offers of personalized check printing from your credit card company, or
perhaps in your teenager's employment contract with the local burger
joint. By accepting the car lease, using your credit card or taking the
job, you and your family forfeited one of the most treasured American
rights--the right to a day in court and a jury of your peers to judge
whether you have been wronged.
If you don't know whether you have waived your rights to access the
judicial system, you are not alone. You likely didn't read through the
entire cell phone contract, or didn't notice the arbitration clause in
your car lease. Like most Americans, you might not have have understood
that the clause meant you were forfeiting your constitutional rights as
a consumer, rights that protect your health and safety and protect you
from fraud.
If you did see the arbitration clause in your credit card contract,
you might have thought that it might not be such a bad thing. Before
any dispute has arisen between you and your creditor or service
provider, the prospect of such a dispute is distant and theoretical.
Arbitration might even sound better than litigation should the
unthinkable happen and you and the company you are doing business with
have a falling out. But the average consumer (and even the more
sophisticated consumer) does not consider the breadth of rights waived
by agreeing to the clause.
You should also be troubled that you had no choice but to agree to
the mandatory arbitration if you wanted to make the transaction. It was
not a term you could negotiate out of the contract--most mandatory
arbitration clauses are in standard form, take-it-or-leave-it
contracts. And you could hardly ``leave it'' and go to another creditor
or retailer because more and more of them insist you give up your
rights. In these situations, it is manifestly unfair to allow these
contracts of adhesion (one-sided contracts that are not negotiated by
the parties and are embodied in a standardized form prepared by the
dominant party) to take away consumers' constitutional rights of access
to the courts to protect their rights. The power imbalance at the
moment of contract is tremendous and without any real remedy for
consumers, abuses will soar to new heights.
In the employment context, the power imbalance is even more obvious
and insidious. There is no true voluntary assent to mandatory
arbitration clauses when employees are told to either assent or lose
their jobs and applicants who refuse simply are not hired. Very few job
seekers are in a position to refuse proffered employment, which would
provide the means to support their family, in order to preserve a
comparatively intangible right should an unforseen problem develop
years later.
Some courts have recognized the extreme power imbalance and lack of
true bargaining power in employee contracts, particulary when the
employee seeks to invoke state or federal antidiscrimination policy.
Those courts have refused to enforce a mandatory, pre-dispute
arbitration clauses. Unfortunately, other circuits have held such
clauses are enforceable.
The Federal Arbitration Act and its preemption of consumer protection
and anti-discrimination law
The Federal Arbitration Act (FAA) of 1925 grew out of international
maritime dispute resolution systems. In that commercial context,
companies have essentially equal bargaining power and can negotiate
over the suitability of adopting alternative dispute resolution systems
such as arbitration.
However, in consumer credit and employment contracts, as well as in
other transactions between individual consumers and businesses, the
parties have extremely unequal bargaining power. In consumer credit
contracts, consumers often don't even see the full language of the
contract until the credit application or the consumer purchase has been
completed. Job seekers focus on pay and benefit packages and are seldom
in an economic position to insist on rights they never expect to use.
Many state legislatures have recognized these problems and have
been particularly concerned about individuals in these types of
adhesion contracts, where they are faced with signing take-it-or-leave-
it contracts for employment or credit without the option to strike the
arbitration clause or negotiate the terms. Some states have passed laws
to protect consumers in those situations. Some have required
arbitration clauses to be particularly visible to ensure that consumers
know what they are agreeing to. Other states have disallowed pre-
dispute arbitration agreements in particular subject areas of law, such
as employment discrimination disputes, because they deemed arbitration
to be unsuitable to enforce their state's public policy in those
critical areas.
However, the Supreme Court has interpreted the Federal Arbitration
Act as preempting those consumer and employee protection efforts by
individual states. Despite the extreme power imbalance in formulating
these contracts, the Supreme Court has in a series of decisions ruled
thatCongress' intent to promote arbitration preempts sate regulation.
The Court has enforced pre-dispute arbitration agreements even in
consumer credit and employment contracts.
In particular, the Court has invalidated all state laws that single
out as unenforceable arbitration provisions in contracts that are
otherwise enforceable. Under the Court's rulings, the only way a state
court may avoid enforcing a pre-dispute arbitration agreement is by
voiding the contract under traditional, general contract rules
regarding consent, fraud, unconscionability and revocation. State
legislatures cannot pass a bill that just regulates arbitration abuses;
they can only legislate general contract law changes. But mandatory
arbitration clauses are different. They should not be treated the same
as any other contract term (such as price, quantity, dates of service,
etc.) because: The constitutionally protect right to a day in court is
too important; Consumers do not fully understand the importance of the
rights they are waiving until a dispute actually arises; and the
enforceability of the entire contract depends on the fairness of the
arbitration provision because the consumer can have them enforced
nowhere else.
In other decisions, including Gilmer v. Interstate/Johnson Lane
Corp., 500 U.S. 20 (1991), the Supreme Court ruled that absent proof
that Congress intended civil rights legislation to preclude
arbitration, contractual mandatory pre-dispute arbitration can be
enforced. The Court cited the FAA's provisions that manifest a
``liberal federal policy favoring arbitration agreements.''
Because the Supreme Court's decisions interpreted the U.S.
Congress' intent in adopting the FAA, Congress has the responsibility
to revise the law to level the playing field for the consumer and
employees and restore their fundamental legal rights.
Mandatory pre-dispute arbitration clauses are discriminatory and unfair
In addition to the denial of consumers' and employees' rights to
seek remedies in court, arbitration between two parties with unequal
bargaining power is too often a discriminatory and one-sided process,
benefitting the corporations mandating it. The following are problems
faced by consumers and employees who are forced into arbitration by
contracts written solely by the corporation:
Substantial up-front costs.--For most consumer transactions and
many employment disputes, the fees imposed by mandatory arbitration may
make it economically impossible for consumers or employees to vindicate
their rights. Many arbitrators require hundreds of dollars in filing
fees and hundreds or thousands more in hearing fees. Some consumers,
particularly those who have just suffered a financial loss, will be
unable to pay these fees and will therefore be precluded from any
remedy. Similarly, high fees may preclude employees whose financial
future may already be endangered because of their employment dispute
from pursuing their anti-discrimination claims. In other consumer
claims, the small amount in dispute may actually be less than the
arbitration fees, making any arbitration a losing proposition
economically. In contrast, most jurisdictions provide consumer access
to small claims courts with minimal fees and costs.
Prohibition of class actions.--Certain harms inflicted on consumers
may be small yet widespread so that they would be impractical to pursue
unless brought as a class action. Companies are using mandatory
arbitration clauses to avoid class actions, making it impossible for
plaintiffs with small claims to pursue their cases or afford any legal
advice. The prohibition on class actions thereby provides legal
immunity for corporations who may have gained a substantial benefit
through small injuries to a large number of persons.
Choice of venue.--Arbitration clauses often include a venue
selection that favors the corporation, such as requiring arbitration in
a location inconvenient to the consumer. Thus, consumers may find
themselves having to bear the cost of long-distance travel to make
their claims heard. For example, the Internet auction site eBay
requires its consumers to travel to its home turf of San Jose,
California, to arbitrate any dispute. This requirement is obviously an
impediment to justice for modest disputes of a couple of thousand
dollars or less.
One-way agreements.--Many arbitration clauses require only one side
(the consumers or employees) to resort to arbitration on a particular
claim, while allowing the other side (the corporation) to sue in court
on the same claim. In addition, sometimes only one side (the consumers
or employees) is bound by the outcome of the arbitration while the
other (the corporation) is not. Arbitration clauses also may provide
certain remedies for one side but not the other--for example, allowing
the imposing corporation to be awarded attorney fees, but not the
consumer on whom arbitration has been imposed.
Choice of arbitrator.--Many arbitration clauses give the company
the right to pick the arbitrator, formulate the list of possible
arbitrators from which the consumer or employee must select, or select
the arbitration organization. When companies establish relationships
with arbitration organizations to handle their continuing business,
arbitrators have a self-interest in favoring the company in their
decisions in order to attract repeat business. Moreover, neither
arbitrators, nor those that impose arbitration, are required to keep a
public archive of decisions. Therefore, consumers and employees suffer
from the disadvantage of not being able to check for biases in
prospective arbitrators, even when they have some role in choosing
them.
Lack of a public record.--Because in many cases no written
decisions are made available and most arbitration clauses require that
all facts relating to a dispute are confidential, public discussion on
the validity the fairness of a given arbitration finding is
discouraged, no legal precedents or rules for future conduct are set
and individuals cannot cite previous decisions for precedential effect.
Imagine if we had never learned about tobacco company misbehavior from
the Minnesota litigation.
Since businesses that impose arbitration are likely to keep an
archive of decisions, they enjoy the advantage of being able to choose
those arbitrators that have ruled for them. And withno public record,
the companies can present to the arbitrator favorable cases from their
own files while not disclosing cases favoring the employee or consumer.
Lack of discovery requirements.--Many arbitration schemes greatly
restrict discovery, the process by which parties obtain information
from one another, even though in-court claims cannot be litigated
effectively without it. The lack of discovery and adherence to rules of
evidence and procedure in arbitration amounts to the wholesale denial
of one of the most basic rights in our civil justice system. Lack of
discovery may make creditors' and employers' discriminatory behavior
impossible to prove. Consumers and employees are prevented from
discovering patterns of abuse that would reveal the corporation's
culpability; this immunizes companies from sanctions, including
injunctions, sufficient to deter continued wrongdoing.
Limited Judicial Review.--Under the FAA, parties are allowed only
limited judicial review of an arbitration award and virtually no review
of the substantive merits of the award. The court can review for bias
in the process, partiality by the arbitrators, and whether the
arbitrators exceeded their powers. But to overturn a decision on
substantive legal grounds, the appellant must show ``manifest disregard
of the law,'' an extraordinarily difficult standard to prove. The true
scope of review is even more limited because often there is no
requirement for any written opinion and no requirement that any
voluntarily prepared written opinion include a statement of what law
the arbitrators applied or what facts were deemed proven. Any consumer
wishing to show bias or partiality or error in applying law or finding
fact has an extraordinary burden to meet, particularly where no records
of the company's dealings with the arbitrator are made public and no
discovery rules provide for their disclosure.
Arbitration is ill-suited to decide causes of action based on
statutes involving preferred public policies such as civil rights
protections.--Statutory rights and remedies are not fully vindicated in
the arbitration process. The use of unilaterally imposed pre-dispute
mandatory arbitration clauses in employment contracts as a condition of
employment harms both the individual employee and the public interest
in eradicating civil rights violations. Those who the laws seeks to
regulate should not be allowed to exempt themselves from the
enforcement of civil rights laws. Nor should they be allowed to deprive
the civil rights claimants the ability to vindicate their rights in a
court of law by a jury of peers.
Likewise, consumer protection statutes designed to ensure the
public's safety embody important public policies. Corporations should
not be allowed to avoid those policies, by forcing individuals into
arbitrations where their rights are not protected.
Limited Remedies.--Mandatory pre-dispute arbitration clauses may
eliminate some remedies, such as injunctive relief and punitive
damages, or shorten the time within which a claim must be brought.
These provisions circumvent carefully considered and crafted laws
governing the creditor/consumer and employer/employee relationships.
Many claims are not worth bringing without the prospect of full legal
remedies. By inserting these clauses into their contracts, creditors
and employers intend to prevent legitimate claimants from ever
receiving justice.
Examples of how current arbitration law is fundamentally unfair to
consumers and employees
Unfortunately, examples of how mandatory arbitration has unfairly
twisted the resolution of disputes are quickly accumulating day by day.
The Washington Post (3/1/00, pp. E1/E10) revealed that for just one
large company, First USA, mandatory, pre-dispute arbitration had
resulted in 19,705 arbitration awards over the last two years. Only 87
were decided in favor of the customers; First USA won 99.6% of the
cases.
The following real life examples demonstrate how consumers and
employees are severely disadvantaged by the mandatory arbitration
process. As other consumers and employees have similar experiences,
most injured persons will choose not to pursue their legitimate claims
because the likelihood of fair hearing and decision is so small.
CONTRACTOR/FINANCE COMPANY FRAUD
Harris v. Green Tree Financial Corporation (183 F.3d 173; Third
Circuit, 1999) illustrates how the courts have interpreted the Federal
Arbitration Act in a way that is fundamentally unfair to consumers.
The Harrises were approached by home improvement contractors
marketing themselves as Federal Housing Authority and U.S. Department
of Housing and Urban Development-approved dealers promising affordable
work with no payment required until the customer was satisfied with the
construction.
In fact the contractors themselves had been solicited by Green Tree
Financial Corporation to encourage consumers to use high-interest rate
secondary mortgage contracts to finance home improvements.
The Harrises allege that they receive little of value from the
contractors, but were saddled by sizeable debt secured by mortgages on
their homes. When they attempted to sue Green Tree and the contractors
alleging fraud and breach of contract, Green Tree moved to compel
arbitration.
The work orders for home improvements that the Harrises originally
signed when agreeing to have the work done did not mention arbitration.
However, the secondary mortgage contract (described to them as
standardized contracts that needed to be signed before construction
could begin) included an arbitration clause in small print on the back
page near the end of the contract.
The arbitration clause was not only boilerplate language about
which the Harrises had no opportunity to bargain, but the clause bound
only the Harrises, not the contractors or Green Tree. The companies who
allegedly defrauded the Harrises retained their right to go to court to
enforce the mortgage or to foreclose on the real property secured by
the loan.
Despite the lack of effective notice, the unequal bargaining power
of the parties, the use of a boilerplate contract of adhesion, and an
arbitration clause that only bound one party to the contract, the Third
Circuit upheld the arbitration clause. It found that the District court
had erred in holding that the clause was not enforceable because of
lack of mutuality or procedural or substantive unconscionability. The
court then used the FAA's ``liberal policy favoring arbitration
clauses'' to bar the courtroom door to these defrauded consumers,
forcing them into arbitration where all the advantages lie with the
repeat user of arbitration, not the one-time consumer complainant.
AUTOMOBILE CONSUMER CREDIT FRAUD
On January 31, 1999, Ann Brown of Sandusky, Ohio borrowed $5,500 at
25% interest from a J.D. Byrider Franchise car lot to finance her
purchase of a car from Byrider's used car lot. The car turned out to be
a ``junker'' and a safety hazard. The entire wheel and axle fell off
when Ms. Brown's teenage daughter was driving down the road. In her
lawsuit in Ohio court, Ms. Brown alleged that she was forced to pay an
artificially inflated price in violation of the Truth in Lending Act.
Ms. Brown also alleged that Byrider violated the Truth in Lending Act
by requiring her to accept an $895 warranty fee that was also to be
financed by J.D. Byrider at 25% interest. In addition, Ms. Brown
alleged violations of the Ohio Sales Practices Act and fraud.
But Ms. Brown was denied her day in court by the district court in
Ohio, which ruled that the arbitration agreement contained in Ms.
Brown's contract had to be enforced because of the FAA's policy
favoring arbitration. Under that arbitration clause, Ms. Brown lost all
her claims under state and federal lending and consumer protection laws
although Byrider retained the right to sue her. She also waived her
right to punitive damages, no matter how reckless or malicious
Byrider's conduct. Instead, she must proceed under Byrider's choice of
arbitration, for which she must pay half the costs and attorney fees.
The costs of arbitration, which begin with $300-$500 filing fees and
approximately $1,500 per day arbitrator's fee, exceed the value of her
claim. It is simply not worth it to take the case to arbitration. In
sum, Byrider is using this arbitration clause to insulate itself from
the consequences of violating the Truth in Lending Act, Ohio Sales
Practices Act and flat-out fraud.
Ms. Brown did not understand that she was waiving her right to go
to court when she signed an arbitration agreement with Byrider. This is
hardly surprising because the Byrider financing officer himself had no
idea what arbitration is or what the rules of arbitration are, so he
was unable to tell Ms. Brown what rights she was waiving. Nor was she
given an option--the credit contract was presented in a standard form,
take-it-or-leave-it format and she was not allowed to challenge any of
its provisions. The mandatory arbitration provision only applied to Ms.
Brown. Had she defaulted on her loan, Byrider would have been able to
file a lawsuit against her.
When Ms. Brown first filed her lawsuit, Byrider stopped using the
mandatory arbitration clauses in their contracts. But once the courts
refused to vindicate Ms. Brown's rights in court in favor of
arbitration, Byrider began using the clauses again. Ms. Brown's
attorneys have received inquiries from over 40 consumers similarly
defrauded by Byrider. Unfortunately, no matter how many of J.D.
Byrider's former customers are defrauded, they cannot file as a class
action because the mandatory arbitration clauses in their contracts
waive their right to maintain class actions.
SEXUAL HARASSMENT
In a San Francisco, California case a woman named Sherry claimed
that her employer, a prominent physician, physically and verbally
sexually harassed her. Whether her claim was legitimate or not we will
never know, but there was a great deal of evidence supporting her
allegations, including: corroborating testimony from another employee,
an admission that the defendant had been ``squeezing titties,'' a
calendar owned by the defendant showing his female employees nude, and
expert testimony from a psychologist. Sherry filed suit in 1994 for
violations of her civil rights.
The defendant employer had included a mandatory arbitration clause
in the plaintiff's employment contract, although Sherry did not see the
arbitration material until she had been working a week. At that time,
the document was given to her while she was working and she was told
that it was necessary for her to sign it to keep working; she was given
no time to read the document. In addition, Sherry did not understand
the mandatory arbitration clause or its significance. Despite this
clear evidence that Sherry had not agreed to waive her rights, the
court ruled that Sherry was bound by the clause and could not sue here
employer in court.
Sberry took her cause to arbitration under the American Arbitration
Association (AAA). After three years and eight days of hearings, the
arbitrator found in favor of the defendant. The result in the cause
perplexes civil rights attorneys--and with good cause. The arbitration
proceedings were conducted behind closed doors and the legal and
factual bases for the arbitrator's decision are not publically
available.
Most shocking in Sherry's case is that the arbitrator also found
Sherry liable for over $207,000 in attorney fees to pay the defendant's
attorneys. Under civil rights litigation in the federal and state
courts, such attorney fees are only awarded for frivolous or bad faith
suits, because public policy favors the bringing of such suits. In
addition, the cost of the arbitrator and the AAA's fees totaled
$16,000, compared to the $200 filing fee for a court case.
Sherry's ability to vindicate her civil rights was hampered in part
by here inability under the arbitration rules to conduct discovery and
develop a full factual record. Future employees who are discriminated
against will not be able to use Sherry's experience to assist in
building their cases. Under the arbitration procedure, both Sherry and
her attorney are effectively gagged and cannot discuss the case without
risking a lawsuit, which, ironically enough, the employer would be able
to pursue in court.
The outcome in Sherry's case will act as a deterrent to others
wishing to bring suit for sexual harassment when there is a mandatory
pre-dispute arbitration agreement in their employment contracts. And
more ominously, it will encourage employers to use pre-dispute
arbitration clauses to insulate themselves from civil rights laws.
CONCLUSION: S. 121 AND S. 2117 ARE IMPORTANT CONSUMER AND EMPLOYEE
PROTECTIONS INITIATIVES
As noted in Part I of this testimony, Public Citizen believes that
the current state of arbitration law has resulted in a corruption of
citizens' fundamental rights to equal justice under the law. We have
suggested a comprehensive legislative initiative to resolve the
problem.
Pending consideration of that comprehensive solution, we urge your
support for S. 121, the Civil Rights Procedures Protection Act of 1999
and S. 2117, the Consumer Credit Fair Dispute Resolution Act of 2000.
These pre-consumer, pro-worker bills would address two areas of law
where arbitration is exceptionally inequitable.
Employers should not be allowed to force employees charging their
employers with illegal discrimination into an unfair dispute resolution
scheme of the companies' own device. S. 121 would expressly prohibit
the use of arbitration or other alternative dispute resolution
procedures in federal civil rights discrimination claims unless after
the claim arises, the claimant voluntarily agrees to arbitration.
Mandatory arbitration schemes in consumer credit adhesion contracts
deny consumers their right of access to the courts and the protection
of state consumer laws. S. 2117 would make mandatory arbitration
clauses in consumer credit contracts invalid and unenforceable, unless
the consumer voluntarily agrees to arbitration after the controversy
has arisen.
Both S. 121 and S. 2117 would not eliminate arbitration in these
situations, but would harness market forces to reduce current abuses.
After a dispute has arisen, if both sides believe it is in their
interest to proceed to a specified arbitration forum, they may agree to
do so. After the dispute, both parties have inducements to pay
attention to the equities of the arbitration procedure. If a consumer
or employee is only offered a biased or procedurally unfair
arbitration, then she will not choose arbitration. Therefore, the
legislation provides the proper incentive to make these voluntary
arbitrations demonstrably fair.
Public Citizen urges the Subcommittee to explore the broader issue
of unfair arbitration. As a first step we support the enactment of S.
121 and S. 2117 into law. Consumers and employees need the bills'
protections now.
Senator Feingold. I also ask that the Washington Post
article, dated today, already referred to, entitled, ``Win
Some, Lose Rarely: Arbitration Forums' Rulings Called One-
Sided,'' be entered in the record of this hearing.
[The article follows:]
[From the Washington Post, Mar. 1, 2000]
Win Some, Lose Rarely?--Arbitration Forum's Rulings Called One-Sided
(By Caroline E. Mayer)
Like many banks, car dealers and retailers, First USA N.A., the
nation's second-largest issuer of credit cards, no longer permits its
customers to sue it in court. Instead, any disputes must be resolved
through arbitration by a firm chosen by First USA.
Businesses such as First USA say that for everyone involved,
arbitration is faster, more efficient and cheaper than litigation. But
arbitration may also mean that the company wins most of the time--at
least according to data recently submitted in a lawsuit in an Alabama
state court.
The data, disclosed last month by First USA in a class-action
lawsuit challenging mandatory arbitration, show that not only has the
company sought arbitration far more often than consumers, it has also
won in 99.6 percent of the cases that went all the way to an
arbitrator.
First USA's experience in the two years since it imposed its
arbitration requirement is likely to become a focal point in the debate
over the arbitration rules contained in many consumer contracts.
Arbitration has for years been a means to resolve disputes between
businesses, but increasingly companies are including arbitration
clauses in consumer agreements and employment contracts. In First USA's
case, consumers were notified by a fine-print insert in their monthly
bills that by using their cards, they agreed to take disputes to
arbitration.
Dozens of lawsuits around the country are contesting the
arbitration rules, with mixed results. At least three of these suits
also question the impartiality of the arbitration firm selected by
First USA and many other credit-card firms and retailers, such as
American Express and Best Buy.
These suits contend that the firm, the National Arbitration Forum,
is so financially dependent on the banking industry that it can seldom
afford to rule against companies. Furthermore, they say the forum's own
marketing materials, promising a ``positive impact on the bottom
line,'' suggest that the organization is inherently biased against
consumers.
A spokesman for Bank One, which owns First USA, declined to discuss
the suits, saying the company doesn't comment on pending litigation.
Edward Anderson, managing director of the forum, dismissed the
allegations in the lawsuits, saying, ``We are impartial, and more
importantly our arbitrators--former judges, lawyers and law
professors--are impartial.'' Anderson said the lawsuits ``are merely an
attempt by trial lawyers to find a way to avoid arbitration'' so they
can continue to collect high fees in big class-action court cases. In
arbitration, high lawyer fees are unlikely because almost all involve
individual claims for relatively small amounts.
The controversy over arbitration will get attention today in
Congress. The Senate Judiciary subcommittee on administrative oversight
and the courts will hold a hearing on the growing number of contracts
that require employees, businesses and consumers to agree, in advance
of any disputes, to give up their rights to sue and submit all future
disputes to arbitration.
Subcommittee Chairman Charles E. Grassley (R-Iowa) said he is a
proponent of arbitration as a means of unclogging the courts. But he
said he wants to ``make sure consumer interests are protected in the
process and that the arbitration is being conducted in a fair way.''
Rep. Luis V. Gutierrez (D-Ill) introduced a bill in the House last
year that would bar mandatory-arbitration provisions in consumer
contracts, and Sen. Russell Feingold (D-Wis.) plans to introduce
similar legislation. He tried to attach such a provision to the
bankruptcy legislation recently passed by the Senate, but he dropped
the attempt in exchange for the subcommittee hearing.
Since First USA implemented its arbitration clause in early 1998,
it has filed 51,622 claims against consumers with the forum. In the
cases that First USA filed, the forum has made 19,705 awards. First USA
prevailed in 19,618, card members in 87. (Of the remaining cases, First
USA said more than 28,000 had ``expired'' because the customers had not
been notified in a timely fashion as is required by the forum's rules.
More than 3,600 cases are still pending.)
Meanwhile, only four consumers have filed cases against First USA
with the forum. In two of these four cases, the arbitrators made awards
against first USA; one case was settled, and another is still pending.
The fact that the company sends cases to arbitration far more often
than consumers is a function of economics, say consumers' lawyers. It
costs $49 to file a complaint with the forum, an amount that may be
reasonable to big businesses trying to collect large unpaid debts. But
for a consumer challenging late fees of about $29 or high interest
rates, the filing fee may not be worthwhile. In the past, these
consumers might have joined a class-action suit to fight the companies.
Costs for such suits are minimal because most lawyers take them on a
contingency basis.
While Bank One spokesman Thomas Kelly declined to talk about
thelawsuits, he said ``the overwhelming majority'' of cases that First
USA filed at the forum ``are claims against customers who are more than
six months delinquent'' in paying their bills.
To the forum's Anderson, the figures are meaningless because First
USA would probably have had a similar success rate had it pursued the
same cases in court. Anderson said creditors win about 98 percent of
collection actions brought against debtors in federal courts. While
declining to discuss the specific numbers provided by First USA, saying
they ere confidential, Anderson said ``expired'' cases should be
counted as victories for consumers.
As companies have adopted these clauses, business has grown for the
forum, a private firm where 20,000 cases were filed last year, up from
16,000 the year before, according to Anderson. It is the second-largest
arbitration firm in the country, behind the nonprofit American
Arbitration Association, which handled more than 140,000 cases last
year. Officials at the American Arbitration Association said almost all
of those were commercial cases that didn't involve consumers. In
contrast, arbitration industry experts say, the forum's business
involves more corporate-consumer disputes, in large part because of the
company's aggressive marketing.
The forum's marketing letters are an issue in at least three
lawsuits that question its impartiality. In one letter, Anderson wrote:
``There is no reason for your clients to be exposed to the costs and
risks of the jury system.''
Another letter urged lawyers to contact the forum to see ``how
arbitration will make a positive impact on the bottom line.''
A coalition of public interest groups that includes the Trial
Lawyers for Public Justice, AARP, the National Association of Consumer
Advocates and the Association of Trail Lawyers argues that these
letters suggest that the forum will take the companies' side.
``If a court were to solicit business from a party that might come
before it with strong hints that the solicited party would get a good
deal in her on his courtroom, there is no doubt that this would be
improper and sanctionable behavior,'' the group said in a fried-of-the-
court brief filed in a case challenging First USA's arbitration
clauses.
Anderson said the letters simply state the law and economics of
arbitration. ``The letters say you save money through arbitration, and
that's true--all parties save money. * * * There's nothing secret about
the way we market. We market to everybody--to attorney's general,
consumer protection administrators, anybody who will listen,'' he said.
Britton D. Monts, a Dallas lawyer who has filed a class-action
suite against First USA in a federal court in Texas alleging improper
late fees, said evidence collected in his lawsuit shows that
``virtually all'' of the forum's income comes from First USA collection
fees, making its business vital to the future of the company.
Anderson said that is a ``complete fabrication'' and ``there's no
evidence that it's true.'' He declined to disclose specific financial
data, saying the forum was a privately held company. The company did
submit is financial records to the federal court in Dallas, after a
court order, but on the condition that they be kept confidential.
Firtst USA papers filed in the Dallas case show that the company
paid the forum $5.3 million between January 1998 and November 1999.
``Without question, loss of First USA's business would result in a
major financial blow to [the forum] and is the kind of loss [the forum]
would necessarily have to avoid,'' Monts said, ``The idea of a private
court being financially dependent on a litigant appearing before it is
an insult to the integrity of our justice system.''
Alan Kaplinsky, a Philadelphia lawyer who represents several
financial institutions and is a strong advocate of mandatory-
arbitration clauses, said such charges are unfair. ``The forum has put
together an extensive list of experienced, highly reputable
arbitrators,'' he said. ``To suggest that the forum would basically
become partial because of the First USA fees impugns the integrity of
their arbitrators.''
WHEN THE CUSTOMER IS RARELY RIGHT
Tha National Arbitration Forum has ruled in favor of First USA in
more than 99 percent of the cases that went to an arbitrator.
Victories by: First USA: 19,618; Customers: 87.
Note: More than 28,000 cases have expired; more than 3,600 are
pending.
Senator Feingold. One other quick comment. What I am going
to do as I work on this issue, I hope with other committee
members, is really sort of watch and almost fly-speck this
tendency to talk about mandatory arbitration's merits and then
quickly shift to just reading quotations and comments that
refer only to arbitration. This is sort of a bait and switch,
where you are taking a concept of arbitration, which as Mr.
Maltby suggests, everyone supports, thinks is an excellent part
of our system, and then to somehow attribute general
characteristics of arbitration to mandatory binding
arbitration. I think they are very different things.
And I think the conversation, the discussion led by Mr.
Lorber, about what the courts have said is a fair point. But
the purpose of these hearings is not to suggest that there is a
constitutional problem with mandatory arbitration or to suggest
that they are not at least technically legal, it is whether it
is good policy and whether it is fair, and that is our job
here.
So what we are about here is considering passing Federal
legislation that will say--even though it may be something you
can do, I will leave that to the courts whether or not there is
some automatic or constitutional barrier--whether it is a fair
thing to do or the right thing to do. And, I have obviously
come to the conclusion that in the cases I have seen, it is
not, in most situations.
So let me turn to Ms. Sturdevant. In a letter I received
this week from the National Arbitration Forum, the NAF cites an
ABA study of consumer arbitration that found consumers
prevailed in 80 percent of their claims in arbitration compared
to just 71 percent in court. How do you respond to the NAF's
numbers that seemingly favor arbitration for consumers?
Ms. Sturdevant. Senator Feingold, there is no information
that indicates what they looked at or how they came to that
conclusion. So it is very difficult to counter the assertion
because it is completely unsupported. But I think more telling
is the evidence in the Alabama case that was referred to in
Caroline Meyer's article in The Washington Post today, which
indicates that 99.6 percent of the time the company wins; that
is, the company wins 225 times for every once that a consumer
prevails, and I think that is a more believable statistic.
The National Arbitration Forum has been marketing its
services to financial institutions for a number of years, and
it says in its written solicitations that businesses should
bring their business to the National Arbitration Forum because
it will improve their bottom line.
Senator Feingold. Let me follow with another argument
raised by the National Arbitration Forum. How do you respond to
the assertion that arbitration is advantageous to consumers
because, without it, consumers may not be able to get a
business to agree to arbitrate after a dispute has arisen?
Ms. Sturdevant. I think that that is very deceptive. I do
not think that a consumer, challenging a wrongful business
practice, will want to go to arbitration for the reasons I
mentioned in my testimony. You cannot get discovery, the
arbitrator does not have to follow the rules of law, does not
have to follow precedent, cannot give injunctive relief, cannot
award punitive damages. So a consumer would not want
challenging an unlawful practice to go to that forum.
If a consumer wanted to go to Small Claims Court, then it
would not matter whether or not the company agreed. But I think
the more significant problem is that I have seen companies
adopt this requirement specifically to insulate their wrongful
practices from review. When Bank of America, the first bank to
adopt mandatory arbitration by a statement stuffer, did it, it
is because it was facing a price-fixing case in which the other
California-based banks had settled for $55 million, and it was
to insulate itself from having to face the accountability of
judges and juries that it adopted the clause. And the rest of
the banking and financial institutions looked at that and said,
``This is a great idea because we will not have to pay. We will
not get caught.''
Senator Feingold. Thank you very much, Ms. Sturdevant.
Mr. Mogilnicki, you said that arbitration is cost
effective, that not all of the cases are large enough to
justify court action and the goal here is to somehow have a
neutral third party. What would be wrong in cases involving a
small amount of money, with just allowing Small Claims Court to
be the cost-effective alternative rather than arbitration.
Mr. Mogilnicki. I think this issue of what the proper forum
is just the right issue. But we believe that the right choice
here is to maximize consumer choice. So it is to allow
consumers to choose a credit card or other credit arrangements
that allows them to go to Small Claims Court, if that is what
they prefer, or to choose a different contract entirely; one
that allows them to go to arbitration. And so there is nothing
inherently wrong with Small Claims Court any more than there is
something inherently wrong with arbitration. What we would like
to see is a financial marketplace in which credit card issuers
and others are able to afford consumers the choice, a choice to
agree to a contract that binds into arbitration or, from other
providers, a choice of a contract that allows consumers to go
to court, including Small Claims Court.
Senator Feingold. Realistically, do you think people will
make determinations about which credit card to take based on
this choice?
Mr. Mogilnicki. I do, for the consumers for whom this
matters, and for consumers for whom it does not matter, there
is no need for legislation.
Senator Feingold. I would suggest that very few people
would make the decision based on this, and I do not see it
greatly harming your industry if within the context of your
contracts they would have an option of either arbitrating or
going to Small Claims Court, but that is obviously the nature
of our disagreement. Thank you for your answer.
Mr. Maltby, getting to the issue of employer agreements,
why is the practice--and I have to say, again, all of these
practices trouble me. But the one that bothers me the most, the
one that got me involved in this issue is this question of
employment discrimination.
If we make agreeing to arbitrate voluntary as my bill does,
will we make arbitration unworkable? Would anyone agree to go
to arbitration after a dispute arises, for example?
Mr. Maltby. Senator, there may be a certain intuitive
appeal to the idea that if you make it voluntary, peoplewill
not choose arbitration, and the whole desire to get this new access to
justice will fall apart, but that is just not true. It is not true for
a reason, and it is not true for some data. The simple reason is that
employees are not stupid. They may not know exactly how much it costs
to go to court. They may not know it is $50,000 or more, but they know
it is more money than they have got. And if you can show them that the
arbitration system is fair, they will choose it. There is absolutely no
reason for them not to choose it.
And while the data in this area is not overwhelming, as I
indicated in my original testimony, there are at least a dozen
major American corporations that have tried voluntary
arbitration, some predispute, some post-dispute, and every
single one of them worked--every single one. And I mean by
that, not that I thought they worked, but that the corporations
who set those voluntary programs up considered them to be a
success. So, yes, there is intuitive appeal to this idea that
it has to be mandatory to get people to use it. But all of the
available information says that that idea simply does not hold
up when you look at it carefully.
Senator Feingold. Thank you.
Mr. Lorber, let me, again, say for the record because it is
so important that this discussion not get off track, that I
support alternative dispute resolution as a means of allowing
businesses to restrain costs and remain competitive. Could you
give us any estimates of the additional cost to business that
would result from the enactment of S. 121, which would permit
arbitration of Civil Rights claims, only if voluntarily agreed
to by both parties after the claim arises? Do you have any
sense of what would be the----
Mr. Lorber. No, I do not. All I do know is that if you look
at the cost of litigation and it is a cost initially,
interestingly enough, borne by the employer, initially, it is
substantial. Fifty thousand dollars I think, candidly,
understates the cost. And if we are facing 24,000 Federal
filings a year right now, these numbers, I mean, one could play
with numbers, but they are obviously significant.
Let me just, Senator Feingold, one other point, and I just
very briefly, you had indicated quotes in favor of arbitration
in and of itself are fine, but you are talking about mandatory
arbitration. At least what I quoted, the Gilmer decision, and
the Gilmer progeny, of course, is quotes that involve mandatory
pre-employment arbitration. So that this is, when I talk about
the Gilmer and the Gilmer cases, this is what I am talking
about. And, indeed, as I cited in my statement, the Supreme
Court, in 1998, again, indicated unanimously that private
employment arbitration is something that it would look very
favorably upon.
Senator Feingold. That is absolutely a fair remark. In
fact, I made that distinction. I was talking about the court
cases in one context, but an awful lot of the testimony that
was favorable to mandatory arbitration today was based on
language and quotations that had to do with general
arbitration. And I, frankly, think that it gets in the way of
the discussion of the core issue here, which you have actually
honestly addressed. You have tried to point out the benefits of
mandatory arbitration. But I think when you start bringing in
arbitration, generally, you are sort of preaching to a very
large choir, and it is not really relevant to the issue, the
specific issue, of whether mandatory arbitration is worth the
costs in terms of the rights that people give up.
And on that note, let me thank all of you. This has been a
very good hearing, and all of the witnesses on the first panel.
And we look forward to working with you as these pieces of
legislation move forward.
[Whereupon, at 4:18 p.m., the subcommittee was adjourned.]
A P P E N D I X
----------
Questions and Answers
----------
Responses of Jill Lajdziak to Questions From the Senate Committee on
the Judiciary
Question 1. Manufacturers argue that because disputes between
dealers and manufacturers are complex commercial disputes, the courts
are not the competent venue in which they should be decided. They argue
that these disputes are best resolved through arbitration. However,
courts have always confronted and resolved all types of commercial and
business disputes and continue to do so.
When a dispute arises between an auto dealer and a manufacturer, it
many times involves significant amounts of money and a number of
complex legal questions. Because of these issues, it seems there are
times when a full discovery process and otherdural safeguards of a
court of law are necessary. When the full protection of a court of law
is necessary in order to properly resolve a dispute, why should not a
party to the dispute a accorded these rights?
Answer 1. The Retailer/Saturn Dispute Resolution Process, which
includes mandatory binding arbitration, was developed jointly by a
group of experienced automobile dealers and Saturn representatives as
the desired means of resolving disputes under the franchise agreement.
They recognized that both the company and the dealer could have a
tremendous financial stake in a dispute and felt their interests would
be not only protected, but also enhanced by the mandatory binding
arbitration conducted within the Saturn family.
The National Automobile Dealers Association (NADA) was briefed by
Saturn representatives and prospective retailers on the dispute
resolution process at the time it was developed, and NADA raised some
concerns and responded to NADA with the attached letter, which says in
part:
``Our team met recently and spent a considerable amount of time
reviewing our dispute resolution process in light of your comments. We
reaffirmed through consensus that our process is well designed to serve
the unique interests of the entire Saturn family. * * * In fact, our
dispute resolution process was viewed to be the ONLY [emphasis added]
process consistent with the Saturn philosophy and operating style. * *
* we drafted our agreement and the dispute resolution process jointly,
we intend to implement our plans jointly, and, if we decide that change
is appropriate, we have created a joint process in the agreement to
make such changes.'' (See attached letter from prospective Saturn
dealers to NADA.)
Since this letter was sent to NADA in January 1988, the Saturn
Franchise Operating Team (which consists of eight Saturn retailers and
eight Saturn representatives) has met periodically to review the
agreement. No changes in the mandatory binding arbitration portion of
the dispute resolution process have been suggested.
As a result, which it may seem reasonable to afford ``a full
discovery process and other procedural safeguards of a court'' to the
parties in a dispute, there are other ways of handing such concerns to
which the parties themselves may choose to agree. It does not seem
right that these other approaches to dispute resolution should be
banned or limited by law.
Question 2. Can you provide the Committee with the number of
contracts between auto dealers and manufacturers that contained
mandatory binding arbitration clauses five years ago and the number of
contracts that contain these clauses today?
Answer 2. Since this question was also posed to the witness for the
Alliance of Automobiles Manufacturers and it applies to the entire auto
industry, we have provided the information requested to the Alliance
for inclusion in their response.
Question 3. According to you and others who testified on behalf of
the automotive industry against S.1020, most sales and service
contracts auto dealers and manufacturers do not contain mandatory
binding arbitration clauses, and each party is allowed the option of
litigation or arbitration. If Congress fails to pass S.1020 now, can we
ensure that in the future the option of arbitration or litigation will
continue, and, when two parties enter into arbitration they do so
voluntarily?
Answer 3. S.1020 proposes to disrupt the agreed upon approach to
dispute resolution that the Saturn organization (including its retailer
body) has created. For this reason, Saturn opposes passage of this
bill.
The Retailer/Saturn Dispute Resolution Process was included in the
original franchise agreement between Saturn and its retailers. As a
result, prospective Saturn retailers then knew that mandatory binding
arbitration was how their business issues with Saturn would be
resolved, before making any investment whatsoever. If this approach to
dispute resolution was deeded to be unacceptable, the prospective
retailers could simply decide not to invest in Saturn--or they cold
pursue a Saturn retail store and then work within the Retailer/Saturn
process to change the approach. No such changes in the mandatory
binding arbitration portion of the dispute resolution process have been
sought.
Furthermore, the Saturn process does not allow unilateral company
decisions in matters where joint decision-making is provided for. Any
changes to the franchise agreement involving the dispute resolution
process would have to be approved by the Franchise Operating Team
(FOT), a consensus decision-making body comprised of eight retailers
and eight Saturn representatives. Over time, when the agreement itself
is rewritten, changes will be suggested by a joint task force, and then
approved by the FOT before being presented to each retailer.
What other manufacturers may or may not choose to do in the future
is their business--a subject of discussion and negotiation between the
companies' managements and their dealer organizations. At the present
time, however, the protections being sought by the legislation appear
to be largely speculative. With so few dealers subject to mandatory
binding arbitration today, and the trend over the last few years moving
away from the use of these clauses, it is puzzling why Congress would
need to enact this legislation. Clearly it will have an adverse impact
on some manufacturers, yet it would appear to provide essentially no
change or no benefit to most of the remaining body of dealers. If, in
the future, the concerns over the use of these clauses prove to be born
out, Congress can certainly intervene at that time to provide the
protection being sought.
______
Saturn Corporation,
January 29, 1988.
Mr. James T. Caplinger,
President, National Automobile Dealers Association, Caplinger Chevrolet
Co., Inc., England, AR.
Dear Jim: The members of the Saturn Marketing Planning Team thank
you for your on-going interest in our franchise agreement and marketing
plans, and for your courtesy in inviting us to your headquarters to
discuss these matters with you.
Our team met recently and spent a considerable amount of time
reviewing our dispute resolution process in light of your comments. We
reaffirmed through consensus that our process is well designed to serve
the unique interests of the entire Saturn family--including Saturn, its
dealers and its customers. In fact, our dispute resolution process was
viewed to be the only process consistent with the Saturn philosophy and
operating style. As we indicated in McLean, we drafted our agreement
and the dispute resolution process jointly, we intend to implement our
plans jointly, and, if we decide that change is appropriate, we have
created a joint process in the agreement to make such changes.
Although we respect the concerns you have raised over this issue,
we respectfully ask you to consider the extensive dealer/manufacturer
involvement and the many innovative features embraced by this unique
agreement. We believe that by continuing to work together as true
partners, many of the objectives shared by dealers, manufacturers and
NADA will be realized.
Thank you again for your interest. We hope to continue the close
working relationship we have enjoyed during the development of Saturn's
marketing plans.
Sincerely,
Don Hudler, Saturn Corporation; Greg Baranco,
Baranco Pontiac; Jim Butler, Jim Butler
Chevrolet; Larry Paul, Larry Paul
Oldsmobile-GMC; Rick Hendrick, III, City
Chevrolet; Louis King, King Motor Company;
Chris MacConnell, Thomson-MacConnell
Cadillac; Carl Sewell, Sewell Village
Cadillac; Jim Weston, Jim Weston Pontiac-
Buick-GMC; Eli Bloom, Myrtle Motors; Dick
Deane, Deane Buick; Lou Herwaldt, Lou
Herwaldt Oldsmobile; Bob Longpre, Bob
Longpre, Inc.; Pete Reynolds, Reynolds
Buick/GMC Trucks; Greg Sutliff, Sutliff
Chevrolet; John Zimbrick, Zimbrick Inc.
__________
Response of Jill N. MacDonald to a Question From Senator Feingold
Answer 1. I testified on behalf of the Alliance of Automobile
Manufacturers. Alliance members are 11 car and light truck
manufacturers representing more than 90% of U.S. vehicle sales.
Alliance members are BMW Group, DaimlerChrysler Corporation, Fiat, Ford
Motor Company, General Motors Corporation, Isuzu Motors America, Inc.,
Mazda, Nissan North America, Toyota Motor Sales, USA, Inc., Volkswagen
of America, and Volvo. Members of Alliance do not manufacturer heavy
duty trucks and therefore, your question regarding the number of truck
manufacturer-dealership agreements that contain mandatory binding
arbitration clauses does not pertain to the Alliance. Freightliner
Corporation did file written testimony with the Committee and would
have testified at the hearing had there been an opportunity for them to
do so. A copy of that testimony is attached for ready reference.
______
Responses of Jill N. MacDonald to Questions From Senator Grassley
Answer 1. As I testified at the hearing on March 1, 2000, mandatory
binding arbitration has become a preferred way of resolving commercial
disputes because: It promotes and expedites resolution of disputes, it
promotes harmonious resolution of disputes preserving relationships, it
provides certainty of forums of resolving disputes, it is more cost
efficient, it eliminates bias, and it provides finality.
Notwithstanding assertions to the contrary heard at the hearing,
arbitration is not some lesser form of adjudication. Parties rights to
discovery, providing witnesses, etc. are fully protected in arbitration
proceedings and in fact are not limited by the very technical rules of
evidence in being able to bring before the arbitrators all information
they believe important to their dispute. Moreover, arbitration
decisions will be set aside if they are procedurally unfair to either
side and arbitration is not pursued to avoid state law. In fact, Iowa,
Arizona, New York, South Carolina and Wisconsin to name a few require
application of their state law in arbitration proceedings.
Another unique feature about arbitration in our industry is that
the arbitrators selected are knowledgeable about the industry and are
experts on the issues affecting it. Arbitrators bring their
considerable expertise to the decision making process unlike, courts
where choice of counsel may be more important than the merits of a
dispute.
The intent of the Federal Arbitration Act was to allow parties to
agree or disagree outside of the overcrowded federal court system. To
exempt one industry based on special interests and to prohibit those
parties from agreeing voluntarily to arbitration makes no sense.
Mandatory arbitration agreements are present in some dealer/
manufacturer contracts. They are one part of a complex of arrangement
dealers must evaluate in determining whether to invest in a dealership.
Most importantly, alternative dispute resolution mechanisms like
arbitration provide for a fair, fast, and cost-efficient way to resolve
disputes and maintain business relationships.
Answer 2. A chart with the current number of Franchise Agreements
with Mandatory Binding Arbitration (MBAC) and a chart number of
Franchise Agreements with Mandatory Binding Arbitration (MBAC) in 1995
are attached.
Answer 3. If Congress does not pass S. 1020, it will ensure that
contracting parties (dealers and manufacturers) have the right to enter
into contracts containing a mandatory arbitration clause and ensure
that arbitration is a viable tool for resolving disputes in a less
confrontational, faster, and more cost-efficient manner. State laws can
and do prevent arbitration clauses from being forced on existing
relationships.
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Responses of Patricia Sturdevant to Questions From Senator Grassley
Question 1. A recently released Study by the Rand Institute for
Civil Justice (Class Action Dilemmas, Pursuing Public Goals for Private
Gains) discussed the fact that in many consumer disputes the percentage
of the settlement awarded to the class counsel exceeded that awarded to
the class members combined. On the whole, when consumers proceed as a
class, the biggest winners are the class counsel. Moreover, in most
consumer class claims, the class counsel award grossly exceeded the
amount of work involved on the part of counsel. Would you like to
comment on these facts?
Answer 1. On behalf of the National Association of Consumer
Advocates, I very much appreciate the opportunity to comment and
respond to these follow up questions, but have serious doubt that the
assertions in question 1 are indeed facts. We have not yet been able to
obtain a copy of the complete Rand Study, but have reviewed the summary
and the news release summarizing its findings, which are available on
the Rand Website.
If it is a fact that awards of fees to class counsel exceed the
sums awarded to class members combined, that could only occur in cases
where attorneys fees are shifted to defendants under a statutory fee
shifting provision, most likely in cases which result in injunctive,
declaratory, or other non-pecuniary relief. As a matter of law, in both
federal and state jurisdictions, in a case which results in the
recovery of damages for the class, the attorneys fees awarded are
generally based on a percentage of the class recovery, usually 30%, or
are calculated using the lodestar method, which is based on the number
of hours worked multiplied by the hourly rate. Some federal circuits
require one, and some the other method, and one circuit requires that
both methods be used as a cross check against the other.
In a number of areas Congress has passed legislation recognizing
that, as a matter of public policy, private litigation to enforce the
law and redress wrongs should be encouraged by permitting fee shifting.
Approximately 150 federal laws provide for an award of attorneys fees
to the prevailing plaintiff in civil rights, consumer, or environmental
cases. A good example is the Magnuson-Moss Consumer Warranty Act, in
which Senator Magnuson argued for the fee-shifting provisions in 15
U.S.C. Sec. 2310, urging the need to give industry the incentive to
perform its statutory obligations: ``One way to effectively meet this
need is by providing for reasonable attorney's fees and court costs to
the successful litigants, thus making consumer resort to the courts
feasible.'' Sen. Rep. No. 93-151, 1st Sess. pp. 7-8 (1973).
The purpose of these fee shifting statutes is to encourage
competent attorneys to take on meritorious cases in the public
interest. In such an instance, the law of some circuits does not tie
the proper amount of fees to the recovery by the plaintiff. Instead:
``The value of an attorney's services is not only measured by the
amount of recovery of plaintiff, but also the non-monetary benefit
accruing to others, in this case the public at large from his
successful vindication of a national policy to protect consumers * *
*.''
Fleet Investment Co., Inc. v. Rogers, 620 F.2d 792, 794 (10th Cir.
1980). This case was litigated under the federal Odometer Act, which
provides in 15 U.S.C. Sec. 1989 for an award of attorney fees against
any person violating the act.
To say that the biggest winners in consumer cases are the class
counsel ignores the value of an order enjoining wrongful conduct and
disregards the importance of the vindication of the public interest in
enforcement of the law. The recovery of fees disproportionate to the
recovery on behalf of the class only occurs as a result of statutory
entitlement to fees because Congress has determined that encouraging
private enforcement of consumer protection and other laws through
awards of attorneys fees serves the public interest. Another example is
42 U.S.C. Sec. 1988, which allows for the awarding of attorneys fees in
civil rights cases in recognition of the public interest in preventing
discrimination based on race, gender, or national origin.
We also dispute the accuracy of the assertion that in ``most
consumer class claims, the class counsel award grossly exceeded the
amount of work involved on the part of counsel''. In jurisdictions
where the lodestar method is followed, compensation is indeed based on
the amount of work performed, with the possibility in some cases for an
enhancement to reflect the fact that fees are sometimes awarded years
after work was performed, and during that time the attorney was
required to expend funds to pay staff and expenses. In other
jurisdictions, where awards are based on a percentage of the fund
recovered, the law requires that fees be calculated not on the amount
of work performed but on the value of the benefit to the class.
Regardless of the method by which reasonable fees are determined, class
counsel only get paid as a result of action by the courts, which must
approve all fee applications.
The thrust of the question, therefore, is either expressing
disagreement with existing legislation, which the Congress has enacted
over a period of decades, or with theway judges are approving fee
awards. If it is the former, the solution is to change the statutes
that provide for fee shifting or argue for changes in the decisional
law governing proper awards of attorneys' fees. Even if were the case
that courts are not doing their job and are awarding fees in excess of
what the applicable authorities allow, it is no solution to substitute
arbitration for courts. In the arbitral forum, the decision makers are
not bound to follow congressional statutory mandates or applicable case
law, so that there would be no controls whatever on arbitrators'
exercise of their discretion in awarding fees. The factual assertions
referred to in question 1, if they are accurate, are not a result of
any misconduct by class counsel, but instead reflect disagreement will
existing law, which judges as well as class counsel are obliged to
follow.
NACA shares the view, which apparently underlies this question,
that in some instances there have been abuses by counsel in class
actions. Indeed, we promulgated a comprehensive set of Standards and
Guidelines for Litigating and Settling Consumer Class Actions meant to
address abuses, which is published at 176 F.R.D. 375 (1988). But the
fact that some individuals misuse the class action device should not be
allowed to obscure the essential point that consumer class actions
serve an important function in our judicial system and can be a major
force for economic justice. They often provide the only effective means
for challenging wrongful business conduct, stopping that conduct, and
obtaining recovery of damages caused to the individual consumers in the
class. Frequently, many consumers are harmed by the same wrongful
practice, yet individual actions are usually impracticable because the
individual recovery would be insufficient to justify the expense of
bringing a separate lawsuit. Without class actions, wrongdoing
businesses would be able to profit from their misconduct and retain
their ill-gotten gains Id. at 377.
Question 2. Consumer advocates claim to believe in the efficacy of
alternative dispute resolution. If that is the case, how should an
acceptable pre-dispute clause be written?
Answer 2. NACA, along with other consumer advocates, endorses the
use of alternative dispute resolution, including mediation and
arbitration, when parties of equal bargaining strength voluntarily make
the choice of these alternatives to traditional adjudication of
disputes by the courts. However, we do not believe that it is possible
to have meaningful consent by a consumer to a predispute arbitration
clause in a contract of adhesion. Arbitration as a method of resolving
disputes is a creature of contract premised on the ability of parties
of equal bargaining power to chose the method of resolving disputes
which will best service their mutual needs. Free choice is the
foundation of all alternative dispute resolution mechanisms, including
arbitration, and we believe that consent of the parties is a
prerequisite to an enforceable agreement, as a matter of both law and
policy.
NACA's views are based on and supported by the case law. The
Supreme Court has repeatedly recognized that arbitration is a matter of
contract between the parties. See e.g., First Options of Chicago, Inc.
v. Kaplan (1995) 514 U.S. 938, 944-945. There, the Court held that in
deciding whether the parties agreed to arbitrate a certain dispute,
courts should apply ordinary state law principles that govern the
formation of contracts, and explained: ``After all, the basic objective
in this area is not to resolve disputes in the quickest manner
possible, no matter what the parties' wishes, but to ensure that
commercial arbitration agreements, like other contracts, `are enforced
according to their terms,' and according to the intentions of the
parties,'' citing and relying on Mastrobuono v. Shearson Lehman Hutton,
Inc. (1195) 514 U.S. 52, 56-57, 62-63; Dean Witter Reynolds Inc. v.
Byrd, (1985) 470 U.S. 213, 219-220; Volt Information Sciences, Inc. v.
Board of Trustees of Leland Stanford Junior Univ., (1989) 489 U.S. 468,
475-476; Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,
(1985) 473 U.S. 614, 626. Thus, as the Court noted in Volt, arbitration
is a matter of consent, not coercion.
NACA's view that voluntariness is essential to any acceptable
alternative dispute resolution system also finds strong support as a
matter of policy in ``Justice in the Balance 2020'', the Report of the
Commission on the Future of the California Courts. This Report was
issued by a committee, appointed by the Chief Justice of the California
Supreme Court, which for two years studied the propriety of alternative
dispute resolution mechanisms as a component of a system of justice.
That Report concludes that appropriate alternative dispute resolution
``stands for the principle of parties' control over the resolution of
their own disputes'' at p. 53. The Report recognizes both the
importance of choice and the right to adjudication of disputes in court
absent consent to an alternative.
When an arbitration clause is placed into a standardized form
contract before a dispute arises, the consumer is deprived of any way
to intelligently decide if she really wants arbitration or if it will
be an appropriate way to resolve that particular dispute. Therefore, we
do not believe that there is any way to draft an acceptable pre-dispute
clause in a standardized form contract between parties of unequal
bargaining strength. It will always be the case in these contracts of
adhesion that the clause is drafted by the party of superior bargaining
strength and imposed on the weaker party, raising troublesome questions
both about the actuality and the perception of unfairness.
Question 3. According to consumer advocates, one of the most
egregious aspects of many consumer contracts is the lack of disclosure
on the part of many financial institutions. They argue that financial
institutions unilaterally insert arbitration clauses into contracts
with no notice and without negotiation.
If disclosure is a problem, what form should proper notification
take?
Answer 3. The problem with unilaterally imposed, mandatory and
binding arbitration clauses is not lack of disclosure, but lack of
consent to arbitration by the consumer party. The importance of the
fact that financial institutions insert arbitration clauses into
contracts without notice or negotiation is that it negates any
possibility that consumers could consent to a provision when they do
not even know that it exists. The deficiency of sucha procedure is not
that there is inadequate disclosure, but, more significantly, that
there is no manifestation of assent or agreement to arbitration. As
noted in answer to Question Number 2 above, the law requires that
arbitration be a matter of consent, not coercion. Volt Information
Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ.,
supra, 489 U.S. at 475-476.
It cannot reasonably be disputed that arbitration infringes on
constitutionally protected rights to trial by judge and jury. Recently,
a California appellate court decided Badie v. Bank of America (1998) 67
Cal. App. 4th 779,806, rev den (Feb. 1999), a case involving the
enforceability of an arbitration clause which the Bank attempted to
impose on all of its several million credit card and deposit account
customers by a stuffer in their billing statements. The Court held
that, because the right to a jury trial is a substantial fundamental
right, it cannot lightly be deemed waived, and waiver requires a
``clear and unmistakable'' or an ``unambiguous and unequivocal waiver''
of that right. A statement stuffer purporting to change contract terms
was found inconsistent with the requirements for waiver of the
fundamental right to trial by jury, and the clause was held to be
unenforceable.
Thus, the parties' consent is a prerequisite to an enforceable
agreement to arbitrate. Notice is not the same as consent, and
disclosure will not suffice to constitute waiver of the fundamental
constitutional right to a jury trial. The importance of consumers'
having access to the courts is underscored by the attempts of
unscrupulous wrongdoers to coerce consumers into arbitration, which
they perceive as a forum more favorable to them, as a way of insulating
their wrongful conduct from any meaningful oversight. In a front page
story in the New York Times on March 15, 2000 dealing with predatory
mortgage lending, the reporters note that First Alliance Mortgage
Company ``tried to shunt the case off to arbitration, but a state
appeals court, in a crucial ruling, concluded that the elderly couple's
signature on a form agreeing to forego lawsuits had been `obtained by
fraud'.'' A copy of the article is attached.
It would be possible to structure an alternative dispute resolution
clause for post-dispute agreement by regulating the content of
disclosures necessary to obtain consent, just as Congress regulates the
disclosures for extensions of consumer credit under the Truth In
Lending Act, 15 U.S.C. Sec. 1605 (``TILA''). For example, Congress
could require that such a clause appear in a separate document, in
certain size type, be clear and conspicuous, and give consumers the
right to decline, just as it did in enacting TILA, and just as many
states have done in regulating the sale of insurance.
Question 4. As the Rand study pointed out, most consumer class
members have only a small financial stake in the litigation, and
representative plaintiffs may play an insignificant role in the
litigation. And, because of the manner in which class action rules are
commonly applied, class members may not learn of the litigation until
it is almost over. As a result, there are few if any active monitors of
the class attorney's behavior. Such clientless litigation holds within
itself the seeds for questionable practices.
Are mechanisms currently in place to monitor the behavior of class
attorneys? Moreover, do you feel that the grossly disproportionate fees
awarded to the class counsel in relation to the amount of work involved
and the portion awarded to the plaintiffs is indicative of possible
malfeasance on the part of many class attorneys?
Answer 4. It is inherent in much class action litigation that class
members only have a small financial stake. That is precisely why you
need a class. If each individual has large claims, they would have the
economic incentive to seek individual representation. See e.g., Kelly
v. County of Allegheny, (1986) 515 A.2d 48 (recognizing the need for
class actions when individual damages are small). It is true that class
members may play an insignificant role in the litigation, but that is
due more to their lack of legal training than the size of their
damages. The same is true of people with a huge economics stake in
litigation like Bill Gates; they rely on their counsel to protect their
interests. That role in class litigation is played by the court, which
has a fiduciary duty to absent class members to ensure that their
interests are protected at every stage of the litigation pursuant to
Federal Rules of Civil Procedure, Rule 23.
It is true that notice to class members may not occur until a case
has been settled. But the fact that notice to class members comes at
that stage may not be a problem if they have a small stake and play an
insignificant role. Even if it is considered problematic, the timing of
notice is not class counsel's fault. Under Rule 23(d) the court can
order that notice be sent to the class at any time after the class is
certified. Often it is defendants who want class notice to be delayed
because they fear adverse impact on their business interests. See Katz
v. Carte Blance, 496 F.2d 747 (3rd Cir., 1974), cert. denied 419 U.S.
885. In any event, in any class action for damages, notice is given
before class members will be bound by any settlement.
Mechanisms currently exist to monitor the behavior of class
counsel. As an initial matter, before a case is allowed to proceed as a
class action, the court must decide whether class counsel are adequate
to fairly and adequately represent the class. Newberg, NEWBERG ON CLASS
ACTIONS, Sec. 3.21, p. 3-125, 3rd Ed. (1992). Under the case law, the
trial court has the continuing duty to undertake stringent examination
of the adequacy of representation by named class representatives and
their counsel at all stages of the litigation. In re General Motors
Corp Engine Interchange Litig, 594 F.2d 1106 (7th Cir. 1978), cert
denied, 444 U.S. 870 (1979).
Moreover, the Federal Rules of Civil Procedure in Rule 23(e)
require court approval before a class action is dismissed or
compromised. That rule gives judges the power to protect the interests
of absent class members and ensure that any settlement is in their best
interests. Newberg notes that a major purpose of Rule 23(e) is to
discourage the use of the class action device to provide a windfall to
the named plaintiffs and their counsel at the expense of the class, and
concludes: ``Particularly before there has been any class ruling, the
court is in the position to monitor instances of potential abuse
forprivate benefit, while encouraging settlements in the public
interest.'' Newberg, supra, at Sec. 11.65, p. 11-182.
As an additional check on the fairness of settlements by class
counsel, class members have the opportunity to exclude themselves from
any settlement or to file an objection to it pursuant to Federal Rule
of Civil Procedure, Rule 23. Objections to the fairness and adequacy of
the settlement are decided by the trial courts, which are not reluctant
to disapprove class settlements that they find unfair to absent class
members, See e.g., Amchem Products, Inc. v. Windsor, (1997) ____ U.S.,
117 S. Ct. 2231; In re General Motors Corp. Pick-up Truck Fuel Tank
Products Liability Litigation, (1995) 55 F.3d 768 (3rd Cir.), cert.
denied, ____ U.S., 116 S. Ct. 88. This provides not only a mechanism to
monitor the conduct of class counsel in overseeing the adequacy of the
recovery they obtain for class members, but also provides oversight
over the propriety of the requested fee award.
The Rand Study is entirely in accord with NACA's views. According
to the news release issued on November 1, 1999 by the Rand Institute
for Civil Justice, the principal finding of the Rand Study is that:
[t]he key to improving outcomes and eliminating abuses in class action
litigation over money damages is increased regulation of settlements
and fee awards by judges equipped with the training, resources and
determination to do the job''.
Finally, it is NACA's view that ``grossly disproportionate fees
awarded to the class counsel in relation to the amount of work involved
and the portion awarded to the plaintiffs'' is a myth, which does not
reflect reality or indicate possible malfeasance on the part of many
class attorneys. As our answer to question 1 indicates, even in the few
cases which there is such disproportion, it may be soundly based on
case law and public policy. Framing the question in this way fails to
take into account two important points. First is that it is Congress
which has limited the possible recovery in consumer class actions under
TILA, which is the basis for many class actions in the area of consumer
credit. In 1974, Congress amended the act to impose a ceiling on the
class action recoveries of $100,000 or 1% of the defendant's net worth,
and in 1976 modified that limitation to $500,000 or 1% of net worth,
whichever is less. 15 U.S.C. Sec. 1640. It is as a result of that
ceiling, imposed to protect defendants, that individual recoveries to
consumer class members are often small. Second, consumers and the
general public may benefit significantly from class litigation through
the cessation of wrongful practices even when class members recover
only a small monetary sum as their share of class wide damages.
Question 5. The bottom line is: once a class is certified the risks
in proceeding become too great, and pressure to reach a settlement
without adequate investigation of the facts and law increases. For
defendants the rewards of a settlement are less expensive than a
protracted legal battle and the ability to get back to business. Many
times, businesses will simply settle to get rid of the lawsuit at an
attractive price, rather than because the case was meritorious.
In light of possibly huge wind-falls for class attorneys, what
mechanism will prevent the further proliferation of frivolous consumer
lawsuits?
Answers. Once again, this question does not reflect the reality
that NACA members experience in their practices, in which defendants
are unwilling to settle even meritorious cases. Counsel for corporate
wrongdoers who are well funded often will engage in a war of attrition
against their less affluent adversaries and refuse to participate in
settlement discussions even when their clients are plainly liable until
after a class has been certified, all the while resisting both
discovery and class certification with every procedural device that the
Rules of Civil Procedure afford.
While it is true that once class is certified, the defendants face
the threats of substantial liability, there are safeguards in place
that protect them from frivolous lawsuits. As the preeminent
commentator on class actions as explained:
``Because the financial stakes in a class action for damages may be
substantial, both courts and prospective defendants have been
generously empowered to curb potential class action abuses or frivolous
class action. At the outset, it should be recognized that it is
squarely against the normal presumption of professional competence as
well as against the economic self-interests of prospective class
counsel to bring a frivolous class action or strike suit. Empirical
evidence shows that the bringing of a class suit of highly doubtful
merit virtually never results in a settlement, nuisance value or
otherwise, from the defendants. As a practical matter, such suits have
no coercive settlement value at all.''
Newberg, supra, Sec. 15.29, p. 15-84. The empirical evidence relied
upon is a Class Action Study, prepared for the United States Senate
Commerce Committee, 93d Cong., 2d Sess. (1974), reprinted in 62
Georgetown L.J. 1123 (1974). Newberg goes on to note that the Federal
Rules of Civil Procedure provide the defendant with means of summary
dismissal of frivolous lawsuits under Rules 12(b)(6) for failure to
state a cause of action, Rule 12(e) for judgement on the pleadings and
Rule 56 for summary judgement. Moreover, dismissal and sanctions for
the filing of unmeritorious actions are available under Rule 11.
Question 6. Many consumer disputes arise that involve an amount
over $1,000, in which there is a genuine dispute with both parties
believing their claim is valid. If the dispute involves more than
$1,000, it will exceed the limit for small claims court in many
jurisdictions; and, the consumer's claim does not involve a situation
in which he or she may pursue it on a class basis.
How do you propose that a consumer pursue this claim without
arbitration--Superior court? If the amount involved is between $1,000-
$5,000, who is going to pay the attorney's fees? From a cost benefit
analysis, why would somebody pay $4,000 to pursue a $3,500 dispute?
Answer 6. First, small claims court limits are often higher than
$1,000. For example, in California, the limit is $5,000. Second, the
Municipal Courts provide another alternative, and are often cheaper and
faster than Superior Court. Third, do not suggest that consumers be
deprived of the ability to select arbitration, which may well be
desirable for resolution of such a consumer's claim. We merely urge
that that alternative should not be forced on them by coercion, rather
than by their choice.
Whether these disputes are resolved in a judicial or arbitral
forum, the availability of fee shifting statues, discussed in answer to
question 1 above, make it possible for consumers suing under many
federal or state laws to recover fees from the defendant. Congress has
taken into account the importance of making consumer access to the
courts feasible when it passed the 150 pieces of legislation that
provide for an award of attorneys fees against defendants who violate
that statute. By these fee shifting provisions, Congress has made it
economically feasible for consumers subjected to unlawful business
conduct, as well as individuals subjected to discrimination based on
race, gender or national origin to obtain redress. If a consumer is the
target of wrongdoing, just as Congress repeatedly has recognized, it is
appropriate to shift fees to the defendant. And this fee shifting
should be one way, unless the plaintiff's claim is frivolous, like
Congress provided in enacting Title VII. No consumer should be faced
with the possibility of a $10,000 fee award for bringing a $1,000
claim.
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Responses of Lawrence Z. Lorber to Questions From Senator Grassley
Question 1. You stated in your testimony before the Subcommittee
that ``[i]t is common knowledge that the litigation process is much
more time-consuming than arbitration, which is the indisputable
advantage that arbitration has over litigation. To say the prohibiting
arbitration of employment claims will be fairer or more just ignores
the amount of time a party must wait to have the claim resolved. From
the perspective of employees and employers, time is critical.''
In some instances, however, employers are using arbitration as a
means by which to prolong a dispute. I have attached a copy of a letter
regarding a case involving Raytheon. Apparently, Raytheon, as a
condition of employment, required three former employees to sign
mandatory arbitration clauses. Because of the arbitration clauses, when
a dispute arose, the employees were compelled to arbitrate the matter.
The arbitrator ruled in favor of the employees. Then, despite the fact
that the arbitration clause made the arbitration final and binding, it
appears the company refused to pay the award, and filed a motion to
have the award overturned.
In some employment settings, arbitration seems to impose an
additional proceeding, which only serves to prolong the dispute. In
assessing the benefits of mandatory arbitration clauses, how can
mandating an additional proceeding before a party can pursue his or her
claim in court serve to expedite the process of dispute resolution,
particularly, if the stronger party is dissatisfied with the result of
the arbitration process, and will simply file a motion in court to have
the award overturned?
Answer 1. Arbitration provides the most expeditious means of
resolving employment disputes. However, the Federal Arbitration Act
itself provides for limited review of an arbitrator's award when the
award was (1) procured by corruption, fraud or undue means; (2) where
there was evident partiality or corruption [by] the arbitrators; (3)
where the arbitrators were guilty of misconduct in refusing to postpone
the hearing, upon good cause shown, or in refusing to hear evidence
pertinent and material to the controversy; or of any other misbehavior
by which the rights of any party may have been prejudiced; or (4) where
the arbitrators exceeded their powers, or so imperfectly executed them
that a mutual, final, and definite award upon the matter submitted was
not made. 9 U.S.C. Sec. 10(a).
While arbitration is designed to expeditiously resolve matters
without the delays and expenses common to civil litigation, it has
never been an unreviewable process. As noted above, the FAA provides
for limited review. The vast majority of federal courts have built in
additional safeguards. As noted in my testimony, the Gilmer decision
cited with approval the Court's prior holding in Mitsubishi that a
party in arbitration does not forgo his or her substantive
statutoryrights. Simply put, arbitrators must follow the law, see
Shearson/American Express Inc. v. McMahon, 482 U.S. 220 (1987).
Further, arbitration awards are subject to judicial review to insure
that they do not represent a ``manifest disregard'' of the law. See
Wilko v. Swan, 346 U.S. 427 (1953). As noted by the Eleventh Circuit,
``every other circuit except the Fifth has expressly recognized that
`manifest disregard of the law' is an appropriate reason to review and
vacate an arbitration's panel decision.'' Montes v. Shearson Lehman
Bros., Inc., 128 F.3d 1456, 1460 (11th Cir. 1997). The District of
Columbia Circuit held in Cole v. Burns Int'l Security Service, 105 F.3d
1465, 1487 (D.C. Cir. 1997), that in employment discrimination cases,
the limited review permitted under the ``manifest disregard of the law'
standard must be ``sufficiently rigorous to ensure that arbitrators
have properly interpreted and applied statutory law.'' Indeed, this
standard was recently relied upon by the Second Circuit to vacate an
arbitration decision in favor of the employer in an age discrimination
case. See Halligan v. Piper Jaffray, Inc., 148 F.3d 197 (2nd Cir.
1999). The point here is that both parties to an arbitration have, and
always had a right to a limited review of awards. And in employment
discrimination matters, several circuits have expanded the standard for
review.
Perhaps even more to the point, this historical review process has
absolutely nothing to do with whether the arbitration process is made a
part of the employment relationship or is completely voluntary. Since
there was general endorsement of arbitration as an expeditious and fair
means of resolving employment disputes, it would be an anomaly if those
in favor of arbitration, whether voluntary or mandatory, would suggest
that judicial safeguards be removed. Indeed, the reported caselaw
suggests that these safeguards are of greater importance for employees
than employers. And in any event, there can be no legal standard which
gives such a right to review to one party in an arbitration but not the
other.
With respect to the Raytheon arbitration cited as the basis for
this question, it is unclear as to what the issue was before the
arbitrator. In particular, there is absolutely no indication from the
question or the letter from the employees' counsel as to what the
underlying issue was. If the matter was an employment discrimination
case, the D.C. Circuit, including the District Court can look to Cole
for guidance. The letter from the employees' counsel seems to argue
both sides of the issue. While they claim that they wanted to try their
case in court, they now assert that the arbitration award they
otherwise decry should be enforced regardless of the merits of the
underlying arbitration. They seem to be arguing their case before the
wrong forum.
Question 2. Given the inherent importance of civil rights and the
need for the civil rights protection, how do you respond to the
argument that civil rights can only be fully protected through the
court system, unless this option is voluntarily waived?
Answer 2. This question was fully addressed in my testimony. Simply
put, the Congress and the courts have recognized that civil rights and
the statutory protections for civil rights can be fully achieved in an
adjudication regime involving mandatory arbitration. As fully set forth
above and in my testimony, there is no blank check for arbitrators.
Indeed, in the Montes decision cited in my answer to the first
question, the arbitration award was vacated because the arbitration
counsel for the employer apparently urged the panel to disregard
established Fair Labor Standards Act precedent and regulations in
deciding whether the employee was exempt or non-exempt from the FLSA
for purposes of determining eligibility for overtime. The employee's
rights were obviously fully protected, indeed perhaps even more so had
the same argument been advanced to a jury. And in the Halligan decision
cited in my first answer, the Second Circuit suggested an even more
stringent standard for review of awards in discrimination cases. While
Halligan has been questioned as perhaps going too far, it is indicative
of the principle that employee rights are as fully protected in
arbitration as they are in court adjudication. Arguments to the
contrary simply fall of their own logical inconsistency.
Question 3. Percentage-wise, how prevalent is mandatory arbitration
in contracts with American workers?
B. Has there been a trend regarding this percentage, one way or the
other, in the last few years? What direction has any trend been moving?
Answer 3. In the time period allotted to respond to the questions,
I am able to gather the current data.
__________
Responses of Lewis L. Maltby to Questions From Senator Feingold
Question 1. Why is the practice of employers forcing individuals to
choose between accepting employment or signing away their right to go
to court particularly troublesome in the civil rights arena?
Answer 1. The growing practice of requiring employees to give up
their right to go to court and arbitrate employment disputes threatens
to undermine our national effort to create a workplace free of
discrimination.
The United States has worked for four decades to eliminate
employment discrimination. Many of us can remember the time when
segregation and discrimination were not only legal, but normal and
accepted aspects of American life.
We have made a sustained national effort to eliminate
discrimination. Beginning with the Civil Rights Act of 1964, Congress
has carefully constructed a system of federal laws that outlaw almost
every form of employment discrimination. And we have done much to make
these laws the reality of our country. While our efforts are far from
over, equal opportunity now exists in America to an extent we could
hardly imagine a generation ago.
Involuntary arbitration of civil rights disputes has the potential
to reverse this hard won reform. In a perfect world, people would obey
the law automatically, without regard to personal consequences. But in
the world in which we actually live, laws need to be enforced to be
effective. A statute without a credible enforcement system is of very
little value.
Our federal and state courts have been reasonably effective in
enforcing civil rights laws. Not every victim of discrimination
receives justice from our courts, but employers understand that those
who engage in illegal discrimination will generally be held accountable
for their actions.
Our courts are able to be effective because they are independent.
No employer, no matter how large or powerful, has the ability to write
the federal rules of evidence, restrict the range of remedies available
to parties, or choose their own judge. Arbitration, however, is not an
independent legal system. Arbitration is a private system, designed by
the parties to the dispute. Where there is a gross imbalance of
bargaining position, the powerful party has the ability to shape the
process to their advantage. Employers can and do design arbitration
systems that deny remedies approved by Congress, restrict discovery,
and allow the employer to choose the arbitrator.
The Federal Arbitration Act does nothing to prevent this injustice.
Nothing in the FAA requires employers' arbitration systems to provide
even the most basic elements of due process. Moreover, the FAA's
preemption of the field prevents the states from requiring due process.
Many members of the Uniform State Law Commissioners recognized the need
for setting due process standards in their current process of updating
and revising the Uniform Arbitration Act but did not do so because this
option was preempted by the FAA.
Nor are due process requirements required by the appellate courts.
As discussed in the answer to the next question, the circumstances
under which a federal court will reverse an arbitrator's ruling are
deliberately very narrow. Only in rare cases will the courts disturb an
arbitration decision, even when there are due process violations that
would be swiftly reversed had they occurred in a lower court.
The lack of legally required due process standards might not be
catastrophic if employees had the power to refuse to take their cases
to arbitration where the employer's system was unfair. But the Supreme
Court in Gilmer v. Interstate/Johnson Lane Corp. held that employees
may be required, as a condition of employment, to use the employers
arbitration system.
All of this creates a world in which employers have strong
financial incentives to deny due process in arbitration and the current
law forces employees to use employers' arbitration system while
providing virtually no protection from these due process violations.
Employers have the ability to shape the civil rights enforcement system
for their employees in a manner that tilts the playing field steeply in
the employer's favor. This does not formally repeal our laws against
employment discrimination, but the end result could be very much the
same.
Question 2. Why is voluntariness so important to having a fair and
credible alternative dispute mechanism?
Answer 2. Voluntary choice is essential to making employment
arbitration systems fair because due process is not required by law.
The Federal Arbitration Act does not require due process, and preempts
state laws which might contain such requirements. Contrary to some of
the testimony at the March 1 hearing, federal courts do not review
arbitration decisions to ensure that due process was provided.
Under the Federal Arbitration Act, the grounds for appellate review
are extremely limited. The only grounds to vacate an arbitration award
are:
a. Fraud [FAA section 10(a)].
b. Partiality or corruption [section 10(b)].
c. Misconduct by the arbitrator [section 10(c)].
d. Where the arbitrators exceeded their powers [section 10(d)].
FRAUD
These grounds, narrow to begin with, have been rendered even more
narrow through judicial interpretation. For example, showing evidence
of fraud is not enough to vacate an arbitration decision. Nor is it
enough to show the existence of fraud through the preponderance of the
evidence. The evidence of fraud must be clear and convincing, the
highest legal standard in civil law (Bonar v. Dean Witter Reynolds, 835
F.2d 1378 (11th Cir. 1988).
But even proving the existence of fraud by clear and convincing
evidence is not sufficient to vacate an arbitrator's decision. The
petitioner must also demonstrate that the award was procured by the
fraud. Unless the petitioner can demonstrate a nexus between the fraud
and the arbitrator's decision the decision will be allowed to stand in
spite of the fraud (Forsythe International, S.A. v. Gibbs Oil Co. of
Texas, 915 F.2d 1017 (5th Cir. 1990).
This burden is almost impossible to meet. Most arbitration
decisions are very spare, and contain little information concerning the
course by which the arbitrator reached his or her decision. Without
knowing the arbitrator's thought process, one cannot show that it was
influenced by the fraud.
PARTIALITY
It is possible to vacate an arbitration award where the arbitrator
has demonstrated bias against a party, or has an undisclosed conflict
of interest. This provision, however, protects parties only against a
corrupt arbitrator who rules in an unjust manner from a bad motive. It
offers no protection from an arbitrator who denies a party a fair
hearing, or makes rulings that are totally at odds with the law, in the
absence of malice.
OTHER MISCONDUCT
Since the only form of misconduct which the courts have recognized
as grounds for vacating an award is bias, this section of the FAA has
become irrelevant. MacNeil and Speidel's authoritative treatise,
Federal Arbitration Law: Agreements, Awards, and Remedies under the
Federal Arbitration Act, lists not a single case in which an
arbitration award was vacated under this section.
EXCEEDING POWERS
The core of this provision is that an arbitrator cannot decide a
matter which the parties did not agree to submit to arbitration. An
arbitrator who rules upon a dispute which lies outside the bounds of
the agreement to arbitrate may well have his or her decision vacated.
This rule, while important, contains no requirements for an
arbitrator's handling of a dispute which is within the scope of the
agreement.
Thus, the FAA on its face provides no grounds for vacating an
arbitrator's decision on due process grounds. Faced with the obvious
unfairness of such a rule, some courts have interpreted the concept of
exceeding powers to include making decisions that are contrary to
established law.
But, like all other opportunities for judicial review, the concept
that arbitrators must follow the law has been applied very narrowly. As
the Supreme Court stated in Wilko v. Swan (346 U.S. 427 (1953),
``interpretations of the law by the arbitrators are not subject to
judicial review for error''. Following Wilko, courts have generally
allowed arbitration decisions which contain an error of law to stand.
Only when the arbitrator shows a ``manifest disregard for the law''
will the decision be vacated.
The court in Siegel v. Titan Indus. Corp. (779 F.2d 891 (2nd Cir.
1978) defined this standard as ``something beyond and different from a
mere error in the law or failure on the part of the arbitrators to
understand or apply the law.'' Manifest disregard means that ``the
arbitrator understood and correctly stated the law but proceeded to
ignore it''. This standard is obviously one which will seldom be met.
The bottom line is that both Congress and the courts have
deliberately chosen to avoid disturbing arbitration decisions, even to
the extent of allowing decisions to stand which are obviously wrong.
There are benefits to this policy. It would be extremely difficult to
achieve the benefits of arbitration with unlimited judicial review.
But if the law does not protect parties in arbitration from
unfairness, it must allow them to protect themselves. People must be
allowed to decide for themselves whether the enter into arbitration
agreements. They must be allowed to walk away from arbitration when the
system appears unfair. Without this ability, there is nothing to
constrain employer and other powerful parties from deliberately
designing unfair arbitration systems for their own financial gain.
Additional Submissions for the Record
----------
Volkswagen of America, Inc.,
Washington, DC, March 29, 2000.
Hon. Charles E. Grassley,
Chairman, Subcommittee on Administrative Oversight and the Courts,
Committee on the Judiciary, U.S. Senate, Washington, DC.
Dear Mr. Chairman: On March 1, 2000, the Subcommittee on
Administrative Oversight and the Courts held a hearing concerning S.
1020, the ``Motor Vehicle Franchise Contract Arbitration Fairness Act
of 1999.'' The purpose of this letter is to respond to and correct
testimony made by one of the witnesses, Mr. Gene Fondren of the Texas
Automobile Dealers Association.
During the hearing and in his written testimony, Mr. Fondren
testified: ``On October 11, 1999, Volkswagen Credit, Audi Financial
Services and Bentley Financial Services notified dealers that all
disputes, including tort, would be resolved by binding arbitration and
that the laws of the state of Michigan would govern.'' (See p. 11, 2nd
paragraph of written testimony). Mr. Chairman, this statement is true,
but is misleading given the content of the proposed legislation and the
stated purpose of your hearing.
As both the proposed text of S. 1020 and Senator Feingold's
introductory remarks make clear, the purpose of you hearing was to
examine the franchise relationships upon which motor vehicles dealer's
businesses depend, and not on the many other incidental commercial
relationships they may have. You expressly intended a study of the
existence and use of mandatory binding arbitration for resolving
franchise disputes between motor vehicle manufacturers and their
dealers, not a study of motor vehicle financing. The legislative
concern with these agreements arises from the perception (with which we
disagree) that manufacturers have disproportionate bargaining power
with respect to franchise agreements, which are essential to the
dealers' operation.
The Volkswagen Credit, Audi Financial Services, and Bentley
Financial Services agreements, to which Mr. Fondren refers, solely
concern optional financial services between our finance subsidiary and
our dealers. They do not in any way involve franchise agreements
between the motor vehicle manufacturer and its dealers, which was the
issue before the subcommittee and is the focus of S. 1020. As you know,
our dealers are not in any way, shape or form required to use the
services or the funding of our finance company. The agreements to which
Mr. Fondren referred relate to the wholesale inventory financing which
we make available to qualifying dealers who wish to use this service. A
large proportion of our dealers choose to finance their inventories
with other institutions, and our finance company competes every day
with every dealer for this business. Even if the franchise relationship
were the one-sided contract of adhesion, which the dealers say it is,
nothing could be further from the truth with respect to the finance
agreements.
Further, as Mr. Fondren knows, these financial services agreements
are not franchise agreements as defined by S. 1020. A ``motor vehicle
franchise contract'', as defined in section 2 of S. 1020, is ``* * * 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.'' These financing agreements
clearly do not fall under that definition.
As a member of the Alliance of Automobile Manufacturers, Volkswagen
of America, Inc., opposes S. 1020, and believes the bill would
seriously weaken the ability of U.S. state and federal court system to
provide alternatives to costly and time-consuming litigation through
forms of alternative dispute resolution, like mandatory binding
arbitration. The well-established benefits of alternative dispute
resolution, like mandatory binding arbitration, are well known by the
judiciary and therefore have a preferred status in the law. Forms of
alternative dispute resolution, like mandatory binding arbitration,
provide a certain forum for resolving disputes in a convenient and
efficient manner, which affords parties a final, unbiased decision.
Lastly, Volkswagen of America, Inc., based on the available data,
supports the Alliance of Automobile Manufacturers' testimony that the
vast majority of franchise contracts between the manufacturers of motor
vehicles and its franchised dealers do not contain mandatory binding
arbitration clauses. In our case, not one of Volkswagen of America's
567 Volkswagen and 258 Audi dealer franchise contracts contain a
mandatory binding arbitration clause. Rather, each of our dealer
franchise contracts provide for non-binding arbitration.
Mr. Chairman, Volkswagen of America, Inc respectfully submits this
letter as a clarification of the testimony contained in the record for
the March 1, 2000 hearing entitled, ``Overview of Contractual Binding
Arbitration.'' We would welcome the opportunity to answer questions or
provide further information regarding this matter as your convenience.
Sincerely,
W. Christopher Leahy.
__________
Wisconsin Automobile & Truck
Dealers Association,
Madison, WI, March 3, 2000.
Re Statement for the record.
Hon. Charles Grassley,
Chairman, and Members of the Senate Judiciary Committee, Subcommittee
on Administrative Oversight and the Courts.
The origin of state franchise laws was in Wisconsin in 1937-38.
Since, nearly all states have franchise laws to give some level of
balance on major aspects of the relationship where one party has
absolute control.
The U.S. Supreme Court decision to apply the 1925 Federal
Arbitration Act to these contracts of adhesion must be corrected by
Congress. Why?
State laws in effect are by-passed.
We cannot get a precedent to determine what should be reviewed by
the State legislature, since there are no public, written opinions.
Statutory remedies are negated.
The result is arbitration being used as an insurance policy. Limit
risk. Spread risk.
These state laws and venues are for serious matters. Voluntary
arbitration is most practical for lesser disputes. But when a dealer's
lifeblood is at stake, public forums are essential, practical, and in
the public interest.
The state laws act as a deterrent to certain behavior. If they can
be effectively bypassed by suppressive mandatory binding arbitration
schemes, it seems likely we will lose the deterrent factor.
The arbitration plans in place were not negotiated. Just as the
franchise agreements themselves, they are written by the manufacturer
for the manufacturer. I have read some in which a dealer would be a
fool to use arbitration. There would be no way to get full recompense
even if you ``won.''
We need two things:
1. Full access to state statutes and venues;
2. Voluntary arbitration plans after a dispute arises, where the
parties agree also to the rules and format of the arbitration.
S. 1020 helps us get back to some level of equity in process. It
provides a legislative nod at the federal level that state legislative
bodies have legitimacy as well.
We thank the members of the committee, the many sponsors, and
particularly the lead co-sponsors, Senator Grassley and Senator
Feingold.
After 14 years of work on this issue, it would be wonderful to see
it pass this session.
On behalf of the Wisconsin dealers.
Best regards,
Gary D. Williams, CAE,
President.