[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
ARBITRATION FAIRNESS ACT OF 2007
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
ON
H.R. 3010
----------
OCTOBER 25, 2007
----------
Serial No. 110-163
----------
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
______
ARBITRATION FAIRNESS ACT OF 2007
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
ON
H.R. 3010
__________
OCTOBER 25, 2007
__________
Serial No. 110-163
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
-----
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio
MAXINE WATERS, California DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts CHRIS CANNON, Utah
ROBERT WEXLER, Florida RIC KELLER, Florida
LINDA T. SANCHEZ, California DARRELL ISSA, California
STEVE COHEN, Tennessee MIKE PENCE, Indiana
HANK JOHNSON, Georgia J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois TOM FEENEY, Florida
BRAD SHERMAN, California TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota
Perry Apelbaum, Staff Director and Chief Counsel
Joseph Gibson, Minority Chief Counsel
------
Subcommittee on Commercial and Administrative Law
LINDA T. SANCHEZ, California, Chairwoman
JOHN CONYERS, Jr., Michigan CHRIS CANNON, Utah
HANK JOHNSON, Georgia JIM JORDAN, Ohio
ZOE LOFGREN, California RIC KELLER, Florida
WILLIAM D. DELAHUNT, Massachusetts TOM FEENEY, Florida
MELVIN L. WATT, North Carolina TRENT FRANKS, Arizona
STEVE COHEN, Tennessee
Michone Johnson, Chief Counsel
Daniel Flores, Minority Counsel
C O N T E N T S
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OCTOBER 25, 2007
Page
THE BILL
H.R. 3810, the ``Arbitration Fairness Act of 2007''.............. 2
OPENING STATEMENTS
The Honorable Linda T. Sanchez, a Representative in Congress from
the State of California, and Chairwoman, Subcommittee on
Commercial and Administrative Law.............................. 1
The Honorable Chris Cannon, a Representative in Congress from the
State of Utah, and Ranking Member, Subcommittee on Commercial
and Administrative Law......................................... 9
The Honorable Hank Johnson, a Representative in Congress from the
State of Georgia, and Member, Subcommittee on Commercial and
Administrative Law............................................. 11
WITNESSES
Laura MacCleery, Esq., Director, Public Citizen's Congress Watch
Division, Washington, DC
Oral Testimony................................................. 14
Prepared Statement............................................. 17
Mr. Richard Naimark, Senior Vice President, American Arbitration
Association, Washington, DC
Oral Testimony................................................. 29
Prepared Statement............................................. 31
The Honorable Roy E. Barnes, The Barnes Law Group, LLC, Marietta,
GA
Oral Testimony................................................. 48
Kenneth L. Connor, Esq., Wilkes and McHugh, P.A., Washington, DC
Oral Testimony................................................. 49
Prepared Statement............................................. 51
Ms. Deborah Williams, Annapolis, MD
Oral Testimony................................................. 61
Prepared Statement............................................. 63
Cathy Ventrell-Monsees, Esq., Law Offices of Cathy Ventrell-
Monsees, Chevy Chase, MD, on behalf of the National Employment
Lawyers Association
Oral Testimony................................................. 64
Prepared Statement............................................. 67
Peter B. Rutledge, Esq., The Catholic University of America,
Columbus School of Law, Washington, DC
Oral Testimony................................................. 93
Prepared Statement............................................. 95
Theodore G. Eppenstein, Esq., Eppenstein and Eppenstein, New
York, NY
Oral Testimony................................................. 113
Prepared Statement............................................. 115
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable Steve Cohen, a Representative
in Congress from the State of Tennessee, and Member,
Subcommittee on Commercial and Administrative Law.............. 12
APPENDIX
Material Submitted for the Hearing Record
Material submitted by the Honorable Chris Cannon, a
Representative in Congress from the State of Utah, and Ranking
Member, Subcommittee on Commercial and Administrative Law...... 211
Response to Post-Hearing Questions from Laura MacCleery, Esq.,
Director, Public Citizen's Congress Watch Division, Washington,
DC............................................................. 296
Response to Post-Hearing Questions from Richard Naimark, Senior
Vice President, American Arbitration Association, Washington,
DC............................................................. 361
Post-Hearing Questions submitted to the Honorable Roy E. Barnes,
The Barnes Law Group, LLC, Marietta, GA........................ 367
Response to Post-Hearing Questions from Ken Connor, Esq., Wilkes
and McHugh, P.A., Washington, DC............................... 369
Response to Post-Hearing Questions from Deborah Williams,
Annapolis, MD.................................................. 376
Response to Post-Hearing Questions from Cathy Ventrell-Monsees,
Esq., Law Offices of Cathy Ventrell-Monsees, Chevy Chase, MD,
on behalf of the National Employment Lawyers Association....... 379
Response to Post-Hearing Questions from Peter Rutledge, Esq., The
Catholic University of America, Columbus School of Law,
Washington, DC................................................. 385
Response to Post-Hearing Questions from Theodore G. Eppenstein,
Esq., Eppenstein and Eppenstein, New York, NY.................. 392
ARBITRATION FAIRNESS ACT OF 2007
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THURSDAY, OCTOBER 25, 2007
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:41 p.m., in
room 2141, Rayburn House Office Building, the Honorable Linda
Sanchez (Chairwoman of the Subcommittee) presiding.
Present: Representatives Sanchez, Johnson, Lofgren, Cohen,
and Cannon.
Staff present: Norberto Salinas, Majority Counsel; Daniel
Flores, Minority Counsel; and Adam Russell, Professional Staff
Member.
Ms. Sanchez. This hearing of the Committee on the
Judiciary, Subcommittee on Commercial and Administrative Law
will now come to order.
I will recognize myself for a short statement.
Several months ago, this Subcommittee held an oversight
hearing on the Federal Arbitration Act. At our hearing, we
learned through testimony about the history of arbitration and
the reasons that Congress felt it wise to promote it through
the FAA. Congress wanted to free-up the courts from an
increasingly heavy docket, to place arbitration agreements on
the same footing as contracts, and to encourage arbitration
between businesses possessing equal bargaining powers.
We learned how the use of arbitration has evolved since
1925, and how its use has expanded today. We also learned from
the testimony that although arbitration may offer some benefits
for parties to a dispute, an increasing number of businesses
and employers have begun to utilize arbitration to their
advantage, and thus to the distinct disadvantage of consumers,
employees and others.
Now, several months later, we hold this legislative hearing
on H.R. 3010, the ``Arbitration Fairness Act of 2007,'' which
my esteemed colleague from Georgia, Representative Hank
Johnson, introduced shortly after our June hearing. H.R. 3010
seeks to amend the Federal Arbitration Act to require that
agreements to arbitrate employment, consumer, franchise or
civil rights disputes may be valid and enforceable only if they
were made voluntarily and after the dispute had arisen.
[The bill, H.R. 3010, follows:]
Ms. Sanchez. Arbitration was never intended as a tool to
advantage one side over the other in a dispute. To be a
respected and reasonable alternative to the courts, arbitration
must provide a level and fair playing field. But since our June
hearing, several reports have been issued revealing how
arbitration favors businesses, employers and securities firms.
These reports do not paint a rosy picture for fairness in
arbitration. However, we hope to elicit more testimony today on
the accuracy of these reports to help us determine whether H.R.
3010 is needed legislation.
Finally, during our June hearing on this issue, the Ranking
Member on the Subcommittee, Mr. Cannon, stated that we should
review proposals to restrict the freedom of contract
cautiously. I concur with Mr. Cannon's statement, but also
firmly believe that we should thoroughly review any process
such as arbitration that may restrict constitutional and
statutory rights and that may cement any unfair advantages at
the expense of consumers, and particularly employees.
Today, we gather to hear testimony from several individuals
with knowledge of the arbitration process. I want to emphasize
that today's testimony is very important for our understanding
of the legislation. Accordingly, I look forward to hearing
today's testimony and welcome a thorough discussion of the
issues and legislation.
I would now like to recognize my colleague, Mr. Cannon, the
distinguished Ranking Member of the Subcommittee, for his
opening remarks.
Mr. Cannon. Thank you, Madam Chair.
I would like to welcome our witnesses today. I got to shake
some hands down there. I apologize, Ms. MacCleery, we didn't
have a chance to shake hands. I will step down after the
hearing.
Arbitration is an important subject, and I am glad that we
are having this hearing to help us sort out some of the serious
issues and consequences of H.R. 3010. In June, we held a
hearing on mandatory binding arbitration clauses in consumer
contracts. These clauses have become more and more common over
the years. What we found, as I recall the hearing, was this. It
appears that those clauses are fair. Results for consumers in
arbitration tend to be somewhat better than in court, costs
tend to be lower, and consumers tend to be happier with the
results.
If an individual is told that arbitration is mandatory, the
general reaction from most, including me, is one of concerned
skepticism. But when one looks at the facts, one can see that
arbitration on the whole is a good deal, and year by year
becomes better and better as consumer-friendly procedures like
due process clauses and opt-outs and off-ramps to small claims
court and fee-shifting become more and more common in mandatory
binding arbitration clauses.
Arbitration is cheaper, simpler, faster and more effective
than litigation, and makes sure the consumer's complaint is
heard. Arbitration is a process that provides protection to
consumers because there are few consumers who have the deep
pockets of a large corporation if the dispute heads to
litigation.
All these facts came out at our hearing, and so when the
hearing was concluded, I expected that we wouldn't be
entertaining legislation to roll back mandatory binding
arbitration clauses in consumer contracts. I was surprised to
read the extent of H.R. 3010. Not only does it propose to
prohibit mandatory binding arbitration clauses in consumer
contracts, it reaches back and proposes to render null and void
all such clauses in existing contracts, something that would
undo bargains struck in probably millions of contracts over the
years.
It also proposes to prohibit mandatory binding arbitration
in franchise and employment contracts. It even proposes to rule
out and undo mandatory binding arbitration clauses in any
setting in which the contracting parties had unequal bargaining
power. I suspect that could even apply to disputes between
groups or companies like Citibank and Chase Manhattan, as I am
certain that one of them has more money than the other.
Not one of these areas was considered in our hearing in
June. The breadth of this bill is so great, the sectors
affected so varied, and the potential solutions to any problems
that do exist so many that we cannot possibly sort that out all
today, even with two panels of witnesses.
So my strong suspicion is that were we to get the real
facts on the fairness of arbitration in all these settings, we
would find the same thing we did with arbitration in consumer
contracts--that arbitration is a good deal. That is why
Congress and the courts have so strongly supported it for so
long through so many acts and decisions.
I appreciate the interest of my colleague from Georgia, Mr.
Johnson, in arbitration, and I appreciate the interest
reflected in the title of his bill, that arbitration be fair.
As I said, our earlier hearing already showed arbitration,
including mandatory binding arbitration, to be generally fair.
I am not aware of any other proceeding of the Committee that
has given us a reason to believe that mandatory binding
arbitration isn't delivering similarly fair results in all of
these sectors.
I am left to wonder who really benefits from this proposed
legislation. Would it be consumers and companies large and
small that are vital to our economy? Would they really benefit
if we took a widespread effective arbitration option off the
table? We know from basic economics that when you artificially
limit available services you can bank on driving up the cost
and driving down the quality of the services that remain.
So how will it benefit consumers--the little guy, the
working man--to take an arbitration option off the table? Or
would the only ones guaranteed to be helped be the ones who
lost business to arbitration? Would the only ones guaranteed to
benefit be the trial lawyers? I venture a yes. Common sense and
the laws of economics suggest that if this bill were to pass,
trial lawyers would be the largest beneficiaries.
I expect that today's testimony will help us sort that out.
I am interested in hearing from today's panel of witnesses. I
am particularly interested in the testimony of Professor
Rutledge, who has dedicated serious academic study to this
issue. I am also interested in the testimony of Mr. Naimark of
the American Arbitration Association. No one at the witness
table can offer us anything near the association's hands-on
familiarity with arbitration, all of its features, fine points
and foibles, and with all of the efforts over the years to
assure that it does indeed deliver fairness.
Thank you, Madam Chair. I look forward to the testimony of
the witnesses, and yield back the balance of my time.
Ms. Sanchez. I want to thank the gentleman for his
statement.
I would also like to recognize Mr. Johnson, a distinguished
Member of this Subcommittee and the author of the bill that we
are examining today, for an opening statement.
Mr. Johnson. Madam Chair, thank you. I appreciate your
holding this hearing.
This Subcommittee is holding its second hearing on the
troubling trend toward binding arbitration clauses becoming
ubiquitous in consumer, employment and franchise agreements.
Most people would think twice before they signed away their
right to free speech, their freedom to worship, or their right
to vote. But every day, people are forced by stronger parties
to give up their constitutional right to a jury trial, often
unknowingly, and compelled to agree to pre-dispute mandatory
binding arbitration.
The result? Well, businesses will say that they are a good
thing. Consumers fare well under these agreements. They enjoy a
fast economical and efficient means to settle their disputes
through a neutral third party arbitrator. But what do consumers
have to say about that? The reality is quite different. As a
witness in previous hearings stated, arbitration hearings are
neither economical nor neutral. Rather, pre-dispute binding
arbitration strips consumers of a number of rights and
procedural protections designed to produce impartial and fair
justice.
Arbitration sessions are largely conducted in secret, with
limits on discovery and the appealability of decisions
rendered, which limits the ability of consumers to sometimes
bring class action suits and often saddles consumers with high
administrative fees. Historically, the Federal Arbitration Act
was enacted as an alternative dispute resolution process for
resolving disputes voluntarily between businesses on equal
footing. It was not enacted to force parties of unequal
bargaining power into arbitration, but to enforce voluntary
arbitration agreements between parties of equal bargaining
strength.
During floor debate on the Federal Arbitration Act in 1924,
Representative George Graham, who chaired the House Judiciary
Committee, clearly stated, ``This bill provides for one thing,
and that is to give an opportunity to enforce an agreement in a
commercial contract, when voluntarily placed in the document by
the parties to it.''
Rather than upholding the spirit of that law, big
businesses have turned that law on its head and have made
alternative dispute resolution a trap for the unwary, locking
consumers into a process that is neither consumer-friendly nor
fair. The arbitration companies that are supposed to administer
this type of justice are neither unbiased nor neutral.
Arbitration is a lucrative business. Although advocates say
arbitration is much more economical than court action, the
truth is consumers are often saddled with fees that they would
not be charged with if they went to court.
For example, the National Arbitration Forum's fee schedule
published in August of this year, if a consumer files a claim,
the filing fee can range anywhere from $25 to $240, depending
on the size of the claim. Administrative fees start at $200 and
a participatory hearing session fee starts at $150. If you or I
have a claim for under $2,500, we could face a $325 filing fee
just to get the case into the arbitration process.
To some, that doesn't seem like a lot, but in life there
are always unexpected events. So if you need to expedite the
hearing, that is an extra $500. You need an extension? $50;
What about a discovery order? $250; a request to open or
reconsider? $250 for the fee. As I said, arbitration is a
lucrative business not only through fees generated by the
cases, but also through repeat business.
The danger to consumers is obvious--a system where the
arbitrator has a financial interest to reach an outcome
favorable to the commercial interest which his company receives
its referrals from is no longer a fair process of resulting
disputes. The current system is flawed as it grants stronger
commercial interests the upper hand against consumers.
That is why I, along with my colleague, Senator Feingold,
introduced the Arbitration Fairness Act of 2007, which has of
today enjoys bipartisan support of over 35 members. This bill
does not eliminate arbitration agreements as a means to settle
a dispute. It would simply return the Federal Arbitration Act
to its original intent and render unenforceable pre-dispute
mandatory binding arbitration clauses in consumer, medical and
franchise agreements.
I think all of us can agree, a fundamental feature of a
fair justice system is that both sides to a dispute have a fair
system of resolving the dispute. This legislation will ensure
that citizens have a fair choice between arbitration and the
civil court system to which they are entitled by the seventh
amendment of the Constitution of the United States of America.
I yield back.
Ms. Sanchez. I thank the gentleman for his statement.
We are joined also by the gentleman from Tennessee, Mr.
Cohen, and without objection, other Members' opening statements
will be included in the record.
[The prepared statement of Mr. Cohen follows:]
Prepared Statement of the Honorable Steve Cohen, a Representative in
Congress from the State of Tennessee, and Member, Subcommittee on
Commercial and Administrative Law
I am of the firm belief that consumer protection must be among the
foremost considerations for Congress when it considers legislation
affecting commerce. That is why I am a cosponsor of H.R. 3010, the
Arbitration Fairness Act of 2007. I do not oppose arbitration in
principle. Anecdotal evidence, however, suggests that companies' use of
mandatory pre-dispute arbitration clauses in consumer, employment, and
other contracts may be unfairly stacking the arbitration system against
the interests of consumers, employees, and others with relatively less
bargaining power. While parties are certainly free to agree to
arbitrate a dispute, consumers and employees are unable to negotiate
away the mandatory arbitration clauses that I referred to because of
the unequal bargaining power between them and the corporations with
which they are conducting the transaction. The result, I fear, is that
people are giving up their right to have their disputes heard in court
without any meaningful choice in the matter. H.R. 3010 is one way to
address this imbalance.
Ms. Sanchez. Without objection, the Chair will be
authorized to declare a recess of the hearing at any point.
I am now pleased to introduce the witnesses on our first
panel for today's hearing. Our first witness is Ms. Laura
MacCleery. Ms. MacCleery is director of Public Citizen's
Congress Watch Division. She works to promote public access to
civil justice and a more ethical and sound government with
public financing of elections. Prior to joining Congress Watch,
Ms. MacCleery was deputy director of Public Citizen's Auto
Safety Program. She has worked for the general counsel of the
Federal Trade Commission, the Office of the Federal Public
Defender in San Francisco, California, and at the Legal Aid
Society Federal Defender Division in New York City.
Our second witness of our first panel is Richard Naimark.
Mr. Naimark is the senior vice president of American
Arbitration Association at the International Center for Dispute
Resolution. He is the founder and former executive director of
the Global Center for Dispute Resolution Research, which
conducted research on arbitration and ADR for business disputes
in cross-border transactions. Mr. Naimark is an experienced
mediator and facilitator, having served in a wide variety of
business and organizational settings. Since joining the
association in 1975, Mr. Naimark has conducted hundreds of
seminars and training programs on dispute resolution and
published several articles on alternative dispute resolution.
We welcome you.
Our third witness is Governor Roy Barnes. I would like to
hand the honor of introducing him over to my distinguished
colleague from Georgia, Mr. Johnson.
Mr. Johnson. Thank you, Madam Chair.
Roy Barnes won a seat in the state of Georgia Senate and
became one of the youngest legislators in the State. As the
chair of the State Senate Judiciary Committee, he used his
legal talents to rewrite the Georgia constitution. He served in
the Senate for a number of years before running for governor
unsuccessfully.
Thereupon, he returned to the House of Representatives of
the Georgia legislature, where he again was assigned to the
House Judiciary Committee, and distinguished himself. He later
ran for governor and won, but while serving as a legislator,
he, as an attorney, scored a number of tremendous legal
victories on behalf of consumers, most notably a victory
against Fleet Finance, which had been involved in predatory
lending activities in Georgia. He held them accountable and
forced them to exit that business.
When Governor Barnes became Governor of Georgia, among his
many accomplishments was a tough, probably the toughest, anti-
predatory lending ordinance or statute in the country that was
passed. It was later watered down, but if that legislation had
been in effect over the last 4 years, Georgia would not be
facing the extent of the foreclosure crisis that it now faces.
One of the things that Governor Barnes will always be
remembered for in Georgia is his courageous act in removing the
Confederate battle flag from the state of Georgia flag. For
that, he won the Profiles in Courage Award from the JFK Library
Foundation. After leaving office as governor, Governor Barnes
lended his legal talents to the Atlanta Legal Aid, where he
practiced for free, representing indigent men and women in need
of legal services. He did that for 6 months before going back
into private practice at his hometown in Marietta, Georgia,
where he practices law with his daughter and son-in-law.
So Governor Barnes, we are pleased to have you here with us
today.
Ms. Sanchez. Thank you for joining us.
Our final witness of the first panel is Mr. Ken Connor. Mr.
Connor co-founded the Center for a Just Society in 2005, and
serves as the organization's chairman and one of its principal
spokesmen. Affiliated with the law firm of Wilkes and McHugh,
Mr. Connor recently served as counsel to Governor Jeb Bush in
Bush v. Schiavo, the matter involving Terri Schiavo, and the
court order to remove her feeding tube.
Mr. Connor is also an advocate on behalf of nursing home
residents, and was appointed to Florida's Task Force on the
Availability and Affordability of Long-Term Care. He has served
as chairman of the state of Florida Commission on Ethics, and
as a member of the state Constitution Revision Commission.
I want to thank you all for your willingness to participate
in today's hearing. Without objection, your written statements
will be placed into the record in their entirety, and we are
going to ask that you limit your oral testimony to 5 minutes.
We have a lighting system that will turn green when you are
recognized. After 4 minutes, it turns yellow as a warning that
you have 1 minute left, and then it will turn red at 5 minutes.
If your light turns red, please quickly try to summarize your
last and final thought so that we can move on to all of the
witnesses.
After each witness has presented his or her testimony,
Subcommittee Members will be permitted to ask questions subject
to the 5-minute limit.
Now that we have all the rules out of the way, I am going
to invite Ms. MacCleery to please proceed with her testimony.
TESTIMONY OF LAURA MacCLEERY, ESQ., DIRECTOR, PUBLIC CITIZEN'S
CONGRESS WATCH DIVISION, WASHINGTON, DC
Ms. MacCleery. Madam Chairwoman, Congressman Cannon,
Representative Johnson, who is the sponsor of the Arbitration
Fairness Act, and honorable Members of the Committee, good
afternoon. Thank you very much for the opportunity to provide
this testimony. My name is Laura MacCleery. I am the director
of Public Citizen's Congress Watch Division.
We oppose the use of pre-dispute binding mandatory
arbitration for three main reasons. First, it is imposed on
consumers and is mandatory, rather than voluntary. Second,
proceedings and decisions are shrouded in secrecy. And third,
it utterly lacks due process and impartiality.
For example, there are only very limited grounds for appeal
of a decision. Under current case law, decisions which are, in
the words of the courts, ``silly,'' ``wacky,'' or ``contrary to
law,'' are routinely allowed to stand. Moreover, binding
mandatory arbitration is poisoned by the fact that arbitrators
and their firms have a direct financial stake in business-
friendly outcomes.
The framers of our Constitution sought to create the public
courts and to enshrine due process in our laws because they
understood that secrecy is anathema to democracy and that
unfettered power of any kind will become abuse. Binding
mandatory arbitration, or BMA, in contrast, disregards
fundamental notions of fairness. It is wrong by design.
BMA is imposed on consumers in millions of take-or-leave-it
contracts of adhesion for routine matters, often without
signers' full or even partial understanding of the
consequences. It lacks basic mechanisms for transparency and
accountability and threatens hundreds of hard-won State and
Federal consumer protection statutes with legal irrelevance.
We recently concluded an 8-month investigation of 34,000
cases in binding mandatory arbitration used by credit card
companies and other firms that buy credit card debts. Only one
State in the country, California, requires any public
disclosure whatsoever of these decisions. We used the data from
reports made public under California's law by the National
Arbitration Forum, NAF. In the approximately 19,000 cases in
which an arbitrator was appointed, we found that consumers lost
a shocking 94 percent of the time and prevailed only 4 percent.
Ninety percent of the cases were handled by a small cadre of 28
arbitrators, and the busiest arbitrators processed as many as
68 cases in a single day, or one case every 7 minutes.
Other findings are in our report, a copy of which is
submitted for the record.
We also found arbitrators decided more than 83 percent of
the cases based entirely on documents supplied by companies
making the claims, without a hearing or any consumer
involvement. In this large subset of cases, arbitrators ruled
for business a stunning 99 percent of the time, and for
consumers only twice out of 16,000 cases.
Our research shows that consumers often either do not
receive notice of arbitration or do not understand the notice
when they do receive them. Ronald Kahn, an NAF California
arbitrator, who has decided 820 cases, recently discussed his
work. Mr. Kahn's comments confirm that NAF arbitrators
routinely rubber-stamp company requests in violation of its own
procedural rules. ``Because they are defaults,'' Kahn said,
``the power of an arbitrator is such that you have no choice as
long as the parties have been informed. There is no one there
to argue due process.'' Kahn's decisions show his lopsided
record. He decided 96 percent of cases in favor of business,
and 1.7 percent of the time for consumers.
Yet, NAF's own procedural rule 36(b) provides that if a
party does not respond to a claim, the arbitrator will review
the merits. And NAF's rule 36(E) provides that no award or
order shall be issued against a party solely because of a
failure to respond, appear or defend.
So a consumer's failure to respond should not mean that NAF
arbitrators would award a bank or other claimant every penny of
the amount requested without further review of the merits. But
several consumers interviewed for our reports told us that
arbitrators confirmed awards where there was no evidence that
an account even existed beyond the credit card company's bald
assertions. And one victim, Troy Cornock, in fact told us that
even after he repeatedly protested that he had never signed up
for that account, he was still pursued for the debt.
Of the nearly 34,000 consumer arbitrations that NAF
identified in California, 99 percent were collections cases,
and more than half involved the cardholders of MBNA. If
arbitration firms are acting as part of a debt collections
mill, they are in effect circumventing Federal regulations that
protect consumers under the Fair Debt Collection Practices Act
and other statutes. While default rates for collection cases in
small claims court may be high, in any court there are far more
assurances of due process, including notice to consumers
through service of process, than in binding mandatory
arbitration.
Indeed, it is an open question whether arbitrators are
making awards on the basis of records far too spotty or poorly
maintained to support the same claim in court. BMA may be an
elaborate shell game set up to hide the fact that companies are
seeking to collect on debts that have long since run past their
expiration date, or are otherwise uncollectible under
prevailing law. Congress should investigate whether arbitrators
are being used as a scrim to conceal these legally dubious
practices.
Ms. Sanchez. Ms. MacCleery, your time has expired. Could
you just finish your final thought?
Ms. MacCleery. Absolutely.
The fundamental thought is that arbitration runs contrary
to constitutional rights that are core notions of fairness, and
that Congress should enact the Arbitration Fairness Act.
Thank you very much.
[The prepared statement of Ms. MacCleery follows:]
Prepared Statement of Laura MacCleery
Ms. Sanchez. Thank you very much for your testimony.
I would invite Mr. Naimark to begin his testimony.
TESTIMONY OF RICHARD NAIMARK, SENIOR VICE PRESIDENT, AMERICAN
ARBITRATION ASSOCIATION, WASHINGTON, DC
Mr. Naimark. Thank you. Good afternoon, Madam Chair,
Congressman Cannon, Congressman Johnson. Thank you for the
invitation, spending your time and attention with us this
morning.
I would like to say at the outset the AAA is a not-for-
profit service organization with an 81-year history in the
administration of justice. AAA does not represent the ADR
industry or other arbitral institutions. We feel as a result of
our unique position, we have something valuable to add to the
proceedings today.
I want to say at the outset that the public policy in the
United States on consumer and employment arbitration is
something that could use some fixing, could use some balancing.
We would like to discuss briefly with you here about how
Congress might accomplish that.
About a decade ago, before there was any turmoil and
controversy about consumer cases, AAA recognized that when you
looked at the horizon, that these issues would begin to arise.
So we assembled a group which is in Annex A of our submission
if you get a chance to look at it, a very broad coalition of
people from all different diverse interest groups to work on
what we call the due process protocol for mediation and
arbitration of consumer disputes.
These protocols provide for rules of fair play in the
arbitration process and were the best consensus thinking at
that time and currently for what provides for fair play in the
arbitration process that applies to consumer disputes.
To date, the AAA and a few other organizations have
implemented this protocol, but others have not. By the way, in
the employment arena, we have a similar task force which
developed due process protocols for employment cases and as a
result there has been fairly broad recognition by the courts of
these protocols as the standard of fair play all the way up to
Supreme Court justices citing them, at least in oral
commentary, as the standard of fair play for employment
disputes.
A couple of highlights in the due process protocols. They
do common sense things. They, for instance, provide that
consumers and employees always have a right to representation;
that the costs of the process must be reasonable; that the
location of the proceedings should be reasonably accessible;
that no party should have a unilateral choice of arbitrator;
that there shall be full disclosure by arbitrators of any
potential conflict or appearance of conflict or previous
contact between the arbitrator and the parties. The arbitrator
shall have no personal or financial interest in the matter.
Perhaps most important, I would like to highlight there
shall be no limitation of remedy that would be otherwise
available in court of administrative hearing. There are other
features as well to the protocols, but I think that gives you a
bit of a flavor.
I was told a few years ago by a very prominent plaintiffs'
employment attorney that at least 95 percent of the meritorious
claims that come into his office will never get legal
representation because no one can afford to pay for it. The
lawyer can't afford to bankroll all these cases and the
individual often cannot afford to pay for it. So for those that
do get to court, only 2 percent ever get to trial before a
judge or a jury.
So the idea of ``my day in court'' is in reality a myth for
more mere mortals. Most Americans can't afford the court
process. This is a problem. Lack of access to justice is a drag
on our democracy and our social system. But, and I say ``BUT''
in capital letters, arbitration needs to be done right--no
sloping of the playing field, no structural advantages for
either side, the need to be these procedural safeguards built
into the process.
That essentially is my message for the Committee. Congress
can address these problems in the use of arbitration in
consumer and employment disputes by codifying the standards and
protections that were built by the National Consumer Disputes
Advisory Committee and the Task Force on Alternative Dispute
Resolution in Employment. In that way, fairness in consumer and
employment arbitration will no longer be voluntary.
Thank you.
[The prepared statement of Mr. Naimark follows:]
Prepared Statement of Richard Naimark
Ms. Sanchez. Thank you, Mr. Naimark, and you came in under
5 minutes.
I would now at this time invite Governor Barnes to please
give his oral testimony.
TESTIMONY OF THE HONORABLE ROY BARNES,
THE BARNES LAW GROUP, LLC, MARIETTA, GA
Mr. Barnes. Madam Chair, Mr. Cannon, Mr. Johnson and
others, I want to talk about just one category of cases. I
began to see these when I was down at Legal Aid, and they have
become the result of a decision of the Supreme Court of the
United States. I came up and listened to the argument. Paul
Bland made the argument over there that you previously heard
from.
That is contracts that are illegal. You would think that an
illegal contract, that is a contract for a crime, that you
wouldn't have to worry too much about arbitration. For example,
the chief justice asked the counsel for the bank, if Murder
Incorporated were still in existence and it had an arbitration
provision, would we have to go to arbitration on a dispute over
whether the fee had ever been paid on Murder Incorporated?
Well, the answer under the law as it exists today is yes,
you would have to go to arbitration about it. You would have to
go to arbitration and argue before arbitration on a ridiculous,
or as Ms. MacCleery says, as the courts have said, ``crazy''
decisions that are made. Now, the case that arose in Cardegna
v. Buckeye, which is the case that came up from Florida, is
that in most States the making of payday loans is a crime. It
is in Georgia. It was a felony in Florida.
With all due respect, Mr. Cannon, I will tell you I never
found anybody at Legal Aid that thought it was fair and
efficient after they had been taken advantage of, that they
were told they had to go to arbitration to prove that they were
a victim of a crime.
The other point I want to make, these claims are so small.
If you ever file an arbitration, they may pay the claim. But it
doesn't stop the conduct, even though it is illegal. Let me
tell you something, there are more payday lenders in the United
States than there are McDonald's stores, more payday lenders
than there are McDonald's'.
They charge anywhere from 250 percent to 1,000 percent
interest. It is a practice that has been universally condemned
over the years. Let me give you some examples of cases that we
have been involved in that I can tell you about. Ina Claire
Evans, one of Mr. Johnson's constituents over there--make sure
I don't run over my time here--she was charged 829.55 percent
interest on a $500 loan. Ms. Shamburger, also from over in
DeKalb, was charged $701. That case was filed on August 6,
2004. We have been to the court of appeals twice on the
arbitration.
And then you say, well, you tried to go to court. Why
didn't you just go to arbitration? We did go to arbitration. We
took two of them and put them in arbitration, and I want to say
and benefit Mr. Naimark over here, it wasn't AAA now. But we
went to arbitration on two of them. Do you know how long those
cases have been pending? They have been pending 3 years. And do
you know why? Because the arbitrator ruled in our favor in one
of the cases. It said, well, if it is a crime under the Georgia
law, then of course the arbitration provision, all the
restrictions of not being able to group the cases together and
stop this practice, of course it is illegal.
And then on motion to reconsider after a letter was sent up
and objection was made about the decision, upon reconsideration
the arbitrator said, ``Well, no, I can't decide that.'' And so
you can only litigate one case, and we have to let the criminal
activity continue.
One of the cases, a lady came to me. She worked for the
State. I would see her when I would go down to the World
Congress Center. She was a secretary down there, a young
African American woman. She came up to me after I left the
governor's office, and she said, ``I am so embarrassed.'' I
said, ``Well, what is wrong?'' She said, ``I have a child, and
I have been raising the child by myself. Christmas came, and I
wanted some money to buy Christmas for my child, so I went down
and I borrowed $300 from a payday lender. I have been paying
every month"--this was July--"and I paid $900 and I still owe
the $300.'' And I said, ``Don't pay another penny,'' and they
took the money out of her account before I could stop the
automatic withdrawal. I filed suit for her. We have been
litigating that case 3 years over the arbitration provision.
So I will tell you, at least if you do nothing else, take
arbitration provisions out of criminal acts. At least say if it
is a criminal act, you don't have to go to arbitration, and
take it away from the Supreme Court of the United States. The
Supreme Court of the United States says, well--and this is my
last word I am going to take--the Supreme Court said, and I
heard it from the justice myself, because they ruled that the
arbitration provision was valid in the Supreme Court, Cardegna
v. Buckeye. They said, ``Well, if Congress didn't want us to do
this, they would stop us.''
Well, here it is and it is up to you all to see if it is
going to be stopped.
Thank you.
Ms. Sanchez. We appreciate your testimony, Governor. It is
very compelling. Thank you.
At this time, I would invite Mr. Connor to give his oral
remarks.
TESTIMONY OF KENNETH L. CONNOR, ESQ.,
WILKES AND McHUGH, P.A., WASHINGTON, DC
Mr. Connor. Thank you very much, Madam Chair, Congressman
Cannon, and Members of the Committee. I appreciate the chance
to come and share some experiences with you about arbitration
in the context of nursing home cases. I think it is important
for you to understand the background of these cases so that you
can understand the implications of the waiver of the rights
that frequently come up in these cases.
For over 25 years I have represented victims of abuse and
neglect in nursing home cases around the country, from Florida
to California. I have reviewed hundreds of charts, represented
hundreds of clients. I can tell you without hesitation, but
with great sadness, that the way in which we treat many of our
frail, elderly families and adults in this country is really
America's shame and dirty secret.
Daily, I encounter nursing home residents who suffer from
avoidable pressure ulcers, some literally as big as pie plates,
infected to the bone, infected because they were left
languishing in their urine and feces for so long that their
wounds became contaminated and their skin became increasingly
excoriated. They often suffer from avoidable malnutrition and
dehydration. They have gaunt bodies and hallow eyes and parched
tongues that are a testimony of the lack of time that harried
and often overworked nursing home employees have to devote to
their care and attention in the nursing homes.
They frequently suffer from multiple falls and avoidable
fractures because again, given the short staffing in nursing
homes which is a product of nursing home operators' decisions
to consciously seek to maximize profits by minimizing their
labor costs. These residents are allowed to fall and suffer
horrific fractures. We frequently find that nursing home
employees have to use shaving cream and other substances to try
to soften the feces that have dried so hard on their bodies.
Their bed linens have become covered with brown rings, a
testament to the length of time the urine has been there and
been left to dry.
But the point I make, very simply, is it is these kinds of
circumstances that give rise to the claims that nursing home
residents have against their caregivers, against the
institutions that typically are being paid money by Medicare
and Medicaid to take care of these residents. I guarantee you,
if the results of these kinds of outcomes were occurring at Abu
Ghraib or Guantanamo, there would be no end to the
congressional hearings into the matter. There would be no end
to the outrage that the media would be expressing about the
consequences of those actions.
But these facts are often suppressed by nursing home
operators by shredding the records or falsifying the records. I
routinely come in contact with records that have been so poorly
falsified, they are documenting care as having been given
before residents are admitted to the facility, long after they
are dead or buried, while they are in the hospital. I look at
their time cards and find they are giving care on days when the
employee isn't even at work.
But it is in this context in which issues relating to
nursing home arbitration arise. I can assure you that there is
no more stressful emotional difficult experience than families
who are now admitting for the first time their inability to
care for their loved one at home and are putting them into the
care of a nursing home, who in soothing tones is assuring them
of their ability to care for their loved one.
Typically, these families and often the residents who
suffer from dementia or who are medicated or who are blind or
deaf or both or otherwise lacking in some mental capacity to
appreciate the significance of what they are signing, they are
presented with 50 or 60 pages in an admission packet. They are
told that they need to sign these documents so that grandmother
can be admitted to the nursing home, and if they don't, she
won't be. That is not acceptable because usually these folks
have a monopoly in many communities, and the family would have
to travel miles to see them otherwise.
Typically, these documents are signed by someone who merely
makes their mark, because they are so illiterate they can't
understand. They can't read or write, and frequently, as I
mentioned, their sight or hearing is compromised, and they are
unable to appreciate the significance of what they are signing.
Yet because they were afforded an opportunity to sign, the
courts often enforce these agreements notwithstanding the
unconscionable circumstances in which they are entered into.
As a result, typically you find a waiver of all kinds of
rights, not just the right to a jury trial, but the right to
discovery, limitations on witnesses, limitations on the ability
to present your case, limitations on the ability to interview
witnesses. And yet typically, all of this information is
available to the nursing homes.
When they are finally arbitrated, Congressman Cannon, I
would submit to you, you will find that the costs in these
settings are typically higher than they are in cases involving
litigation, and the rewards are lower. As a result, the costs
as a percentage of the awards are much higher than they would
be in the case of a jury verdict.
Ms. Sanchez. Mr. Connor, your time has expired. I will
allow you to summarize your final thought and we will get a
chance to visit more testimony through our questions.
Mr. Connor. Thank you, Madam Chairman.
I would simply say that in the nursing home context, the
mandatory binding arbitration regime is a playing field that is
tilted substantially in favor of the nursing home and against
our most frail and vulnerable members of society, who are most
desperately in need of the protection of the rights that they
are accorded under the law.
Thank you.
[The prepared statement of Mr. Connor follows:]
Prepared Statement of Kenneth L. Connor
Mr. Chairman and Members of the Subcmmittee:
Thank you for the opportunity to share some thoughts with you about
the use of binding mandatory arbitration in the context of nursing home
cases. In order to fully appreciate the implications of what is at
stake for nursing home residents and their families, some background is
in order.
For almost twenty five years I have represented nursing home
residents who have suffered abuse and neglect at the hands of their
caregivers in long term care institutions. I have been involved in
cases from Florida to California and have been exposed to the charts of
hundreds of patients in facilities all over the country. I am saddened
to tell you that the care and treatment that many of our elders receive
in long term care facilities is nothing short of scandalous and is
America's shameful and dirty secret. This problem is pervasive and
extends to every part of the country.
Daily, I encounter frail elderly adults in nursing homes who have
suffered from avoidable pressure ulcers (bed sores) which penetrate all
the way to the bone. Some of these wounds are as big as pie plates.
Often they are infected and so foul smelling that when you approach
their room from down the hall, you can smell the resident before you
can see them. The wounds often become infected because residents are
left to languish in urine and feces for so long that the feces becomes
hardened and stuck to their bodies and the urine dries in tell-tale
brown rings on their bed clothes. Residents often suffer from avoidable
malnutrition and dehydration and their gaunt bodies, hollow eyes and
parched tongues are testimony to the lack of time and attention that
overworked and harried staff are able to afford them. Many times these
residents suffer from multiple falls and associated fractures resulting
from a lack of supervision--that lack resulting from nursing home
operators consciously understaffing their facilities seeking to
maximize profits by minimizing labor costs. All too often my clients
are the victims of rape or sexual assault--sometimes by their
caregivers, and sometimes by fellow residents who, because of their
diminished capacity and lack of supervision, are allowed to prey on
weaker residents.
The results of this abuse and neglect are so horrific that if it
were happening to detainees at Guantanamo or Abu Ghraib, there would be
no end to the Congressional hearings investigating the problem or to
the hue and cry of America's media howling in outrage. Yet, year after
year, these problems persist and they are multiplying.
These facts are often suppressed by unscrupulous nursing home
operators who falsify records or shred them in an attempt to conceal
them from regulators, residents' family members, and their lawyers.
These attempts at falsification are often so poorly executed that in my
practice I regularly review records that reflect care as having been
given on non-existent days (February 30 or 31), on days when the
resident was in the hospital rather than in the nursing home, and
before the resident was even admitted. Sometimes I find care charted on
days that occur long after the resident has been dead and buried.
Often, when I compare the care givers' time cards with their charting,
I find that the care givers are not even at work when the care was
purportedly administered.
In an interview with the Washington Post published February 4,
2000, John T. Bentivoglio, special counsel for health-care fraud at the
Department of Justice, said in an interview, ``A number of highflying
nursing home chains appear to have incorporated defrauding Medicare as
part of their business strategy.'' In my experience, those words are
just as true today as they were when they were uttered seven hears ago.
It is into this milieu that families bring their precious, elderly
loved ones to be cared for by the nursing home industry. Most people
seeking care for their loved ones don't have a clue about the scope of
problems that exist in the nursing home industry (and, of course, the
problems I have outlined above, while pervasive are not universal).
They just know that they no longer can provide the care needed by their
aging parent or grandparent and their local nursing home has assured
them that it can do so. Comforted though they are by those assurances,
the admission process is, nevertheless, stressful to say the least.
Few decisions are as difficult or as painful as the decision to
surrender one's loved one to be cared for by strangers. Families are
often wracked with remorse and guilt at the time of the nursing home
admission. The elderly person is often filled with apprehension and
fear and worries about being abandoned to the care of strangers.
Emotions typically run high. An admissions packet of 50-60 pages is
often presented for review by the patient or their family. The briefest
of explanations is offered and the patient or their representative is
asked to sign on multiple pages. The agreement for binding mandatory
arbitration is commonly sandwiched toward the end of the documents and
is explained, if at all, in the briefest of terms and in the most
soothing of tones. Prospective new residents frequently suffer from
dementia or are on medication or are otherwise mentally compromised.
Often they suffer from poor vision or illiteracy. Rarely do they have
the capacity to understand the significant and complex documentation
with which they are presented. Sometimes, the nursing home
representative will acknowledge, after the fact, that they, themselves,
didn't really understand the significance of the arbitration agreement
they were asking the resident or their family member to sign. The goal,
however, is to get patient's or family member's signature or mark on
the document. If the family balks, they are told that admission will be
denied. That is not acceptable to most family members since the next
nearest available nursing home is often miles away and it will be
extremely difficult to visit their loved one on a regular basis.
Equality of bargaining position between the nursing home and the
resident or their family does not exist.
The terms of the binding mandatory arbitration agreement are often
as unconscionable as the circumstances under which the agreement is
executed. There is no mutuality. The residents and their families
typically aren't afforded an opportunity to negotiate the terms. As to
the proposed agreement, they must ``take or leave it.'' The nursing
home often retains the right to modify the contract, but that same
right is not afforded to the resident or her family. The nursing home
reserves the right to pursue a collection action in the courts against
the resident or their family, but the resident is usually left with
only the right to pursue any claims against the facility through
arbitration. Discovery pursuant the agreement is emasculated. The
agreement typically imposes draconian limits on (1) the number of
witnesses who can be deposed or called at the arbitration, (2) the
number of experts who can be called, (3) the number of interrogatories,
requests for admission and requests for production that can be filed,
and (4) the length of time to be allotted for the arbitration hearing.
The arbitrator or arbitral forum is typically selected by the nursing
home and often the home (or the chain of which it is a part) provides
repeat business for the decision maker. This is a process which hardly
leads to a fair and just result for the resident who is a victim of
abuse and neglect in a nursing home. Not surprisingly, therefore,
arbitration awards are usually substantially lower than court awarded
jury verdicts.
The current system of binding mandatory arbitration employed by
nursing homes creates a playing field that is tilted in favor of
nursing homes and against frail, vulnerable residents who suffer
terribly at the hands of their caregivers. Sadly these residents are,
all too often, the victims of abuse by their caregivers. They should
not be further abused by an arbitration system that dispenses anything
but justice.
Ms. Sanchez. Thank you. I appreciate your testimony, Mr.
Connor.
We will now begin the first round of questioning, and I
will begin by recognizing myself for 5 minutes.
Ms. MacCleery, I want to start with you. Consumer advocates
argue that some businesses forbid class action lawsuits with
the use of arbitration clauses. I am curious to know what
effect do you believe that this has on consumers who are
arbitrating their claims?
Ms. MacCleery. I think it means that a lot of claims that
might be brought won't be, because there are abuses by
corporations, particularly ones that have financial impact in
small aggregate amounts--credit cards, cell phones--where the
company has unrightful gains. They have obtained ill-gotten
gains through some kind of accounting practice. There was a
credit card company out in California that was sitting on
people's payments until they were late, and then dinging them
with late fees--that sort of abusive behavior, but any
individual consumer would not suffer a huge loss. So that if it
was not able to be aggregated into a class action, you would
not in fact be able to ever correct that abuse or bring it to
light.
Also, one other thing about this which is that there was a
move by some of the arbitration providers, the firms, to allow
class actions, including AAA, and yet when their members
revolted and essentially threatened to pull their business out
of that arbitration provider, that pressure was enough to get
them to cave on that decision. That is documented in our
report.
Ms. Sanchez. So in other words, if I have this correct, if
you are a consumer who has been harmed, if there are thousands
of consumers who have been harmed let's say $50 or under, for
an individual it may not be worthwhile to try to recoup that
$50 because you might have to pay $250 in fees to get back that
$50. But if you could aggregate it, you might be able to punish
companies who are doing bad business practices, or perhaps even
illegal business practices and force them to compensate the
whole class of people that have been affected.
Ms. MacCleery. The issue is the deterrent effect that a
case like that has against similar abuses.
Ms. Sanchez. And if I am understanding you correctly,
Governor Barnes, even with illegal actions, each individual
plaintiff, if you will, has to arbitrate each claim and in the
aggregate they can't say this is a wrong business practice and
you have to stop this immediately. Is that correct?
Mr. Barnes. That is correct, to answer your question
directly. Even where there is a crime, well, why doesn't the
solicitor prosecute them? Well, we have tried that a time or
two, and we have had a few that have been prosecuted. But you
go to most solicitors, and they said, ``Listen, I have mayhem
and murder in the streets. The courts have to take care of
this.'' This is more in a civil nature. Even though the general
assembly said, ``Listen, you ought not to be in this
business.'' The only way you can ever litigate these cases is
to aggregate them some way.
The courts, you all have put the Class Action Fairness Act,
you have put all these requirements. Most of the States have.
You have an interim appeal from it. Whether I agree with them
or disagree with them, they have been controls on the abuses of
class actions, but let me tell you something. In consumer
cases, if a business, particularly an illegal one, knows they
can get by with it because everybody is too busy, and they know
they don't have any responsibility or accountability because
they can't be brought, they are going to do it. That is just
the way it is, and they are going to make the money.
Ms. Sanchez. Because it is profitable.
Mr. Barnes. And then when you sue them and when you go to
arbitration with them, you have every white-shoe law firm from
New York to Atlanta because this business is so profitable.
Ms. Sanchez. Correct.
Mr. Connor, I was very touched by some of the problems that
you have outlined in care facilities. Now, you are a
Republican, is that correct?
Mr. Connor. I am. I am a conservative Republican trial
lawyer.
Ms. Sanchez. Okay.
Mr. Cannon. Thank heaven for a few. [Laughter.]
Mr. Connor. An oxymoron, some less charitably call me.
Ms. Sanchez. I would never call it an oxymoron or any other
kind of moron, I dare say. [Laughter.]
I appreciate your testimony. I am interested in hearing
from you and Mr. Naimark, and it is sort of a joint question.
In your opinion, is this is partisan issue, the pre-arbitration
mandatory arbitration clauses? Do you think that that is a
partisan issue?
Mr. Connor. I don't. I think that this bill gets at frankly
some bedrock fundamental conservative principles that
Republicans ought to be affirming. Accountability and
responsibility run hand in hand. If you don't hold wrongdoers
fully accountable for the consequences of their wrongdoing,
that wrongdoing is going to multiply. Republican conservatives
have typically said we believe decisions made at the local
level by people with their feet on the ground are the best
decisions. That is what the jury system is all about.
What the arbitration system does, certainly in the nursing
home context, is just exactly what Mr. Naimark was critical of.
It slopes the playing field in favor of one side against the
other. It doesn't result in full accountability for wrongdoing.
Wrongdoers calculate the cost of doing business. They can
calculate the profit as easily as you and I can. Their
wrongdoing multiplies and the profiteering increases, and it is
at the expense of our frailest and most vulnerable residents
for whom Republicans maintain they have high esteem for the
sanctity of their lives, but are actually in many respects I
think undermining the protection of those lives.
Ms. Sanchez. I appreciate that. I have one last question I
would beg everybody's indulgence to go over my time by 1
additional minute to just ask Mr. Naimark. Is there any
objection? Okay.
The AAA does not support pre-dispute binding arbitration in
the health care context such as disputes involving medical
malpractice or health insurance coverage. I am interested to
know why does AAA take this stand, and yet support arbitration
involving civil rights employment cases or consumer protection
cases or in other contexts? Why is there that carve-out, and
how can you justify that?
Mr. Naimark. In a word, the health care cases are
qualitatively different. I mean, they can literally be matters
of life and death and very similar to the situation Mr. Connor
described, where people under great duress may be signing
documents and not knowing what they are signing. So it was the
considered opinion of the advisory committee that they are
qualitatively different, different stakes.
Ms. Sanchez. I can understand and appreciate that, but to
me the idea that that somehow deserves exception and people
signing away their civil or statutory rights is somehow not as
important, to me is a distinction that I couldn't place the
line there.
Mr. Naimark. Well, let me say a couple of things. First of
all, this is a public policy issue, whether mandatory clauses
in the consumer and employment context are acceptable or not.
The courts in fact are very split on this. It is a very
contentious issue. You asked about the class actions, is that
contentious? This is also. They are both contentious issues.
So it really is not an issue that AAA necessarily supports
or defends. It is an issue that we have to deal with. So if the
cases come in, what we try to do is make sure that you have the
protections with the due process protocols so that people are
not giving away their civil rights or any rights. That was one
of the issues that I pointed to about all remedies should be
available that they would otherwise get in court or in an
administrative hearing. It is merely a change in forum, and we
try to make sure that that is followed through all the way so
people aren't losing.
Ms. Sanchez. Okay. I appreciate that. My time has expired.
I would now recognize Mr. Cannon for 5 minutes of
questions.
Mr. Cannon. Thank you, Madam Chair.
I appreciate the testimony received from this panel. Let me
just say, this is to a large degree not a partisan issue. This
is a question of how we do things that make some sense, and
both Mr. Connor and Governor Barnes have made cases for
particular classes of people.
I don't think these things are so simplistic. For instance,
after we passed the bill that disallowed payday loans, Utah has
a disproportionate number of people in Iraq and Afghanistan,
and we have a bunch of wives who can go in and for a $25 fee
get a loan until the next pay day. That can be a horrible thing
when those fees pile up, and in those cases you often have
criminality. But it is a huge burden on families when they
can't make it to the next pay day because we have a problem
with payday loans. So it is something where we need some
balance.
Governor Barnes, you were talking about a case in
particular, and you ended by saying that it had to wait until
the criminality was over. Was there a criminal charge in that
case?
Mr. Barnes. It is a crime, but there was not a criminal
charge in that case. I don't know which one, of course,
sometimes----
Mr. Cannon. Yes, there were both. But what you are saying
essentially is the criminality continues then because there is
no civil solution----
Mr. Barnes. Oh, I see what you are talking about. Yes,
because I mean it is just an enforcement problem. In other
words, it is a crime. It is a crime in Georgia and has been, to
do payday lending, but you go down there and solicitors just
don't have the time to do it. And if they are shielded from
civil responsibility, there is no impediment at all.
Mr. Cannon. Right. But in that particular issue, it did not
have some criminal activity going on. Thank you.
Mr. Barnes. Well now, there was criminal activity.
Mr. Cannon. Right, but no criminal prosecution. I am sorry.
That is exactly what I meant.
Ms. MacCleery, your study as I understand it was limited to
the National Arbitration Forum, and you did not study things
like the AAA?
Ms. MacCleery. Well, here is the problem. The NAF is
actually, and I hate to say this really, better than AAA in
terms of their disclosures on the California reports in the
sense that they have created a consistent dataset that allowed
us to build a mechanism to dump it into a sortable database. So
NAF still----
Mr. Cannon. So it was an easier thing for you to do to
study them.
Ms. MacCleery. Well, it is still 34,000 records.
Mr. Cannon. There are some limitations on that study. Those
are mostly credit card debt studies or collection cases, right?
So you have----
Ms. MacCleery. It was all of the NAF cases in their data,
all 34,000.
Mr. Cannon. What kind of cases did they deal with?
Ms. MacCleery. It was mainly debt collection cases. Now,
AAA doesn't even complete its records in the California
disclosures. So we have been trying to build----
Mr. Cannon. It is hard to get conclusions, is what you are
saying.
Ms. MacCleery. Well, they don't complete the records. I
mean, you cannot----
Mr. Cannon. I understand that. What we are trying to figure
out here is what kind of weight to put on your study. There is
a huge difference between a consumer who says, ``my widget
broke,'' and goes to an arbitration process, and a person who
says, ``I paid that bill,'' when maybe they did or maybe they
didn't. Certainly, there will be outlandish cases where bills
were paid and were not credited. You mentioned the case where a
payment is held and then a late charge is added. Those kind of
things happen. We recognize that. Those are terrible things and
should not happen. But generally speaking, credit cases are
overwhelmingly going to go against the person who failed to pay
the bill.
Ms. MacCleery. There is a high level of what you would call
default in credit card cases. There was another database of
20,000 cases in an Alabama court case that came to light that
showed similar decision rates against consumers about 99
percent that were NAF data records. We would love to analyze
the AAA data.
Mr. Cannon. Were those also----
Ms. MacCleery. Those were also collections.
Mr. Cannon. So in the collection cases, you had 94 percent
of the cases that were decided by NAF in favor of the company
and against the creditor.
Ms. MacCleery. That is right.
Mr. Cannon. Would that have been different, for instance--
did you take a look at whether or not that would have been
different if those people had been in the court system and been
litigating in the court system?
Ms. MacCleery. The only two studies we found on default
judgments in the court systems are dated. They pre-date a lot
of identity theft problems. There is one from 1990 and one
study in the late 1960's. Both of them have default rates for
consumers that are lower than the default rates in our study.
But there is very little data on a comparison basis to look at
whether small claims court data are similar to the arbitration
outcomes.
But I think the argument is really fundamental. It is about
fairness in the structural problems that we highlighted.
Mr. Cannon. With your data, you are dealing with a very
narrow slice, and I just think we need as a Committee to be
thoughtful about how narrow that slice of data you looked at is
as you look at it. We have particular problems that Governor
Barnes raised, particular problems that Mr. Connor raised, but
what your data shows is what it is in a very narrow slice of
the issue of arbitration clauses. I think I understand what the
position is. I think the record is fairly clear that this is a
very narrow study in a very narrow environment with the best
data available, but not data that particular is illuminating in
other areas.
Ms. MacCleery. Well, I would disagree that it is narrow. It
was all the cases. We didn't exclude any cases by subject
matter.
Mr. Cannon. Well, it is narrow by nature of the question--
--
Ms. MacCleery. Well, it is 19,000 cases.
Mr. Cannon. That is a lot of cases, but it is a very narrow
category of cases.
Ms. MacCleery. We would love to look at AAA's data if they
would only complete their records in California. We would love
to expand the power of the study, but this is the only
empirical data that is currently available.
Mr. Cannon. But I think we understand each other that you
are not disagreeing that the nature of the study is very, very
narrow. That is, it is related to cases that are consumer
credit cases, debt cases where you have collections. There is
no way even to compare that data--and I apologize, I am going
over my time, but I would like to just clarify the point.
Ms. Sanchez. Yes, finish. Yes.
Mr. Cannon. Which is that there is no way even to compare
that narrow kind of data with what would happen in courts. You
are not purporting that your study compares with courts, and so
it is a data point that we can look at, but it is hard to
associate with the larger issue.
Ms. MacCleery. I think there are a lot of stories in our
report that go outside the credit card context and look at the
same kind of patterns of problems in decision-making in
arbitration that point to the structural deficiencies. So I
would agree that it deals with a certain type of case, but I
would disagree that its implications are narrow.
Ms. Sanchez. The time of the gentleman has expired.
Mr. Cannon. Thank you. I yield back.
Ms. Sanchez. Thank you.
At this time, I will recognize Mr. Johnson, the gentleman
from Georgia, for his questions.
Mr. Johnson. Thank you.
Mr. Naimark, would you say that AAA would be the largest
arbitration firm in the Nation?
Mr. Naimark. Yes, but with a qualifier. Our annual consumer
caseload is approximately 1,500 cases, of which 60 percent
settle before they ever get to an arbitrator, so we are talking
about a relative few hundred a year that actually get to an
arbitrator. In employment cases, it is roughly 2,000 per year.
So we do lots and lots of arbitration of all types with unions,
companies and international. These caseloads for us are fairly
small.
Mr. Johnson. Do you advertise your services in the yellow
pages or newspapers?
Mr. Naimark. I don't know if we have listings anymore in
the yellow pages. We have run a number of ads over the years in
a variety of publications.
Mr. Johnson. Typically what type?
Mr. Naimark. What type?
Mr. Johnson. Yes.
Mr. Naimark. For the international business disputes, we
will run them in the international business journals.
Mr. Johnson. You typically run them in business journals,
in publications that are directed toward businesses. Is that
correct?
Mr. Naimark. For business-to-business dispute resolution,
yes.
Mr. Johnson. Because it is rare that a consumer would ever
choose AAA to arbitrate a dispute.
Mr. Naimark. I don't know that that is so.
Mr. Johnson. Let me rephrase the question. How does AAA get
the bulk of its business?
Mr. Naimark. How do we get the bulk of it?
Mr. Johnson. Isn't it through referrals from businesses
that either are instituting arbitration proceedings against a
consumer, or a consumer that is limited in the choice of the
arbitration panel that he or she can employ to pursue a dispute
against a commercial interest?
Mr. Naimark. In the consumer caseload--I assume that is
what we are addressing--we get both. A significant number--I
can't tell you the exact percentage--are filed by consumers.
Our stats show they win basically half of those cases, and the
businesses file the rest.
Mr. Johnson. I guess the point I am trying to make is you
get most of your referrals from business interests. Isn't that
correct? Most of your arbitrations are done as a result of
referrals from business interests, commercial interests?
Mr. Naimark. Unions and businesses primarily, yes.
Mr. Johnson. Who typically pays the fee for the arbitration
process?
Mr. Naimark. If we are talking about the consumer process,
we have two levels of fees for consumers. Claims up to $10,000,
they pay a maximum of $125. For claims up to $75,000, they pay
a maximum of $375. Business will pay the rest.
Mr. Johnson. Most of your claims are instituted by
commercial interests against consumers, however. Isn't that
correct?
Mr. Naimark. No, that is not correct.
Mr. Johnson. Well, let me ask you this question. What class
of disputes do you get where consumers tend to file more than
the commercial interests?
Mr. Naimark. I don't know that they file more, but in our
consumer caseload--those 1,500 cases I mentioned--a significant
number are filed by consumers because they are seeking redress
against the business. Let me try to explain it this way, if a
company----
Mr. Johnson. Okay. I am running out of time. I want to
switch to a different tack now.
The arbitrators who you employ, approximately how many do
you employ?
Mr. Naimark. Well, if you look at the entire panel for
every category, roughly 9,000 I would say.
Mr. Johnson. Are they judges?
Mr. Naimark. Most of them are not judges, no.
Mr. Johnson. Are they lawyers?
Mr. Naimark. Most of them are lawyers, yes.
Mr. Johnson. Yes. And most of them are selected by AAA
based on, I guess, their connections to businesses that employ
them?
Mr. Naimark. Absolutely not. We have committee that
reviews. We look especially for diversity and try to get as
much balance between, especially plaintiff and defense as
possible. What you try to do is get senior respected people in
the community.
Mr. Johnson. Let me ask you this question. Is there a court
reporter that takes down the typical proceeding?
Mr. Naimark. For a consumer case, typically no.
Mr. Johnson. So there is no record upon which to appeal on?
Mr. Naimark. No. I have to say typically under U.S. law,
even if you had one, it would be tough to appeal.
Mr. Johnson. There is basically no effective right to
appeal the arbitrator's decision, correct?
Mr. Naimark. That is correct.
Mr. Johnson. And there is no right to discovery of
documents or witnesses?
Mr. Naimark. No, the protocols provide that there is right
to discovery.
Mr. Johnson. And those are the protocols that AAA follows,
but not necessarily all of the others?
Mr. Naimark. Yes. The discovery may be limited. It is
controlled by the arbitrator, but this is an especially
important issue in the employment cases where typically the
employee needs records that the employer has, so you have to
make provision that they can at least get some of the
documentation.
Mr. Johnson. Well, if the arbitrator rules unfairly against
the consumer and in favor of the employer, there is no right to
appeal is there?
Mr. Naimark. No.
Mr. Johnson. So it pretty much means that whatever the
arbitrator says goes.
Mr. Naimark. Yes.
Mr. Johnson. And there is no requirement that the
arbitrator be an attorney.
Mr. Naimark. No. In the employment area, the parties pick
their arbitrators.
Mr. Johnson. And you do have some arbitrators who are not
even lawyers.
Mr. Naimark. In the consumer area, virtually none.
Ms. Sanchez. The time of the gentleman----
Mr. Johnson. Virtually none are lawyers?
Mr. Naimark. No, they are virtually all lawyers.
Mr. Johnson. All right.
Ms. Sanchez. The time of the gentleman has expired.
I am going to thank the first panel for their testimony. I
am going to excuse you, and we will invite the second panel to
please come up and be seated.
I am now pleased to introduce the witnesses for our second
panel for today's hearing. Our first witness is Ms. Deborah
Williams. Ms. Williams is a Coffee Beanery franchise owner,
along with her partner Richard Welshans, and was a victim of a
binding mandatory arbitration clause. She resides in Annapolis,
Maryland. We appreciate your being here today.
Our second witness is Ms. Cathy Ventrell-Monsees. Ms.
Ventrell-Monsees has been practicing in employment
discrimination law since 1983. She litigated several ADEA class
actions and has written more than 50 amicus briefs in the U.S.
Supreme Court and circuit courts. Ms. Ventrell-Monsees has a
part-time law practice and teaches employment discrimination
law at the Washington College of Law at American University.
From 1985 to 1998, she worked in and directed an age
discrimination litigation project at AARP and, with Steve
Platt, she is coauthor of ``Age Discrimination Litigation.''
Ms. Ventrell-Monsees has appeared in numerous national and
local media as a commentator on employment issues. We welcome
you to today's hearing.
Our third witness is Professor Peter Rutledge. Professor
Rutledge is an associate professor of law at The Catholic
University of America, where his teaching and research
interests include international dispute resolution and criminal
law. A former law clerk at the United States Supreme Court and
the United States Court of Appeals for the Fourth Circuit,
Professor Rutledge regularly advises parties and lawyers on
matters before the U.S. Supreme Court. Before entering the
academy, Professor Rutledge practiced at Wilmer, Cutler and
Pickering, where his practice included Supreme Court work, and
at Freshfields Bruckhouse Derringer, where his practice
concentrated on international arbitration. We welcome you to
our second panel.
Our final witness is Theodore Eppenstein. Mr. Eppenstein is
a member of Eppenstein and Eppenstein, a law firm with an
international practice. He has testified previously before
Congress on matters of compulsory arbitration and arbitration
reform. Mr. Eppenstein was appointed to be one of three public
members of the Securities Industry Conference on Arbitration,
an advisory committee to the U.S. Securities and Exchange
Commission on arbitration. He is a member of the American
Arbitration Association's Security Advisory Committee and has
coauthored many articles on securities arbitration and
litigation.
I want to thank you all for your willingness to participate
in today's hearing. You understand the rules about the lights
from the previous panel. So with that, I will invite Ms.
Williams to please begin her oral testimony.
TESTIMONY OF DEBORAH WILLIAMS, ANNAPOLIS, MD
Ms. Williams. I want to thank Chairwoman Sanchez and the
Members of the Subcommittee for giving me the opportunity to
share my story.
My name is Deborah Williams. I am 54 years old, and I am
bankrupt and on the verge of being homeless, all because of a
binding mandatory arbitration clause. In February 2004, my
partner and I opened a Coffee Beanery franchise in Annapolis,
MD. Included in our franchise contract hid a binding mandatory
arbitration agreement.
Within 3 months, our dream of owning our own small business
was becoming a nightmare. The franchise rapidly fell apart
through no fault of our own. The Coffee Beanery had sold us a
failed business concept that generated massive losses. We were
required to purchase expensive, faulty equipment, such as a
discontinued lighting system that cost $14,000, and a defective
display case that cost $8,000, a $2,000 markup from what it
normally sells for.
We were forced into illegal third-party contracts which
required ongoing fees and additional equipment such as a gift
card program, a required DMX music and security system, and a
Pepsi contract. The DMX music and security system was listed in
our contract as already paid for, but the Coffee Beanery forced
us to pay an additional $8,000 for the system. The gift card
program and Pepsi contract were not disclosed in our initial
contract as required by law, but we had invested so much money
that we had no choice but to accept the exorbitant additional
fees. We would have never bought the franchise if these
contracts had been disclosed.
We conducted more research and discovered over 73 other
failed Coffee Beanery franchises, and that the Coffee Beanery
was being investigated in other States. We also learned that a
Coffee Beanery cafe had an average life span of 3 years. That
is pretty unbelievable considering that the investment is over
$375,000 for the average cafe.
We immediately alerted the Maryland attorney general of our
situation. The attorney general's office conducted an
investigation and, based on Maryland franchise law and the
Federal Trade Commission franchise rule, they concluded that
the franchisor committed fraud in the sale of our small
business. When someone commits fraud they should be held
accountable. In December 2005, we filed our civil case in
Maryland district court, but despite the Maryland attorney
general's finding and the protection of Maryland franchise law,
we were forced to resolve our dispute through binding mandatory
arbitration.
The arbitration company that the Coffee Beanery used in our
case is called the American Arbitration Association, the AAA.
The AAA arbitrator was selected without our input and without
our consent at a fee of $200 an hour. We had no information
about her history as an arbitrator, or if she had been hired by
the Coffee Beanery before to arbitrate, and how often she ruled
in their favor.
We also discovered that our arbitrator shared an accounting
firm with the Coffee Beanery, an obvious conflict of interest.
We tried to have her replaced, but were unsuccessful. If a
judge had a similar connection to the defense in a court case,
it would have been thrown out immediately, but not in the
kangaroo court known as arbitration. We also found later that
the Coffee Beanery's attorney also doubled as an arbitrator for
the AAA.
Because discovery is very limited in arbitration, we had
difficulty obtaining copies of the Coffee Beanery's illegal
third-party contracts to use as evidence in our case. The
Coffee Beanery did not respond to our discovery requests,
dragging out the process for 7 months, knowing that we couldn't
afford the exorbitant costs that accompany a long arbitration
process. We later obtained some of these contracts from another
franchisee, and not the Coffee Beanery.
The arbitration took place in Michigan, 500 miles from our
home. We flew back and forth with our attorney four times for a
total of 11 days of proceedings. We felt that we had a great
chance of prevailing since the attorney general had already
found the franchisor had committed fraud.
Our cost of the arbitration proceedings totaled over
$100,000, hardly a cheaper alternative to litigating locally in
Maryland. In the end, the arbitrator ruled that, contrary to
the findings of the Maryland attorney general's office, we were
at fault. In addition to our costs, we were required to pay the
Coffee Beanery $150,000, plus their attorneys' costs and fees.
That is a total of over $250,000. We are trying to appeal our
decision, but we have been told by several attorneys that it is
a lost cause. It is virtually impossible to overturn a decision
of an arbitrator on appeal.
It has been 4 years since we have opened our franchise. We
haven't made a profit. We haven't paid ourselves wages. We are
in enormous debt. We have invested over $1.5 million in this
failed business, and every year we owe the Coffee Beanery more
money in royalties. Since we signed a 15-year franchise
agreement with the Coffee Beanery, our only options have been
to sell this business to another unsuspecting person which we
refuse to do, or to file for bankruptcy.
Recently, our landlord terminated our lease due to our
inability to pay rent and the doors to our Coffee Beanery cafe
will be locked as of next Wednesday, October 31. We are
borrowing money from our family so that we can file for
bankruptcy. However, we still owe the Coffee Beanery royalties
for the remaining 11 years on our franchise even if our cafe is
no longer open.
Losing our right to a trial by jury has crippled us, but we
are not alone. Binding mandatory arbitration has harmed the
livelihoods of thousands of others. The Arbitration Fairness
Act of 2007 would ensure that all Americans have access to the
courts and trials by juries to resolve disputes. It would still
permit arbitration in cases like ours, but only if both parties
voluntarily agree to it.
Please do not force more consumers into a privatized system
that has no oversight and almost no opportunity to appeal. That
kind of power is dangerous and too easily abused. We never knew
how precious our constitutional rights were until they were
stolen from us by a binding mandatory arbitration clause.
It is the American dream to own your own business. Our
dream has been trampled upon by binding mandatory arbitration.
I hope hearing our story will make a difference and you will
protect hard-working Americans across the country by
eliminating these abusive clauses.
Thank you.
[The prepared statement of Ms. Williams follows:]
Prepared Statement of Deborah Williams
I want to thank Chairwoman Sanchez and the members of the
subcommittee for giving me the opportunity to share my story.
My name is Deborah Williams. I am 54, bankrupt and on the verge of
being homeless, all because of a binding mandatory arbitration clause.
In February 2004, my partner and I opened a Coffee Beanery franchise in
Annapolis, Maryland. In the small print of our franchise contract hid a
binding mandatory arbitration agreement.
Within three months, our dream of owning our own small business was
becoming a nightmare. The franchise rapidly fell apart through no fault
of our own. The Coffee Beanery had sold us a failed business concept
that generated massive losses. We were required to buy expensive,
faulty equipment, such as a discontinued lighting system that cost
$14,000, and a defective display case that cost $8000, a $2000 mark-up
from what it normally sells for.
We were forced into illegal third-party contracts which required
ongoing fees and additional equipment such as a Gift Card program, a
required DMX music and security system, and a Pepsi contract. The DMX
music and security system was listed in our contract as already paid
for, but the Coffee Beanery forced us to pay an additional $8000 for
the system. The gift card program and Pepsi contract were not disclosed
in our initial contract as required by law, but we had invested so much
money that we had no choice but to accept the exorbitant additional
fees. We would have never bought the franchise if these contracts had
been disclosed.
We conducted more research and discovered over 73 other failed
Coffee Beanery franchises, and that the Coffee Beanery was being
investigated in other states. We also learned that a Coffee Beanery
cafe had an average life span of three years--hat's pretty unbelievable
considering the average cost to open one of these cafes is over
$375,000.
We immediately alerted the Maryland Attorney General of our
situation. The Attorney General's office conducted an investigation
and, based on Maryland franchise law and the Federal Trade Commission
franchise rule, they concluded that the franchisor committed fraud in
the sale of our small business. When someone commits fraud then they
should be held accountable. In December 2005, we filed our civil case
in Maryland district court, but despite Maryland Attorney General's
finding, we were forced to resolve our dispute through binding
mandatory arbitration.
The arbitration company that the Coffee Beanery used in our case is
called the American Arbitration Association (AAA). The AAA arbitrator
was selected without our input and without our consent at a fee of $200
an hour. We had no information about her history as an arbitrator--f
she had been hired by the Coffee Beanery before for arbitration or how
often she had ruled in their favor.
We also discovered that our arbitrator shared an accounting firm
with The Coffee Beanery, an obvious conflict of interest. We tried to
get her replaced but were unsuccessful. If a judge had a similar
connection to the defense in a court case it would have been thrown out
immediately, but not in the kangaroo court known as arbitration. We
also found out later that the Coffee Beanery's attorney also doubled as
an arbitrator for the AAA.
Because discovery is very limited in arbitration, we had difficulty
obtaining copies of the Coffee Beanery's illegal third-party contracts
to use as evidence in our case. The Coffee Beanery did not respond to
our discovery requests dragging out the process for seven months,
knowing that we couldn't afford the exorbitant costs that accompany a
long arbitration process. We later obtained some of these contracts
from another franchisee, and not the Coffee Beanery.
The arbitration took place in Michigan, 500 miles from our home. We
flew back and forth with our attorney three times for a total of 11
days of proceedings. We felt that we had a great chance of prevailing
since the Attorney General had already found the franchisor had
committed fraud.
Our cost of the arbitration proceedings totaled over $100,000--
ardly a cheaper alternative to litigating locally in Maryland. In the
end, the arbitrator ruled that contrary to the findings of the Maryland
Attorney General's office, we were at fault. In addition to our costs,
we were required to pay the Coffee Beanery $150,000, plus their
attorneys' costs and fees. That's a total of over $250,000.
We are trying to appeal our decision, but we have been told by
several attorneys that it is a lost cause. It's virtually impossible to
overturn a decision of an arbitrator on appeal.
It's been four years since we have opened our franchise. We haven't
made a profit. We haven't paid ourselves wages. We are in enormous
debt. We've invested over $1.5 million in this failed business and
every year, we owe the Coffee Beanery more money in royalties. Since we
signed a 15 year franchise agreement with the Coffee Beanery, our only
options have been to sell this business to another unsuspecting person
which we refuse to do, or to file for bankruptcy.
Recently, our landlord terminated our lease due to our inability to
pay rent and the doors to our Coffee Beanery cafe will be locked as of
next Wednesday, October 31. We are borrowing money from our family so
that we can file for bankruptcy; however, we may still owe the Coffee
Beanery royalties for the remaining 11 years on our franchise even if
our cafe is no longer open.
Losing our right to a trial by a jury has crippled us, but we are
not alone. Binding mandatory arbitration has harmed the livelihoods of
thousands of others. The Arbitration Fairness Act of 2007 would ensure
that all Americans have access to the courts and trials by juries to
resolve disputes. It would still permit arbitration in cases like ours,
but only if both parties voluntarily agree to it.
Please do not force more consumers into a privatized system that
has no oversight and almost no opportunity to appeal. That kind of
power is dangerous and too easily abused. We never knew how precious
our constitutional rights were until they were stolen from us by a
binding mandatory arbitration clause.
It is the American dream to own your own business. Our dream was
trampled upon by binding mandatory arbitration. I hope hearing our
story will make a difference and you will protect hardworking Americans
across the country by eliminating these abusive clauses.
Ms. Sanchez. Thank you, Ms. Williams. We appreciate your
testimony.
At this time, I would invite Ms. Ventrell-Monsees to give
her testimony.
TESTIMONY OF CATHY VENTRELL-MONSEES, ESQ., LAW OFFICES OF CATHY
VENTRELL-MONSEES, CHEVY CHASE, MD, ON BEHALF OF THE NATIONAL
EMPLOYMENT LAWYERS ASSOCIATION
Ms. Ventrell-Monsees. Thank you, Madam Chair, Congressman
Cannon and Members of the Subcommittee. My name is Cathy
Ventrell-Monsees. I am an executive boardmember of the National
Employment Lawyers Association, known as NELA. NELA advances
employee rights and serves lawyers who advocate for equality
and justice in the American workplace. NELA's concern, and why
we are here today, is the widespread use of pre-dispute
mandatory arbitration to resolve employment cases, and the
deterrent effect that system has on the ability of employees to
enforce their employment and civil rights.
Every day, NELA members see how companies stack the deck in
their favor in their disputes with employees, and the use of
mandatory arbitration has grown exponentially over the past 15
years. In 1991, a mere 3.6 percent of private employers used
arbitration systems. Today, approximately 15 percent to 25
percent of private employers from Circuit City to Hooters to
Halliburton, use mandatory arbitration to keep the potential
claims of more than 30 million employees out of court.
Companies put mandatory arbitration provisions into
employment applications, employment handbooks and employee
benefit plans. Employees must sign those documents if they want
to get the job or keep the jobs they already have, despite
whatever theoretical due process protocols may bar imposing
mandatory arbitration as a condition of employment.
The workers we represent face many different kinds of
employment and discrimination problems, such as being fired
while on family or medical leave; our military and reserve
personnel who return from Iraq and Afghanistan only to find
their jobs gone, blue- and white-collar workers who are forced
to work off the clock so their employers don't have to pay them
overtime; and retaliation against whistleblowers who risk their
careers to report dishonest or risky corporate or government
behavior.
But the courts have held that all of these claims are
subject to mandatory pre-dispute arbitration. So what is wrong
with that? What is wrong is that mandatory arbitration creates
a modern-day version of separate and unequal justice for
employees, and here is how. Under mandatory pre-dispute
arbitration, employees lose their day in court before an
impartial judge. They lose their right to a trial of their
peers and their right to appeal.
They lose the protection of our laws because arbitrators do
not have to follow the law. They do not even have to know the
law. Employees lose important remedies because mandatory
arbitration programs and arbitrators can and do limit the
damages an employee can get in court by Federal or State law.
An employer who forces its employees into this separate system
can pick its favorite arbitrator and use that same arbitrator
over and over again to rule in its favor in other cases brought
by other employees of the company.
The effect of this repeat player phenomenon is dramatic as
shown by two recent examples taken from public reports of the
American Arbitration Association. From January 1, 2003 to March
31, 2007, the AAA held 62 arbitrations for Pfizer in employment
cases, of which 29 went to decision. Of the 29, an arbitrator
found for the employee just once, and for the employer 28
times. That is a rate of 97 percent for the employer.
Halliburton in its cases won 32 out of 39 cases that went to a
decision, a telling 82 percent win rate in arbitration.
The result? Companies that routinely discriminate against
their employees are never held accountable to the public
because of this private separate system. Pre-dispute mandatory
arbitration provides no deterrent effect to prevent employers
from discriminating again and again. Rather, pre-dispute
binding mandatory arbitration deters employees from pursuing
their employment rights. That is a significant cost that
employees in our society bear under the current separate and
unequal system.
Arbitration is often touted as inexpensive. Not true in
employment cases. Employees often have to pay exorbitant fees
just to get a hearing. Arbitrators typically charge $250 to
$450 an hour and arbitrations can last more than 100 hours. A
worker who has been fired from her job simply cannot afford
this cost.
Ms. Sanchez. I am sorry, Ms. Ventrell-Monsees. Your time
has expired. I want you to summarize your final thoughts.
Ms. Ventrell-Monsees. Yes. NELA urges Congress to act
without delay to pass the Arbitration Fairness Act. Congress
should no longer allow this separate and very unequal system to
continue.
Thank you.
[The prepared statement of Ms. Ventrell-Monsees follows:]
Prepared Statement of Cathy Ventrell-Monsees
Ms. Sanchez. Thank you very much for your testimony.
At this time, I would invite Professor Rutledge to give his
testimony.
TESTIMONY OF PETER B. RUTLEDGE, ESQ., THE CATHOLIC UNIVERSITY
OF AMERICA, COLUMBUS SCHOOL OF LAW, WASHINGTON, DC
Mr. Rutledge. Thank you, Chairwoman Sanchez, Ranking Member
Cannon, Representative Johnson and Members of the Subcommittee.
I am an associate professor of law at the Columbus School of
Law, coauthor of the book ``International Civil Litigation in
the United States,'' and author of several articles in the
field of arbitration.
I appreciate the opportunity to participate in the hearing
today, and would like to take you up on your invitation, Madam
Chair, to elicit testimony to assess the accuracy of reports on
exactly what is the state of the empirical data in arbitration
to assist the Subcommittee in deciding whether legislation is
necessary. I hope that both my written testimony and my oral
testimony will assist you in that process.
Allow me to briefly summarize my points. First, the
available data on arbitration is growing and in important
respects is either inconsistent with or flatly contradicts some
of the arguments that have been driving this debate so far. It
is important to fill the gaps in the empirical record before
knowing whether and to what extent legislation is necessary.
Second, several of the findings upon which H.R. 3010 rests
either conflict with the available empirical evidence or rest
on criticism not unique to arbitration.
Third, to the extent there are problems with arbitration,
and let me speak personally here and stress I agree that there
are some, several mechanisms already exist to regulate them.
The question is not whether arbitration is perfect. Surely it
is not. The question is whether the imperfections in the system
justify jettisoning it altogether.
That leads me to my fourth point. Eliminating arbitration
agreements may have significant negative economic effects. I am
the first to admit that this is an area where we need more
empirical research, but several bits of anecdotal evidence
which are summarized in my written testimony indicate that
arbitration has enabled companies to lower their dispute
resolution costs and that those savings have been passed on to
individuals in the form of higher wages, lower prices, and
better share prices.
My own research, which I stress is a work in progress,
indicates that eliminating the employment arbitration docket of
a single organization, the AAA, would increase the cost of
resolving those disputes by $88 million. If eliminating a
single organization's docket increases costs that much, imagine
what the increase in costs would be if arbitration were
eliminated altogether. Basic economics teaches us that those
increased costs have to be borne by someone, and they are going
to be borne by the individuals, the same people whom H.R. 3010
is trying to protect.
And fifth and finally, the notion that post-dispute
arbitration can somehow replace pre-dispute arbitration is
something that is not a viable alternative.
Madam Chair, at bottom let me urge Congress to respond to
the empirical proof here. The risk of legislating otherwise is
that it would make worse-off the very individuals who Congress
is trying to protect. In my remaining time, allow me to
elaborate briefly on two examples.
One, arbitration is often criticized on the ground that it
leaves the party with the weaker bargaining position, whether
the employee, the consumer or otherwise, worse off. You have
heard a few examples today of particular companies or instances
where that is the case. But the aggregate measures indicate
that by most measures, the party with the inferior bargaining
position achieves superior or comparable results compared to
what is the case is in litigation. One thing that I would
encourage the Subcommittee to do is to consider exactly where
are these people going to end up if arbitration is not
available?
Two, arbitration is often criticized on the grounds--and it
has been so criticized today--that it surrenders the employee's
or the consumer's right to a jury trial. It is certainly true
that arbitration does not involve a jury, but eliminating
arbitration is not going to magically cause a jury to appear
for all these cases. The available evidence indicates that if
Congress eliminated arbitration, many of these individuals who
it is trying to protect will not be able to find an attorney.
If they can, few of their cases will reach a jury, and if they
do, justice will come far later than it does for them in
arbitration.
To paraphrase the words of one respected scholar in this
field, in a world without arbitration, we would essentially
have a Cadillac system of justice for the few, and a rickshaw
system of justice for the many. Arbitration replaces that with
a system of justice of Saturns for all. In other words, it
enables citizens as a whole to have greater access to justice,
even if a few individuals and their lawyers experience a
marginal reduction in recoveries.
Madam Chairman, I have tried to keep underneath my time.
Thank you for the opportunity to present my testimony. I would
be happy to answer your questions.
[The prepared statement of Mr. Rutledge follows:]
Prepared Statement of Peter B. Rutledge
Ms. Sanchez. I appreciate your testimony. Thank you.
I would now invite Mr. Eppenstein to present his oral
testimony.
TESTIMONY OF THEODORE G. EPPENSTEIN, ESQ.,
EPPENSTEIN AND EPPENSTEIN, NEW YORK, NY
Mr. Eppenstein. Thank you, Madam Chairwoman, and thank you,
Mr. Johnson, for proposing this bill to the House.
I am going to talk to you today a little bit about
securities arbitration. I have had various opportunities to
view securities arbitration, first as an advocate for the
investing public in the landmark securities case before the
U.S. Supreme Court in 1987, Shearson v. McMahon.
Secondly, after that I testified in Congress twice,
attempting to retroactively reverse the decision in that case,
which in effect required mandatory arbitration, since it
permitted the broker-dealers to require mandatory arbitration
in their customer agreements.
Also, I have been a public member of the Securities
Industry Conference on Arbitration, and we are a group that
meets regularly involving not just the three public members,
but a member from the industry, SIFMA today, and members from
each of the securities regulatory organizations, the self-
regulatory organizations like the NASD and the New York Stock
Exchange. The SEC sits in regularly at our meetings. I have
been a public member since 1998.
I can tell you through my experience from what I have
observed, securities arbitration does not work for the
investor. I request that you specifically include securities
disputes and other investment malpractice disputes in your
bill. My concern is that if it is not specifically laid out in
your bill, we are going to be coming into court and finding out
whether or not what is said here in the legislative process
covers securities arbitration.
Now, let me tell you why I think you should do this. First
of all, the Supreme Court in 1987, in a very close 5 to 4
decision, ruled that based on the SEC's position, which was
presented in an amicus brief in support of the industry's view,
and against the public, that pre-dispute arbitration clauses
would be okay with them. This they did despite the fact that
there was an SEC rule in place at the time--SEC rule 15(c)2-2,
which prohibited the use by broker-dealers of arbitration
clauses with regard to Federal statutory claims of fraud.
The SEC argued to the Court that they should permit
mandatory arbitration, deem these contracts to be enforceable
because they had oversight over the arbitration process. Well,
they have oversight over the arbitration process, but it hasn't
worked for the investor's protection. Let me tell you why. SRO
arbitration, and that is self-regulatory organizations, and I
am covering now all of the self-regulatory organizations, have
arbitration panels of three people for claims over a minimal
amount.
One person must come from the securities industry--must.
There is no way the investor can get this person off. There are
no investor advocates on the arbitration panels. Yes, there are
people selected from a public pool of arbitrators. However,
these people sometimes have conflicts of interest and are
problematic to the investor.
Aside from that, the public pool is impure. They are very
concerned about their own image and they want to work another
day. So they are not prone to come out with a large award
because they think they are going to be stricken the next time
their name comes up.
Let me tell you about a few other things, and I am not
going to go into a description of war stories. There certainly
are plenty. I am going to talk about statistics because that
has been specifically challenged. In our area, it is clear--and
I will lay it out to you in very summary fashion--that the
investor has taken it on the chin ever since the McMahon
decision came out.
The GAO did a study in 1992 taking a look at decisions that
came out of arbitrations at the SROs from 1989 and 1990. They
found the customer won about 60 percent of the time. They found
that the customer got about 61 percent of what they claimed.
After that, the Securities Arbitration Commentator, a private
commentator looking at all SRO arbitration awards, took a look
at the first 10,000 awards after the McMahon decision and found
there was a downward trend in the results.
After that, you can see through the NASD's own statistics
on how customers fare on their website the wins and the losses
from 2000 to 2006. You can go there right now and you will see,
back in 2002 the customer--just on a win-loss basis--was
winning 53 percent of the time. I would like to correct my
written statement at page 10. It had 50 percent. It was 53
percent in 2002. Every year after 2002, it went down.
Today, 2006 are the final figures that we have, it is down
to a 42 percent win rate for customers. That means that 58
percent of the time, a customer goes home not only empty-
handed, but they are going to have to pay their lawyers. They
are going to have to pay the costs for the privilege of going
to arbitration, and they have no faith in the system that the
public believes is a stacked deck against them.
There has been a very recent study that has just come out,
and this will be the last thing I will quote, and that is a
2007 study that came out looking at 14,000 arbitration awards
from 1995 through 2004. That study is mentioned in my written
materials. That study found not only the declining trend in
arbitration of win rates, but they look at something called an
``expected recovery rate,'' and that is not just the win-loss,
but they took the probability of winning and they took the
amount of recovery and they meshed it together, and they found
that today--2004 was the last year that they covered--in 2004,
the investor would get back approximately 22 percent in an
arbitration.
I ask that you do three things. One, include us in your
bill. Two, there is a place in some instances for arbitration,
but it is not going to work at the industry-run forum, FINRA,
which is where everything is now required to be held. We need
an independently run arbitration system for those people who
want to go to arbitration as opposed to court. If they have a
$10,000 claim, they would rather go to arbitration. Give them
that opportunity. Have the industry cosponsor it. Have them
fund it.
The NASD paid their members each $35,000 in order to--some
commentators have said--vote in favor of a consolidation of the
arbitration forums and regulatory division at the NASD and the
New York Stock Exchange. That equates to $175 million due to
the costs that the companies are going to save because after
consolidation the arbitrations will be heard at one forum. But
where is the benefit to the investor?
[The prepared statement of Mr. Eppenstein follows:]
Prepared Statement of Theodore G. Eppenstein
Ms. Sanchez. Mr. Eppenstein, I apologize, but we are way
over time and we do have questions we need to get to and we are
expecting votes on the floor shortly. So I am going to have to
cut your testimony off. Perhaps we can elicit some more
information through the round of questions.
I am going to begin by recognizing myself for 5 minutes of
questions. I will start with Ms. Ventrell-Monsees. One of the
attachments to Mr. Naimark's testimony is the employment due
process protocols. The president of your association, the
National Employment Lawyers Association, at the time signed the
protocols. Can you please explain the disconnect between the
president of NELA approving the protocols, and your contrary
testimony representing the NELA today?
Ms. Ventrell-Monsees. Yes, I can. The president of NELA did
not sign the document, the employment due process protocol, as
the president of NELA. The first paragraph of the employment
due process protocol specifically states that the signatories
were designated by their organizations, but the protocol
reflects their personal views and should not be construed as
representing the policy of the designating organizations.
I happened to be at the time working at AARP when the
employment due process protocol and the consumer due process
protocol were being developed. I was also a member of the
American Bar Association's Labor and Employment Council at that
time. You will see the other signatories on the due process
protocol for employment were members of the American Bar
Association's Labor and Employment Council, of which I was
also.
All of those people acted in their individual capacities,
bringing their knowledge and expertise to that process. The
greatest flaw in the employment due process protocol is that,
one, it did not bar pre-dispute mandatory arbitration. That is
NELA's concern and it remains our position today.
Ms. Sanchez. I appreciate that answer.
Ms. Williams, I am sorry for your experience, because it
sounds like it has been an absolutely terrible one. I am going
to ask you some very simple questions, and then I am going to
ask you a little bit tougher question. Do you feel like you got
ripped off? Just real briefly, yes or no?
Ms. Williams. Absolutely. I feel like what was done to me
was against the law.
Ms. Sanchez. Do you think that the option of going to court
would have been more fair to you and perhaps less costly to
you?
Ms. Williams. According to our franchise agreement,
Maryland law would supersede the entire agreement, so that I
should never have been in arbitration. We filed a civil suit. I
was not to be in arbitration. I was forced in there.
Ms. Sanchez. How do you feel when you hear things like
something that Professor Rutledge said, that, well, you know,
most people can't hire attorneys to take their cases to court,
so by virtue of the fact that they have mandatory arbitration,
and you know, we are sorry that a few people are going to have
bad experiences there, but you know, that is kind of the cost
of doing business.
Ms. Williams. It is kind of incredible to me that the
gentleman who spoke for the AAA and this gentleman here talk
about, yes, there are flaws and yes, there are things that need
to be done. What are you going to do for me? That flaw cost me
everything I have ever had. What is going to happen for me?
Ms. Sanchez. I am sure it is not just you, but I am sure
that there are many others who find themselves in similar
situations.
Ms. Williams. True.
Ms. Sanchez. Ms. Ventrell-Monsees, Professor Rutledge
points out in his written testimony that a founder of NELA
testified a few years ago that employment attorneys turned away
at least 95 percent of employees who sought representation, and
he suggested arbitration would allow those who have been turned
away to have their disputes heard. I am interested in knowing
what your response is to his observation and conclusions?
Ms. Ventrell-Monsees. Post-dispute voluntary arbitration or
mediation would provide a forum for employees. That is
absolutely clear. Attorneys also turn away many, many cases
that would be forced into mandatory pre-dispute binding
arbitration because the deck is stacked against the employees.
Ms. Sanchez. So in other words, a lot of employees who
would normally consult with an attorney about bringing a case
get turned away because of the very reason that there is a
mandatory arbitration clause and they feel like it is not a
worthwhile case to take because they have so many obstacles.
Ms. Ventrell-Monsees. The arbitrator doesn't have to follow
the law. At least if you go to court, you are assured that the
judge has a law guiding him or her and a right to appeal; that
the jury should follow the law based on the instructions given
by the judge; that you will get full discovery, not the limited
discovery that you would be left with in arbitration; you will
get full remedies stated by the Federal and State law, not the
limited remedies that arbitrations take away from employees.
Ms. Sanchez. Thank you.
Professor Rutledge, if arbitration is more favorable to
consumers and employees, according to the empirical studies
that you cited in your written testimony, what rational
business or employer would choose to arbitrate if it is in fact
this wonderful system for employees and consumers who feel like
they have been wronged?
Mr. Rutledge. Thank you, Chairwoman Sanchez. That is an
excellent question. The best way that I can answer it to you is
by referring you to a 1997 study by the GAO entitled
``Alternative Dispute Resolution: Employers' Experiences.'' I
would just briefly highlight, recognizing that you are at the
end of your time and you have votes going, two anecdotes that
would explain why.
Ms. Sanchez. That study is more than 10 years old now.
Correct?
Mr. Rutledge. Absolutely, but I believe what it does, Madam
Chairman--excuse me, Madam Chairwoman.
Ms. Sanchez. I have been called a lot worse, so
``chairman'' is not such a bad thing. [Laughter.]
Mr. Rutledge. Me, too. [Laughter.]
Very briefly, the reason why I believe this study is
relevant is because I believe it helps establish for you and
the other Members of the Committee the context in which we came
into a world where arbitration is much more prevalent. Ms.
Ventrell-Monsees cited for you studies which I agree with
indicating that if you look back, there was a relatively lower
frequency of arbitration, and that has grown.
Two anecdotes very quickly. The GAO study cites an instance
in which the Rockwell Corporation spent over $1 million in
attorneys fees winning a legal case. So I think the reason why
a company might well choose to opt into an arbitration even if
in the aggregate the individuals against whom they are
arbitrating prevail more often is because it is lowering their
attorneys fees.
Second example, the Brown and Root Company spent over
$400,000 in legal fees defending an employment discrimination
suit which it won. Following that experience, it put an ADR
system in place which included an arbitration clause. According
to GAO, the overall costs of dealing with employment conflicts
were less than half of what the company used to spend, and
legal fees were down 90 percent for the first 3 years following
Brown and Root's adoption of the program. That is GAO's
findings, not mine.
I am not a business person. I can't speak for the
community. But responding to your initial invitation, Madam
Chairman, I believe that the information such as what is
contained in the GAO report will help you assess the empirical
record to determine whether this legislation is necessary.
Ms. Sanchez. I thank you for your answer. I would only note
that Mr. Eppenstein did say that statistically not only are
consumers and employees going to mandatory binding
arbitration--not only is their win-rate falling, but their
recovery is also falling as well. And that may be one reason
why businesses choose to go through the arbitration system as
well.
My time has expired. I will recognize Mr. Cannon for 5
minutes for questions.
Mr. Cannon. It seems to me, before you run my time, that
Mr. Rutledge wanted to respond to your last statement-question.
Mr. Rutledge. Thank you very much.
Ms. Sanchez. I will grant him the opportunity if he so
chooses.
Mr. Rutledge. If I may, Madam Chairman. Thank you for the
opportunity, and to Ranking Member Cannon. I would just make
two points. I would not put words in Mr. Eppenstein's mouth,
but I believe that his testimony was concerned with the
declining win rates in the securities industry.
Ms. Sanchez. I stand corrected. You are correct. That was
in one specific area. My apologies.
Mr. Rutledge. The other point that I would make,
Congressman Cannon, is this. There are a variety of studies in
the securities industry, the 2007 one that Mr. Eppenstein cited
being only one. Footnote--excuse me, congressman--a footnote in
my written testimony cites several others, including the
Tidwell study and the Perino study.
Very briefly, as to the 2007 study that Mr. Eppenstein
kindly brought to our attention, there is one point that I
would make, picking up on what Mr. Eppenstein said. Mr.
Eppenstein indicated that--well, two points that I would make.
One, Mr. Eppenstein indicated that win rates in securities
arbitration were approximately 98 percent. Let us compare that
for a moment with what William Howard found in 1995 in looking
at employment and consumer arbitrations.
In employment and consumer arbitrations, Mr. Howard found
that in employment and consumer litigation only 8 percent of
those claims went to trial, and when they went to trial, the
employer's win rate was 72 percent. So if we are going to
engage in a comparison of raw win rates, let's be clear that
there are instances where the win rates at trial are more
favorable to the business than the win rates in arbitration.
The other point that I would make----
Ms. Sanchez. Mr. Rutledge, I am going to just interrupt you
to point out, though, the paradox that I think we have already
stated with Ms. Ventrell-Monsees, which is many possibly
meritorious employment claims never go to court by virtue of
the fact that there is a mandatory binding arbitration clause
in the employment context.
Mr. Rutledge. Absolutely true, Chairwoman Sanchez. The
other point that I would make is that many potentially
meritorious employment claims would never go to trial because
there would not be lawyers willing to take them. I cite in my
written testimony a statistic indicating that if you don't have
a meritorious claim of at least $60,000, that an employment
lawyers is not going to be willing to take your case.
Ms. Sanchez. I hate to keep contradicting you, but if legal
services were more available to people who needed access to
them, I don't disagree that perhaps they would be able to bring
their claims. But it seems to me that that is a whole other
issue that we need to look at as Members of Congress, because
there is a way that we can impact that as well.
Mr. Rutledge. I agree with you, Madam Chairwoman, and that
is precisely why I say I think it is so important to respond to
your initial invitation, which is to ask: Does the empirical
record justify the remedy that is being proposed here? There
may be other remedies that are appropriate, but the question is
whether jettisoning arbitration on balance is going to yield
net benefit to the individuals whom Congress is trying to
protect. The point that I am trying to make is based on my
assessment of the empirical evidence, and I am not convinced
that is the case.
Ms. Sanchez. I appreciate that.
Mr. Cannon?
Mr. Eppenstein. Madam Chairperson, do I get to respond to
inaccuracies about my testimony?
Mr. Cannon. I don't think we have any objection here.
Ms. Sanchez. Okay. If there is no objection, absolutely.
Mr. Eppenstein. Thank you.
First of all, Professor Rutledge, the customer never won 98
percent of the time. In 2006, the customer is down to a 42
percent win rate; 58 percent of the time, the industry wins.
The other thing you mentioned was settlements, and the
impact of settlements. I can tell you that settlements are
impacted by arbitration. That is because--and I am not the only
one to know these statistics, the broker-dealers do also--they
feel in a settlement situation that they don't have the big
risk if they go to arbitration and get a decision by the
arbitrators, because they know that they are not going to be
hit for a big number, and they know 58 percent of the time they
are going to win anyway.
So they give low-ball offers to the investor. The investor
is there with the investor's attorney and the investor says,
``Why are they so low?'' And the attorney has to tell the
investor what the deal is in terms of the stacked deck and what
we have been talking about, how you can't get a fair trial.
That pushes down the settlement offers. It pushes down the
deals. It has a negative impact.
And you cannot compare a court decision to an arbitration
decision because you don't have the same customer going to both
forums at the same time.
Ms. Sanchez. That is very valid point.
Mr. Eppenstein. That comparison is out the window.
Ms. Sanchez. I appreciate that.
I am now going to allow Mr. Cannon to ask questions.
Mr. Cannon. Thank you.
There are distinctions between sectors, and Mr. Eppenstein,
you mentioned I think in your testimony that there is no public
faith in the system. Doesn't that have the effect of moving
people and customers out of the system? Isn't there a profound
problem for stockbrokers who cheat their clients and then have
the benefit of an arbitration system that is counterproductive
for the industry and then perhaps for themselves individually?
Mr. Eppenstein. I don't quite understand your question, Mr.
Cannon. I am sorry.
Mr. Cannon. If stockbrokers cheat their customers, the
customers won't come back.
Mr. Eppenstein. They may not have any money to continue
anyway.
Mr. Cannon. Of course not--well, perhaps. The point is
there are other factors that affect how these things proceed
and it is not just what happens in arbitration. Once burned,
twice not there, I guess.
Let me shift to Ms. Ventrell-Monsees. We are looking
actually at a bill here, and I wonder if you are familiar with
it. There are basically three kinds of contracts, grossly
speaking here. You have an at-will contract, you have a signed
contract. You can't have an arbitration clause in an at-will
contract. You can in a signed contract. And then you have union
contracts. This bill excludes union contracts. Do you think
that is appropriate? Are you familiar with that?
Ms. Ventrell-Monsees. Yes, I am familiar with it, and I
have been dealing with it for many years. We have no concern
with arbitration in collective bargaining agreements. The
unions are there to represent their workers. They often do a
very good job, and so there is no reason for Congress to
address that issue.
The real problem that needs to be addressed is the
contracts, and you can have mandatory arbitration in employment
at-will. When you apply for the job, at the bottom of that
application oftentimes there is a mandatory arbitration clause
that people never see.
Mr. Cannon. Then it is a contract that is not an at-will.
There may be few protections for the person at that point.
You pointed out that there are overtime problems. There are
resolutions to overtime issues and those made a major story in
Business Week last week. There clearly are other protections in
the system.
I had one other question for you, and that is that you
cited two statistics, one I think was 85 percent win for the
employer, and the other was 97 percent win for the employer.
Did you look at the merits of those cases, or would it have
been acceptable if it had been a 50-50 win?
Ms. Ventrell-Monsees. It is not possible to look at the
merits because they are the results of the AAA decisions in
California, so it is just the result itself.
Mr. Cannon. And that result you characterized as routinely
discriminating against employees, as opposed to figuring out
what the merits were. Let me just suggest that that is not very
helpful to us because all kinds of things go into what is
happening. From 1 year to the next, the employment world,
whether we have a shortage of labor or a surplus, affects that
sort of thing and companies have a fairly long-term interest in
keeping their employees relatively happy. There are aberrations
to that, but I don't think those statistics are very helpful in
what we are looking at here.
Ms. Williams, my understanding is that in your case, there
was a point at which the attorney general from the State
actually got a settlement for you, and perhaps others--I am not
sure if it included others in your franchise situation. Was
that the case?
Ms. Williams. What do you mean by ``settlement''?
Mr. Cannon. An offer to refund and take equipment back and
things like that.
Ms. Williams. There is an open pending investigation still.
We can talk about arbitration today if you like. I would love
to talk about that with you, and I hope I get the opportunity
at another point in time.
Mr. Cannon. I am just asking a question here. Did you have
an opportunity to settle that was provided by the attorney
general?
Ms. Williams. Mr. Cannon, Congressman Cannon, I should
never have been in arbitration regardless.
Mr. Cannon. I understand that you don't like that. I am
just wondering. Look, you ended up spending $1.5 million, and
you told us that you didn't know at the time you made an
investment which led to $1.5 million in expenditures that the
average life of a coffee shop was 3 1/2 years.
Ms. Williams. That is correct. That would be the fraud.
Mr. Cannon. Was that fraud on the part of the company that
sold you the equipment and the franchise, instead of telling
you all the downsides?
Ms. Williams. Exactly. The information was not disclosed.
Mr. Cannon. You didn't have a reason to go look on the
Internet--at the time, I am not sure that was available--to
check out the kind of business you were getting in? In other
words, you are a victim here, and I don't know this franchisor,
but all the money you put out to vindicate your right to a
trial, when you might have cut your losses and gone into some
other kind of business, seems to me to be an unfair indictment
of a franchisor.
Ms. Williams. That is correct, and we were given a UFOC,
and according to the FTC guidelines there are 21 requirements
by law that a franchisor needs to disclose. We did our due
diligence based on the information we were given. Your due
diligence is only as good as the information that is being
disclosed to you.
Mr. Cannon. With all due respect, we live in a world full
of information, more full these days than before. It seems to
me that it can't all be the franchisor's fault. This is not a
case for the franchisor, but a case for the responsibility of
the investor.
Thank you, Madam Chair. I yield back.
Ms. Sanchez. The gentleman yields back his time.
We have been called for votes, but we have just enough
time, I think, to allow Mr. Johnson for his 5 minutes of
questions, and then we will conclude our hearing.
Mr. Johnson?
Mr. Johnson. Well, I don't know if I will take 5 minutes. I
will say that your testimony, Ms. Williams, has been very
compelling.
Ms. Williams. Thank you.
Mr. Johnson. You purchased a franchise, and when you
entered into that agreement, you really didn't have a choice as
to whether or not to accept the pre-dispute binding mandatory
arbitration clause that was in it. If you did not accept it,
you simply would have been turned away from being able to
purchase that franchise. Is that correct?
Ms. Williams. In our situation, the UFOC and the franchise
agreement are amended to adhere to Maryland franchise
registration disclosure laws. Under those laws, if there is a
dispute as to whether or not fraud has been committed, it does
not arbitrate. It goes to court.
Mr. Johnson. Well, my point is there was a mandatory
binding arbitration clause in the franchise agreement that you
signed. Correct?
Ms. Williams. I am finding out now that the amendment to
the contract to adhere to Maryland law was useless. That is
correct.
Mr. Johnson. And you didn't have a choice about whether or
not to sign it or not. If you had not signed the agreement,
then you would not have gotten a contract. I guess the point
that I am trying to make is that when you go to purchase a cell
phone, get cell phone service, a nursing home situation, you go
to put your mother in a nursing home, you are confronted with a
mandatory pre-dispute binding arbitration clause in the
agreement.
If you don't sign it, then you won't be able to get mom
into the nursing home. You won't be able to get the cell phone
service. You won't be able to purchase the home from the
builder. Every builder in town has a mandatory arbitration
clause, pre-dispute, in their agreement. So if you want to
purchase a home in that market, you are going to have to sign
that agreement with that clause in there.
So it basically makes the consumer not have a choice as to
whether or not to waive it or not. Of course, the consumer is
not concerned about a dispute at that time. It is only when the
dispute arises that you get caught up and you find that you
have signed away, contracted away your right for a jury trial.
A jury trial is important because it is in a public courtroom.
The judge has either been elected or appointed. He or she has
been subject to the will of the people and remains that way.
Subject to judicial canons of ethics, he or she has to be fair
and impartial, or else there is some recourse.
But there is no recourse available to help a person agree
to buy an arbitrator or an unfair arbitration proceeding. So it
is because of this imbalance that continues to take hold
throughout the commercial industry throughout America that
results in people not having an ability to engage in the public
justice system that gives rise to this legislation.
So your testimony, Ms. Williams, is a clear example
notwithstanding statistics and that kind of thing, but this is
a clear example of why this kind of legislation is necessary,
because of the nightmare that you have been through--no
discovery, no choice of the arbitrator, exorbitant fees. You
have spent $100,000 in costs, and did not have the ability to
select the arbitrator. The arbitration process was held 500
miles away from your home. There are just so many costs
involved.
Do you find, Ms. Ventrell-Monsees, that this is typical as
far as this kind of nightmare is concerned?
Ms. Ventrell-Monsees. Yes. It is a very typical story in
consumer cases and employment cases as well. Just as the
consumer's life is devastated, so is the employee's.
Mr. Johnson. All right.
Mr. Eppenstein, you would agree that in terms of securities
regulations and securities disputes that stockholders who have
been burned by stockbrokers are subject to the same kind of
nightmare?
Mr. Eppenstein. Yes. And more than that, Mr. Johnson, the
public isn't learning about the terrible frauds that are going
on because the hearings are held behind closed doors. The
decisions don't go into detail about what happened, and a lot
of time the public never hears about it.
Mr. Johnson. Thank you.
Ms. Sanchez. The time of the gentleman has expired.
I want to thank all of the witnesses.
Mr. Cannon. Madam Chairman, may I just ask unanimous
consent to submit a packet of documents for the record for the
hearing?
Ms. Sanchez. Without objection, so ordered.
[The information referred to is available in the Appendix.]
Ms. Sanchez. I want to thank all of the witnesses for their
testimony today. We actually got in both panels before the
vote. Without objection, Members will have 5 legislative days
to submit any additional written questions, which we will
forward to the witnesses and ask that you answer as promptly as
you can so that they can be made a part of the record.
Without objection, the record will remain open for 5
legislative days for the submission of any other additional
materials.
Again, I want to thank everybody for their time, patience
and effort in coming today to help us get to the bottom of this
issue.
This hearing on the Subcommittee on Commercial and
Administrative Law is adjourned.
[Whereupon, at 4:40 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Material submitted by the Honorable Chris Cannon, a Representative in
Congress from the State of Utah, and Ranking Member, Subcommittee on
Commercial and Administrative Law
Response to Post-Hearing Questions from Laura MacCleery, Esq.,
Director, Public Citizen's Congress Watch Division, Washington, DC
Attachment 1
Attachment 2
Response to Post-Hearing Questions from Richard Naimark, Senior Vice
President, American Arbitration Association, Washington, DC
Post-Hearing Questions* submitted to the Honorable Roy E. Barnes,
The Barnes Law Group, LLC, Marietta, GA
--------
*At the time of the printing of this hearing, the Subcommittee on
Commercial and Administrative Law had not received a response to these
questions from the witness.
Response to Post-Hearing Questions from Kenneth L. Connor, Esq., Wilkes
and McHugh, P.A., Washington, DC
Response to Post-Hearing Questions from Deborah Williams, Annapolis, MD
Response to Post-Hearing Questions from Cathy Ventrell-Monsees, Esq.,
Law Offices of Cathy Ventrell-Monsees, Chevy Chase, MD, on behalf of
the National Employment Lawyers Association
Response to Post-Hearing Questions from Peter B. Rutledge, Esq., The
Catholic University of America, Columbus School of Law, Washington, DC
Response to Post-Hearing Questions from Theodore G. Eppenstein, Esq.,
Eppenstein and Eppenstein, New York, NY