[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

                              ----------                              

                            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

                              ----------                              


                       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

                              ----------                              


               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





                                 
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