[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
AUTOMOBILE ARBITRATION FAIRNESS ACT
OF 2008
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
ON
H.R. 5312
__________
MARCH 6, 2008
__________
Serial No. 110-173
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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41-083 PDF WASHINGTON : 2008
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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
Sean McLaughlin, Minority Chief of Staff and General 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
----------
MARCH 6, 2008
Page
THE BILL
H.R. 5312, the ``Automobile Arbitration Fairness Act of 2008''... 2
OPENING STATEMENT
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......................................... 5
The Honorable Lamar Smith, a Representative in Congress from the
State of Texas, and Ranking Member, Committee on the Judiciary. 8
WITNESSES
Ms. Rosemary Shahan, President, Consumers for Automobile
Reliability and Safety, Sacramento, CA
Oral Testimony................................................. 10
Prepared Statement............................................. 12
Ms. Erika Rice, Arcanum, OH
Oral Testimony................................................. 27
Prepared Statement............................................. 29
Mr. Richard Naimark, Senior Vice President, American Arbitration
Association, Washington, DC
Oral Testimony................................................. 33
Prepared Statement............................................. 35
Mr. Hallen D. Rosner, Rosner & Mansfield, LLP, San Diego, CA
Oral Testimony................................................. 37
Prepared Statement............................................. 39
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable Chris Cannon, a
Representative in Congress from the State of Utah, and Ranking
Member, Subcommittee on Commercial and Administrative Law...... 5
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan,
Chairman, Committee on the Judiciary, and Member, Subcommittee
on Commercial and Administrative Law........................... 6
Prepared Statement of the Honorable Hank Johnson, a
Representative in Congress from the State of Georgia, and
Member, Subcommittee on Commercial and Administrative Law...... 7
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the American Financial Services Association
(AFSA)......................................................... 78
Letter from the Alliance of Automobile Manufacturers............. 89
Responses to Post-Hearing Questions from Rosemary Shahan,
President, Consumers for Automobile Reliability and Safety,
Sacramento, CA................................................. 91
Responses to Post-Hearing Questions from Erika Rice, Arcanum, OH. 96
Responses to Post-Hearing Questions from Richard Naimark, Senior
Vice President, American Arbitration Association, Washington,
DC............................................................. 99
Responses to Post-Hearing Questions from Hallen D. Rosner, Rosner
& Mansfield, LLP, San Diego, CA................................ 105
AUTOMOBILE ARBITRATION FAIRNESS ACT OF 2008
----------
THURSDAY, MARCH 6, 2008
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:37 a.m., in
room 2237, Rayburn House Office Building, the Honorable Linda
Sanchez (Chairwoman of the Subcommittee) presiding.
Present: Representatives Sanchez, Johnson, Watt, Smith, and
Cannon.
Staff present: Norberto Salinas, Majority Counsel; Daniel
Flores, Minority Counsel; and Adam Russell, Majority
Professional Staff Member.
Ms. Sanchez. This hearing of the Committee on the
Judiciary, Subcommittee on Commercial and Administrative Law
will now come to order, and I will recognize myself for a short
statement.
During the last session, this Subcommittee held two
hearings focusing on arbitration. Our first hearing in June
provided the Subcommittee with a basic knowledge of the history
of arbitration, and its benefits and problems. We revisited
arbitration during a hearing in October in which we reviewed
H.R. 3010, the ``Arbitration Fairness Act of 2007,'' authored
by Congressman Hank Johnson. During those hearings we learned
that an increasing number of businesses and employers have
begun to utilize arbitration to the detriment of others,
especially consumers.
Today we hold this legislative hearing on H.R. 5312, the
``Automobile Arbitration Fairness Act of 2008'' to respond to a
significant problem with arbitration: the take-it-or-leave-it
approach of pre-dispute binding mandatory arbitration clauses.
This legislation targets certain arbitration clauses solely
related to motor vehicle purchase or lease contracts. It would
grant to automotive consumers what Congress extended to motor
vehicle dealers in 2002: protection from mandatory binding
arbitration clauses.
[The bill, H.R. 5312, follows:]
Ms. Sanchez. Since then, automobile manufacturers have been
prohibited from requiring automobile dealers to accept pre-
dispute mandatory binding arbitration clauses in their
franchise contracts. It seems only fair that consumers receive
the same protection afforded to automobile dealers.
H.R. 5312 would give consumers the choice to settle a
dispute related to their purchase or lease of a motor vehicle
through arbitration or in court. As a result of this simple
change, consumers would be able to consider the advantages and
disadvantages of choosing to arbitrate with the specifics of
their own case in mind. They could negotiate with the dealer or
financier the terms of the arbitration agreement, should they
decide to arbitrate.
Most importantly, arbitration could still be an avenue to
resolve a dispute, but one to which all the parties would agree
to voluntarily, fairly, and with full knowledge of the
potential costs and benefits.
Today we gather to hear testimony from several individuals
with knowledge of the arbitration process and consumer
automobile contracts. I want to emphasize that today's
testimony is very important for our understanding of the
legislation. Accordingly, I very much am looking forward to
hearing today's testimony, and I welcome a thorough discussion
of the issues and legislation.
At this time 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 look forward to the
testimony today. As we talked about earlier, there is a markup
in Courts and Intellectual Property shortly after this, and I
am a Member of that Subcommittee and so in the interest of time
I would ask unanimous consent to submit my opening statement to
the record----
Ms. Sanchez. Without objection.
[The prepared statement of Mr. Cannon follows:]
Prepared Statement of the Honorable Chris Cannon, a Representative in
Congress from the State of Utah, and Ranking Member, Subcommittee on
Commercial and Administrative Law
Thank you Madam Chair and welcome to our witnesses.
This hearing marks the third time this Congress we have met to
consider the question of mandatory binding arbitration.
I welcome the opportunity to talk about arbitration, because its
wide availability is one of the most important features of our modern
dispute resolution system.
It is a fact that our courts are overburdened, and arbitration has
provided an escape valve for citizens hoping to avoid an unresponsive
judicial system.
We should do everything we can to protect it.
Part of protecting it is overseeing it to assure that the abuse we
have seen in the judicial system does not creep into the arbitration
system.
Opponents of arbitration allege that mandatory binding arbitration
clauses are abusive, and in response we have seen the introduction of
H.R. 5312 in the auto sector, and we have seen the introduction of H.R.
3010 in the broader area of consumer, employment, franchise and other
contracts.
One thing we have not seen, though, is hard, representative and
credible evidence that mandatory binding arbitration is being widely
abused.
On the contrary, the evidence we have seen is that mandatory
binding arbitration produces fair results, prompt results, and lower
costs of goods and services.
And we have seen that, to make the arbitration system ever better,
companies asking their customers to consent to mandatory binding
arbitration are offering those costumers pro-consumer contract clauses.
These are known as ``fair clauses.'' They provide important
innovations, such as opt-outs, off-ramps to small claims court, and
fee-shifting so that consumers don't bear the costs of arbitration.
Although we have not seen much evidence concerning the use of
mandatory binding arbitration in the auto purchase and lease field, I
think there is every reason to believe that the same scenario exists in
that sector.
Competition between dealers for customers is intense. Many dealers
are bending over backward to make customers happy. Manufacturers are as
well, as can be seen in the wave of high-mileage, multi-year warranties
accompanying new car sales.
Solicitousness towards customers should be especially strong in the
auto lease market--where so much depends on whether a dealer can keep a
happy customer coming back every few years for a new lease.
The composition of today's witness panel--doubled up with consumer
advocates, complemented by an individual witness and the arbitration
sector--means we won't be able to hear from the auto dealers or any of
the companies that write the peripheral contracts associated with car
sales like financing agreements or insurance agreements.
That is unfortunate. We, for one, tried to obtain a witness from
the auto finance sector, which works arm-in-arm with dealers on most
any auto sale or lease in the country, but due to the size of the panel
the majority could not accommodate that request.
The reason why we were interested in having the auto finance sector
was related to their concerns that H.R. 5312 would include their
contracts. It is my understanding that the Chair and the other sponsors
present indicated that their intent is not to cover auto finance
contracts, other peripheral contracts associated with an auto sale or
lease, or even rental-car agreements so without their testimony we will
presume that is the case.
I expect today that we will hear a good deal about how H.R. 5312
simply seeks to impose parity in contracts involving auto dealers.
Under a 2002 law, dealers cannot be forced into mandatory binding
arbitration with auto manufacturers. H.R. 5312, its proponents argue,
would simply give the same benefit to consumers when they contract with
dealers.
I find that argument unpersuasive. Because we limited arbitration
in a particular sector in 2002 doesn't provide enough of a record for
action here today.
When we are done today, I suspect we will be at the same place we
were when we started--staring at a record that tells us that
arbitration works, and that we should do nothing to limit buyers' and
sellers' freedom to enter into it.
And I am left wondering whether there is anyone that would benefit
from the proposed legislation other than trial lawyers.
I yield back the remainder of my time.
Mr. Cannon [continuing]. And just point out that we have
been through several of these hearings and discussions about
arbitration, but I would only make the point that there is a
huge difference, just in nature, between dealers and consumers.
We ought to focus on that during the course of this hearing.
With that, Madam Chair, I am happy to yield back.
Ms. Sanchez. I thank the gentleman for his statement.
Without objection, other Members' opening statements will
be included in the record. And without objection, the Chair
will be authorized to declare a recess of this hearing at any
point.
[The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Commercial and Administrative
Law
Properly used, arbitration can help parties avoid the delay and
costs of protracted litigation.
But unfortunately, as we have heard in prior Subcommittee hearings,
some businesses are insisting on mandatory arbitration clauses in their
consumer contracts, with consumers who have no practical choice but to
go along, because of their unequal bargaining position.
These mandatory arbitration clauses are written by the business's
lawyers, and quite naturally often favor the business.
Some of the procedural requirements they impose can make it
exceedingly difficult, even cost- prohibitive for consumers to protect
their rights under the law.
At their essence, these mandatory arbitration clauses, when imposed
on consumers who have no power to refuse them, force consumers to give
up their constitutional right to a jury trial.
Chairwoman Sanchez has introduced H.R. 5312, the ``Automobile
Arbitration Fairness Act of 2008,'' to address these concerns in one
specific area, automobile sales and leases. This bill would give
consumers who have a legal claim against an automobile dealer the right
to choose--after the problem arises--whether to resolve the claim
through arbitration, or in court.
The auto dealers obtained this same relief from Congress a few
years ago, when we decided that in light of the unequal bargaining
position auto dealers faced against manufacturers in their franchise
agreements, it was not fair to permit the manufacturers to impose
mandatory arbitration clauses.
It is now time to take this same step on behalf of fundamental
fairness with the automobile dealer- consumer relationship.
I commend Chairwoman Sanchez for her leadership in authoring this
legislation, which is supported by a majority of the Subcommittee's
Members.
And I look forward to the testimony from today's witnesses.
[The prepared statement of Mr. Johnson follows:]
Prepared Statement of the Honorable Hank Johnson, a Representative in
Congress from the State of Georgia, and Member, Subcommittee on
Commercial and Administrative Law
Thank you Madame Chairwoman for holding this
important hearing today on H.R. 5312, the Automobile
Arbitration Fairness Act of 2008.
And many thanks to our witness for coming before the
Committee.
Fairness is the key word in the title of this bill
and fairness is the underlying issue that brings us here today.
In 2002, with bipartisan support and over 250 co-
sponsors Congress passed the ``Motor Vehicle Franchise Contract
Arbitration Fairness Act.''
At that time, auto dealers sought relief because they
were saddled with mandatory binding arbitration agreements in
franchise contracts. They rightly cited the inherent unfair
nature of such agreements.
The 2002 Bill, introduced by Representative Mary
Bono, granted relief by making such agreements voluntary. It
was a sensible, no nonsense solution to a heavy-handed
practice. It leveled the playing field for auto dealers.
It is a bill that makes perfect sense. The Congress
overwhelmingly supported the idea.
Fast forward to 2008 and H.R. 5312, a bill that would
extend to automobile consumers the same fairness that the
automobile dealers now enjoy.
We are all familiar with purchasing a car; it is
often an arduous and complicated process, filled with stacks of
papers to sign, complicated financial terms, and wait times
that can last for hours,
And when consumers finally walk away--worn out--but
usually happy with a vehicle their families will depend on to
get to work, school, and home; they are totally unaware that
tucked away in the ``mice print'' of all those financial terms
and ``legalese'' is a provision that strips them of a
constitutional right.
For the average American the right to a day in court
is a dearly held right one that is automatically assumed, one
that is deeply embedded in the Bill of Rights.
Yet there are thousands of citizens, who unknowingly
have given away their right to a trial by signing consumer
contracts when they purchase a vehicle.
And more ironically they have done so because of the
heavy-handed tactics of the very auto dealers who just six
short years ago came before Congress to have that right
restored to them.
Later, for those consumers who have a problem with
their vehicle or the dealership the small ``mice print'' clause
becomes a ticking time bomb that explodes when they seek
relief.
These clauses are a very unpleasant surprise to
consumers who never realized that their consumer dispute would
be forced to go to a private, closed system with no oversight,
no chance of appeal and no real justice.
So we are back to a simple matter of fairness-- Good
for the goose, good for the gander. Automobile dealers must
extend the same terms to their customers that they so
rightfully claimed for themselves.
As most of you are aware, in the last session, I
introduced, H.R. 3010, the Arbitration Fairness Act, which
would do away with pre-dispute mandatory arbitration agreements
in all consumer, medical, employment, and franchise contracts.
I did that because fair is fair and the fundamental
feature of a fair justice system is that both sides to a
dispute are on equal footing in a public court of law, governed
by the civil rules of procedure.
The imminent associate Supreme Court Justice the late
William J. Brennan once put it very succinctly
``The Framers of the Bill of Rights did not purport to ``create''
rights. Rather they designed the Bill of Rights to prohibit our
Government from infringing rights and liberties presumed to be
preexisting.''
Clearly, the right to a trial is a widely presumed, preexisting
liberty and we must ensure that it is preserved and protected for all
Americans.
So, I return to my previous statement, ``Fairness is
the key word in this Bill and fairness is the underlying issue
that brings us here today--and--there is no time like today--to
restore fairness to the people!
Thank you Madame Chairwoman and I yield back.
Mr. Smith. Madam Chair, I would like to be recognized, just
very briefly.
Ms. Sanchez. Absolutely. I would recognize our
distinguished Ranking Member of the full Committee, Mr. Smith,
for opening remarks.
Mr. Smith. Thank you, Madam Chair. Actually, I don't have
an opening statement and I will certainly concur with the
precedent that has been set about putting it in the record. I
just wanted to say that I think the subject of today's hearing
is a very important one.
I tend to lean toward appreciating the value of
arbitration, and perhaps I ought to confess to a slight bias.
Long ago and far away when I was a county commissioner in Bexar
County in San Antonio, Texas, I actually started the first
mediation center in that county. So I think that that could
have real value. Although I also recognize that there are two
sides to the issue and that is what is going to be explored at
this very interesting hearing today.
I also want to follow up on what the Ranking Member, Mr.
Cannon, said. I, too, have to be in 20 minutes at the mark-up
of a bill in the IP Subcommittee, and I just hope, Madame Chair
that you will pass along to those who make decisions as to when
Subcommittee hearings and mark-ups are scheduled that, many
times, it puts Members in the untenable position, where we
would like to be at a hearing, and we would like to be at a
mark-up. And it is probably helpful to Members not to have both
scheduled concurrently, just because it does put us in the
position of having to choose.
So I just make that statement for the record and hope that
those who schedule these kinds of hearings and other mark-ups
can consider that in the future. And with that I will yield
back.
Ms. Sanchez. I thank the gentleman for his comments, and I
am mindful of the concern of concurrent hearings and mark-ups.
Now, I am pleased to move on and introduce the witnesses
for today's hearing. Our first witness is Rosemary Shahan. Did
I pronounce that correctly?
Ms. Shahan. Yes, thank you.
Ms. Sanchez. Okay. Ms. Shahan is the president of Consumers
for Auto Reliability and Safety, otherwise known as CARS. In
1979 she initiated California's Auto Lemon Law and worked as a
volunteer for enactment of the law from 1979 to 1982. This
legislation became the model for similar laws in all 50 states.
Ms. Shahan has continued her consumer advocacy work and has
been a major force in the adoption of Federal Motor Vehicle
Safety Standards to require airbags. She spearheaded Federal
Motor Vehicle Safety Standards adopted by the National Highway
Traffic Safety Administration to improve vehicle safety recalls
and improve seatbelts for smaller adults and children. Ms.
Shahan also assisted in the enactment of major landmark auto
safety and anti-fraud legislation.
Our second witness is Erika Rice. Ms. Rice was born and
raised near Dayton, Ohio, and now lives in the town of Arcanum,
Ohio, is that correct?
Ms. Rice. Yes, it is.
Ms. Sanchez. She has an associate's degree in social work,
and has been working for more than 3 years with children with
emotional, behavioral, and mental health disorders. Ms. Rice is
here today to tell us about her experience with mandatory
binding arbitration in an automobile contract.
Our third witness is Richard Naimark. Mr. Naimark is senior
vice president of American Arbitration at the International
Center for Dispute Resolution Research. He is the founder and
former executive director of the Global Center for Dispute
Resolution--which conducted research in arbitration and
alternative dispute resolution 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.
Welcome to you, Mr. Naimark.
Our final witness on the panel is Hallen Rosner. Mr. Rosner
is a partner at Rosner & Mansfield, LLP, specializing in auto
fraud. He also represents the National Association of Consumer
Advocates, a nonprofit corporation whose primary focus involves
the protection and representation of consumers.
Over the past 23 years Mr. Rosner's firm has represented
thousands of consumers and, in particular, servicemen and women
who serve in the armed services. In 2007 his firm was awarded
the Public Service Award by the San Diego Bar Association,
recognizing over two decades of helping consumers.
Mr. Rosner teaches military, legal aide and volunteer
attorneys, among others, about how to understand vehicle
contracts and recognize the most common forms of auto fraud. He
is a board member for EPIC, the Energy Policy Initiative
Center, and has acted for many years as legal counsel for the
consumer organization UCAN, the Utility Consumer's Action
Network. Mr. Rosner writes ``Ask Hal,'' an Internet auto-fraud
advisory column that gets over 10,000 hits a month from across
the country.
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 please limit your oral testimony today to
5 minutes.
You will note that we have a lighting system, and when your
time begins you will receive a green light on the lighting
system. After 4 minutes of testimony you will get the yellow
warning light that you have about a minute to finish your
testimony. And when the light turns red, of course, your time
has expired and we would ask that you finish off any final
thoughts so that we can move on to our next witness.
After each witness has presented his or her testimony,
Subcommittee Members will be permitted to ask questions subject
to the 5-minute limit.
With that I will invite Ms. Shahan to please proceed with
her testimony.
TESTIMONY OF ROSEMARY SHAHAN, PRESIDENT, CONSUMERS FOR
AUTOMOBILE RELIABILITY AND SAFETY, SACRAMENTO, CA
Ms. Shahan. Thank you, Chairwoman Sanchez and Members of
the Committee, and Ranking Member Mr. Cannon, for the
invitation to testify today in support of H.R. 5312, the
``Automobile Arbitration Fairness Act of 2008.''
I am Rosemary Shahan, president of Consumers for Auto
Reliability and Safety. We are based in Sacramento, and we are
delighted to have the opportunity to support this desperately
needed legislation that will improve protections for consumers
and also benefit honest businesses by freeing car buyers from
having mandatory pre-dispute arbitration imposed on them as a
condition of selling or leasing a vehicle.
H.R. 5312 will allow consumers and auto dealers to resolve
disputes through arbitration if they choose after a dispute has
arisen. Thus, it will make participation in arbitration more
informed and voluntary. H.R. 5312 will ensure that a consumer's
rights are protected against a fraudulent auto dealer who seeks
to use a binding mandatory arbitration clause buried in a
purchase contract to take advantage of the consumer. The bill
will also give auto consumers the same right to be free from
binding mandatory arbitration agreements that auto dealers
currently enjoy.
First I should tell you, I am not an attorney. I am a
former college English teacher who had a horrendous car
experience at a car dealership in Lemon Grove, California, and
as well, my family was stationed on active duty with the United
States Navy.
And that led me to get active on behalf of car owners and
initiate California's Auto Lemon Law that was authored by
Assemblymember Sally Tanner that became the model for similar
laws in all 50 states. Our organization is dedicated to
preventing motor vehicle related fatalities, injuries, and
economic losses, and we see this as one of the most important
bills pending before Congress to help consumers across the
country.
Pre-dispute mandatory binding arbitration deprives
consumers of access to justice. Since 1979, I have listened to
complaints of consumers all over the country who are harmed due
to illegal practices perpetrated by car dealers. The victims
run the gamut. Most of them are pretty sophisticated; they
don't have problems with other kinds of financial transactions
but they are no match for car dealers who sometimes engage in
very sophisticated forms of fraud.
Some of the consumers have been students who had to drop
out of school because their vehicles kept breaking down, even
though when they bought them they were promised they were in
mint condition. Others are active duty members of our Armed
Forces and their families, who are often targeted by
unscrupulous auto dealerships. And this is a problem
nationally; if you ask the military about it they can tell you
more.
For decades I have been able to offer consumers hope that
they could recover from their losses and be made whole if they
simply persisted in pursuing their rights. We actually have
really good laws on the books, on the Federal level and on the
state level, to protect consumers, but over the past several
years it has become increasingly difficult for consumers to
have access to justice under those laws due to the imposition
of pre-dispute binding mandatory arbitration.
Pre-dispute binding arbitration is inherently unfair. As
Members of Congress argued in favor of granting auto dealers
access to courts for resolving disputes with auto
manufacturers, the contracts are take-it-or-leave-it, boiler
plate contracts of adhesion. There is no opportunity to
negotiate, especially since the majority of car dealers now use
these clauses in their contracts.
The parties to the contracts are on an unequal footing; the
arbitrators are inherently biased in favor of repeat customers
like the car dealers, who contract their decisions and have the
advantage of knowing which arbitrators or which arbitration
processes tend to rule in their favor. Arbitrators are not
required to apply the law or adhere to judicial precedent.
Even if the arbitrators totally disregard the law, there is
rarely any review, little or no check on their power; there is
usually not even a record that would be subject to review.
Discovery is very, either nonexistent or very limited, and
without discovery consumers are severely disadvantaged.
H.R. 5312 will provide consumers with the same protections
already enjoyed by car dealers. The same arguments that were
made by auto dealers in Congress in favor of preserving their
rights apply equally to consumers, if not more. As Senator
Hatch stated when he introduced S. 1140, the Motor Vehicle
Franchise Contract Arbitration Fairness Act of 2001, ``The new
law was needed to protect car dealers from having mandatory
arbitration clauses imposed on them by automakers due to their
unequal bargaining power.''
And I would be happy to answer any questions that you or
the Committee may have.
[The prepared statement of Ms. Shahan follows:]
Prepared Statement of Rosemary Shahan
Ms. Sanchez. Thank you. Again, we appreciate your
testimony.
At this time I would invite Ms. Rice to please share her
testimony.
TESTIMONY OF ERIKA RICE, ARCANUM, OH
Ms. Rice. Good morning. I would like to get started by
thanking Chairwoman Sanchez, Ranking Member Cannon, and the
rest of the Members of the Subcommittee for hearing my
testimony today. I am hoping that when this bill becomes a law,
other families will be protected from what has happened to us.
My name is Erika Rice, and I am a mother of two from
Arcanum, Ohio. My husband and I were taken advantage of by a
car dealership that used a clause that was buried in some fine
print. I later learned that this clause could take away my
right to hold the dealership responsible for their actions.
In November of 2006, my husband, daughter, and I went to a
car dealership with the intention of buying a safe car that
would last us for a number of years. After being there for
almost 4 hours, the dealer finally sat us down and in just a
few minutes, hurried us through a mountain of documents.
Because it was 45 minutes past the closing time of the
dealership, I was not given the chance to read the unending
lines of fine print; instead, the dealer just pointed and said,
``Sign here, sign here,'' not answering any of my questions.
The dealer assured me that the car had undergone quality
assurance inspections, and I was led to believe that the car
had never been in an accident or been damaged. I learned later
that in fact, the car had been in a crash where the airbags had
deployed and the car was seriously damaged. In short, they had
sold me a rebuilt wreck.
During the whole process of buying the car, the word
``arbitration'' was never mentioned. I didn't even know what
the word meant until I was forced to file a claim against the
dealership due to their lack of responsiveness. The dealer
never explained the term or explained that by signing certain
documents I might be giving up my right to hold them
accountable for what I later learned was a complete scam.
That night as I was driving home it began to rain, and my
windshield wipers in my new car quit working. Here I was,
driving with my 6-year-old, on the interstate in a rainstorm,
and the windshield wipers quit working. Needless to say, I
wasn't happy with the car.
The next morning I drove the car back to the dealer. On the
way there, the ``check engine'' light came on. When I got to
the dealer I informed them that I wanted another car because of
the obvious problems with the car they had just sold me hours
before.
They told me they couldn't help me; my pleas fell on deaf
ears. I told them that I still wanted to buy a car and I would
be willing to buy that car from them, only I didn't want a car
that had problems within minutes of driving it.
After a few weeks had passed, the car had spent more time
in the shop being fixed than being driven by myself or my
husband. I was getting nowhere with the dealer, and so I told
them that I was looking into hiring an attorney, thinking that
if perhaps they knew how serious I was about the situation they
would actually try to rectify it.
Instead, the people at the dealership literally laughed at
me. They said, ``Bring it on.'' What they knew, that I didn't
at the time, is that I might be unable to hold them accountable
by the fine print: the binding mandatory arbitration clause.
The worst part about my case is that the box that said I
would be bound under my contract for arbitration was never even
checked. This alone should allow me to pursue my claim in
court. Let me clarify: My purchase agreement for the car has a
provision in it which states, ``Buyer acknowledges that if this
box is checked, this agreement contains an arbitration
clause.'' Right next to that statement is a checkmark box, but
the box is not checked on my contract.
So even though the box is not checked, the dealer's lawyers
have filed a motion to force me to go to arbitration with the
AAA. This motion has been pending for over a year.
You may be asking yourself, ``Why don't I just submit to
the arbitration and try to get a good settlement that will
allow me to buy a car that works?'' First of all, I know there
is not much of a chance that I will win in arbitration. I have
learned about the thousands of other car buyers who have paid
thousands of dollars in arbitration fees believing that the
arbitrator would be fair, only to find out otherwise.
Secondly, I can't even afford the cost of going through
with the arbitration process. In order to just start that
process, I would have to pay half or more of all the cost of
arbitration. I have learned that arbitrator's fees usually
range from at least $700 to $1,800 per day with an average of
$1,300. In addition to the arbitration fees, I would also have
to pay half of the administrative fees. I know that the cards
are totally stacked against me.
What upsets me the most is that all of this could have been
prevented. If the dealers were not allowed to use mandatory
arbitration clauses in their contracts, perhaps they would have
treated me right from the start. I would never have been forced
to get a lawyer and spend all my time and money just to get a
judge to hear my concerns. It has been a very stressful
situation.
I went to a dealership excited to get a new car. Instead, I
was scammed and lied to. If the dealer was never allowed the
opportunity to try and force me into an unfair, secret, and
expensive arbitration system, all of this could be avoided.
Thank you for hearing my testimony.
[The prepared statement of Ms. Rice follows:]
Prepared Statement of Erika Rice
Ms. Sanchez. We are sorry for the trouble that you
obviously encountered in your experience, but we appreciate
very much the fact that you took the time to attend today. At
this time I would like Mr. Naimark to speak.
TESTIMONY OF RICHARD NAIMARK, SENIOR VICE PRESIDENT, AMERICAN
ARBITRATION ASSOCIATION, WASHINGTON, DC
Mr. Naimark. Good morning, Madam Chair, Congressman Cannon,
all the Members of the Committee. I am Richard Naimark; I am
senior vice president of American Arbitration Association, and
we appreciate the opportunity to testify before the
Subcommittee today.
May I say at the outset that the AAA is a not-for-profit
public service organization with over 80 years of experience in
the field. Arbitrators who hear cases that are administered by
the AAA are not employees of the AAA, but are independent,
neutral, screened, and trained, and in the consumer context are
virtually always attorneys.
The AAA does not represent an industry, per se. It does not
represent the ADR or arbitration industry or other arbitral
institutions. And our primary concern today, and reason for
attending, is concern about the health and integrity of the
arbitration process in particular.
I will note that there is a marked irony in the hearing
today and in the bill that is being proposed, as already has
been noted in some of the submitted testimony: The automobile
dealers themselves were successful in securing a provision and
law that allows them to circumvent the arbitration provisions
in their contracts with automobile manufacturers, and now we
have sort of the other end of the spectrum, which I think is a
rather ironic situation. Nonetheless, let me say that we have
two primary suggestions that we would like to propose to the
Subcommittee--to the Committee--changes to H.R. 5312 that would
preserve the objectives but would not have extensive potential
unintended impacts that might be undesirable.
And the first thing I want to say is that this is largely,
in many respects, as has already been said, an issue of access
to justice. The reality is that for most Americans, consumers
don't have ready access to justice. Studies have shown
difficulty for consumers, individuals, for claims typically
less than $65,000, in obtaining legal representation, unless
they can finance the lawsuits themselves; and for pro se, self-
representation in court is often extremely difficult to manage.
The court process was not designed for easy access.
So I want to say, in that context, that arbitration can
provide a fair, balanced dispute resolution in the consumer
context if it incorporates principles like due process
protocols, which require some fair play in the process.
Very briefly, some highlights of the due process protocols
which are part of the AAA process in the consumer setting. They
provide for things like:, consumers and businesses have a right
to independent, impartial neutrals to decide their disputes;
consumers always have a right to representation; costs of the
process must be reasonable; the location of the proceeding must
be reasonably accessible; no party may have a unilateral choice
of arbitrator; there should be full disclosure by arbitrators
of any potential conflict or previous contact with any of the
parties; and perhaps most importantly of all, there should be
no limitation of remedy that would otherwise be available in
court.
And in this way, you preserve safeguards. There are other
aspects, certainly, of the protocols.
Now, the other thing I want to stress is that it would be a
mistake to amend the Federal Arbitration Act. The so-called
Dealers' Day in Court did not amend the FAA; it was a piece of,
sort of, collateral legislation. The reason we talk about that
is, the arbitration world context is extremely large. There are
all kinds of business-to-business arbitrations, there are
international arbitrations, there are some arbitrations
involving governmental bodies, there are lots of arbitrations
involving unions and management.
The alterations of the FAA potentially impact over 80 years
of judicial wisdom, which have built up the contours and the
confines of how arbitration ought to be properly conducted. So
rather than doing something like that, we would suggest not
amending the FAA, but thinking about sort of a collateral piece
of legislation.
Thank you.
[The prepared statement of Mr. Naimark follows:]
Prepared Statement of Richard Naimark
Ms. Sanchez. Thank you, Mr. Naimark.
At this time I would like to invite Mr. Rosner to provide
his testimony.
TESTIMONY OF HALLEN D. ROSNER, ROSNER & MANSFIELD, LLP, SAN
DIEGO, CA
Mr. Rosner. I agree with Mr. Conner, what we need to do
today is focus on the car dealer context.
And Mr. Smith, while you are leaving, I did want you to
see, I brought a car contract here today. I kept one thing just
to flash you with as you leave. This is the standard retail
installment sales contract that a consumer gets.
This is what they see after they have been at the
dealership for 3 or 4 hours and been shown paperwork that would
take hours to read; there have been various studies done. This
is what comes at the end. They have already signed 10 times
that they are going to buy. Then they get the retail
installment sales contract.
In this contract is one single line on the front page that
mentions arbitration. I have two for you; I would like to
submit them at the end of my testimony. If you want to play
``look for the needle in the haystack,'' try and find the one
line on the front of a contract that mentions arbitration.
It actually beautifully blends in, and I will give you a
clue: The one line that mentions arbitration is where they have
the consumer, after spending 4 hours, after being told, ``Here
is where you sign,'' and they finally just want to be out of
there, the one line is the line where they promise that they
thoroughly read the front and back of the contract, which, of
course, they wouldn't know that they are acknowledging that
because no one reads the front and back of the contract.
I brought two agreements for a reason. One is a 2006; one
is a 2004. The front side has 2,000 words, there are over 100
clauses--there you will find the arbitration clauses. The
reason I brought two is that the 2004 version had a group
called JAMS, that is Judicial Arbitration Mediation Services--
highly respected ex-judges. They instituted rules such as
proposed by AAA.
The result was, they were disqualified and taken out of the
contracts as a provider because the put in rules of fairness. I
was unfortunately having to explain that AAA is right now
rumored, because they put in some better consumer protections
recently, that they are going to be taken out of the dealer
contracts. The only improvement they want is the National
Arbitration Forum, and in my testimony and others there has
been quite a lot of documentation about the nature of that
organization.
So if you did read the back of the contract, and I did a
whole section in my written statement here about how people buy
cars. This is something you end up doing after many, many
hours. It is the last thing you sign. They have already had you
sign that you are going to buy it.
You wouldn't know what you are agreeing to because this
tells you to go to a Web site to learn the rules of the
organizations that are involved in what you are doing. So if
you happen to have your laptop and you go to the Web site, you
can then pull up United States Code and read the other 100
pages of regulations governing the agreement that you are
entering into.
What we propose here, and this is--arbitration should be
knowing and voluntary. It is never, never knowing and voluntary
in the car context because the people, first, don't know it
exists; that is the reality. The second, if you knew it existed
you wouldn't know the rules because it is not in the agreement.
There was a comment here about the importance of access to
justice. The reality is, arbitration is right now precluding
access to justice. There is no problem getting representation
if you are a consumer of a $10,000 car if your case has merit.
Anyone in my state can get me to represent them if their case
has merit because we have consumer laws that, if the consumer's
car should be brought back, the dealership has to pay their
fees.
But what I get on my column, from across the country, is
people can't get lawyers. They won't take arbitration cases
with arbitration clauses. The same lawyer who will represent
you in court, not charge you one penny up front, won't take the
arbitration because among the clauses here is a clause that
takes away, potentially, that right to get paid to represent
the consumer. These rules aren't fair.
And I guess I ask you to consider this fact: Would the same
car dealer who sells you a wrecked car, who took advantage of
this young lady here, hesitate to maybe tilt the field a little
bit in a document like this, in writing the rules and
regulations? They get to pick the organization you have to go
to. We run into the repeat-player bias and other difficulties.
I noted in the written statement submitted by the gentleman
from AAA, he says, ``No party should have a unilateral choice
of arbitrator.'' I would like to amend to that, ``Or group or
arbitration system.'' Of course, everyone spreads butter
different. When you have groups that send out mass
solicitations, like the National Arbitration Forum, saying,
``Choose us and we will make your bottom line better. We will
take care of you,'' and that is what they do, then tell you how
to write in clauses, that is not where you as a consumer want
to have your dispute heard.
The problem is access to justice. And the other biggest
problem is the inability to do discovery and stop it. It
promotes widespread fraud because it is all done in secrecy,
versus, I detailed how one lady changed the law for millions by
doing it in a court proceeding because it became public, it
became a record, it because a law.
Arbitration is secret. It promotes continued fraud and
predatory practices against consumers, and I think that is one
of the major problems we have.
[The prepared statement of Mr. Rosner follows:]
Prepared Statement of Hallen D. Rosner
Ms. Sanchez. Thank you. Your time, unfortunately, has
expired.
And we want to thank all of the witnesses for their
testimony, and we are going to now begin our round of
questioning. And I will begin by recognizing myself for 5
minutes.
My first question is for Ms. Shahan. One section of the
proposed legislation that we are talking about today requires
that arbitrators provide a written decision if either party to
the arbitration requests one. I want you to please explain why
that language is important.
Ms. Shahan. Yes. Thank you, Congresswoman.
That is one of the best provisions in the bill, and we see
that as a real benefit because right now, when consumers are
going to these arbitration programs, there is no requirement
that there be any record at all. And I think that it is very
carefully crafted so that it is not overly burdensome. It
doesn't require formal findings of fact; it requires simply
that the arbitrator provide an informal explanation of how they
arrived at their decision.
And that will help other consumers. It will also help, I
hope, policymakers decide how these decisions are being
rendered and why, so that if there is a need to improved this
system, that can be done.
Ms. Sanchez. In your prepared statement, you state that
lenders will not accept retail installment contracts for auto
loans unless the dealers include binding mandatory arbitration
clauses in the contract, and I would like you to please explain
that.
Ms. Shahan. Yes. This has been a real concern because some
dealers were not imposing mandatory binding arbitration, pre-
dispute, but lenders insist on it. And so consumers, especially
consumers who aren't paying cash for a car and have to get a
loan and use a retail installment contract, are having
arbitration forced on them by virtually all the dealers.
If you are a consumer, you have very limited options. If
you are buying a new car, you have to go to a franchise car
dealer unless you are going overseas and getting it directly
from the manufacturer, because they have a monopoly in all 50
states. That is the only place you can go to get a new car.
And if you are buying a used car and you want to go to a
reputable dealership that is licensed by the state, where you
have some expectation that they are a legitimate business, you
really don't expect that they can engage in massive fraud and
get away with it. And so consumers' guard is down, their
options are limited, and the lenders are forcing dealers who
might not be inclined to use these provisions to do it.
Ms. Sanchez. Thank you.
Ms. Rice, and again, I am sorry for the experience that you
have had, but we are still thankful that you are here to talk
about your experience in this field. One of the many arguments
that are used for mandatory binding arbitration is that it is
less costly than litigating in the traditional court system.
And I wanted to know whether you found that to be true in your
situation, that having to arbitrate your issue would be less
costly than it would be to pursue that claim in court.
Ms. Rice. There aren't set fees; there aren't set
limitations on how much a private person can charge a consumer
in regards to arbitration. There is no way for me to research
that and to come up with a number that says, ``Okay, this is,
you know, where it is at, and what it is going to cost me.''
You know, my lawsuit has cost me some money, but if the
dealership would have just done the right thing at the
beginning, it wouldn't have come to this; I wouldn't be sitting
in front of all of you today and telling you this story. It
would be, ``This dealership did me right, and everything is
great and wonderful.'' So, I mean, short of having my attorney
here to tell you the difference between what she is going to
charge me versus what arbitration is going to cost, I mean,
there is really no way to come up with the correct answer on
that.
Ms. Sanchez. Thank you.
Mr. Rosner, maybe you can provide a little bit of
information on the cost to the consumer between arbitration
versus court.
Mr. Rosner. Obviously, the cost of a court proceeding in a
case with my firm, for a consumer, is zero. There is a
complaint fee of $300; the court system if free. In the court
system we have arbitration available, but those arbitrators are
people who donate their time, don't do it as a regular
business, and we pay them a minimal fee and they will hear
disputes. We also have mediation, and there is no cost during
it.
If they want to go to arbitration, you are lucky if you get
an arbitrator whose fees are limited to $300 to $600 per hour.
Plus, I have to look to a consumer and say, ``Despite the fact
that California law says that you will not have to pay the
dealer's attorneys fees in these consumer cases,'' because they
know no one will bring--they can't afford it. The risk is too
high. Even if there is a 10 percent chance they lose, they
can't afford to spend more than a car.
But in arbitration, they can get awarded the fees of the
dealership. So they have to risk losing everything they have,
and they are in for paying large fees, and arbitration is often
very expensive--$300 to $600 an hour. And the way I put it is,
they are being asked to contribute to someone per hour, a fee
equal to their car payment per month. This is outside of their
area.
So there are firms like mine that will advance fees for
consumers. It limits what cases we can take, and it leaves
tremendous numbers of consumers begging for legal
representation because the consumer can't pay the arbitration
fee, and there is not a lot of lawyers who could afford to
advance that without going broke and otherwise take those sorts
of risks.
So this is why I say this denies access to people, it does
not encourage it. And there is no rational base for saying it
is cheaper. It flat out isn't.
Ms. Sanchez. Thank you. My time is expired, but Mr. Cannon
has generously agreed to allow me to ask one last question, and
it is also a question for you, Mr. Rosner.
Mr. Naimark has suggested that Congress incorporate into
this legislation due process and procedural protocols which are
aimed at protecting consumers. And my question for you is, are
these protocols sufficient to actually protect consumers?
Mr. Rosner. They really aren't. They are hard to enforce,
they are hard to put down, but you can achieve his objective.
If you make people have to enter into arbitration voluntarily
and knowingly, then people won't enter into it unless you make
the system fair.
So if you set up things like--I use core arbitration all
the time; arbitration is not inherently bad. But if you take
the first step, and make it knowing and fair. So if the
consumer doesn't have to enter into it until the dispute
arises, to where they haven't sat in a car dealership for 6
hours, if they want consumers to go to arbitration, if they
present a fair system, then there may be the possibility of
arbitration.
So the way to get the protocols isn't to try and make car
dealers rewrite their contracts and create a huge board and
bureaucracy, it is to create a knowing and fair system. And if
people have to be knowing and voluntary, then you are going to
have to be encouraged to create a fair system so they want to
go. That is very American; it is the marketplace of ideas.
If you offer them a better alternative to the court system,
they shall take it. But if you unilaterally impose it on the
back of a huge contract or let the car dealers write the
agreements--so let us use your legislation will result in these
results without having to go through creating an unenforceable
system. And these are good things that should happen; they are
not happening, and if they do the car dealers won't use the
system.
So we can achieve the results by making it knowing and
voluntary. We are not saying no arbitration; we are saying
knowing and voluntary.
Ms. Sanchez. Thank you. I think that is a very important
distinction with respect to the legislation we are discussing
today. I thank you all for your answers. And now I would like
to recognize Mr. Cannon for 5 minutes of questions.
Mr. Cannon. Thank you, Madam Chair.
Thank you for being here, Ms. Shahan. You are sort of like
this embodiment of this great hero in my life, and it is nice
to know who you are and see you here. I think the Lemon Law was
actually a remarkably good thing. And, by the way, did you call
it the Lemon Law because you lived in Lemon Grove, which I
always thought of as sort of a sweet place. I have a brother-
in-law and sister-in-law who live there.
Ms. Shahan. I love Lemon Grove.
Mr. Cannon. It doesn't really relate to the fact that you
buy a lousy car----
Ms. Shahan. That is right. The nomenclature came from the
sour taste it leaves in people's mouths.
Mr. Cannon. Let me just ask one question, Mr. Rosner. If
you essentially cost zero to your clients, do you tell them
that they don't need to pay you for the filing fees, that sort
of thing?
Mr. Rosner. Yes.
Mr. Cannon. And California then, I take it, it is----
Mr. Rosner. It is completely permissible. In California, to
be honest, sir, after a few thousand cases I am a pretty good
judge of how things will go in court. The results have been
very--the same cases I have never lost in court I find myself
losing in arbitration, but I pay everything.
Mr. Cannon. You are comfortable getting paid back for the
risk, but you don't put that risk on the client, right?
Mr. Rosner. That is correct, sir.
Mr. Cannon. Different laws, different states. It is an
interesting fact.
I actually want to--I don't often do this, but I actually
want to lecture here a little bit. And you guys are stuck, and
I apologize---- [Laughter.]
The Chair has apologized twice to Ms. Rice for the problem
that she has had, and on the other hand, you have Mr. Naimark,
who talks about the cost of litigation and why it is not worth
litigating. I personally have passed up a number of lawsuits in
my life because I am not going to get paid back as much as it
is going to cost me to do the litigation.
And I think there is a philosophical gap here that I think
we ought to explore. I think the Chair would agree with me that
the reason she apologizes to Ms. Rice is because she believes
there is an obligation, by the system, to you as a person.
And I think that philosophy derives from a guy named Kant,
who wrote a book called ``The Social Contract,'' a French
author some time back. And his premise was that society, as
human beings, we owe each other something, and that is an
attractive idea--I read the book when I was 18 or 19 and I was
interested in the idea. And it is a good idea; I think that
people do actually owe each other things.
The problem is, who gets to decide who owes what to whom?
And that is the fundamental concept that we are actually
dealing with here. This is a fundamental philosophical
discussion, and I think it ought to be considered in the
context of philosophy, because that allows us to make
decisions, instead of in sympathy, in a context that allows us
to create a system that actually works.
So, somewhere between your problem, which is very serious
and a clear problem, and, for instance, Ms. Shahan's dramatic
impact on the law by getting the California Lemon Law enacted,
and Mr. Naimark's fairly dry and clear statement about the cost
that we are incurring to society. I think were talking about
philosophy and what we are doing that makes a big difference.
So if you say that we have an obligation to each other as
individuals, that is like a good Christian, or Jewish, or
Muslim, or any other kind of religious view that elevates our
obligations to other people. If you say government should take
a role, then you take an additional responsibility because
government has to make decisions.
And, in fact, if we decide that you have been wronged and
government should step in, then you might actually find
yourself in a position where the government can reimburse you
for the foulness of the dealer who cheated you. And that would
be okay if God were the guy who was making those kinds of
decisions, but to do that kind of a payment to you, you would
need to take money from other people to make it available. And
so the idea behind socialism is that there is force in
government to take money and reallocate it.
And in fact, the recent debate between Senator Obama and
Senator Clinton in Ohio--a large part of that debate was about
which program required more force by government. And, a
remarkable debate because in America, you see, we have never
had success with the Socialist Party, and a large part of the
reason for that failure or success is that communism, which is
just socialism with force, has had such an awful rap in the
world today.
So as we look at these things, and I see my time is
running; I am not going to go over that time. But what we are
talking about here is how we use the system. In America we
don't do socialism; in America we have what I like to call
Anglo-American constitutionalism. We have a Constitution that
has principles; we build a superstructure over that of law. And
that way, it doesn't matter what your background is or your
context is, whether you are a millionaire or a pauper, Ms.
Rice, you get the same protection, theoretically, in front of
the law.
And Mr. Rosner is absolutely right when he is thinking, and
I know this is going through his mind, that people that are
poor don't get the same kind of shake that people that are rich
get. And that is a reasonable conclusion. And so our job is to
create a system where people, regardless of their economic
circumstances, their educational circumstances, their other
inherent differences, have the same rights or the same
opportunities, without saying we are going to substitute our
judgment for a legal system and reach into some people's pocket
and put it into other people's.
And in the end, that is what this bill is about. This bill
that is before us is about how we reallocate resources in
society to protect some. And I would just tell you, if you want
protection from the government you ought to think twice.
Because the people that end up being protected tend to be the
elite, rich, the corporations that have vast resources, and
they can use the law to benefit their interests and not others.
And so while I sympathize heavily, Ms. Rice, with your
circumstance, I want a system that is most likely to create an
environment where you are better served. And by the way, I
think you should tell all your friends what a creep the guy was
you bought the car from and tell them not to go there. And that
is the ultimate defense, because creepy people do creepy
things, and in our lives we have a choice of getting on with
our lives or spending money. And I read part of--if you will
allow me another moment----
Ms. Sanchez. If you would yield to me when you are done.
Mr. Cannon. Absolutely. Absolutely.
In your circumstance, you are facing the worst of all
choices. You have got arbitration that costs a great deal of
money; you hire a lawyer, it costs a lot of money. No lawyer is
going to step in because of the legal context that you are in.
You face some really ugly choices. And you end up saying to
yourself, and I hate the fact that this is the case, but you
say to yourself, ``Look, how much is this lousy car going to
cost me? What can I do with it? How do I get out of it? How can
I get on with my life?''
Because you were talking about $1,800 or $1,300 a day, I
think you said was the average cost. You know, it doesn't take
many days before you say, ``I am just going to pay this off,
find a dealer I can trust, get a car that is reliable, and go
on with my life.'' And the only alternative to that is to say,
``I want the government to take care of it,'' and that comes
with burdens and costs that I think that you probably are not
ready to ask for.
And with that, I would be happy to yield.
Ms. Sanchez. Thank you. I would just like to make a couple
of brief comments. Number one, my apology to Ms. Rice was for
her having gone through such a bad experience. I am not
assessing blame in her particular situation, but I can
empathize with the idea of being excited about getting a brand
new car, and then finding out that it doesn't function just
minutes after you have driven it off the lot.
Secondly, with respect to some of the arguments that you
were making, Mr. Cannon, about asking government to step in and
who bears the cost. I don't think that we are asking government
to reimburse Ms. Rice for her bad experience or for the lemon
that she bought. We are certainly not asking taxpayers to come
to her rescue and bail her out of what ended up being a very
unfortunate circumstance for her.
I think what we are asking for is what Mr. Rosner said, is
some fairness in a system, and not getting rid of arbitration,
but merely making it a knowing, willing, informed, and
voluntary decision on the part of a consumer, whether or not
they choose to pursue what they think is their due in the
arbitration system, or whether or not they choose to go the
route of the traditional court system.
And I think that is what this bill ultimately is about, is
ensuring that there are safeguards that people aren't reading
or missing--that would be a better word, missing a mandatory
binding arbitration clause in a lengthy contract that comes at
the end of a very heavy negotiating session over price and
mountains of paperwork.
Mr. Cannon. Reclaiming my time, let me just say that I
agree with the gentlelady and that you explained your view and
your nature of your apologies, I think, perfectly. I would only
just add this, that our decision today is not a decision about
solving Ms. Rice's problem; it is about solving a societal
problem. We are in the position we are in because we have
looked at the costs and the best ways to get to it over a very
long period of time. And the bill that you have introduced fits
within the structure of the Anglo-American constitutional
system.
It is not a matter of, the bill you introduced is not a
socialistic bill; I would not suggest that. But rather, I
talked about Ms. Rice's circumstances to point out that what we
are really doing in Congress is trying to create the system
that is the most efficient for her and for other consumers to
keep prices down, costs down, interest rates down, and give her
the mobility to move back and forth between.
If you change the system and create another system, it may
actually benefit Ms. Rice because she can go to Mr. Rosner and
get a lawyer to work the system. But I believe, this is my
personal belief in this regard, that that is not wise, because
what it ends up doing is raising the cost to all consumers,
because now lawyers can get all the complicated and expensive
system in a way that they benefit an individual but costs the
entire system a great deal more. That is the ongoing debate we
have had about these arbitration clauses.
And with that, Madam Chair, I would be happy to yield.
Ms. Sanchez. Will you yield to me?
The only comment that I would have to your final concluding
remarks is that, with respect to fixing Ms. Rice's problem and
making the system more expensive by allowing her to perhaps
choose to go the traditional court system, perhaps what we will
also do is with these dealers who are engaging in this practice
find it is too expensive to continue to try to sucker people
into buying bad cars. Maybe they will reform their behavior and
actually sell the product that they are representing to the
customer, that the customer wants to buy when the customer goes
in and plunks down their money, and maybe we actually will get
a change in behavior so that this doesn't happen on a
widespread basis.
Mr. Rosner. I would love a 1-minute response to Mr.
Cannon's question on obligation if I--I don't know if that is
asking for too much. Mr. Cannon asked, ``Where is the
obligation to this young lady?'' if you would. The obligation
is the Constitution of the United States, which had guaranteed
her a right to a jury trial and to have her grievances heard.
It is the government that took away that right through various
arbitration provisions and put her into an unfair system.
The right, here, is to have compensation to her. In Ms.
Shahan's testimony she talked about $10 billion consumers lose
buying bad cars. We help the good car dealers if we go ahead
and make the other car dealers pay the price for what they do.
And as I point out in my testimony, the advantage of a court
system is, one single lady, like I pointed out Rita Thompson,
changed the way millions of cars are sold. That can't happen in
arbitration, which cloaks everything in secrecy, which tells
the car dealer, even if he loses a secret arbitration to her,
it is profitable to keep doing it. So we protect society, and
the cost is to the people doing the wrong where it should be.
Mr. Cannon. Reclaiming my time, and I hope this will be
final. In fact, Mr. Rosner makes a very good point. I don't
think that good car dealers would object to having bad car
dealers driven out of business. But I think if you look at the
overall system, the cost of litigation is much, much higher,
and the effectiveness of telling your friends what a creepy
dealer you went to is much better.
With that, Madam Chair, I yield back.
Ms. Sanchez. I thank the gentleman, and I want to thank,
again, all of the witnesses for their testimony today.
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 this record as well. And
without objection, the record will remain open for 5
legislative days for the submission of any additional material.
Again, I thank everybody on the panel for their time and
patience, and this hearing of the Subcommittee on Commercial
and Administrative Law is adjourned.
[Whereupon, at 10:27 a.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Prepared Statement of the American Financial Services Association
(AFSA)
Letter from the Alliance of Automobile Manufacturers
Responses to Post-Hearing Questions from Rosemary Shahan, President,
Consumers for Automobile Reliability and Safety, Sacramento, CA
Responses to Post-Hearing Questions from Erika Rice, Arcanum, OH
Responses to Post-Hearing Questions from Richard Naimark, Senior Vice
President, American Arbitration Association, Washington, DC
Responses to Post-Hearing Questions from Hallen D. Rosner,
Rosner & Mansfield, LLP, San Diego, CA