[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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                       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

                              ----------                              


               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










                                 
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