[Senate Hearing 110-396]
[From the U.S. Government Publishing Office]
S. Hrg. 110-396
S. 1782, THE ARBITRATION FAIRNESS ACT OF 2007
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HEARING
before the
SUBCOMMITTEE ON THE CONSTITUTION
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
DECEMBER 12, 2007
__________
Serial No. J-110-68
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts ARLEN SPECTER, Pennsylvania
JOSEPH R. BIDEN, Jr., Delaware ORRIN G. HATCH, Utah
HERB KOHL, Wisconsin CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California JON KYL, Arizona
RUSSELL D. FEINGOLD, Wisconsin JEFF SESSIONS, Alabama
CHARLES E. SCHUMER, New York LINDSEY O. GRAHAM, South Carolina
RICHARD J. DURBIN, Illinois JOHN CORNYN, Texas
BENJAMIN L. CARDIN, Maryland SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island TOM COBURN, Oklahoma
Bruce A. Cohen, Chief Counsel and Staff Director
Michael O'Neill, Republican Chief Counsel and Staff Director
------
Subcommittee on the Constitution
RUSSELL D. FEINGOLD, Wisconsin, Chairman
EDWARD M. KENNEDY, Massachusetts SAM BROWNBACK, Kansas
DIANNE FEINSTEIN, California ARLEN SPECTER, Pennsylvania
RICHARD J. DURBIN, Illinois LINDSEY O. GRAHAM, South Carolina
BENJAMIN L. CARDIN, Maryland JOHN CORNYN, Texas
Robert F. Schiff, Chief Counsel
Ajit Pai, Republican Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Brownback, Hon. Sam, a U.S. Senator from the State of Kansas..... 3
Feingold, Hon. Russell D., a U.S. Senator from the State of
Wisconsin...................................................... 1
prepared statement........................................... 107
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont,
prepared statement............................................. 118
WITNESSES
Alderman, Richard M., Associate Dean for Academic Affairs,
Director, Center for Consumer Law, University of Houston Law
Center, Houston, Texas......................................... 9
Bland, F. Paul, Jr., Staff Attorney, Public Justice, Washington,
D.C............................................................ 17
de Bernardo, Mark A., Executive Director and President, Council
for Employment Law Equity, Jackson Lewis LLP, Vienna, Virginia. 14
Luke, Fonza, Birmingham, Alabama................................. 6
Naimark, Richard, Senior Vice President, American Arbitration
Association, Washington, D.C................................... 11
Rutledge, Peter B., Associate Professor of Law, Columbus School
of Law, Catholic University of America, Washington, D.C........ 7
Solov, Tanya, Director, Illinois Securities Department, Illinois
Secretary of State, Chicago, Illinois.......................... 13
QUESTIONS AND ANSWERS
Response of Richard Naimark to a question submitted by Senator
Brownback...................................................... 33
Responses of Peter B. Rutledge to questions submitted by Senator
Brownback...................................................... 34
SUBMISSIONS FOR THE RECORD
ABC News, Dec. 10, 2007, article................................. 38
Additional views of Senators Feingold, Durbin, and Kennedy....... 41
Alderman, Richard M., Associate Dean for Academic Affairs,
Director, Center for Consumer Law, University of Houston Law
Center, Houston, Texas, statement.............................. 44
Alliance for Justice, Marya Torrez, Center for Responsible
Lending, Jilliam Aldebron, Consumer Federation of America,
Barbara Roper, Consumers Union, Sally Greenberg, HomeOwners for
Better Building, Janet Ahmad, Public Citizen's Congress Watch,
Laura MacCleery, and U.S. Public Interest Research Goup, Edmund
Mierzwinski, joint letter...................................... 48
Bland, F. Paul, Jr., Staff Attorney, Public Justice, Washington,
D.C., statement................................................ 50
Coalition to Preserve Arbitration, September 21, 2007, joint
letter......................................................... 87
Cox, Christopher, Chairman, Securities and Exchange Commission,
Washington, D.C., letter....................................... 89
de Bernardo, Mark A., Executive Director and President, Council
for Employment Law Equity, Jackson Lewis LLP, Vienna, Virginia,
statement...................................................... 91
Feingold, Hon. Russell D., and Hon. Patrick J. Leahy, joint
letter......................................................... 109
Financial Services Roundtable, Steve Barlett, President and CEO,
Washington, D.C., statement.................................... 114
International Franchise Assciation (IFA), David French, Vice
President, Government Relations, Washington, D.C., letter...... 116
Luke, Fonza, Birmingham, Alabama, statement...................... 119
Minority views of Senators Kyl, Specter, and Brownback........... 121
Naimark, Richard, Senior Vice President, American Arbitration
Association, Washington, D.C., statement and attachments....... 124
National Association of Home Builders (NAHB), Washington, D.C.,
statement...................................................... 140
National Employment Lawyers Association (NELA), Washington, D.C.,
statement and attachments...................................... 144
Organizations supporting the Arbitration Fairness Act of 2007,
joint letter................................................... 160
Public Investors Arbitration Bar Association, Laurence Schultz,
President, Norman, Oklahoma, statement......................... 163
Rutledge, Peter B., Associate Professor of Law, Columbus School
of Law, Catholic University of America, Washington, D.C.,
statement...................................................... 180
Securities Industry and Financial Markets Association,
Washington, D.C., statement and attachments.................... 208
Solov, Tanya, Director, Illinois Securities Department, Illinois
Secretary of State, Chicago, Illinois, statement............... 214
Wall Street Journal, November 7, 2007, article................... 223
Wireless carriers concerned with the Arbitration Fairness Act of
2007........................................................... 225
S. 1782, THE ARBITRATION FAIRNESS ACT OF 2007
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WEDNESDAY, DECEMBER 12, 2007
U.S. Senate,
Subcommittee on the Constitution,
Committee on the Judiciary,
Washington, D.C.
The Subcommittee met, pursuant to notice, at 9:32 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Russell D.
Feingold, Chairman of the Subcommittee, presiding.
Present: Senators Feingold and Brownback.
OPENING STATEMENT OF HON. RUSSELL D. FEINGOLD, A U.S. SENATOR
FROM THE STATE OF WISCONSIN
Chairman Feingold. I call the Committee to order, and good
morning, everybody. Welcome to this hearing of the Subcommittee
on the Constitution on S. 1782, the Arbitration Fairness Act of
2007.
I want to welcome our witnesses and thank them for taking
the time to join us this morning and give us the benefit of
their expertise on this very important topic. I look forward to
hearing your testimony.
One of the most fundamental principles of our justice
system is the right to take a dispute to court. Indeed, all
Americans have the constitutional right in civil and criminal
cases to a trial by jury. The right to a jury trial in civil
cases in Federal court is contained in the Seventh Amendment to
the Constitution. Many States provide a similar right to a jury
trial in civil matters filed in State courts.
Now, I have been concerned for many years that mandatory
arbitration clauses are slowly eroding the legal protections
that should be available to all Americans. A large and growing
number of corporations now require millions of consumers and
employees to sign contracts that include mandatory arbitration
clauses. Most of these individuals have little or no meaningful
opportunity to negotiate the terms of their contracts, and so
they find themselves, if they even realize that the provision
is in the contract, having to choose either to accept a
mandatory arbitration clause or to forgo securing employment or
needed goods and services. Perhaps most disturbingly, mandatory
arbitration clauses are being used to prevent individuals from
trying to vindicate their civil rights under statutes
specifically passed by Congress to protect them.
There is a range of ways in which mandatory arbitration can
be particularly hostile to individuals attempting to assert
their rights. For example, the administrative fees--both to
gain access to the arbitration forum and to pay for the ongoing
services of the arbitrator or arbitrators--can be so high as to
act as a de facto bar for many individuals who have a claim
that requires resolution. In addition, arbitration generally
lacks discovery proceedings and other civil due process
protections. Furthermore, under a developing body of case law,
there is no meaningful judicial review of arbitrators'
decisions.
Unfortunately, in a variety of contexts--employment
agreements, credit card agreements, HMO contracts, securities
broker contracts, and other consumer and franchise agreements--
mandatory arbitration is fast becoming the rule rather than the
exception. The practice of forcing employees to use arbitration
has been on the rise since the Supreme Court's Circuit City
decision in 2001. Unless Congress acts, the protections it has
provided through law for American workers, investors, and
consumers will slowly, but surely, become irrelevant.
Just as its name suggests, the Arbitration Fairness Act is
designed to return fairness to the arbitration system.
Arbitration can be a fair and efficient way to settle disputes.
I strongly support voluntary alternative dispute resolution
methods, and we ought to encourage their use. What this bill
does, though, is ensure that citizens once again have a true
choice between arbitration and the traditional civil court
system by making unenforceable any predispute agreement that
requires arbitration of a consumer, employment, or franchise
dispute. The bill does not apply to mandatory arbitration
systems agreed to in collective bargaining, and it certainly
does not prohibit arbitration if all parties agree to it after
a dispute arises.
Let me quickly address two questions that have arisen about
the bill. First, it is intended to cover disputes between
investors and securities brokers. I believe that such disputes
are covered by the definition of consumer disputes, but to
clear up any uncertainty, we will make the intent even clearer
when we mark up the bill in committee.
Second, as I mentioned, the bill covers consumer,
employment, and franchise disputes, each of which is a defined
term. In addition, it covers disputes that arise under civil
rights statutes or ``any statute intended...to regulate
contracts or transactions between parties of unequal bargaining
power.'' Now, some opponents of the bill have seized on that
language and misstated it, saying that the bill covers any
contract between parties with unequal bargaining power. They
then say that such a provision is overbroad and very vague. I
actually agree that such a provision would be problematic, but,
of course, that is not what the bill says. The provision in
question is essentially a savings clause so that a cause of
action under a civil rights statute or a statute that is
specifically designed to address disparities of bargaining
power can be brought in court, even if the dispute does not
meet the definition of a consumer or employment or franchise
dispute. So I hope this helps to clear up any misunderstanding
about the scope of the bill.
In our system of Government, Congress and State
legislatures pass laws and the courts are available to citizens
to make sure those laws are enforced. But the rule of law means
little if the only forum available to those who believe they
have been wronged is an alternative, unaccountable system where
the law passed by the legislature does not necessarily even
apply. This legislation both protects Americans from
exploitation and strengthens a valuable alternative method of
dispute resolution. So I look forward to exploring the
implications and the details of this bill with our witnesses.
[The prepared statement of Senator Feingold appears as a
submission for the record.]
Let me now turn to my friend and Ranking Member, Senator
Brownback, for any opening remarks he would like to make, and I
want to thank him and his staff for cooperation in putting this
hearing together. Senator Brownback?
STATEMENT OF HON. SAM BROWNBACK, A U.S. SENATOR FROM THE STATE
OF KANSAS
Senator Brownback. Thank you very much, Senator Feingold. I
appreciate that, and I would like to--I have a series of items
I want to enter into the record about this topic. I would ask
that they be placed in the record at the end of my statement,
if that would be possible.
I want to thank my colleague for holding the hearing. I
appreciate the witnesses for being here. It is an important
topic. It is one that I believe that the statute that is being
proposed is overly broad and will be subject to an
interpretation that goes far beyond the intent that has been
stated here by the author of the bill.
In 1925, Congress passed the Federal Arbitration Act. The
Act embodies the national policy favoring arbitration and
places arbitration agreements on equal footing with all other
contracts. It was intended to overcome judicial resistance to
arbitration.
The bill before us today, S. 1782, would decimate many
provisions of this and over eight decades of Federal policy
favoring arbitration. It would invalidate countless contracts,
clogging our court system, I believe, with claims and depriving
consumers and other people with less access to the courts, the
so-called, in often cases, little guys have their only real
chance of meaningful recovery. I am hopeful that the author of
this legislation can persuade me differently, but I think that
is what this will lead us toward.
Let me develop that. The bill's supporters claim that it is
intended to help people with less influence in the system--
powerless employees, consumers--avoid contracts of adhesion.
Its sweeping scope belies, I believe, that purported goal. The
bill would render unenforceable all--this is a quote--``pre-
dispute arbitration agreements in employment, consumer, and
franchise contracts.'' The bill does not distinguish between,
on the one hand, the so-called fine print arbitration
agreements that supporters attack as unfair and, on the other
hand, fully negotiated contracts between sophisticated parties.
The bill would apply not only to the teenager working at a
fast-food joint, but to the CEO who brought in his own attorney
to negotiate a generous employment contract.
The fact of the matter is that in our system the person,
the so-called little guy, is by and large better off in
arbitration than trying to get to court. Arbitration is cheaper
than litigation, and it leads to faster results for plaintiffs.
Numerous studies also show that arbitration is more favorable
to consumers and employees than litigation.
For example, the National Work Rights Institute found that
employees were almost 20 percent more likely to win employment
cases in arbitration than they were to win in court. A
California study showed that consumers won 65.5 percent of
their arbitration claims against businesses as opposed to
between 60, 61 percent of lawsuits nationwide. When you add
settlements into the equation, the vast majority of consumers
who arbitrate against businesses resolve their disputes
satisfactorily.
Moreover, the settlements or awards that plaintiffs receive
in arbitration are typically the same as or even larger than
court awards. Arbitration is also far more accessible to the
little guy than is the court system. First of all, it generally
is not costly, a 2006 article citing average arbitration fees
of only $46.63. Under the American Arbitration Association's
consumer procedures, for example, consumers cannot be asked to
pay more than $125 in arbitration costs. Business defendants
shoulder all the remaining fees. Second, and more importantly,
arbitration doors are always open to consumers and employees
with small individualized claims.
Indeed, Justice Breyer has explained that low-value
disputes, like the typical consumer dispute, are particularly
well suited for arbitration. Without enforceable arbitration
agreements, ``the typical consumer who has only a small damage
claim would be left without any remedy but a court remedy, the
cost and delay of which could eat up the value of any eventual
small recovery.''
Cost and fees make the courts inaccessible to most small
claims, but an even bigger problem for plaintiffs with low-
value claims is trying to secure the legal representation
needed to approach the courthouse doors.
Under the contingency fee systems, plaintiffs' trial
lawyers will not look twice at disputes that are too small to
net sizable attorneys' fees and too unique to bundle into a
class action. One survey of plaintiffs' attorneys revealed that
they agree to represent only 5 percent of the individuals who
seek out their help, and they require a minimum of $60,000 in
provable damages, ask for a retainer, and require payment of a
35-percent contingency fee.
Another report found that a consumer or employee would need
to have a claim of at least $75,000 before litigation became
cost-effective for an attorney.
Now, the trial bar may point to class actions as a solution
for small-value disputes. But most consumers and employees will
not be able to obtain redress in class actions. The vast
majority of their claims are individualized. My toaster did not
work, or my account was charged twice, or I was wrongfully
denied a promotion. These kinds of claims do not meet the Rule
23 Federal standard for class actions because common issues of
law, in fact, do not predominate.
Even where claims can be bundled together into a class
action, though, class members generally receive no real
benefit. Congress recognized in passing the Class Action
Fairness Act of 2005 that, ``Class members often receive little
or no benefit, and they are sometimes harmed.''
The reality in most class actions is that counsel are
awarded large fees while too often class members with coupons
or other awards get little or no value. And at times,
unjustified awards are made to certain plaintiffs at the
expense of other class members.
I believe S. 1782 trades a system that works fairly well
for the vast majority of claimants for a system that leaves
more consumers and employees without any meaningful chance at
recovery. I do not think this is the route we want to go. I am
certain that is not the route that my colleague wants to go.
I stand open to discussion and dialog of how we can improve
the current system, but I think both of us in our background
and our practice would look at if there are ways and places
that you can take things to arbitration, that is generally a
better way to go. It gets things done faster. It gets things
done with less cost. And it gets people a resolution to items.
So I think this is overly broad. I am willing to look at
and to listen to it, but I think we ought to continue with the
favor that we have put on arbitration since 1925 and not really
throw that system out. I look forward to the testimony of the
witnesses to further illuminate the topic.
Thanks for holding the hearing.
Chairman Feingold. Thank you, Senator Brownback, and you
have well stated the opposite view. But let us be very clear:
This bill is about mandatory arbitration. So whatever
statements you use from 1925 about arbitration in general or
whatever studies you use about arbitration in general does not
necessarily relate to this bill. And we will be fly specking
that as we go through this to make sure that the general value
of arbitration is not questioned. This is only about mandatory
arbitration. But I thank the Senator, and, of course, he very
eloquently articulated a different view.
Will the witnesses please stand and raise your right hand
to be sworn in? Do you swear or affirm that the testimony you
are about to give before the Committee will be the truth, the
whole truth, and nothing but the truth, so help you God?
Mrs. Luke. I do.
Mr. Rutledge. I do.
Mr. Alderman. I do.
Mr. Naimark. I do.
Ms. Solov. I do.
Mr. de Bernardo. I do.
Mr. Bland. I do.
Chairman Feingold. Thank you, and you may be seated at this
point.
We will proceed in the order that you are seated from my
left to my right. I would ask each of you to limit your oral
presentation to 5 minutes so we have ample time for questions
and discussion.
Our first witness is Mrs. Fonza Luke, and I am so glad that
she is here to tell her story about her experience with
mandatory arbitration. Mrs. Luke was a licensed nurse for more
than 30 years at Baptist Medical Center-Princeton in
Birmingham, Alabama, the last 5 years of which she spent in the
gastrointestinal lab. She was trained at Birmingham School of
Nursing. Currently, she works two jobs--full-time as a night
supervisor in an assisted living community, and part-time in
the emergency room at Birmingham's Cooper Green Hospital. Mrs.
Luke also serves on the board of Blessed Sacrament Catholic
Church in Birmingham. She has four children and six
grandchildren, including two under the age of one, whom she
cares for frequently. She has been happily married for 42
years.
Thank you for coming here to testify, and you may proceed.
STATEMENT OF FONZA LUKE, BIRMINGHAM, ALABAMA
Mrs. Luke. Chairman Feingold and distinguished members of
the Subcommittee, thank you for the invitation to testify at
this hearing about my experience with mandatory arbitration as
an employee. I would also like to acknowledge my attorney, Mark
Elovitz, without whom I would not have the opportunity to be
here today.
I started working as a licensed nurse for BMC Princeton in
1971. For almost 30 years, I was a dedicated employee, and I
received the highest performance ratings from the doctors I
worked with every day. When the hospital needed me to work
extra days and hours because of staffing shortages, I came in.
Once I worked almost every day of the year to give them the
help they needed. Whenever the hospital offered new training or
skills development, I took advantage of it so I could do my job
better.
In November 1997, I was required to attend a meeting of
hospital employees where I was given a copy of a new ``Dispute
Resolution Program.'' The other employees and I were told we
would have to give up our right to go to court that if we had
legal claims against BMC, they would have to go to binding
arbitration. If we did not sign the so-called agreement
describing this program, we were told we would lose our jobs. I
refused to sign this agreement because I did not want to give
up my rights. I thought it was not right to make employees give
up their right. I talked to my husband, also to my priest about
it, and they both agreed that I should not sign. About a year
later, the hospital again asked me to sign the agreement. Again
I refused. In spite of what the hospital said, I was not fired
for refusing.
About 3 years later, in early 2001, when I returned from a
continuing education class in Atlanta, the hospital's human
resources director told me that I was being fired for
``insubordination.'' I was devastated because I never thought I
would lose my job after almost 30 years of working at BMC,
always with good evaluations.
I do not think I was insubordinate at all. The only things
I did they called ``insubordinate'' were things that younger,
white employees did all the time without being fired. At that
time, I went to see Mr. Elovitz. I believed that BMC fired me
because of my race and my age. I was 59 years old. I believe
that the explanation of insubordination was just an excuse.
With the help of my lawyer, I filed race and age
discrimination claims with the EEOC, which, after a long
investigation, ruled in my favor.
The next step was to file a discrimination case in Federal
court, which I did. But BMC asked the Federal court to dismiss
my case because, they said, I had agreed to bring all claims to
arbitration. I told the Federal court I never signed the
arbitration agreement and never gave up my right to go to
court. But the Federal court said that BMC could force me to
arbitrate because I kept working in my job. I thought this was
unfair that I appealed the Federal court's decision, but the
Federal court agreed with the lower courts and ordered me into
arbitration. The fact that I specifically refused to agree to
arbitration twice meant nothing.
The arbitrator was chosen by process of elimination from a
list that was composed heavily of defense lawyers. According to
my lawyer, with that list of arbitrators, it was impossible for
me to get someone who was even in the middle of the road, much
less someone who would be sympathetic with employees. I find it
hard to believe this arbitrator, whose time was paid for by
BMC, could make a fair decision in my case. In the end, my
claims of discrimination and retaliation were denied. I got
nothing, no relief whatsoever. I don't think the arbitrator
even looked at my side of the story.
Today, I have to work two jobs to make as much as I did at
BMC. I did everything I could to keep my right to go to court,
but the court doors were closed when I got there. I was not
allowed to bring the evidence of discrimination before a fair
and impartial judge or a jury of my peers. Before a judge and
jury instead of an arbitrator, I believe I would have gotten at
least a fair hearing.
Thank you for listening to my story.
[The prepared statement of Mrs. Luke appears as a
submission for the record.]
Chairman Feingold. Thank you so much, Mrs. Luke.
Our next witness is Professor Peter B. Rutledge. Professor
Rutledge is an Associate Professor of Law at the Columbus
School of Law, Catholic University of America. He is co-author
of the book ``International Civil Litigation in the United
States'' and the author of several articles in the area of
arbitration law.
Thank you for joining us, Professor Rutledge, and you may
proceed.
STATEMENT OF PETER B. RUTLEDGE, ASSOCIATE PROFESSOR OF LAW,
COLUMBUS SCHOOL OF LAW, CATHOLIC UNIVERSITY OF AMERICA,
WASHINGTON, D.C.
Mr. Rutledge. Thank you, Chairman Feingold and Senator
Brownback, for the opportunity to testify. I could not agree
with both of you more that the issues raised by this bill are
important, and, therefore, my urge to the Subcommittee would be
to pay careful attention to the underlying data and to the
underlying impact of the bill if it were enacted. Allow me
briefly to summarize the main points of my written testimony.
First, a thorough understanding of the available data and
the gaps in the data should drive this policy debate over the
future of arbitration as a whole. In important respects, that
data are inconsistent with several of the premises underlining
calls to abolish predispute arbitration agreements.
Second, to the extent that there are particular instances
of problematic arbitrations, existing mechanisms are available
to filter out the unfair ones.
Third, if Congress were to eliminate predispute arbitration
agreements, individuals would find it more difficult to obtain
a lawyer; they would achieve smaller recoveries; and all of
this would occur at a slower pace due to our overburdened court
system. Companies' legal costs would rise, and those higher
costs ultimately would be borne by the very individuals whom
this bill is trying to protect. The only people who, with
certainty, are going to benefit from this bill are the lawyers.
Fourth, postdispute arbitration does not present a viable
alternative to a system of predispute enforceable agreements.
In my remaining time, Mr. Chairman, allow me to elaborate
please on two of these points.
First, eliminating predispute arbitration agreements would
not make individuals as a whole better off. Arbitration is
often criticized on the grounds that it leaves the party with
the inferior bargaining position worse off. In fact, nearly all
of the available academic studies, many of which I concede
concern employment arbitration, demonstrate precisely the
opposite; that is, by various measures, individuals achieve
either superior or at least comparable outcomes in arbitration
compared to litigation. A variety of studies have also
indicated the difficulty that individuals, particularly low-
income ones, encounter in their efforts to find an attorney
willing to take their case due to the higher expense and
greater delay in our court system. Ranking Member Brownback has
already referred to some of these studies. And, moreover, for
those individuals who do find a lawyer, studies consistently
document that it takes far longer for our litigation system to
deliver them justice than for arbitration.
For example, a 2004 study of employment disputes found that
the median time between the filing and the judgment was
approximately three times as long in litigation as opposed to
arbitration.
The second point on which I wish to elaborate, Mr.
Chairman, is this issue of postdispute arbitration, and I
understand the appeal of the argument that says if arbitration
is such a good deal and parties are willing to agree to it
predispute, surely they would agree to it postdispute. And what
I would refer to you and your staff, Mr. Chairman, is a 2004
study by David Sherwyn, which is one of the only studies that I
am aware of that is an empirical study of postdispute
arbitration, looking specifically at the Illinois Human Rights
Commission's postdispute arbitration option. Professor Sherwyn
surveyed 1,300 cases that were submitted before the Illinois
Human Rights Commission, and he could not identify a single one
in which the parties agreed to postdispute arbitration.
As you know, Mr. Chairman, recently the Congress enacted a
bill which carved out arbitration agreements between automobile
dealers and manufacturers, and I cite in my testimony a recent
decision by the Seventh Circuit in which the dealer attempted
to propose postdispute arbitration, and the manufacturer
resisted it. My point is this: I think we should not delude
ourselves that post- dispute arbitration is somehow going to
capture all the benefits of predispute arbitration while
eliminating the unfairnesses. I think at the end of the day, if
Congress were to enact this bill, it would be effectively
gutting arbitration as an effective system of dispute
resolution, with deleterious benefits for the very people whom
this bill is trying to protect.
Thank you.
[The prepared statement of Mr. Rutledge appears as a
submission for the record.]
Chairman Feingold. Thank you, Professor.
Our next witness is Richard M. Alderman, who is Associate
Dean for Academic Affairs and Director of the Center for
Consumer Law at the University of Houston Law Center. The
author of 19 books and numerous articles, Dean Alderman is a
national and international leader in the field of consumer law.
Dean Alderman also serves as the editor in chief of the Journal
of Consumer and Commercial Law, the official publication of the
Consumer and Commercial Law Section of the State Bar of Texas.
Dean, thank you for agreeing to testify today and for
making the trip up from Texas, and the floor is yours.
STATEMENT OF RICHARD M. ALDERMAN, ASSOCIATE DEAN FOR ACADEMIC
AFFAIRS, DIRECTOR, CENTER FOR CONSUMER LAW, UNIVERSITY OF
HOUSTON LAW CENTER, HOUSTON, TEXAS
Mr. Alderman. Thank you, Chairman Feingold, Ranking Member
Brownback. Thank you for the opportunity to discuss the
Arbitration Fairness Act of 2007. I appear before you--I did
not say anything important before.
[Laughter.]
Mr. Alderman. I appear before you as someone who has served
as an arbitrator and who supports arbitration and ADR, but who
supports our court system more.
Not long ago, automobile dealers came to Congress to ask
for help. They asserted they were being denied access to the
courts through the manufacturers' use of predispute arbitration
provisions. The dealers believed it was unfair for the stronger
party to unilaterally force the weaker party to give up the
right to sue as a condition of doing business. In 2002
Congress, with the support of 50 cosponsors in the Senate and
252 in the House, passed the Motor Vehicle Franchise Fairness
Act. I am asking you to provide similar protections for
consumers.
As some who has taught consumer law for 35 years, in my
opinion this is the most important piece of consumer
legislation of the last three decades. I say this for one
simple reason: Excessive predispute mandatory binding
arbitration frustrates our system of Government by denying
courts the ability to play the vital role that the founders of
this country envisioned.
You have heard already and will continue to hear about
whether consumer arbitration is good or bad, whether it is
expensive or inexpensive. But no one disputes one issue. It is
imposed by the stronger party, not voluntarily agreed to.
Ask any school child and he or she will tell you about our
system of Government, checks and balances, legislative,
judicial, and executive branches of Government. And it is the
judicial branch that is a uniquely American institution and its
role is essential. Our civil justice system provides an open,
public forum to resolve disputes. It interprets and applies the
laws that the legislature enacts, and it creates or modifies
the laws through our common law system. The current system of
arbitration has allowed business to effectively ``opt out'' of
our civil justice system and replace it with a system of
private justice that it controls. Even the supporters of
consumer arbitration recognize this.
In a recent article written by supporters of consumer
arbitration, the authors note that the auto and home industry
has ``divorced'' themselves from the Alabama justice system
because of the fear of unfair awards. Instead of working
through the legislative process to enact change, instead of
electing different decisionmakers, car dealers and home
builders simply included a few sentences in their contracts to
enact major substantive changes in the application of the law.
And our courts do more than just resolve disputes; they
interpret statutes and create common law. Through stare decisis
and precedent, decisions of higher courts are binding on lower
courts, and it ensures uniformity of results. For example, in
1995, Congress amended the Truth in Lending Act. Unfortunately,
the language chosen was not the most precise, and courts gave
differing interpretations to how the damage cap should be
applied. In 2004, the U.S. Supreme Court held the damage cap
should be applied. That decision is binding on all lower
courts, ensuring a uniformity and consistency of application.
Today, most consumer credit contracts contain an
arbitration provision. It is unlikely that courts will be given
the opportunity to review a statute. Instead, we have
arbitrators who are not bound by precedent, who are not bound
by the decisions of other arbitrators, and who have to decide
individually how the law will be interpreted and applied. The
widespread use of consumer arbitration ensures that consumers
with identical claims in identical circumstances may be treated
differently by arbitrators who have no way of establishing the
consistency that our system mandates.
And finally, the common law tradition of this country
empowers our courts to create and modify legal doctrine.
Consumer doctrines such as unconscionability, strict products
liability, habitability, good and workmanlike performance have
all been created, modified, extended, and limited by our courts
to protect consumers and ensure a fair bargain. Arbitrators
cannot create the common law; arbitrators cannot modify the
common law. They are bound by existing legal doctrine.
Essentially, we have frozen the law by submitting everything to
arbitration, denying the courts the ability to develop and
adapt the law as society and business changes.
To me the question is simple. It is not whether arbitration
is fair; it is not whether it benefits consumers. It is whether
the powerful party to a bargain should be able to deny the
other person access to the courts. The answer, as Congress
recognized in the case of automobile dealers, is clearly no. I
encourage you to enact the Arbitration Fairness Act and
recognize that sellers and buyers of automobile deals have the
same rights.
Thank you.
[The prepared statement of Mr. Alderman appears as a
submission for the record.]
Chairman Feingold. Thank you so much, Dean.
Our next witness is Richard Naimark, Senior Vice President
of the American Arbitration Association and of the
International Center for Dispute Resolution. Mr. Naimark is the
founder and former Executive Director of the Global Center for
Dispute Resolution Research, which conducted research in
arbitration and ADR for business disputes in cross-border
transactions. Mr. Naimark is an experienced mediator and
facilitator, having served as an arbitrator in a wide variety
of business and organizational settings. His experience
includes work with the United Nations, government,
universities, corporate, construction, computer, real estate,
land use, insurance, and nonprofit subject areas.
Thank you for joining us, Mr. Naimark, and you may proceed.
STATEMENT OF RICHARD NAIMARK, SENIOR VICE PRESIDENT, THE
AMERICAN ARBITRATION ASSOCIATION, WASHINGTON, D.C.
Mr. Naimark. Thank you, Chairman Feingold, Senator
Brownback. Thank you for the invitation and the opportunity to
participate in the hearing today.
I would like to say at the outset that I am here on behalf
of the American Arbitration Association, which has over the
years pioneered the development of arbitration rules and
standards, standards in the form of what we call due process
protocols and codes of ethics for arbitrators.
The AAA is a not-for-profit public service organization. We
have been around for 81 years, shortly after the formation of
the Federal Arbitration Act, actually. Arbitrators who hear
cases that are administered by the AAA are not employees of the
AAA. Typically, they are practicing attorneys with outside
practices, and they will from time to time serve as
arbitrators. The AAA, I want to say, does not represent an
industry, does not represent the ADR or arbitration industry,
so we are really only speaking out of our own position and out
of our own experience.
I would like to say that we should make no mistake about
the focus of this particular subject matter. The primary issue
at hand, I believe, is access to justice.
The reality in this country is that our legal system is
very difficult to navigate for most Americans. We have heard
before and will continue to hear claims with a dollar value
somewhere below $50,000 to $65,000 have a very difficult time
obtaining legal representation, regardless of the validity of
the claim. Litigation is an exceedingly difficult process for
pro se individuals to pursue. Arbitration can, and does,
provide ready access to justice if--and I would say ``if'' with
capital letters--due process protections are built into the
process. Otherwise, litigation frequently, unfortunately, is a
big money endeavor.
Arbitration can provide a fair, efficient, and cost--
effective mechanism for resolving disputes.
Recognizing about a decade ago that these issues in the
context of consumer and employment disputes were going to
arise, I am going to say the fairly heavy use of consumer and
employment arbitration really began to trickle in about 10
years ago. And recognizing that it presented some unique
challenges, the AAA organized some work groups, widely diverse
groups of advisers from all sides of the issue, to try to
establish standards of fair play for the process that could be
applied so that there would be essentially a level playing
field. The result is what we call the due process protocol.
There is one for consumer disputes, there is one for employment
disputes, there is one for health care disputes.
Now, the AAA and a few other organizations have implemented
this protocol, but others have not. In the employment area, as
I mentioned, also, there is a similar protocol.
Arbitration between a consumer and a business, or an
employee and a business, must incorporate these safeguards to
ensure a level playing field and maintain basic procedural
fairness. And we have had good results, and the courts have
repeatedly referred to the protocols as a standard of fair play
in this area.
The protocols do common-sense things. I will give you a
little sampling.
For instance, consumers and businesses have a right to
independent and impartial neutral administration of their
dispute.
Consumers and employees always have a right to
representation.
Costs of the process must be reasonable.
Location of the proceeding must be reasonable.
No party may have a unilateral choice of the arbitrator.
There shall be--and I think this is very important--full
disclosure by arbitrators of any potential conflict or
appearance of conflict so that the parties can be assured of
having a neutral, independent, and impartial arbitrator.
Perhaps most important, there shall be no limitation of
remedy that would otherwise be available in court or
administrative proceeding.
And there are a number of other aspects of the protocols.
As I say, they are common-sense types of protections that need
to be built into every arbitration in this context.
I would say to this Committee and I would say to Congress,
you have it in your hands to assure access to justice and a
level playing field for all participants in our legal process,
and you can do so by passing a requirement that the due process
protocols, or something very much like them, and codes of
ethics for arbitrators are applied to all consumer and
employment arbitrations in this country. And in that way,
fairness in consumer and employment arbitration would no longer
be voluntary.
Thank you.
[The prepared statement of Mr. Naimark appears as a
submission for the record.]
Chairman Feingold. Thank you so much, Mr. Naimark.
Our next witness is Tanya Solov, the Director of the
Illinois Securities Department. Ms. Solov began her career with
the Securities Department in 1994 as the senior enforcement
attorney and later served as the Assistant Director for
Enforcement until 1999, when she was appointed Director by
Secretary of State Jesse White. Tanya serves on the
Corporation, Securities, and Business Law Section of the
Illinois State Bar Association. She is also actively involved
in the North American Securities Administrators Association,
having served as the past Chair and now a current member of the
Broker-Dealer Section and a participant in the Arbitration
Legal Services and Financial Intermediaries Project Group.
So, Ms. Solov, thank you for coming all this way to
testify, and the floor is yours.
STATEMENT OF TANYA SOLOV, DIRECTOR, ILLINOIS SECURITIES
DEPARTMENT, ILLINOIS SECRETARY OF STATE, CHICAGO, ILLINOIS
Ms. Solov. Thank you. Chairman Feingold and Ranking Member
Brownback, I am Tanya Solov, and I am honored to convey NASAA's
support for the Arbitration Fairness Act of 2007. This is an
important issue for investors and State securities regulators.
The constitutional right of investors to have their day in
court was rendered meaningless after the U.S. Supreme Court in
McMahon held that predispute arbitration clauses were
enforceable in the securities context. The impact of that
decision is more profound today because roughly half of all
U.S. households rely on securities markets to plan and prepare
for their financial futures, and that number is growing.
Twenty years ago, investors had a choice of investing with
a firm that required arbitration or one that recognized a
judicial forum. Today, almost every broker-dealer includes in
their customer agreements a predispute arbitration provision
that forces investors to submit all disputes to a single
securities arbitration forum run by the securities industry.
It is not surprising that many investors view industry
arbitration as biased and unfair. An investor's chance of
winning an arbitration award has declined from approximately 60
percent in 1989-90 to about 43 percent by 2006. It is also
noteworthy that a ``win'' in arbitration often amounts to
recovery of only a fraction of the losses incurred by the
investor. Sometimes the sum awarded is less than the costs and
fees the investor paid to obtain some reimbursement for the
broker's wrongdoing.
When arbitration is inadequate to protect the substantive
rights of investors, an independent judicial forum must be an
option. Arbitration may be desirable and appropriate if both
parties knowingly and voluntarily agree to arbitrate at the
time the dispute arises. If arbitration really is fair,
inexpensive, and quick, then these benefits will prompt
investors to choose arbitration.
However, even if arbitration is cheaper and faster, in many
cases, especially where investors lose their life savings, a
fair forum with appellate review is more important than cheap,
fast, and unfair.
In the securities context, the investor and the brokerage
firms are not on equal footing. Brokerage firms have
significantly more resources to fight investor claims, and they
currently have the benefit of arbitrating in their own industry
forum with an industry member hearing the case. The option to
litigate in an independent judicial forum would go a long way
toward bringing balance to the process.
Until mandatory securities arbitration is a thing of the
past, NASAA will continue to work to eliminate the inherent
industry bias in the existing system. The consolidation of the
NASD and the NYSE into FINRA has effectively resulted in a
single industry forum run by the industry.
Securities arbitration cases are heard by a three-member
panel that includes one securities member. Many have justified
mandatory industry participation based on the industry's role
as an educator of the other panelists. The industry arbitrator
is acceptable only if all parties in the case voluntarily agree
that an industry expert is needed. Otherwise, expert witnesses
ably serve the purpose of educating the arbitrators.
Industry arbitrators bring their particular experiences,
based on their firm's training, policies, and procedures, to
the decisionmaking process. As evidenced by industry scandals
and regulatory enforcement actions, the industry's way of doing
things is not always in conformance with the law. Even if the
industry arbitrator has no preconceived notions, the industry
arbitrator creates a presumption of bias that is contrary to
the principles of fair play and substantial justice.
It is also disconcerting that the industry believes that
the public arbitrators are not capable of understanding a case
and rendering a decision without industry influence. If that is
indeed true, investors should not be forced to bring their case
in such a forum.
NASAA believes that the securities arbitration system
should be truly voluntary; arbitration panels should be
unbiased; arbitrators should be better screened and trained;
and meaningful and accurate statistics concerning arbitration
outcomes should be compiled and disseminated.
As long as securities arbitration remains mandatory,
investors will continue to face a system that is not fair and
transparent to all. For this reason, NASAA supports the passage
of the Arbitration Fairness Act of 2007.
Thank you.
[The prepared statement of Ms. Solov appears as a
submission for the record.]
Chairman Feingold. Thank you very much, Ms. Solov.
Our next witness is Mark A. de Bernardo. Mr. de Bernardo is
a partner in the Washington, D.C., regional office of Jackson
Lewis, where he concentrates his practice on employment
litigation in counseling and workplace drug- testing issues. He
is the author of four State drug-testing laws and 18 books on
employment and labor law topics and has testified more than 40
times before Congress and various Federal and State regulatory
committees on employment and labor law issues. Mr. de Bernardo
is a graduate of the Georgetown University Law Center and
Marquette University, which we, of course, approve of.
Mr. de Bernardo. In Wisconsin, yes.
Chairman Feingold. Thank you for joining us today, sir, and
you may proceed.
STATEMENT OF MARK A. DE BERNARDO, EXECUTIVE DIRECTOR AND
PRESIDENT, COUNCIL FOR EMPLOYMENT LAW EQUITY, JACKSON LEWIS
LLP, VIENNA, VIRGINIA
Mr. de Bernardo. It was quite a win over the University of
Wisconsin on Saturday, was it not?
[Laughter.]
Senator Brownback. Hear, hear.
Chairman Feingold. Out of order.
[Laughter.]
Mr. de Bernardo. Can I have my 8 seconds back, Mr.
Chairman?
Chairman Feingold, Mr. Brownback, Senator Brownback, I
appreciate this opportunity on behalf of the Council for
Employment Law Equity to testify in support of ADR, in support
of mediation and arbitration as an alternative to litigation,
and in opposition to S. 1782.
I have been a labor lawyer for nearly 30 years. If you want
justice, I firmly believe you are more likely to get justice in
arbitration than you are in litigation. Arbitration is going to
be much more predictably balanced, neutral, and fair. It is
quicker. And as we have seen and as is included in my statement
and statements of some of the other witnesses, all of the
empirical evidence, all of the evidence that is out there shows
that, in fact, individuals that are going to arbitration,
mandatory binding arbitration, fare better. They are more
likely to prevail, 63 percent to 43 percent over litigation.
They do not have their cases dismissed, which 60 percent of the
employment cases--if we look at just employment cases, we
prevail, we, the management community, prevail on 60 percent of
those cases on dismissals--motions to dismiss, motions for
summary judgment. So only 40 percent of those cases go on.
There is much more access to our judicial system through
arbitration than there is through litigation. A survey of
plaintiffs bar found that only 5 percent of plaintiffs'
attorneys agreed to provide representation--I am sorry. They
provide representation of only 5 percent of the individuals who
seek out their help.
In addition, plaintiffs' attorneys require a minimum of
$60,000 provable damages. They commonly request a retainer up
front. They typically require a payment of a contingency fee of
between 33 and 40 percent.
In fact, when you take a look at the studies, the average
award--the median award provided to individuals in arbitration
is, according to Lewis Maltby of the National Work Rights
Institute in Princeton, formerly of the American Civil
Liberties Union, higher for individuals who are pressing their
claims in arbitration than it is for litigation. In another
study, the difference was de minimis. It was between $68,000
and $64,000. But when you factor in attorneys' fees and costs,
the people pressing this claim in arbitration are actually
faring better financially.
So you have more access to the judicial system. You have
more likelihood of redress of the complaints. And, frankly,
arbitration in America makes employers better employers because
more issues are addressed, they are address earlier, there is a
quicker fix.
You mentioned, Chairman Feingold, my background in terms of
drug-testing issues. One of the things we know in drug testing
is earlier intervention in substance abuse is going to be more
successful. Well, you know, that is true in workplace problems
of all kinds--earlier intervention. And what arbitration
provides is a mechanism by which problems are identified early.
There is intervention early. Things are corrected. There are
many, many, many more employee concerns and complaints that are
addressed.
If you just take a look at the plaintiffs' bar and the
survey that I talked about, only 5 percent of those people
seeking help from the plaintiffs' bar, representation from the
plaintiffs' bar in employment matters; 95 percent of them have
the door slammed on them. And if we do not have arbitration as
an alternative, 95 percent of those people that--some high
portion of them will have no other legal recourse.
I do believe that this bill would be a death blow to
arbitration in America. As a practical matter, there are
hundreds of thousands of arbitrations every year. The vast,
overwhelming majority are what is referred to in the
legislation as ``predispute'' and what I refer to as
``mandatory binding arbitration.'' There are very, very few
postdispute arbitrations in America. In fact, an American Bar
Association survey found that 86 percent of lawyers, both
plaintiff and defense lawyers, said that they would not
recommend postdispute arbitration to their clients. So as a
practical matter, this bill, if it were enacted, would impose a
death sentence in terms of ADR in America.
I do not know how we can do that. I do not know how, when
there are hundreds of thousands of arbitrations per year, when
there are hundreds of thousands of individuals who have access
and recourse, legal recourse to our system to redress their
concerns, how we can cast those people out and close the door
in terms of their pressing their claims forward.
In terms of the advantages for employees, I will just
mention briefly they get a faster resolution of the problems; a
simpler, more focused, more confidential, and more dignified
process; less disruption to career. Arbitration is a job saver.
Litigation is a job destroyer. Once we are in litigation, the
employee does not want to work for us; we do not want them in
our workplace. With arbitration, you have that possibility of
preserving the job. You have peace of mind because it diffuses
employee issues and concerns; they do not come to a boil on the
stove; it is not simmering, you know, these issues that are of
concern to the employees.
You have the same range of remedies. As I mentioned
earlier, you have higher awards. You have the same
decisionmaking process, and you have a better chance of
prevailing.
I appreciate this opportunity to testify, and I pledge my
cooperation as we move forward.
[The prepared statement of Mr. de Bernardo appears as a
submission for the record.]
Chairman Feingold. Thank you very much, sir.
Our final witness, F. Paul Bland, Jr., is a staff attorney
for Public Justice, which was formerly Trial Lawyers for Public
Justice, where he handles precedent-setting, complex civil
litigation. He is the co-author of the book entitled ``Consumer
Arbitration Agreements: Enforceability and Other Issues'' and
numerous articles. For 3 years, he was the co-chair of the
National Association of Consumer Advocates. He was named the
San Francisco Trial Lawyer of the Year in 2002 and the Maryland
Trial Lawyer of the Year in 2001 for his role in two cases
challenging abuse of mandatory arbitration clauses. In the late
1980's, he was chief nominations counsel to the U.S. Senate
Judiciary Committee under then-Chairman Biden. He graduated
from Harvard Law School in 1986 and Georgetown University in
1983, and we welcome you back to the Judiciary Committee, Mr.
Bland. Thank you for joining us today. The floor is yours.
STATEMENT OF F. PAUL BLAND, JR., STAFF ATTORNEY, PUBLIC
JUSTICE, WASHINGTON, D.C.
Mr. Bland. Thank you so much for the invitation to come
here, Senator Feingold, Mr. Chairman, and also thank you,
Senator Brownback.
Senator Feingold, you are a hero to a lot of people in the
consumer and the civil rights community for your work on this
issue, and it has been incredibly important. We are really
grateful for it.
Rather than trying to summarize my lengthy written
statement, I would like to sort of respond to some of the
things that have been going on here, because there are some
just outlandish comments being made, frankly.
Rather than looking at the principles here, is it a better
system to let the stronger party to a dispute pick who the
judge is? Is it a better system to have human beings who make
decisions have their decisions be essentially unreviewable,
where errors of law, errors of fact cannot be looked at? Is it
a better system to have a secret system?
Rather than looking at the big picture and the principles
here, what we get from the professor and what we get from Mr.
de Bernardo is let's look at studies, let's look at data, let's
break this down into which side has been able to pay for
studies that will be more on their side. And let's look at what
that data is. The data is unbelievably handpicked and
selective, and the reason is because arbitration is so
secretive in every place in the United States except for the
State of California. Everywhere else there are secrecy
provisions; there are rules--AAA's rules, there are rules in
the National Arbitration Forum rules that keep all the data
secret.
So the studies that have been done have been very careful
about what samples they use. For example, the Bankers'
Association paid Ernst & Young to do a study, which Professor
Rutledge likes to talk about. The Ernst & Young study selected
one case out of every 1,000 consumer cases that have been
handled by the National Arbitration Forum in order to come up
with the results that supposedly show that consumers win more
often. And when they decided how a consumer wins, if a consumer
lost their home due to a predatory practice or deceptive
practice, and they brought a case for $100,000 and they got $1,
Ernst & Young, paid for by the Bankers Association, said,
``well, that is a win for the consumer, they got $1 ''. That
kind of study does not get you very far.
There has been a lot of talk about the National Work Rights
Institute. What is the institute? The institute is one guy--it
is Mr. Maltby--and a secretary. It is not a big institute in a
broader sense. Mr. Maltby is generously funded by the American
Arbitration Association. That is where he gets most of his
money. He is on their board. He does a huge amount of AAA
arbitration work. And there are real selection samples with his
studies. What he does is he tends not to consider cases in
which people were forced into arbitration by a court or ordered
in. He takes all those cases and puts those to the side when he
selects what his sample is.
So what is the one place in the country where there is data
that is not hand-picked, that is not cherry-picked by one side?
That is California, because California passed a statute that
said in consumer and employment arbitrations, the arbitration
companies have to post all the data--all the data, not just the
data that Ernst & Young and the Bankers Association have
picked, but all the data on their websites.
Now, this was passed over the strong lobbying opposition of
the American Arbitration Association, but it went through. What
does that data show?
Now, we just heard a statement from Mr. de Bernardo that
every study shows that individuals do better in arbitration.
That statement is outlandishly untrue. In my statement, at page
16, I quote from Alexander Colvin, a professor at Penn State,
who just did a study of the California data, which is not
cherry-picked. And what he finds is that employee win rates and
damage awards are much worse for the individual in arbitration.
There is another study that came out in California in the
HMO setting where arbitrators were handling HMO cases. And what
the HMO study found was that, first of all, every single time
that an arbitrator gave a large award to an individual, the
arbitrator was blackballed and they never heard another
arbitration involving an HMO. They also found worse win rates
and much lower awards.
I can tell you what my own experience is, and from talking
to tons of consumer lawyers and employment lawyers around the
country, is where you go into litigation, if you beat the
arbitration clause--there is a drafting error, there is a flaw,
there is something they did wrong, and you are able to knock it
out--the settlement value of the case doubles. I have had a
series of cases where my client has gotten past the arbitration
clause and the value of the case goes way up. So the idea that
arbitration is a great thing that employees and consumers are
loving is crazy.
With respect to the American Arbitration Association, do
their due process protocols solve everything? Well, first of
all, the American Arbitration Association is being undersold by
the National Arbitration Forum, which sends out these
advertisements to banks and gives speeches at bankers
associations conferences and so forth, where they basically
say, look, the AAA in States in which it is illegal to have a
ban on class actions, the AAA will actually allow a class
action to go forward and follow State law. We at the NAF have
never had a class action in front of our organization.
The NAF advertises that there are some settings in which
the AAA will give consumers discovery. We do not allow
discovery except in rare circumstances with us.
What is the result? I follow a lot of arbitration clauses,
particularly for big companies. I collect them for the book
that I write. The AAA is being written out of more and more
clauses, and the National Arbitration Forum is being written
in. Since the stronger party gets the right to draft the
contract, it is a race to the bottom.
But even with the AAA, there are a lot of times that they
have broken promises. For example, they talked about the due
process protocols, and Mr. Naimark talked about how AAA said,
well, you cannot strip people of remedies, corporations cannot
say ``not only does the consumer have to go from court to
arbitration, but she also loses her rights under various
consumer protection statutes''.
Prior to 2001, AAA had never enforced that. There was case
after case in which a company would have an arbitration clause
that stripped people of remedies and they would not enforce
that. It was only when we brought this to the attention of a
Federal judge in San Francisco, who threw out an AAA
arbitration clause as unconscionable, that we finally got a
change that went the other way where AAA finally started to
enforce their protocols in some cases.
But, similarly, the AAA has as one of the due protocols
that says we will only have a reasonable cost, we will not have
very expensive arbitration clauses. But there are more than
half a dozen Federal court cases that are reported in which
courts have found that their costs of arbitration are so high
as to be unconscionable under the law.
AAA says that one of the due process protocols is you will
always get a neutral arbitrator. But when you get a list of who
is going to be on your panel, there are seven names on the
list. The vast majority of the time, every one of those names
is a lawyer who specializes in defending that industry. So, for
example, right now there is someone who has got a case against
Duke Hospital. Well, AAA promised in press releases all over
their website that they would not handle mandatory arbitration
of health cases, but they are doing them for Duke Hospital. But
who shows up on the list? They are all medical malpractice
defense lawyers.
This is what happened to Mrs. Luke. Mrs. Luke has an
employment discrimination claim. Does she get a jury? Does she
get people who are just out of the community? No. She gets a
lawyer whose job it is to defend similar companies, and if the
lawyer rules against the corporation and gives a big award to
the employee or the consumer, they are never going to get
another job as an arbitrator. That is a lousy system.
[The prepared statement of Mr. Bland appears as a
submission for the record.]
Chairman Feingold. Thank you, Mr. Bland, very much for your
testimony. I want to thank the entire panel. It was a very good
panel, and I look forward to our chance, Senator Brownback and
I, to ask some questions.
First, though, at this time, without objection, I will
place in the record the statement of Laurence Schultz,
President of Public Investors Arbitration Bar Association.
I understand that Mr. Schultz is here today. Would you
please stand? Thank you very much, sir. Without objection, that
is entered into the record.
Without objection, I will put in the record a copy of the
letter Chairman Leahy and I sent to SEC Chairman Christopher
Cox requesting that the SEC promulgate rules prohibiting
broker-dealers from requiring investors to accept mandatory
arbitration clauses.
I will also put in the record a copy of the letter to the
SEC from seven consumer, homeowners, and civil rights groups
supporting our request. And, without objection, I will put in
the record a copy of Chairman Cox's reply.
Without objection, I will place in the record a letter from
36 consumer, civil rights, homeowners, and employees rights
groups in support of the Arbitration Fairness Act.
All right. We will start the questions, do a 7-minute round
to begin with. I will kick it off by asking Mrs. Luke some
things.
I want to thank you again for being here and telling your
story. One of the most amazing things to me is that you
actually refused to sign a mandatory arbitration agreement when
your employer was telling you you had to sign it. I think it is
fair to say that most people would not be able to withstand
that kind of pressure in that situation.
Can you tell us more about why you did not want to sign the
arbitration agreement?
Mrs. Luke. Well, I did not want to sign it because, first
of all, the way they explained it, I would be signing away my
rights. I would not be able to go to court if anything
happened. I had been with Baptist Medical Center Princeton for
30-plus years, and I was looking forward to retiring from the
company. And I did not want to sign that because I felt like if
I did sign it and something did come up, they could terminate
me and I would not have a leg to stand on.
Chairman Feingold. And you had been working for your
employer for many years already when you were asked to sign the
arbitration agreement. Did the employer offer you anything in
return for giving up your rights to go to court?
Mrs. Luke. They offered me nothing for giving up my rights,
but they offered to terminate my position if I did not sign it.
Chairman Feingold. Some offer. You said you thought you
would have had a fairer hearing on your case in a court of law
than you did in arbitration. Why do you think that?
Mrs. Luke. Well, because the arbitrator was paid by Baptist
Medical Center Princeton, and I was not allowed to bring any of
the evidence I had. I first went to the EEOC, who investigated
for months and ruled in my favor. The arbitrator told me I
could not bring this up, nor could I bring any evidence from
this. And I felt that that was unfair, that if I had gone to
court, I would have been able to use all of this information,
and that they would have looked at it objectively and possibly
ruled in my favor.
Chairman Feingold. Thank you so much.
Mr. Bland, thank you for your extensive written testimony.
It will be very helpful to the Committee.
There was a shocking report on the ABC News website
yesterday about a Houston woman employed by Halliburton KBR in
Baghdad who alleged she was raped by coworkers. She said that
she was placed under guard by her employer for 24 hours without
food and water and told not to leave Iraq for medical treatment
or she would be fired. She has filed suit against Halliburton
in Federal court. The company is saying that under her
employment contract she must go to arbitration.
I have a copy of the ABC News story that I will put in the
record at this time, without objection.
What is wrong with deciding a case like this in
arbitration, if that is what the contract provides?
Mr. Bland. Senator, there is an unbelievable irony that we
have someone who is overseas fighting to defend our freedoms,
fighting to defend our system, and when she comes back here she
is told ``you have no constitutional rights, you have to go
into a secret, privatized tribunal that is picked by the
company''. I mean, that irony is amazing.
You spoke in your opening statement about the Seventh
Amendment of the Constitution. You know, the right to a jury
trial is not just in the Constitution. It is the central reason
why this country became independent. In the Declaration of
Independence, they not only talk about the jury trial, but
there is actually a clause in which one of the colonists'
principal complaints is that the King was picking the judges
and that the judges depended for their job and their salary
upon the King picking them. Well, does that sound familiar?
Because the arbitrators depend on the King, being Halliburton,
to get the work and to get paid.
Now, first of all, it is obvious why Halliburton wants
this. It is a secret system. They can cover up the facts. There
is a gag order there. None of the facts about what is going on
in that situation will come out if it is done in arbitration as
opposed to the open court system.
The second obvious problem is that what she is likely to
end up with is an arbitrator who is a lawyer whose principal
job is defending companies like Halliburton against employment
claims instead of having a jury. And that is an incredibly
unfair thing particularly to do to someone who is so horribly,
grievously injured. It is an extremely unfair system to have an
arbitrator who knows that they are going to be blackballed if
they rule for the employee.
And if you look at the data under the California disclosure
rules at AAA, Halliburton wins the vast majority of the
employment cases that they face. It is something like 85% of
the cases have gone for Halliburton. Only a handful of cases
have gone for the employee.
And then the final thing is suppose you have an arbitrator
who is still doing their best but they make a mistake and they
get it wrong and they rule against this woman where the law, in
fact, would have favored the woman? She will have no appeal.
Now, in court, she would have an appeal. But in arbitration
the Seventh Circuit said last year that a wacky decision of law
by an arbitrator is not grounds for overturning a decision. The
Third Circuit said 2 years ago that a glaring error of law by
an arbitrator is not grounds for overturning a decision. The
U.S. Supreme Court said in a case which Justice O'Connor wrote
that even if the arbitrator's decisions are silly--involve
silly fact finding, that is not grounds for overturning it.
So the arbitrator has a motive to rule for Halliburton, so
that they will keep getting the work, and they have the
opportunity to do it because there is no review at all. The
review is meaningless. Mr. Naimark in a House hearing a couple
of weeks ago agreed that the judicial review of arbitrators'
decisions is meaningless.
Chairman Feingold. Thank you very much, Mr. Bland.
Professor Alderman, some of my colleagues on the Republican
side argue that we should not get rid of mandatory arbitration
but develop legislation to reform arbitration in order to
ensure its fairness. Of course, they never pushed these kinds
of ideas during the long period that they controlled the
Senate. Perhaps if significant reforms had been made a decade
ago, we would not be in the place we are now. But at this
point, do you think procedural reforms such as ensuring that
there is a neutral arbitrator, better discovery, a written
decision, et cetera, will actually fix the problem of mandatory
binding arbitration?
Mr. Alderman. I think that will guarantee we have the worst
of both worlds, and let me emphasize one point that I think is
really important. You are considering this because of the fact
that arbitration is imposed unilaterally by one side that can
do whatever it wants, and that is just absolutely inconsistent
with ADR and arbitration.
I support arbitration, I favor ADR, and it works because of
its informality, because of its simplicity, because different
people can serve as arbitrators, because it is not a court. To
try and make arbitration more like a court will not work, and
the question is very simply: Should consumers be forced into
arbitration? Should consumers be forced to forfeit their right
to sue as a condition of obtaining the necessities of life?
Chairman Feingold. Thank you, sir.
Ms. Solov, thank you for coming today. I found your
testimony very useful because the State agencies that NASAA
represents are charged with protecting the investing public.
Does NASAA have a position on whether the SEC can and should
act by regulation on this question?
Ms. Solov. The SEC does have oversight responsibility over
the arbitration process and certainly should exercise that
oversight. NASAA does support the letter, Chairman Feingold,
that you sent to SEC Chairman Cox where you noted the problems
of arbitration and the responsibility for oversight. So we do
think that the SEC should exercise oversight.
However, our position is that investors must be given a
choice. They should not be forced to sign a mandatory
arbitration agreement when they open a brokerage account. As
you indicated in that letter, there are many problems with
arbitration. State law is often not followed. And we at NASAA
reviewed many years of awards and found that often investors
are getting just a small percentage of their losses. And I know
much has been said today about data and statistics and
comparisons, but since the McMahon decision, really, investors
have not been able to pursue their cases in court. They have
not been able to bring a case where a broker has churned their
accounts or there was unsuitable trading. So, really, there are
no meaningful numbers, statistics, or data to draw a
comparison. All we know is from hearing the stories of
investors and from actually looking at arbitration awards that
investors are not getting a fair shake in the system.
Chairman Feingold. Thank you, Ms. Solov.
Now I will turn to Senator Brownback for his first round.
Senator Brownback. Thanks, Mr. Chairman.
This to me--and I appreciate the hearing and I appreciate
the panel--is kind of one of these ``where the rubber meets the
road'' hearing because this is a lot of issues and where people
finally get some access to redress on something that has really
been problematic and difficult for them. I see what the
Chairman is trying to drive at. I appreciate it. We both
practiced law before coming here. Mine was a much more
pedestrian law practice than Mr. Feingold's was, and I am the
Kansas--
Chairman Feingold. I am not sure you know what my law
practice was.
[Laughter.]
Senator Brownback. Well, I know you do not know what mine
is, and I was the Kansas expert on fence law, so you can go--I
guess you could Google ``fence law in Kansas,'' and my name
will show up. That is not why I won my seat to the U.S. Senate,
but my point in saying that is that we had this arbitration
provision in Kansas fence law, and we did it because these are
really low-value cases by the most part. Now, sometimes you get
a prize bull into a great cow's pasture, and Russ and I being
from agricultural States, we know things happen then, and
things of value sometimes happen then. So we would have these
series of cases, and even cases where a guy would loosen his
fence wire so the prize bull could get over into the next
pasture.
My point in saying this is you would involve--the county
commissioners would come out and would appraise whose fence--
who needs to build the fence up. And this was binding in the
system, and these articles I would write on fence law would get
read by a lot of people because the cases just had low value.
They could not get settled. And the only way for one to really
get settled would be the county commissioners were coming out
as people were paid $7 a day as arbitrators to come out and
arbitrate the fence law case and justice was served rather than
in the past people pulled guns on each other and said this is
the way justice will be served. And it is an old, historic
legacy, but it tended to work, and the areas of law did not
mature.
Maybe, Mr. Alderman, as to your point--which I think is an
interesting point that you bring forward on that, and that is
why I say this is one of those cases where the rubber meets the
road. This is where people really live and they have real
disputes, and a lot of times they cannot get access to courts
because it is just too expensive for them to get access to
courts or lawyers hired in this type of case.
I would note for the record, Mr. Chairman--and you can
correct me, and I hope your lawyers will. But according to the
Supreme Court case--I want to cite this--in the case of EEOC v.
Waffle House, it is a 2002 case. The Supreme Court has ruled
that the EEOC can bring claims on behalf of employees, despite
any arbitration agreement. Now, if that proves to be different,
then I want that corrected. but I just want to say when you
have that category of case, then the EEOC can say arbitration
is out on this, and so there is access here.
Mr. Naimark, you mentioned, I thought, some interesting
points about you like arbitration, but you would like more due
process built into it, if I am hearing you correctly. How would
you do that?
Mr. Naimark. Well, you might easily start with the existing
models. The due process protocols were not developed by the AAA
per se. They were developed by a diverse committee of people
representing interests typical of people on this panel, widely
divergent. And the search was for common ground. What are
principles we can agree on that provide due process for
everybody, that are unarguably----
Senator Brownback. Would you build that into a statute?
Would you pass that? Would you amend the Federal Arbitration
Act? How would you do that?
Mr. Naimark. I would not amend the Federal Arbitration Act
for other reasons. I would build a piece of companion
legislation and require that all arbitrations in this area
where you are trying to protect the little guy, so-called, that
the due process protocols, or something like them, be applied,
yes.
Senator Brownback. Because the Federal Arbitration Act has
had a number of judicial reviews, and so it has had--it is
refined by the courts to a point that people feel like it is
working better than if you went in and tried to really gut the
law itself?
Mr. Naimark. Yes. The arbitration activity in this country
and around the world is much, much bigger than the area we are
talking about here. There is a lot of business- to-business.
There is actually a lot of Government access of arbitration
process, both in this country and abroad. And the FAA has
become a foundation really built by the judiciary over the
years. If you look at the FAA, it is very brief. But over the
last 82 years, the courts have defined the contours of the
arbitration process. So I think the danger of monkeying with
that and perhaps dismantling some of the 82 years of judicial
wisdom is not worth it, and I would have a companion piece of
legislation.
Senator Brownback. Mr. Rutledge, you view this proposed
piece of legislation--I am sure put forward with all good
intents--as overly broad and gutting the Federal Arbitration
Act?
Mr. Rutledge. Yes, Senator, I do. And I guess I would like
to pick up on something that I believe the representative--
well, I would like to make two points. One goes back to my
earlier testimony.
One of my concerns about this legislation, Senator, and
Chairman Feingold, with respect, is that it lumps together
employment, consumer, franchise, and now apparently securities
arbitration. What I can say to you is that the state of the
data as to how those different arbitration systems function is
very different.
And that takes me to my second point. The representative
from the securities enforcers indicated that one of the things
that she would like to see is more data, and I would encourage
you to make sure that you have the data that you need before
you decide what to do rather than adopt a piece of legislation
that is going to throw this whole system overboard. And if I
could just--
Senator Brownback. That is an interesting thought about
trying to get more data, because there seems to be some dispute
about data issues here.
Mr. Rutledge. And one other thought that I would like to
respond to, Senator Brownback, in response to Mr. Bland, Mr.
Bland--and I do not mean to quote him inaccurately--I believe
accused a professor on this panel of making outlandish
comments. And Professor Alderman and I were sort of sitting
here and conferring exactly whom he was referring to, but I am
going to venture a guess that it probably was not Professor
Alderman.
And lest my sort of outlandish comments and the studies
that I am referring to be taken out of context, let me be
perfectly clear with your staff. As to employment arbitration,
I believe that the best, most accurate data that you can look
at at this point are the Hill and Eisenberg studies cited in my
testimony. As to consumer arbitration, I believe that the best
and most accurate studies that you can look at are the Demaine
and Hensler study and the California Dispute Resolution
Institute's study cited in my testimony. And as to franchise
arbitration, as to which, admittedly, we probably have the
least data, the best and most accurate study to which I can
refer you are the Drahozal and Hylton studies.
I simply offer those to you, Chairman Feingold and Senator
Brownback, both to respond to the claim that I made--or
apparently I made an outlandish remark and to ensure that you
have access to the best, most available accurate data before
you make your decision and determine whether you need more data
before you decide what to do.
Thank you.
Senator Brownback. Chairman, if I could, I have a series of
eight items I would like to enter into the record, and there
are various statements and testimony and articles.
Chairman Feingold. Without objection.
I will start the second round. Mr. Bland, I believe Senator
Brownback is correct that the EEOC can bring a case in court
despite a mandatory arbitration provision. But the EEOC, of
course, can only bring a small number of cases itself. Can you
clarify this for us? And Mrs. Luke said that the EEOC had found
in her favor, but that did not allow her to bring her case in
court, did it?
Mr. Bland. No. The EEOC v. Waffle House case was described
correctly by Senator Brownback. It is a case where a guy was
hired as a short-order cook. He had an epileptic fit. They
fired him. He said under the Americans with Disabilities Act a
company is supposed to do something before it just fires
someone for having epilepsy. They stood by their position.
The arbitration clause blocked the individual from bringing
a case on his own behalf for money to cover himself. The EEOC
was allowed to go forward. The EEOC principally pursues
injunctive relief, like an order saying to Waffle House the
next time you have someone with epilepsy, see if you can get
medicine or something before you fire them. But the EEOC
handles, less than 1 percent of all cases that are brought in
front of it. EEOC's staff has remained fairly constant for 25
years, but the number of claims going into it is gigantic.
So I do think Senator Brownback described the case
correctly. It was a 6-3 decision written by Justice Stevens. My
firm filed an amicus brief, and they followed the side that we
supported. So I am a big fan of the case.
Chairman Feingold. Thank you.
Ms. Solov, I mentioned the testimony from Mr. Schultz from
PIABA. When you hear that the group that represents claimants
in security arbitrations believes that the system is stacked
against investors, does that give you any concern that this
issue could end up affecting investor confidence in the
securities markets and in the brokers they must use to invest?
Ms. Solov. Yes, Chairman Feingold. It can and it has. And
as a State securities regulator, I am hearing more and more
from investors who have had bad experiences in arbitration.
And, in fact, I think that as word gets out--for example, this
hearing and this proposed bill--investors will start taking a
stronger stance because they do not want to risk their life
savings and then have to arbitrate in an industry forum with an
industry arbitrator on industry terms.
I also would like to just respond briefly with regard to
the data. The data has shown that since the McMahon decision in
the securities industry, investors' wins have gone down
significantly. The data that NASAA was referring to that we
would like FINRA to provide is what, in fact, constitutes a
win, because we know from looking at arbitration statistics
that investors are winning just small percentages of their
claims currently, and those are, in fact, counted as wins.
So, to clarify, that is what we are referring to. But I
think that there is enough data and there is enough hard
evidence out there to currently change this system.
Chairman Feingold. Thank you. I have to say, you know, that
I have been working on this issue for 13 years, but I have been
amazed in the last few months at the number of people all over
Wisconsin and all over the country who come up to me and just
mention this legislation. And, Professor Alderman, those of us
concerned by the growing prevalence of mandatory arbitration
clauses often focus on the fairness of the proceedings to
individual claimants. But I was struck by your testimony
concerning the effect of this growing private system of justice
on the law as a whole and, therefore, on society at large. I
would like you to say a little more about that. What do we lose
as a Nation when disputes are resolved in secret proceedings
where the law is not necessarily applied consistently?
Mr. Alderman. First, I think it is important to emphasize
consumer law is different. Consumer law is not a statute. It
does not have the various agencies enforcing it to the extent
of the other areas. It is Federal and State legislation. It is
common law. It is complex.
More importantly, I have been doing a lot internationally.
I taught in half a dozen countries in the last few years. I
host a conference on international consumer law every other
year that we have 60 or 70 professors at. The United States is
different in how we regulate, protect consumers, and deal with
the marketplace. We use private litigation. Our statutes are
enacted on the assumption that lawyers will bring the lawsuits.
Most of them provide for attorneys' fees so you do not need a
minimum of $60,000 to obtain an attorney. And it is this public
resolution of disputes that keeps the marketplace, I think, on
guard. It keeps consumers informed. And when you take that
secret, you are losing one of the biggest benefits of our open
court system. I noticed many members--and I did not check all,
but all that I checked, many members of this Committee very
clearly somewhere on their website, you see reference to the
importance of an open court system. And we are talking about
completely closing and privatizing that court system when it
comes to consumers--consumers again, who, in my opinion,
comparing car dealers--and let me point out I did not follow
all of the hearings, but I do not recall any discussion of the
need for all of the data to see whether car dealers were being
treated fairly by manufacturers or not. The issue was they were
being forced to do something by manufacturers. And I think with
consumers it is so much more important. These are the
necessities of life. This is your house. This is the nursing
home. This is the automobile. If you do not have a way to
publicly access what is going on, to know what is going on, you
cannot protect yourself.
Chairman Feingold. Thank you.
Mr. Bland, in his testimony Mr. de Bernardo calls S. 1782 a
``mandatory litigation bill'' and says that it would
effectively end arbitration in America. I assume that he
realizes that S. 1782 would not prohibit arbitration if both
parties agree to it after a dispute arises. Much of his
argument deals with employment arbitration, so I will ask you
first, but I would also like to hear from Professor Alderman:
Do you agree that this argument seems to assume that no
rational employee would ever choose arbitration voluntarily or
that, when they do, employers would refuse to agree to
arbitration? And if that is so, isn't that a pretty scathing
indictment of the fairness of the current arbitration system?
Mr. Bland. It certainly is. I mean, it is a pretty grim
idea that the only way you can have arbitration is if you force
people into it and that they would never choose it on their
own.
But, you know, another thing is that the idea that this
bill is a dramatic change in the landscape in consumer cases is
a little crazy because the idea of mandatory arbitration in
consumer cases is very recent.
In 1995, almost no banks in America had arbitration
clauses. In 2000, almost no car dealers had arbitration
clauses. All of these clauses have been adopted just in the
last couple of years. It is a very recent phenomenon that they
have happened.
But, also, there are almost no consumers choosing
arbitration today. If you looked at the Public Citizen report
that came out a few weeks ago, they looked at 34,000 cases that
arbitrators decided in California. Of those cases, only 118
were brought by the consumer. All the other cases were cases
brought by businesses against consumers for collections cases.
There was some data that came out of a lawsuit in Alabama
that involved First USA Bank. They found that there were 20,000
cases that had been resolved in arbitration. Of the 20,000
cases, 4--only 4--were brought by consumers. The idea that,
well, this is this really valuable alternative, that consumers
are out there rushing to join and thriving in arbitration and
that if this bill passes, consumers will lose these things that
all these people value--it is 118 people in California in 3
years chose to do this. No one else. This is not something
consumers are seeking. There are not consumers out there who
are going to be going home at night crying if they lose this
opportunity. It is not something they use. It is something that
is forced on them.
Chairman Feingold. Thank you, Mr. Bland.
Now it is Senator Brownback's turn for a second round.
Senator Brownback. The fence law expert is back here.
Mr. de--
Mr. de Bernardo. De Bernardo.
Senator Brownback. Excuse me. Thank you. And
congratulations on the Marquette win.
[Laughter.]
Senator Brownback. As somebody from a State where
basketball is serious business, this is important when that
happens.
Mr. de Bernardo. It was no surprise, Senator.
Senator Brownback. There was no arbitrator there.
Why is it that there are so few post-arbitration dispute
resolutions? You mentioned that in your statement, that if you
do not do it on a required basis, on a post basis, it is like
95 percent, I believe is your number, don't go with a post-
arbitration dispute mechanism?
Mr. de Bernardo. Well, the 95 percent was referring to the
plaintiffs' bar and that only 5 percent of those who seek
representation from the plaintiffs' bar on employment issues
are actually represented by the plaintiffs' bar. So they are
going to say no to 95 percent of the people who feel they have
a grievance in the employment area. For those people, without
arbitration there is no legal recourse. So my point is that
arbitration--and when you have an arbitration system at a
company, which a growing number of companies have--
Senator Brownback. You actually have a recourse.
Mr. de Bernardo. Yes.
Senator Brownback. Whereas there is not a recourse
otherwise.
Mr. de Bernardo. Sure.
Senator Brownback. Why is there not more postdispute
arbitration taking place?
Mr. de Bernardo. Well, because once you have the dispute,
what you have is representation by the plaintiffs' bar, you
know, the cases--the individual fact patterns that could have
been resolved or were earlier--I talked earlier about early
intervention into a problem. So, you know, my secretary feels--
is offended because I use the ``F'' word in the office, OK? I
do not know. It is careless on my part. It is bad. It is a bad
idea. But, you know, I do not know that. If somebody came to me
and said, ``You know what? Your secretary feels offended by the
fact that you''--gee, I would apologize. I would say I will try
never to use it again. I did not realize that. That is a small
adjustment.
But, you know, what happens is we are employment lawyers,
we have 425 employment lawyers representing management. Most of
these cases, it is cumulative. It is not one incident. It is
over the years, a series of things, a series of petty
grievances, maybe not so petty grievances that grow. And what
you have is this hostile and offensive environment.
And so what happens is what you have with arbitration is
this intervention so that you are correcting the action, making
for better workplaces. So now once you get to the point where
litigation has been filed, you have the plaintiffs' bar
involved. They seek recovery. They want attorneys' fees. They
have identified this case from among the 5 percent that they
accept that are coming to them. It is a declaration of war.
At that point, it is very, very unlikely--as I pointed out,
this ABA survey found that 86 percent of lawyers would not--
both defense and plaintiffs' lawyers said that they would not
recommend postdispute arbitration to their clients. And,
frankly, I would not either.
Senator Brownback. Mr. Alderman, I appreciate your
testimony, and I appreciate your expertise in this area. It is
very good. A couple of quick things for you, though, if I
could.
One point that you made is that we have frozen consumer
law, if I hear you, and that kind of intrigued me from the
standpoint of I can see what you are pointing to with that. And
then you talk about the secretiveness of this.
Is there another way to get at those desires on your part
where you represent a broad desire to have a better set of
consumer laws for the United States that you work on here and
with other countries than what I perceive as really going at
the heart of the Federal Arbitration Act and changing a
fundamental basis of law? Is there a different way to go at
that?
Mr. Alderman. I do not see a way that you can deal with the
consumer law in this country and take the courts out of the
picture, and I will use Texas as an example.
In the 1970's, Texas enacted--and this is in one of the
articles of mine that I cite. The Texas Supreme Court
established a doctrine of good and workmanlike performance. It
was a time in the heyday of consumerism. It was a court that
was considered very liberal. Between 1973 or 1974 and 1995, the
Texas Supreme Court and lower courts dealt with that doctrine
about 180 times. By the early 1990's, the Texas Supreme Court
had decided we went too far. We gave consumers too many rights.
We actually have to back off a little bit. And they modified
it.
There have not been any cases in the last 5 or 6 years
dealing with this doctrine. In my opinion, had arbitration
occurred to the same extent it does now 8 years ago,
arbitrators would be applying a law that, had the Texas Supreme
Court been given an opportunity to review it, they actually
would have made it more favorable to businesses.
But to me, the common law is the value of this country. It
is the court's ability to modify the law.
Senator Brownback. And that is where you see we are not
getting the common law development.
Mr. Alderman. And we do not get the interpretation of
statutes. I wish that I could say every statute passed was
perfectly worded and had no ambiguities, but it does not. And
arbitrators cannot resolve that, except individually in the
case before them.
Senator Brownback. Just it would be much more interesting
to me, as one that looks at arbitration--and I think you do
have to go at it in various categories--as being something that
makes the system much more accessible to a lot more people. And
that is something I am interested in, but I am also interested
in the development of consumer law, and--
Mr. Alderman. If I may make one more--
Senator Brownback. Let me just finish this point, and I
would be happy to hear back from you. I do not want to just
throw out something that makes the system somewhat work. I
mean, maybe we could have more TV shows that have these
disputes go on. That is one way we could get more access to it.
But this is a way that can get things resolved for most
people--not everybody, but I am sympathetic to your point of
further development of the law. It is just I would like to look
at it in some other setting other than going right at this
Federal Arbitration Act statute.
Mr. Alderman. I simply do not believe that the increases
use of arbitration, that these entities are looking out for my
rights and they are trying to force me into something that is
better for me. This is substance. And let me give you one quick
example, and I think your example is something that I would
favor, and I would tell everybody to take advantage of: a
county commissioner that heard disputes. I do not have problems
with bias, I do not have problems with cost. I think that is a
wonderful idea. And the Better Business Bureau had something
like that.
Senator Brownback. May I go on to your point just real
quickly in my remaining time. So yours is really the selection
of the arbitrator.
Mr. Alderman. It is the fact that only one side, and
nothing will change it, controls the entire process. In Texas,
if you are a member of the Better Business Bureau, you must use
Better Business Bureau arbitration, regardless of what entity
your contract says. Many consumers--and I advise them to use
Better Business Bureau arbitration. It was inexpensive. It was
held at reasonable times. It was very fair. After they ruled
against one of the home builders in Houston, the home builder
and other home builders withdrew from the Better Business
Bureau, imposing arbitration under one of the national
associations. I think this is being done for one reason. It
gives business control, and there is nothing we can do with the
procedures that will eliminate that control, and it is about
substance, not procedure.
Senator Brownback. Thank you.
Chairman Feingold. Thank you. I appreciate the Ranking
Member's comments about the way in which arbitration provides
access. But access inherently is about something you choose to
access. It is not about something you are forced to access. It
is like saying jails give access to prisoners. They do not have
a choice. So we have to, again, make sure that this topic is
about mandatory arbitration, not arbitration in general.
Mr. Bland, do you want to say something about Mr. de
Bernardo's claim that employment lawyers accept only 5 percent
of the cases that come to them?
Mr. Bland. Yes. When I saw this testimony last night--I got
it at about 9 o'clock--and I read this Footnote 14, I was
really curious about it because I had never heard that before.
And I contacted a number of civil rights lawyers and said this
guy is saying essentially that 95 percent of plaintiffs'
lawyers would turn down employment cases, but that a much
higher percentage of them would take them if they could do them
in arbitration. And that is not the comparison. It is not
even--
Mr. de Bernardo. That is not what I said.
Chairman Feingold. You will get a chance to respond.
Mr. Bland. It is not even apples and oranges. It is more
like frogs and ball bearings, they are so far apart.
What the study says is that if people come in and say, ``I
think I was fired wrongly and I want to be able to sue my
employer,'' because of the at-will doctrine in America,
generally most people in America can be fired at the employer's
choice unless there is something like racism or sexism going
on, that 95 percent of plaintiffs' lawyers will advise the
person not to sue. An employee comes in and says, ``I want to
sue,'' and the lawyer says, ``You don't have a suit.'' That is
good advice. For most people, you don't have a suit. Most
people who are fired, there is nothing they can do about it.
The courts do not go around reinstating everybody who is fired
in America. Nineteen out of 20 times, the good advice is just
go away, there is nothing you can do about it, move on with
your life.
The comparison that is relevant here is are people more
likely to go into arbitration when they do have a valid claim,
they do have a race discrimination claim that is real or a
gender discrimination claim that is real, or are they more
likely to go into court? And the data that I have seen--and
also what virtually every civil rights lawyer I know says--is
that they are more likely to go to court than arbitration
because in arbitration it is very common to have a ``loser
pays'' rule.
The U.S. Supreme Court said in the Christiansburg Garment
case that if a civil rights claim, like a Title VII case, like
Mrs. Luke's case, saying I have been fired because of my age or
because of my race, that you cannot be hit with the other
side's attorneys' fees unless your claim is frivolous.
In arbitration, it is very different. It is very common for
arbitrations to have ``loser pays'' rules. I have seen a number
of cases in which arbitrators have given the complete
attorneys' fees to the defendant, even bankrupted people
bringing sexual harassment cases.
One of the arbitration firms, the National Arbitration
Forum, advertises in speeches and articles written for banking
audiences that they have a ``loser pays'' rule to discourage
cases--not just frivolous cases. A ``loser pays'' rule for
anyone who loses a case.
For my clients, that is a deal breaker. No one walks in my
door and says, ``I was cheated. I was fired improperly.'' And I
said, ``I will tell you what. We will take your case. If you
win, you will get your back pay. If you lose, you will
bankrupted.'' OK? People walk from that.
Chairman Feingold. I want to give Mr. de Bernardo a quick
chance to respond.
Mr. de Bernardo. I am sorry?
Chairman Feingold. I want to give you a quick chance to
respond if you would like. You looked like you wanted to.
Mr. de Bernardo. Well, that is simply a misstatement of
what is in the testimony, and I would urge you, Mr. Chairman,
to read the testimony in that regard.
Chairman Feingold. Thank you. Sam, did you want to ask
anything else?
Senator Brownback. No. We just would note the citation here
that he has got at the bottom, so I would ask that be noted for
the record. I think it is well noted.
Chairman Feingold. Without objection.
I want to thank--
Mr. Rutledge. Senator?
Chairman Feingold. Very quickly.
Mr. Rutledge. Very quickly, Senator, just to Mr. Bland's
point about ``loser pays'' rules, if I could refer your staff
to the 2003 study by Elizabeth Hill and to the 2004 study by
Demaine and Hensler, both of those show that as an empirical
matter, this notion that loser pays is being applied as a
routine matter just is not correct.
Chairman Feingold. Thank you, sir. Well, I want to thank
everybody. I think this is exactly what a hearing should be, a
fair hearing of the issue. From my point of view, the more I
hear about this, the more I am stunned by how central this
issue is to our economy, to our consumers, and to our society.
This is a big deal. And listening to you today, I am even more
motivated to try to do something fundamental about this
mandatory arbitration issue.
So I want to thank Senator Brownback for his participation
and thank our witnesses. The record will remain open for 1 week
for any further written materials that you or anyone else wants
to submit. In addition, Senators may submit followup written
questions for you during that same 1-week period, and I would
ask that you attempt to send in your answers to those questions
as soon as you can so we can complete the record.
The hearing is adjourned.
[Whereupon, at 11:10 a.m., the Subcommittee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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