[Senate Hearing 110-396]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-396
 
             S. 1782, THE ARBITRATION FAIRNESS ACT OF 2007

=======================================================================

                                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

                              ----------                              

                    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

                              ----------                              


                      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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