[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
FEDERAL ARBITRATION ACT: IS THE CREDIT CARD INDUSTRY USING IT TO QUASH 
                             LEGAL CLAIMS?

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 5, 2009

                               __________

                           Serial No. 111-39

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov



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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            DANIEL E. LUNGREN, California
MAXINE WATERS, California            DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts   J. RANDY FORBES, Virginia
ROBERT WEXLER, Florida               STEVE KING, Iowa
STEVE COHEN, Tennessee               TRENT FRANKS, Arizona
HENRY C. ``HANK'' JOHNSON, Jr.,      LOUIE GOHMERT, Texas
  Georgia                            JIM JORDAN, Ohio
PEDRO PIERLUISI, Puerto Rico         TED POE, Texas
MIKE QUIGLEY, Illinois               JASON CHAFFETZ, Utah
LUIS V. GUTIERREZ, Illinois          TOM ROONEY, Florida
BRAD SHERMAN, California             GREGG HARPER, Mississippi
TAMMY BALDWIN, Wisconsin
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York

       Perry Apelbaum, Majority Staff Director and Chief Counsel
      Sean McLaughlin, Minority Chief of Staff and General Counsel
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                    STEVE COHEN, Tennessee, Chairman

WILLIAM D. DELAHUNT, Massachusetts   TRENT FRANKS, Arizona
MELVIN L. WATT, North Carolina       JIM JORDAN, Ohio
BRAD SHERMAN, California             DARRELL E. ISSA, California
DANIEL MAFFEI, New York              J. RANDY FORBES, Virginia
ZOE LOFGREN, California              HOWARD COBLE, North Carolina
HENRY C. ``HANK'' JOHNSON, Jr.,      STEVE KING, Iowa
  Georgia
ROBERT C. ``BOBBY'' SCOTT, Virginia
JOHN CONYERS, Jr., Michigan

                     Michone Johnson, Chief Counsel

                    Daniel Flores, Minority Counsel


                            C O N T E N T S

                              ----------                              

                              MAY 5, 2009

                                                                   Page

                           OPENING STATEMENTS

The Honorable Steve Cohen, a Representative in Congress from the 
  State of Tennessee, and Chairman, Subcommittee on Commercial 
  and Administrative Law.........................................     1
The Honorable Trent Franks, a Representative in Congress from the 
  State of Arizona, and Ranking Member, Subcommittee on 
  Commercial and Administrative Law..............................     2
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in 
  Congress from the State of Georgia, and Member, Subcommittee on 
  Commercial and Administrative Law..............................     3
The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Ranking Member, Committee on the Judiciary.     5
The Honorable Daniel Maffei, a Representative in Congress from 
  the State of New York, and Member, Subcommittee on Commercial 
  and Administrative Law.........................................     6
The Honorable Howard Coble, a Representative in Congress from the 
  State of North Carolina, and Member, Subcommittee on Commercial 
  and Administrative Law.........................................     7
The Honorable Darrell E. Issa, a Representative in Congress from 
  the State of California, and Member, Subcommittee on Commercial 
  and Administrative Law.........................................     7

                               WITNESSES

Michael D. Donovan, Esq., National Association of Consumer 
  Advocates
  Oral Testimony.................................................     9
  Prepared Statement.............................................    11
Richard H. Frankel, Esq., Drexel University Earle Mack School of 
  Law
  Oral Testimony.................................................    99
  Prepared Statement.............................................   101
Christopher R. Drahozal, Esq., University of Kansas School of Law
  Oral Testimony.................................................   121
  Prepared Statement.............................................   123
David Arkush, Esq., Public Citizen
  Oral Testimony.................................................   139
  Prepared Statement.............................................   141

                                APPENDIX
               Material Submitted for the Hearing Record

Response to Post-Hearing Questions from Michael D. Donovan, Esq., 
  National Association of Consumer Advocates.....................   176
Response to Post-Hearing Questions from Richard H. Frankel, Esq., 
  Drexel University Earle Mack School of Law.....................   181
Response to Post-Hearing Questions from Christopher R. Drahozal, 
  Esq., University of Kansas School of Law.......................   185
Response to Post-Hearing Questions from David Arkush, Esq., 
  Public Citizen.................................................   191


FEDERAL ARBITRATION ACT: IS THE CREDIT CARD INDUSTRY USING IT TO QUASH 
                             LEGAL CLAIMS?

                              ----------                              


                          TUESDAY, MAY 5, 2009

              House of Representatives,    
                     Subcommittee on Commercial    
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:10 a.m., in 
room 2141, Rayburn House Office Building, the Honorable Steve 
Cohen (Chairman of the Subcommittee) presiding.
    Present: Representatives Cohen, Delahunt, Maffei, Lofgren, 
Johnson, Scott, Franks, Jordan, Smith, Coble, and Issa.
    Staff Present: (Majority) Norberto Salinas, Counsel; Adam 
Russell, Professional Staff Member; and (Minority) Daniel 
Flores, Counsel.
    Mr. Cohen. This hearing of the Judiciary Subcommittee on 
Commercial and Administrative Law will now to come to order.
    Without objection, the Chair will be authorized to declare 
a recess of the hearing.
    I will now recognize myself for a short statement.
    Within the last year, we have seen an increase in 
foreclosures and job losses and a drop in value of retirement 
accounts. Several congressional Committees have held hearings 
to determine what caused the economic downturn and what impact 
the downturn has had on consumers, workers, and businesses.
    This Subcommittee recently held a hearing to examine 
whether the credit card industry's practices are bankrupting 
Americans. We heard testimony from witnesses that excessive 
fees and interest rates, unilateral change in term provisions 
and changes in credit limits have exacerbated the burden borne 
by credit card debtors. The growing burden, we learned, has 
pushed some debtors into bankruptcy.
    Just last week, Congress passed the Credit Cardholder's 
Bill of Rights Act in an attempt to shield cardholders from 
some of the most outrageous practices of the credit card 
industry. Some of these practices have hindered some 
cardholders' ability to weather this downturn.
    Today's hearing will focus on arbitration and how its use 
has impacted consumers, specifically credit cardholders. Nearly 
every credit card issuer includes an arbitration agreement in 
their terms of use of contracts with cardholders. Arbitration 
agreements were initially used to free up the courts from an 
increasingly heavy docket and to allow quicker resolution of 
the dispute. However, the use of arbitration has expanded from 
simply involving disputes between commercial parties to issues 
between consumers and businesses, employees and employers, 
shareholders and corporations.
    As arbitration has increased in popularity, what was once a 
choice has become a mandatory more or less adhesion part of a 
consumer contract. In effect, according to the 2004 survey, 
one-third of all major consumer transactions are covered by 
mandatory arbitration clauses; and despite all the benefits of 
arbitration, mandatory arbitration agreements may not always be 
in the best interest of the consumer.
    This hearing will provide Members of the Subcommittee the 
opportunity to hear testimony about the credit card industry's 
use of arbitration to resolve disputes with cardholders. We 
will hear from some witnesses who will speak in favor and some 
who will speak against.
    We will also hear testimony about studies which analyzed 
arbitration decisions concerning credit card disputes and how 
those decisions impact the credit cardholder; and Members will 
consider whether the inclusion of arbitration clauses is 
beneficial to the credit cardholders or do these clauses simply 
place an additional burden on the cardholders, many of whom are 
barely keeping up mortgage or rent payments, insurance 
premiums, and credit card bills.
    So today's testimony and hearing is quite relevant to the 
distress that many in America are experiencing. Accordingly, I 
look forward to hearing today's testimony.
    I now recognize my colleague from Arizona, Mr. Franks, the 
distinguished Ranking Member of the Subcommittee, for his 
opening remarks.
    Mr. Franks. Well, thank you, Mr. Chairman; and thank you 
for calling the hearing.
    Arbitration is indeed an important topic. We examined it 
more than once in the 110th Congress, and I would confess that 
my working conclusion from those hearings is that the theory 
and evidence both show that arbitration is working well for 
consumers and that our overburdened court system needs the 
arbitration system as a vital relief valve. And I therefore am 
of the view that if we are going to even consider doing 
anything to reform the arbitration system this term, including 
with regard to credit card arbitration, we need to do more 
oversight and ask more questions about whether that is truly 
needed.
    The issue of credit cards and arbitration is a good example 
of our need for more information. We last considered this 
specific issue in June of 2007 during our initial hearing on 
mandatory binding arbitration. At the end of our hearing, there 
were numerous important open questions. We were able to 
consider only some of those that might bear on whether reform 
on the system makes sense.
    The first set of questions was about what really is 
happening in consumer cases that go to mandatory binding 
arbitration. Are consumers doing well there compared to 
litigation? Do they receive a fair process? Do they receive 
timely results? Do they face excessive costs? Are they 
satisfied with the process, with the system, and the outcome? 
If there are shortcomings in these areas, are there things we 
can do to improve mandatory arbitration, rather than to just 
eliminate it?
    A second set of questions concerned voluntary arbitration. 
If we restrict mandatory binding arbitration, will consumers 
and businesses be able to use it instead of litigation? Or, 
instead, will one side or the other inevitably see that 
litigation gives it the upper hand in such cases if a dispute 
arises, leading requests for voluntary arbitration to fall on 
deaf ears? And will the parties who have had the advantage in 
litigation usually be the businesses which typically have time 
and money on their side?
    Another important set of questions concerns that very 
alternative to arbitration which is, of course, litigation, 
particularly class action litigation. For example, can 
litigation possibly compete with arbitration in its ability to 
deliver at least some reasonable justice promptly? Will 
litigation attorneys even take the small-money, small-fee cases 
that make up so much of the case load in arbitration? And, if 
they don't, won't that leave millions of working poor Americans 
with no recourse to justice at all?
    More poignantly, with regard to class actions, does the 
history of class actions in producing pro-plaintiff awards that 
are little more than peanuts give us any confidence that class 
actions pave a better path to justice than arbitration? And 
what does the class action corruption review about the Milberg 
Weiss scandal tell us? This is where, Mr. Chairman, where 
prominent class action lawyers were convicted for essentially 
buying and selling fake evidence and witnesses in class 
actions. Shouldn't we investigate the corruption of the class 
action system to the bottom before we hand another huge portion 
of this country's disputes over to the class action plaintiff's 
bar?
    I could go on, Mr. Chairman, but I suspect that you see the 
point. There are many, many questions that we must ask, both 
about arbitration and litigation, before we can reasonably 
entertain proposals to expand the litigation system at the 
expense of the arbitration system; and, of course, I am as 
always eager to hear more information today. I expect that much 
of that will confirm our already strong reasons to believe that 
arbitration is often better for consumers and certainly 
typically no worse than litigation.
    And I reserve the balance of my time, it says here, Mr. 
Chairman.
    Mr. Cohen. So reserved. I thank the gentleman for his 
statement.
    I now recognize the distinguished Subcommittee Chairman 
from the great State of Georgia, Mr. Hank Johnson, a 
distinguished Member of the Subcommittee, for an opening 
statement.
    Mr. Johnson. Thank you, Mr. Chairman; and it is always a 
pleasure to come back and learn so much from you. I have been 
sitting at your knee for a long time and listening carefully, 
so----
    Mr. Cohen. You have 7 minutes.
    Mr. Johnson. All right. And I hope you will continue to 
allow me to gain some experience, Mr. Chairman.
    Ladies and gentlemen, the Federal Arbitration Act, is the 
credit card cndustry csing the act to slam shut the courthouse 
door for users? That's our topic today. And, Mr. Chairman, 
forced arbitration has been a concern of mine for some time; 
and I firmly believe that Congress must act in this instance to 
protect consumers.
    Credit card users are certainly subject to forced 
arbitration as employees, cell phone users, and franchisees. My 
legislation, H.R. 1020, the ``Arbitration Fairness Act of 
2009,'' seeks to correct this unfair practice where consumers 
are forced to sign pre-dispute mandatory arbitration clauses. 
In the last Congress, we had 103 cosponsors of the bill. This 
time we have got almost 60.
    One of our indelible rights is the right to a jury trial. 
Guaranteed by the United States Constitution, this right has 
been gradually eroded through forced arbitration agreements. 
Just by taking a job or buying a product or service, 
individuals are required to give up their right to go to court 
if they believe that they are harmed by the company. According 
to a recent study, roughly three-quarters of Americans 
incorrectly believe they could sue an employer or company 
should they be harmed or have a major dispute that arises, even 
when they are bound by forced arbitration.
    Businesses defend these forced arbitration agreements by 
arguing that it is cheaper, more informal, and results--an 
expedited process is the result. But these agreements leave 
consumers, employees, and small businesses at a distinct 
disadvantage.
    However, the Arbitration Fairness Act does not forbid 
arbitration clauses. It merely prevents forced pre-dispute 
arbitration clauses. Consumers may still opt to arbitrate a 
dispute with a company but only when that consumer determines 
that it is the appropriate forum at the time the conflict 
arises and certainly not before.
    Forced arbitration appears fair on its face. What could be 
wrong with being judged by a neutral arbitrator picked by both 
sides? That's only half the story, though, ladies and 
gentlemen. Arbitrators tend to favor what we call ``repeat 
players.'' These are the people who impose the pre-dispute 
mandatory arbitration on consumers; and so it is not the 
consumers that refer the business to these arbitrators, it is 
the businesses. And so they tend to be predisposed, of course, 
to serve the one that pays them. And that's only human nature.
    Arbitration is also expensive, and individuals still must 
pay exorbitant legal fees for the ability to go into an 
arbitration process which is stacked against them. These 
arbitration proceedings may be called 4-, 5,000 miles away from 
where you live or where the dispute arose. You have got to pay 
for travel expenses, going out there, hotel expenses.
    Arbitration can also be difficult for individuals to 
navigate. So, oftentimes, you do need an attorney. And, by the 
way, the corporate attorneys get paid by the hour; and so I 
think we should have tort reform with respect to the hourly 
fees that are charged by these lawyers for commercial 
interests. And I certainly have no problem with lawyers. I am a 
lawyer myself; and some of my best friends are lawyers--and 
lawyers on both sides, by the way, defense and plaintiffs.
    Importantly--I guess most importantly, Americans are not 
even aware that they are signing these clauses because they are 
written in ``legalese'' and buried in fine print.
    Mr. Chairman, once again, thank you for holding this 
hearing; and I will yield back
    Mr. Cohen. Thank you, Mr. Johnson.
    Is there somebody on this side that would like to make an 
opening statement?
    I recognize the distinguished gentleman from the Alamo, San 
Antonio, the Ranking Member of the full Committee, Mr. Lamar 
Smith.
    Mr. Smith. Thank you, Mr. Chairman.
    Let me confess at the outset to having a little bit of a 
vested interest in the subject today. Long ago and far away, 
when I was a County Commissioner in San Antonio, Texas, the 
City of the Alamo, I started the Bexar County Mediation Center, 
and it has grown and prospered and is considered a real 
success. So I do believe in that concept to a great extent.
    Mr. Chairman, arbitration is vital to this Nation's dispute 
resolution system. Consistent with fundamental American values, 
it is fair, low-cost, and easily accessible. It is a beneficial 
addition to our civil courts which are overburdened, 
understaffed, and clogged with abusive lawsuits. Further, 
unlike litigation, it tends to avoid, rather than hasten the 
destruction of commercial relationships.
    Advocates of more litigation, particularly the plaintiff's 
class action bar, have long sought to eliminate arbitration. 
Theirs is largely an effort to stamp out the competition that 
arbitration poses to litigation attorneys.
    Today's hearing might also be called a Hearing on Efforts 
to Void the Federal Arbitration Act: Are Trial Lawyers Trying 
to Stifle Competition? I hope that is not the case. But bills 
are pending in Congress to wipe out large areas of arbitration. 
They are backed by the plaintiff's trial bar; and they are 
contrary to the clear and growing evidence that consumer 
arbitration works, is fair, and should be preserved.
    Not only that, there is growing evidence that arbitration 
works better than litigation. One of the witnesses at today's 
hearing, for example, has just released an important, 
nonpartisan, peer-reviewed study on consumer arbitration. That 
study, Consumer Arbitration Before the American Arbitration 
Association, confirms that arbitration works and works fast for 
the consumer. It produces mutual settlements or voluntary 
dismissals in a large share of cases. Consumers win relief in 
most cases they file. There is no proof that companies are 
favored over consumers.
    Arbitration provides a predictable and low-cost alternative 
to litigation, particularly a class action litigation with its 
runaway jury awards. That, in turn, lowers the costs of goods 
and services; and in this economy, what consumers need are 
lower cost goods and services, not class action lawyers.
    In the credit card sector, lower cost goods and services 
means more accessible consumer credit at lower interest rates. 
We should do everything we can to preserve what makes credit 
cheaper and more valuable in today's economy.
    President Obama, less than 2 weeks ago, highlighted the 
urgent need to make more consumer credit available. He also 
urged credit card companies to make their contract terms more 
understandable and more transparent, and he expressed support 
for curbing some credit card practices alleged to be abusive. 
But he did not identify credit card arbitration as an abusive 
practice, nor did he make any suggestion that we should 
prohibit it.
    The preservation of arbitration is consistent with sound 
economic principles and traditional American values of freedom 
of contract and self-reliance. If we act contrary to these 
principles and values, who will benefit? Consumers will not 
benefit. They will lose access to both a fair means of dispute 
resolution and cheaper credit. The court system will not 
benefit. It will be overloaded with cases that arbitrators can 
resolve more rapidly and less expensively. Taxpayers will not 
benefit. They will have to shoulder the burden of the court 
systems' increased demand for resources.
    Not even plaintiffs in the new and unnecessary litigation 
that trial lawyers seek will benefit in the end. It will take 
longer for them to recover remedies. Their relationships with 
good companies too often will be sacrificed, and the class 
actions that anti-arbitration interests promote too often pay 
pittances in damages or nothing at all.
    So who will benefit? Mainly, it will be class action 
plaintiffs' lawyers who squeeze millions of dollars in fees 
from their clients' cases.
    Let's not let today's hearing mark the day we begin to 
throw another log on that fire of citizen outrage by 
sacrificing our arbitration system to the special interest of 
trial lawyers.
    Mr. Chairman, you have been very gracious with the time, 
and I yield back.
    Mr. Cohen. Thank you, Mr. Smith. I appreciate your 
statement.
    Now I would like to recognize a distinguished first-year 
Member from the State of New York, unlike Mr. Johnson, not a 
lawyer but a holder of a credit card, Mr. Maffei.
    Mr. Maffei. Thank you, Mr. Chairman.
    Though I must point out to you I cut up my credit card on 
the floor of the House last week, so--actually, I do have two. 
My wife wants me to cut up the other one as well.
    I commend you for holding this hearing, and I do want to 
thank the witnesses for being here today. And I want to be 
clear that I do not oppose the concept of arbitration.
    Indeed, Mr. Smith just brought up a very good point. When 
used appropriately, arbitration can be an extremely useful and 
effective tool as it offers an ability to settle cases much 
quicker at a lower cost. However, we do not currently have a 
level playing field right now; and we must be here and do this 
kind of hearing to address some of these problems.
    The credit card industry, in my view, is one example where 
businesses have understood the benefits of arbitration and have 
nearly uniformly included binding arbitration agreements and 
their contracts. Unfortunately, many have gone beyond the 
congressional intent of the Federal Arbitration Act and abused 
the system, effectively tilting the scales of justice unfairly 
in their favor.
    As an example, I would like to tell the story of Anastasia 
Kamarova, a constituent of mine who was wrongfully hurt by 
forced arbitration. In February of 2005, she started getting 
phone calls from debt collectors about a delinquent credit card 
balance. But what is strange is that she did not even have a 
card with that company. In fact, when the card was issued, she 
hadn't owned any credit cards at all. It turned out that the 
credit card company had the wrong Anastasia, who spelled her 
name a little differently.
    The debt collector continued to pursue the issue, and she 
was asked to appear before a private arbitrator in Minnesota. 
Anastasia tried to convince the debt collector that they were 
targeting the wrong person, but they did not seem to care, and 
a judgment of over $11,000 was made in favor of the company in 
this case. This judgment immediately became enforceable in 
court, even without Anastasia having a chance to defend 
herself.
    Under the Federal Arbitration Act, a court would not be 
able to reexamine the decision, even though it was clear that 
she was a victim of mistaken identity or perhaps even identity 
theft.
    So this hearing comes on the heels of the Credit 
Cardholder's Bill of Rights. For far too long, the scales have 
been tilted in the direction of the companies. This, in my 
opinion, is in large part due to the ridiculously broad 
contracts that virtually all credit card issuers issue that 
include these arbitration clauses. Indeed, very few of us can 
say we understand our credit card agreements; and those of us 
that can say usually understand that they give almost all of 
the power to the issuers.
    I do believe that it is appropriate to have a lawyer when 
you are buying a house, when you are purchasing a house. But 
none of us who are not lawyers should need a lawyer there just 
to get a credit card.
    Arbitration was intended to improve access to justice, and 
we should work to keep it that way and not make it yet another 
tool to collect money from consumers like Mrs. Kamarova.
    I look forward to the testimony from our panel and I thank 
the Chairman for holding this important hearing, and I yield 
back the balance of my time.
    Mr. Cohen. Thank you. Appreciate your statement.
    Without objection, the rules of the Subcommittee are in 
place that all Members who make opening statements have to stay 
for the entire hearing.
    Without objection, that is done.
    I now recognize Mr. Coble for an opening statement.
    Mr. Coble. Thank you, Mr. Chairman. I will be very brief. 
Thank you for calling this hearing.
    Mr. Chairman and colleagues, one criticism that has been 
brought to my attention alleges that arbitrations are biased; 
and I would like to hear from the witnesses if they aware of 
any study or empirical data that would confirm or reject the 
notion that only arbitrators favorable to the credit card 
industry oversee these cases on the one hand or, conversely, 
whether arbitrators favorable to credit cardholders or 
consumers oversee these cases.
    And with that, Mr. Chairman, I yield back the balance of my 
time.
    Mr. Cohen. Thank you, Mr. Coble.
    Is there anybody else on the Democratic side who would like 
to make an opening statement?
    If not, anybody on the--Mr. Issa is recognized.
    Mr. Issa. Thank you, Mr. Chairman.
    And I, too, am both not a lawyer and have a credit card. 
But unlike some people, perhaps, I have also been on both sides 
of arbitration. Arbitration has gotten it right, and then also 
I have lost. We will consider those, when arbitration got it 
wrong. But I am an advocate for arbitration.
    But more importantly here today, I hope to hear from the 
witnesses how, in fact, we on the dais seem to have the hubris 
and those in the White House seem to have the hubris to believe 
that we can overturn 200 years of contract precedent, that, in 
fact, what we are talking about here today is depriving an 
arm's-length relationship between somebody who will extend 
money to someone with virtually no collateral or no collateral, 
in most cases, in return for simply a promise that they will 
pay it back under the terms that they're offered.
    In addition to being a credit cardholder, I am the former 
CEO of a company that expanded our sales by huge amounts based 
on the reliance on credit card companies. Many of my customers, 
although all businesses, used their credit cards to extend 
their credit, sometimes as much as $100,000 in credit cards 
that they would run up in purchases of my company's products.
    I signed a contract. I didn't like the contract because the 
contract left the credit cardholder in a position where they 
could dispute a bill and I would be immediately debited back. 
Ultimately, we had a system of arbitration if we felt that was 
unjust, but in fact that was part of the deal. We accepted that 
because it expanded our business, and we did so voluntarily and 
entered into the many contracts. My companies that bought my 
products entered into their contracts.
    What we are talking about here today is preempting the 
ability for companies to offer a contract and individuals to 
choose that contract. We do so at our peril.
    Just as I believe the preemption of bankruptcy in the 
Chrysler case and a great many other things today cause people 
around the world to question whether we are, in fact, a 
constitutional republic where the rule of law is predictable or 
whether or not we will simply, from time to time, for 
convenience, intervene with contracts longstanding.
    With that, I yield back.
    Mr. Cohen. Thank you, Mr. Issa.
    If there are no other Members seeking to make an opening 
statement, they may submit a statement to be entered into the 
record.
    I am now pleased to introduce the witnesses and hear their 
testimony for today's hearing. Thank you all for participating 
in today's hearing. Without objection, your written statement 
will be placed in the record; and we ask that you limit your 
oral remarks to 5 minutes.
    You will note we have a lighting system here. Red is the 
end, yellow you have got a minute to go, and green you're on 
your phone for 4 minutes.
    After each witness has presented his or her testimony, 
Subcommittee Members will be permitted to ask questions, also 
subject to that 5-minute limitation.
    Our first witness is Michael Donovan. Mr. Donovan is a 
founding member of the law firm Donovan Searles. Following 
graduation from Vermont Law School, Mr. Donovan was a trial 
attorney with the SEC in Washington, prosecuted numerous 
securities cases and enforcement matters, including injunctive 
and disciplinary actions against public companies, broker 
dealers, and accounting firms. He has co-authored many 
publications, including Preserving Judicial Recourse for 
Consumers: How to Combat Overreaching Arbitration Clauses.
    Mr. Donovan has appeared as a faculty member and speaker at 
the ABA's Class Action Forum, the Consumer Credit Regulation 
Forum of the New Jersey Bar, National Consumer Rights 
Litigation Conference sponsored by the National Consumer Law 
Center, is a member of the ABA and the Chair of the Consumer 
Law Subcommittee of the ABA Litigation Section's Class action 
and Derivative Suit Subcommittee. He is also the former Vice 
Chair of the National Association of Consumer Advocates and an 
active member of the Trial Lawyers for Public Justice.
    And I guess all that makes you a plaintiffs' class action 
lawyer. Thank you, Mr. Donovan. You may begin your testimony.
    You need to press a button, I guess. Is that the button? 
You need to turn on the clock.

            TESTIMONY OF MICHAEL D. DONOVAN, ESQ., 
           NATIONAL ASSOCIATION OF CONSUMER ADVOCATES

    Mr. Donovan. Let me start by answering directly the 
question presented by the title for this Subcommittee hearing. 
Yes, the credit card industry is using forced arbitration and 
the Federal Arbitration Act to quash legal claims by ordinary 
consumers that are in each of your districts.
    Congress must pass the Arbitration Fairness Act sponsored 
by Congressman Johnson in order to stop the misuse of Federal 
law to deny the due process rights of my clients and every one 
of the American citizens represented by this panel.
    In 2007, I appeared before the Senate Banking Committee to 
discuss the problems with the credit card industry. I described 
the many abuses imposed upon my clients and your constituents 
by the unfair practices of the credit card industry.
    Let me point out, Congressman Issa, that the one difference 
between the credit card contract and 200 years of contract law 
in this country is that the credit card contract, unlike any 
other common law contract with which we are familiar, includes 
a unilateral change in terms provision that allows the stronger 
party, the party with more power, to unilaterally change the 
terms of that contract at any time, for any reason, to impose 
any penalty, charge, fee or term that it wants; and the credit 
card companies have used this abusive change in terms provision 
over and over and over again.
    No other contract in American history has ever included 
that type of unilateral change in term provision without 
notice. And the card companies are using those provisions today 
to impose unfair penalty rates, trip-wire pricing, tricks, 
traps, reverse promotional offers, undermine promotional offers 
and, yes indeed, to impose unfair arbitration clauses in which 
they can sue and have sued my clients in distant fora.
    In fact, most of the credit card industry now uses an 
arbitration forum that is, in fact, biased. It is biased 
because we know from arbitrators who have worked for this forum 
that it is a biased forum. The name of the forum is the 
National Arbitration Forum. It is located in Minnesota; and it 
frequently conducts unfair, on-the-paper arbitrations in which 
it enters judgment unilaterally against consumers, as Mr. 
Maffei's constituent experienced. That Forum unilaterally 
entered a mistaken arbitration award against his constituent 
when, in fact, that constituent never even had a contract 
allowing that Forum to perform arbitration.
    Now, is that a unique experience? Does that happen rarely, 
infrequently? It happens every day. The Web sites are littered 
with tens of thousands, hundreds of thousands of complaints 
about credit card practices, abuses, deceptive misconduct.
    Let me start with an example. One example is the notorious 
In Re Providian Bank. Its credit card portfolio was purchased 
by Washington Mutual. It is now owned in part by JPMorgan 
Chase.
    What did Providian Bank do? Well, Providian Bank was the 
target of a class action litigation. Yes, I was involved in the 
class action litigation. Guess what the class action litigators 
found in litigating this frivolous case? The reality of it is 
is what they found was that Providian Bank had embedded in the 
bar codes of its return payment information, those bar codes on 
the bottom that you send your check in with, intentionally 
embedded the wrong zip code in order to ensure that the 
payments cardholders sent in would be late so that Providian 
could increase its late fee revenues. That is what the class 
action lawyers found.
    And Providian Bank, the reason why they did that was 
because Providian had already sold off its rights to the 
interest that people would pay on those credit card 
receivables. But for the late fees, Providian got to keep those 
as revenues and could report them to their shareholders as 
higher revenues.
    So this is what the class action lawyers found, was that 
this conscious deceit, fraud, deception, was performed by 
Providian on its own cardholders. Why did it perform this? To 
increase its revenue, inflate its stock price, and award higher 
bonuses to all these Wall Street titans. That is what Providian 
did.
    What happened in the Providian case? Well, the class action 
was settled for $105 million. Yes. On a per member basis, is 
that a lot of money? Do people only get back $30? Sure they 
only get back $30 because that is how much they were 
overcharged. That was the late fee.
    They also had to pay penalties because the OCC, their 
regulator, came in late. The OCC has been an abomination. They 
do not regulate banks. They are owned by the banks. In fact, 
the banks pay almost all of their budget. In fact, people 
choose----
    I am over my time. I am sorry.
    Mr. Cohen. Mr. Donovan, somehow or another, you didn't get 
to go to yellow. So what we will do is split the difference and 
give you 30 seconds.
    Mr. Donovan. Very good, and I apologize. Congressman, it is 
my temptation as a trial lawyer to call just about everybody 
Your Honor. So if you will permit me that informality----
    Mr. Cohen. You are down to 17 seconds.
    Mr. Donovan. In any case, the fact of the matter is, in the 
absence of class actions for these small value claims in which 
consumers cannot ever gain access to court, you will have tens 
of thousands of credit card companies continuing to engage in 
massively abusive practices which everyone in the United States 
knows is ongoing and will continue to be ongoing, particularly 
with arbitration.
    Thank you.
    Mr. Cohen. Thank you, Mr. Donovan. I appreciate your 
testimony and your appellation.
    [The prepared statement of Mr. Donovan follows:]

                Prepared Statement of Michael D. Donovan

















































































































































































                               __________

    Mr. Cohen. Our second witness is Richard Frankel. Professor 
Frankel teaches at Drexel University School of Law; and his 
chief scholarly interests include consumer, administrative, and 
immigration law. He served as a teaching fellow and supervising 
attorney for the Georgetown University Law Center's Appellate 
Litigation Program. While there, he supervised students 
litigating before the U.S. Court of Appeals for the D.C. 
Circuit, the Fourth and Ninth Circuits, as well as the Board of 
Immigration Appeals.
    Professor Frankel's clinical interests include consumer 
law, appellate advocacy, landlord-tenant law, immigration law, 
public benefit civil rights and prisoners' rights. Previously, 
he was a Goldberg-Dietzler Fellow for Trial Lawyers for Public 
Justice in Washington, where he litigated class action consumer 
protection and civil rights cases.
    Thank you, Professor Frankel. Will you begin your 
testimony.

            TESTIMONY OF RICHARD H. FRANKEL, ESQ., 
           DREXEL UNIVERSITY EARLE MACK SCHOOL OF LAW

    Mr. Frankel. Honorable Members of the Committee, thank you 
for the opportunity to participate in this hearing.
    As several of the Members of the Committee mentioned, there 
has been a lot of debate about empirical evidence, either for 
or against arbitration and about whether consumers fare better 
in arbitration than they do in court. But what I would like to 
focus on today are problems that exist--with arbitration that 
exist, the public consequences of giving up your right to a 
jury trial, problems that exist irrespective of the specific 
outcomes for the private parties in the process.
    And, specifically, the closed nature of the arbitration 
process relative to court and the expansive reach of Federal 
preemption that prevent States from regulating arbitration 
clauses and the way that they are permitted to regulate any 
other contract mean that no matter who benefits from 
arbitration, the public, and society at large, will suffer.
    In particular, arbitration prevents the law as a whole from 
developing, growing, and adequately keeping up with changing 
circumstances; and this is a particular problem in the credit 
card sector precisely because arbitration clauses are so 
universally used in that area. That essentially allows an 
entire area of consumer protection law to be removed from 
public scrutiny by the use of adhesion contracts' take-it-or-
leave-it arbitration clauses.
    Arbitration hearings, unlike judicial hearings, are private 
matters. Arbitrators have no obligation to provide a written 
decision explaining how they reached their decision or to 
provide reasons justifying that decision. In fact, arbitrators 
have an incentive to write as little as possible in order to 
insulate their decisions from being overturned by courts.
    Arbitrator decisions do not create precedent. They're not 
binding on anyone, including the arbitrator, who is free to 
disregard his or her own earlier decisions in later cases. And 
some arbitration providers even require the parties to keep 
proceedings confidential. This prevents the law from taking 
shape in the way that it normally does.
    Judicial opinions, public, written, well-reasoned decisions 
play a crucial role in adapting the law to changing 
circumstances. They give notice to parties. They explain the 
meaning of the law to the public. They make the legal system 
transparent to the public at large, and they promote deterrence 
by informing individuals of their rights and responsibilities 
under the law. Without written decisions that create this kind 
of precedent, the law stagnates and stays in a position 
essentially of suspended animation.
    And this is true both not just for private law but for 
public law as well. Even statutes, important public statutes 
like Title VII, our Civil Rights Act, the Truth in Lending Act, 
all of these are essentially removed from an ability for courts 
to give precedent decisions explaining what those laws mean 
when they are removed and put in a system of private 
arbitration.
    The Honorable Congressman Franks called for a need for more 
information, and I wholeheartedly agree. And I think one of the 
problems with arbitration is that it is so private that we 
don't get the kind of information that we need in order to make 
informed decisions, in order to know that our justice system is 
working, in order to inspire public confidence in the way 
things work. Many arbitration providers, the ones who hold 
data, won't even release the data that they have unless they 
are required to by State law.
    Now, I think in all of these potential problems with 
arbitration are exacerbated by a lack of meaningful opportunity 
for review of arbitrator decisions. Closed proceedings might be 
a little less problematic if the public had confidence that 
they could be reviewed for error. But the Federal Arbitration 
Act prohibits that from taking place.
    Review of arbitration decisions has been called by courts 
as one of the narrow forms of judicial review that exists; and 
courts have said even when arbitrators findings are wacky or 
silly, or based on evidence outside the record, or based on 
gross errors of law, those findings will not be overturned.
    Given all of these things, how or why the public should 
have any confidence in a system that is closed from public 
view, that involves decisionmakers who don't have to explain 
how they reach a decision, and that makes those decisions 
immune from review is beyond me. Public confidence in any 
judicial system, arbitral or public system, is important in 
making it legitimate; and there is no reason for the public to 
have any confidence in the system.
    Now, the last significant problem with arbitration that I 
would like to address is the inability of States to take action 
to try and protect their citizens from the abuses of 
arbitration. Congressman Issa talked about the hubris of why 
should Congress act to over turn 200 years of contract law. But 
the hubris really is the current preemptive reach of the 
Federal Arbitration Act which precludes State legislatures from 
democratically enacting legislation that protects their 
citizens from the worst abuses of arbitration clauses. All of 
those are preempted by the Federal Arbitration Act.
    Thank you.
    Mr. Cohen. Thank you, Professor.
    [The prepared statement of Mr. Frankel follows:]

                Prepared Statement of Richard H. Frankel









































                               __________

    Mr. Cohen. Our third witness is Christopher Drahozal. 
Professor Drahozal teaches at the University of Kansas, which 
Memphis gave a national championship to 2 years ago, and is an 
internationally known scholar whose writing focuses on the law 
and economics of dispute resolution, particularly arbitration. 
He is the author of multiple books and numerous articles on 
commercial arbitration and has taught and given presentations 
on the subject in Europe and the USA, serving as associate 
reporter for the ALI's restatement of the U.S. law of 
international commercial arbitration.
    Prior to coming to Kansas, the professor practiced law with 
Sidley and Austin in D.C. and served as a law clerk for Justice 
Byron R. White of the United States Supreme Court and Judge 
George H. Aldrich of the Iran-United States Claims Tribunal in 
The Hague, the Netherlands.
    Thank you, Professor Drahozal. Will you please proceed with 
your testimony.

   TESTIMONY OF CHRISTOPHER R. DRAHOZAL, ESQ., UNIVERSITY OF 
                      KANSAS SCHOOL OF LAW

    Mr. Drahozal. Thank you.
    Chairman Cohen, Ranking Member Franks, Members of the 
Subcommittee, I really appreciate the opportunity to be here 
today. I did not wear my Jayhawk tie in deference.
    I have been very pleased with the discussion so far with 
sort of interest in empirical work. Because, from my 
perspective, I think sound empirical evidence is really 
essential for making good public policy. In the arbitration 
area, actually, one commentator recently found ``a consensus 
that the future of arbitration should be decided by data, not 
anecdote.''
    The Searle study, which I am the Chair of the Consumer 
Arbitration Task Force of the Searle Civil Justice Institute, 
is the most recent and, frankly, the most comprehensive look at 
consumer arbitration as here administered by the American 
Arbitration Association. A few sort of background points on the 
Searle study.
    First of all, there is absolutely no industry funding 
whatsoever for the study. It was funded exclusively by the 
initial grant of money to set up the Searle Center to 
Northwestern Law School by the late Daniel Searle, a 
Northwestern trustee. I would frankly have made a condition of 
my participation in the study that they not use industry money, 
and that was never an issue because that was never the plan. So 
no industry funding whatsoever for the study.
    Searle Civil Justice Institute follows a rigorous research 
protocol governing how we do our work. The report itself, as 
was mentioned previously, was peer reviewed by an array of 
scholars on arbitration law and empirical work on arbitration 
law and, frankly, from across the ideological perspective, from 
supporters and critics of consumer arbitration.
    We are very comfortable with the methodology of the study. 
Obviously, our results focusing on the American Arbitration 
Association are limited to the AAA, as we made clear in the 
report. Nonetheless, in deciding national policy on 
arbitration, it seems to me that what is done by the oldest and 
most prominent arbitration association in the country certainly 
is relevant to that debate.
    Our study did not focus exclusively on credit card disputes 
but certainly includes a significant number of credit card 
disputes and, more broadly, debt collection disputes in our 
sample.
    A couple of highlights from the study, and there is a 
lengthy study, plenty to say, but I will just make a couple of 
points at this stage.
    First, the vast majority of the arbitrations in that study 
arose out of pre-dispute clauses, over 96 percent. Only a 
handful of cases arose out of post-dispute clauses. That result 
is actually consistent with every other study that I have seen 
looking at employment arbitration.
    And, interestingly, international arbitration is the same 
way. The vast majority of disputes arise out of pre-dispute 
clauses.
    The standard advice in drafting--and the reason I mention 
international arbitration is there is no question there that 
you have sophisticated parties on both sides, no concerns about 
the fairness of the process; and yet, even in that setting, if 
you don't have a pre-dispute clause, you don't end up with 
arbitration.
    The implications of sort of the finding in a consumer 
setting and in the international setting to me are, first, that 
if you get rid of pre-dispute clauses, it is essentially going 
to get rid of consumer arbitration; and, second, the reason is 
not because of some unfairness in the consumer arbitration 
process, because that rationale wouldn't apply in the 
international arbitration process. The reason is because, once 
a dispute arises, parties' interests and perspectives change; 
and once you have a dispute, somebody's going to benefit from 
going to court, somebody's not. And at that point they can't 
reach an agreement. No reflection on the unfairness of the 
arbitration process, but allowing a pre-dispute clause enables 
parties to enter into agreements that make them both better off 
they otherwise couldn't enter into.
    Second highlight and my final minute of my opening 
statement is we have a variety of findings in the Searle 
report. One that people have tended to be interested in is how 
the cases come out. What we found is that consumers win some 
relief in roughly 53 percent of the cases in which they bring 
claims, and they are awarded just under $20,000 on average. 
Businesses win some relief in roughly 83 percent of the cases 
they bring and are awarded just over $20,000.
    The fact that businesses prevail more often does not show 
that there is any unfairness in the arbitration process. To the 
contrary, what is likely the case is that businesses bring 
different claims than consumers bring.
    The business claimants were very different parties than the 
business respondents. Business claimants tend to be people who 
provided or businesses that have provided services and are now 
collecting debts. Consumer claimants tend to bring claims 
against businesses that have allegedly provided a defective 
product in some way, shape, or form. They are harder to prove, 
and they are harder to quantify damages.
    What that means is you can't just look at outcome numbers 
to tell whether arbitration is fair or not. So the Public 
Citizen studies, which are very interesting, you can't evaluate 
whether a 94 percent win rate shows arbitration is fair or 
unfair without something to compare it to; i.e., how comparable 
cases come out in court.
    Thank you very much.
    Mr. Cohen. Thank you, Professor Drahozal. Appreciate it.
    [The prepared statement of Mr. Drahozal follows:]

             Prepared Statement of Christopher R. Drahozal

































                               __________

    Mr. Cohen. Our final witness is David Arkush. Mr. Arkush is 
the Director of Congress Watch. He joined Public Citizen in 
January, 2008, after working as a staff attorney for Public 
Justice, where he litigated civil rights, environmental, and 
consumer cases primarily in the area of Federal preemption of 
State law, private standing under consumer protection statutes, 
and binding mandatory arbitration in consumer contracts.
    Prior to working at Public Justice, Mr. Arkush taught at 
the Appellate Litigation Program at Georgetown University Law, 
served as the Fuchsberg Fellow at Public Citizen Litigation 
Group, and clerked for the Honorable R. Lanier Anderson, III of 
the U.S. Court of Appeals Eighth Circuit.
    Before clerking, Mr. Arkush worked for the private public 
interest firm Adkins, Kelston and Chavez; and before law school 
he served as Statewide coordinator of Missouri Voters for Fair 
Elections.
    Thank you, Mr. Arkush. Will you proceed with your 
testimony.

        TESTIMONY OF DAVID ARKUSH, ESQ., PUBLIC CITIZEN

    Mr. Arkush. Thank you, Mr. Chairman, Members of the 
Subcommittee.
    Forced arbitration in the credit card industry serves three 
primary functions. First, it allows credit card companies and 
debt collectors to wring more unfair fees out consumers, 
sometimes the consumers who are least able to pay them. Second, 
it makes it easier for debt collectors to collect on debts when 
they lack sufficient----
    Mr. Cohen. You might want to pull your microphone up a 
little bit. Thank you, sir.
    Mr. Arkush. Second, it enables debt collectors to collect 
on debts when they lack sufficient evidence or even when the 
debts are unlawful. And, third, it provides a shield from 
accountability for unfair practices.
    Arbitration, forced arbitration in the consumer context has 
nothing to do with providing consumers a faster, cheaper, and 
fair forum to bring disputes.
    On the first two points, unfair fees and collection, I have 
a story to tell that illustrates those points.
    Cheryl Betts of North Carolina missed one payment. She was 
late for one payment on her Chase credit card. In response, 
Chase lowered her credit limit from $6,000 to $4,900, charged 
her extra fees, charged her a penalty interest rate. Those fees 
and penalty interest soon pushed her over the new credit limit. 
That spurred a new cycle of fees and penalty interest. She 
tried to work out a payment plan with Chase but wasn't able to.
    Two years later, she received a letter in the mail saying 
that she was being taken to arbitration. She owed over $6,000; 
and to her debt had been added $602 in legal fees, over 10 
percent of the debt. She wrote an 11-page response, to which 
the debt collection law firm responded by seeking an 
adjournment, which indefinitely suspended the arbitration.
    Four months later, she wrote another long letter disputing 
the debt, to which the debt collection firm responded by 
seeking a 45-day extension. One day after the 45-day extension 
expired and the debt collection firm still had not responded to 
Ms. Bett's arguments, the NAF arbitrator ruled in the debt 
collection firm's favor.
    In sum, in an NAF arbitration, Ms. Betts was first charged 
extra fees; second, the debt collection firm never responded to 
her arguments; third, the debt collection firm missed its own 
extended deadline to respond to her arguments; and, fourth, the 
debt collection firm won. This is not a fair process. This is 
not a process that has anything to do with providing consumers 
a benefit.
    The third point in terms of what arbitration currently does 
in the credit card industry is that it is a shield from 
accountability for unfair practices. Because there are no class 
actions in credit card arbitrations, that means consumers 
generally can't bring any claims at all. As Judge Posner 
famously said, only a lunatic or a fanatic would bring a small 
claim individually in court. We need class actions if many of 
these people are to bring cases at all.
    The evidence bears out that it is too difficult for 
consumers to bring cases individually in arbitration because 
when we at Public Citizen studied 34,000 NAF arbitrations from 
2003 to 2007, this is 34,000 arbitrations, only 118 of them 
were brought by consumers.
    Forced arbitration is about denying access to justice for 
consumers. It is not about providing them a fair, efficient, 
and inexpensive forum.
    Proponents of arbitration try to show benefits. They have 
failed to meet their burden of showing that arbitration 
benefits consumers. We debunked the majority of these studies 
that have been done last summer in a thorough report.
    There is new study from my colleague to my right here, 
Professor Drahozal, again purporting to show that forced 
arbitration benefits consumers. It suffers from similar flaws 
to all studies that have preceded it.
    First, it is based on Triple A arbitrations. Triple A is 
not a major provider of consumer arbitration. It is not the 
right place to look if you want to find answers to these 
questions.
    Second, the study's own data shows that consumers do worse 
than businesses. Consumers won 53 percent of the time and got 
52 percent of what they asked for. Businesses won 83 percent of 
the time and got 93 percent of what they asked for. That means 
consumers overall got 28 percent of what they wanted and 
businesses got 78 percent of what they wanted. That doesn't 
look fair at a glance.
    The study is also missing key data largely because of 
timing. We have done a preliminary analysis of cases that they 
missed. Of 61,000 cases since 2004, 45,000 come from a single 
debt collection firm, Midland Credit Management, that came in 
after this study's data set concluded. In 87 percent of those 
cases, Triple A awarded exactly amount that Midland Credit 
Management sought.
    The fourth problem is that there is no independent 
verification of these kinds of numbers that are in the study. 
The proponents of arbitration have all of the evidence in their 
hands, and they are afraid to give it up. Instead, we are 
forced to fight with table scraps of evidence, and we are still 
winning the fight on this side.
    This empirical debate, with all due respect, is a bit of a 
distraction. Common sense says that a system where the 
arbitrators are competing for the business of one side is not 
fair to the other.
    Mr. Cohen. Thank you, Mr. Arkush.
    [The prepared statement of Mr. Arkush follows:]

                   Prepared Statement of David Arkush





























                               __________
    Mr. Cohen. We will now begin the questioning, and I will 
begin by recognizing myself for 5 minutes.
    Mr. Donovan, in your prepared statement for this hearing 
you offer several recommendations for Congress to consider to 
protect credit cardholders. One of these is no mandatory 
arbitration either for consumer claims or for collection 
against consumers. Why do you suggest that and how has the 
credit card industry used mandatory arbitration which would 
lead you to this recommendation?
    Mr. Donovan. Thank you for your question, Mr. Chairman.
    Three reasons I suggest that. First, this Congress has 
wisely looked at the exact same question with regard to credit 
extended to our service members. This Congress has wisely 
determined that for credit extended to our service members you 
should outlaw arbitration because the process, as portrayed and 
exercised with regard to service member credit, is unfair and 
it is unwise to force service members to go through biased 
arbitration.
    This Congress has also looked at the exact same question 
when it came to car dealers dealing with car manufacturers, 
franchisees dealing with franchisors. This Congress has looked 
and said, look, a car dealer is a smaller operation. It is 
usually a mom and pop, a small business operation, and it 
cannot defend itself or fight off mammoth car manufacturers who 
dictate what the terms of the franchise agreement is going to 
be. So this Congress wisely, I believe, Republicans and 
Democrats alike, have determined that you should outlaw 
arbitration between car dealers and car manufacturers.
    What are the bases of those two decisions? The bases of 
those two decisions is that this Congress determined that 
arbitration is unfair when you use--when the stronger party has 
an unfair advantage over the weaker party.
    The second point, arbitration is doubly unfair when you are 
talking about small claims. The claims involving credit cards 
are ordinarily claims relating to payment processing practices, 
late fees, over limit fees, or a misapplication of payments for 
an unfair change in terms.
    Those are generally small cases, generally not in excess of 
a couple of hundred dollars at most. Almost no consumer can 
find a lawyer or has any wherewithal or ability to map 
themselves through an unfamiliar arbitration process. So what 
you need is you need a system in which you have lawyers and 
advocates who are able to weed through the good from the bad 
cases and bring the good cases and not pursue the bad cases, 
and what happens is the class action does that.
    Third reason, merchants are also subjected to arbitration 
clauses. Mr. Issa pointed out that he was a business owner. The 
business owners here have also been subjected to unfair 
arbitration clauses. Merchants have agreements with all the 
credit card issuers.
    In fact, one of the biggest class action plaintiffs in the 
bigger credit card class actions in the United States was Wal-
Mart stores. It was a representative plaintiff in a class 
action. It brought that class action and settled it for $3 
billion. That is a major manufacturer that will now be exposed 
to unfair arbitration terms foisted upon it by the credit card 
industry because it is going to be forced to pay unfair 
merchant fees that can change at any time.
    So not only do ordinary consumers need the Arbitration 
Fairness Act to be enacted, but also every entrepreneurial 
decent business in the United States needs the Arbitration 
Fairness Act to be adopted and changed.
    Thank you.
    Mr. Cohen. Thank you, sir.
    Professor Frankel, are there alternatives to mandatory 
binding arbitration less than the bill that are under 
consideration that you think might be offered that would be 
fair to consumers and businesses both?
    Mr. Frankel. One alternative that I think is a good 
alternative is the one proposed in the Arbitration Fairness Act 
which would make post-dispute, voluntarily agreed to 
arbitration where both parties, after the dispute, decide they 
want to arbitrate. That is one alternative. That creates an 
opportunity for greater fairness, for not having specific terms 
foisted upon it. That really is a voluntary agreement.
    And I think there is a big difference, as you can tell from 
I think most companies' own behavior, that they see a big 
difference between voluntary arbitration and forced 
arbitration. Most companies that negotiate arm's-length 
contracts with other companies don't put arbitration clauses 
into these contracts. Where they do use arbitration clauses is 
in where they have a chance to do it unilaterally against 
consumers.
    Mr. Cohen. Thank you. My time has expired; and I now yield 
to the Ranking Member, Mr. Franks, for questions.
    Mr. Franks. Well, thank you, Mr. Chairman.
    Professor Drahozal, the second phase of the study that you 
have been working on will specifically examine the relative 
merits and demerits of arbitration and class actions. That is 
kind of the bottom line for the specific topic of today's 
hearing. When do you expect your study to be complete, and what 
specific questions will you research?
    Mr. Drahozal. Well, the important part of the second phase 
will be looking at how our results compare to other comparable 
cases in the court system. You can't really evaluate whether 
something is fair on its face simply by looking at what happens 
in arbitration. So what you have to look at is how it, 
arbitration, compares to other court cases.
    I was actually doing some preliminary reading on that 
question. Which we have a while to go, unfortunately, before we 
will have final resolution. But I came across a study that 
found that corporations won 90 percent of their claims against 
individuals, and individuals won 50 percent of their claims 
against corporations, which looks a lot like our results from 
arbitration.
    What was interesting is that was a study of Federal court 
diversity cases, which are large claims, not in arbitration. 
And you get very similar results. Now, we will focus on sort of 
comparable claims, which typically are smaller claims, but I 
sort of anticipate finding similar sorts of things.
    Other aspects of what we will do in the second phase will 
be, as you say, look at the extent to which class actions are 
potential substitutes or comparable cases for arbitration 
claims. Presumably looking at the cases that, as Mr. Arkush 
pointed out, were after the time period that we were studying 
in the initial phase. I wish I could promise a date by which 
that will be done. My dream date is realistically the end of 
the year. I mean, this is sort of very intense data collection 
and then writing. We will have to see.
    I had the benefit this year of being on sabbatical to do 
the first phase. I will be back teaching next semester and will 
have competing demands on my time. That is my hope.
    Mr. Franks. Well, thank you.
    I suppose, just from a common sense perspective, that 
doesn't surprise me a great deal, you know, that businesses, 
before they go after one of their customers, they are going to 
probably want to have a pretty strong case; and that they would 
win 90 percent of those doesn't surprise me at all. So what you 
say makes sense.
    I guess my concern is that if we put this where class 
actions are the main--you know, the main mechanism for solving 
these things, it is a little like the old statement that, you 
know, a lot of times lawyers challenge two people to strip for 
a fight and then they steal their clothes. And it is a 
difficult situation to deal with.
    So let me ask you, how do you answer Public Citizens' 
criticism, Mr. Arkush's criticisms there of your study? How do 
you respond to that?
    I want to give you an opportunity because he took your name 
in vain in some pretty significant ways there.
    Mr. Drahozal. Mostly, it was a sort of fair debate, I would 
say. I do not feel slandered in any way, shape or form.
    The main response, again, is to some extent the one I just 
gave, which is--well, first of all, it seems to me the AAA 
results--while I agree that that is one provider out of 
several--are certainly relevant to the debate. We cannot focus 
on just one provider, like the National Arbitration Forum to 
the exclusion of others.
    What is interesting about the AAA consumer database or 
consumer claims is, in our sample, there was a much higher 
proportion of claims brought by consumers. So, if we really 
want to see how consumers do when they bring claims, we really 
need to look at not just the NAF, but also at the AAA, which is 
what we are able to do.
    The second point is the second phase of the study, that to 
really understand what our results mean from the first phase, 
we cannot just look at the numbers and say 90 percent is bad, 
and that is all we need to know; we need to have something to 
compare it to.
    Mr. Franks. Do you have any methodological or other flaws 
that you would point out or opine resulted to Public Citizen 
study of the credit card arbitration in California?
    Mr. Drahozal. Well, there certainly are some disputes, and 
I have not studied the NAF in the same way that I have studied 
the American Arbitration Association, so I cannot sort of talk 
about what exactly the practices are.
    Looking at the empirical results, there is a dispute about 
how you treat settlements, for example. I mean settlements 
benefit the consumer, so they should be seen as sort of a, 
quote/unquote, ``win'' for the consumer.
    My main comment on Public Citizen's study is the 
interpretation of the data, and again, it is the same point: 
Even if businesses win 90-plus percent of the time, that does 
not necessary mean the process is unfair. Again, this is part 
of what we are going to be doing in the next phase of the 
study, but if you look at studies of small claims courts, which 
involve business debt collection, it looks amazingly like the 
way the Public Citizen describes the NAF arbitration. 
Businesses almost always win; the consumers almost never show 
up. So this is not a problem with arbitration.
    Again, we may find out differently in the next phase, and 
so to that extent, I reserve judgment; but from what I have 
seen so far, the problem is not with arbitration. There may be 
issues with debt collection--I mean, if consumers, in fact, owe 
the money, it is not surprising they do not show up, for 
example. So I think a lot of this has to do with the type of 
claim rather than the process that is involved.
    Mr. Franks. Mr. Chairman, the light is red. Thank you.
    Mr. Cohen. Thank you, Mr. Franks.
    I now recognize the distinguished vice Chairman from the 
Bay State and former prosecutor, Mr. Delahunt.
    Mr. Delahunt. Well, thank you, Mr. Chairman, for that 
rather generous introduction.
    I just have one question, and I apologize for being tardy, 
but we always hear how different approaches will save the 
consumer money. For example, arbitration will lower the 
litigation cost, and that is, as a result, a savings that is 
passed on to the consumer.
    Is there any data to support that, Mr. Arkush, or is that 
just simply, you know, credit card industry-speak?
    Mr. Arkush. If it is not nothing more than credit card 
industry-speak, it is barely more. I mean, we have seen no data 
to support that claim, and in fact, there are plenty of data 
points that indicate the opposite.
    During this same period of time when arbitration--when the 
practice of forced arbitration proliferated throughout the 
credit card industry, the industry was raising fees and raising 
penalty interests, basically erecting all of the tricks and 
traps that that industry now uses. And the full House of 
Representatives just acted to ban some of those practices this 
past week.
    Mr. Delahunt. Professor Frankel.
    Mr. Frankel. I agree. The only thing that I would add is 
that, in some way, you could actually perceive it as raising 
costs on the consumer because the consumer's credit card, to 
some extent, is less valuable. The more time that they have to 
spend monitoring credit card companies because they do not have 
litigation as a forum, the more care they have to take. So it 
reduces the value of their card at the same time that credit 
card companies are charging the same price.
    Mr. Delahunt. Professor Drahozal.
    Mr. Drahozal. I would love to be able to do that study. It 
is really difficult to do.
    The way that I think about this issue is: What would happen 
if arbitration--if credit card companies could not use 
arbitration? My prediction would be that prices would probably 
go up, that interest rates would go up; and what that suggests 
to me is, by using arbitration, implicitly the interest rates 
have gone down.
    Again, that is in just sort of a rough sense. I cannot cite 
empirical studies.
    Mr. Delahunt. Right. There is no data.
    I remember during the hearings that we had on the so-called 
``bankruptcy reform act'' that we were told that an average 
family would save somewhere in the neighborhood of $400 a year 
if we passed that particular legislation.
    I have not seen that kind of savings, have you, Mr. Arkush?
    Mr. Arkush. No, we have seen nothing like it. In fact, we 
get these types of claims repeatedly on not just bankruptcy 
issues, but on any sort of so-called ``reform'' of the justice 
system. You frequently see claims that costs will be passed on 
to consumers, and they are never--as far as I can tell, they 
have never been borne out by the evidence.
    In fact, what we can really expect is restoring a robust 
system of accountability and liability for bad practices. That 
is what would reduce costs for consumers.
    Mr. Delahunt. Mr. Donovan.
    Mr. Donovan. Congressman, let me build on that very point.
    We have to understand that the credit card industry, much 
like the subprime lending industry, is structured based upon a 
securitization product. Almost all of the credit card 
receivables are securitized. To the extent that the investment 
community does not have confidence in that securitized product 
because people are using arbitration to hide their bad 
practices, that increases costs. It increases expenses. It 
increases credit throughout the United States.
    The industry right now has used arbitration falsely, in a 
lie, to say costs will go down when, in fact, costs will go up 
directly because of arbitration, because it hides material 
information from investors as well as from consumers. And there 
is no doubt that it hides material information; the whole idea 
of arbitration is to be secret so that nobody else catches on 
to the fact that you are committing bad practices.
    Mr. Delahunt. I can remember this one statistic, and I 
think it occurred maybe in the late 1980's-early 1990's, where 
the Federal funds rate went down to about 3 percent, and yet 
the average interest rate of a credit card was around 14 
percent. It did not go down. It never seems to go down. There 
never seems to be a savings for the consumer.
    Now, I can understand that, you know, there is a 
marketplace, but when the marketplace is--really, the construct 
of the marketplace is, at best, an adhesion contract. And it 
does not just stop there, because it is not just the individual 
consumer who is hurt. What we saw with subprime lending was 
that an entire global economy is put at risk. So, if we do not 
address these issues from a public policy perspective, we put 
the free marketplace at risk.
    Does anyone want to comment on that?
    Mr. Donovan. I just want to second that. I think that is 
exactly right.
    The reality of it is that the securitization product here 
is out there, and it is trading now. To the extent that there 
are issuers who are engaged in bad practices and those things 
are disclosed, that securitization product then plummets. That 
requires banks to increase their reserves, that requires 
investors to buy credit default swaps, and that increases the 
direct costs that the banks--and we see this evidenced right 
now. Every one of the banks in the United States is now 
increasing their fees on credit card consumers, and they are 
doing that because they know that they have now been caught and 
that they have to increase their reserves.
    So arbitration will permit them to continue that bad 
practice in order--and then when it finally comes to the fore, 
the securitizations will fall, and that will undermine another 
part of the credit market that we already saw undermined with 
the subprime lending market. So, to support the free market 
system, one should outlaw arbitration.
    Mr. Delahunt. Mr. Chairman, I thank you for the time. And I 
think that Mr. Donovan speaks with a sense of urgency, and I 
would hope that Mr. Johnson's bill might be considered for a 
markup in this particular Subcommittee.
    With that, I yield back.
    Mr. Cohen. Thank you, Mr. Delahunt.
    I now recognize Mr. Coble from the State of North Carolina, 
whose national champions are being honored today on the House 
floor.
    Mr. Coble. Thank you for that unsolicited endorsement, Mr. 
Chairman. I appreciate that.
    The Jay Hawker may not like that idea, though.
    Mr. Drahozal. Yes. We can talk about that afterwards.
    Mr. Coble. Professor Drahozal, in my opening comments, I 
indicated some thought that maybe these arbitration matters are 
biased, either on the one hand to the benefit of the credit 
card companies, or on the other hand to the benefit of the 
consumers. Any kind of comment on that?
    Mr. Drahozal. Certainly, in the study that we did--I mean, 
a sort of common concern, which has been expressed by various 
members on the panel and by the Committee, is the idea that 
arbitration may favor repeat businesses over nonrepeat 
businesses. The study that--there have been a number of studies 
looking at that type of bias of the arbitration process. 
Typically, what we have find is, under some measures of repeat 
businesses, there was no evidence, there was no statistically 
significant evidence of any sort of bias or of any difference 
in result.
    With other measures, we found some evidence that repeat 
businesses fare better than nonrepeat businesses, but the 
reason for that was that the repeat businesses were more 
sophisticated at handling disputes, that the evidence suggested 
that they tend to settle disputes more readily than nonrepeat 
businesses, and they settle the strong claims against them, 
which means what is left to litigate are the weaker claims such 
that they then tend to do better. But it is not evidence of 
bias; that it is really just evidence of different claims-
handling practices.
    Mr. Coble. I thank you, sir.
    Professor Frankel, do you have any empirical or supported 
reason to believe that the State courts would be able to 
provide trials to the countless single plaintiff or class 
action plaintiffs who will show up on their doorsteps if the 
credit card and other consumer arbitration are eliminated? Any 
idea on that one way or another?
    Mr. Frankel. Let me make sure I understand your question 
correctly.
    I think, if consumers were allowed to go to court, there 
might be class act--there might be some class actions that 
proceed in State courts; and I think State courts are perfectly 
qualified--that State court judges are perfectly capable of 
handling those class actions.
    Mr. Coble. I am concerned that perhaps a plaintiff may not 
be entitled to a class action. He may not be able--Mr. Donovan, 
do you want to weigh in on this either way?
    Mr. Donovan. Congressman, I think I understand your 
question, and that is, if you have an individual case that is 
unique and that is not suitable for a class case--and there are 
thousands and thousands of those. The reality of it is that 
those individual cases are almost always filed very quickly in 
small claims courts, small claims courts handle them. And 
almost always the credit card issuers will settle those fairly 
quickly because they do not want to hire counsel to appear in 
small claims courts; and you get them resolved.
    By contrast, Congressman, with the National Arbitration 
Forum specified in the contract, the credit card companies 
uniformly refuse to settle. Why? Because they own that forum, 
that is why. That is why they put it in the contract, and they 
will fight those cases.
    So what happens is, arbitration prevents settlement, it 
prevents dispute resolution, and it is, in fact, 
counterproductive at least in the credit card contract.
    Now, for class cases, you know, class cases are unique. You 
need a common question, a common, uniform practice. They are 
particularly suitable in the credit card industry because it is 
almost all computer program. If it happens to one, it happens 
to all the credit cardholders; and they are particularly 
suitable for payment processing problems.
    I think I discussed one of the biggest things, and I am 
sure your constituents have this problem; they say, ``Hey, I 
sent the payment in 2 weeks ago.'' They did not credit it, and 
they imposed a late fee on me. Well, what is happening is, many 
times, these credit card companies will change the P.O. Box 
address where you are supposed to send the payment without 
telling anyone, and yet they impose the late payment still.
    Guess what? Anybody can complain. They could say, ``Hey, 
look, you never told us that the P.O. Box has been changed; you 
should credit me the late payment.'' They say, ``No, we are not 
crediting you a late payment.'' What do you need? You need a 
class action.
    Mr. Coble. My time is about to expire, Mr. Donovan. Let me 
extend this to Mr. Arkush.
    Mr. Arkush, I have generally the same question: If we 
eliminate mandatory binding arbitration, it seems to me the 
hordes of credit card customers will either not qualify for 
class action, as we just indicated, or will not be able to 
afford counsel in their individual cases; and if I am on the 
right track, these people may well be denied justice.
    What does Public Citizen say about this?
    Mr. Arkush. If we have a well-functioning small claims 
system, then people can go there without being able to afford 
counsel. Those same people you are describing right now are 
getting no justice from forced arbitration. As I said, in 
34,000 NAF cases, only 118 were brought by consumers.
    The other thing that is important to realize here, I think, 
is that an important value that we get from being able to hold 
a company accountable in court is deterrence of bad practices. 
So one answer to what happens to, you know, the supposed flood 
of cases that would go into the civil courts is, there would be 
fewer cases; there would be fewer disputes because the 
companies would know that they could be held liable, and they 
would, therefore, act better to avoid liability.
    Mr. Coble. Well, thank you, gentlemen. My time has expired.
    I yield back, Mr. Chairman.
    Mr. Cohen. Thank you.
    I recognize the gentleman from Georgia, Mr. Johnson, for 5 
minutes.
    Mr. Johnson. Thank you, Mr. Chairman.
    I would like to hear some discussion about why a public 
proceeding, as opposed to a secret proceeding like you have in 
arbitration--why it is important for the freedoms that we hold 
dear under our Constitution.
    Also, you know, this secrecy with respect to publishing a 
calendar so that the public--if it were not a secret 
proceeding, the public would be able to, you know, just for the 
heck of it, decide I am going to go just like I am going to go 
watch this civil trial in court. You cannot do the same thing 
in arbitration.
    So I would like for you all to talk on that; also, the 
issue of mandatory rules procedurally; also the application of 
substantive law, the requirements or lack thereof in the secret 
arbitration process.
    Lastly, there are some who believe, including myself, that 
there is really no meaningful right to appeal any decision that 
is made by these arbitrators. I will say that I am a big fan of 
all forms of alternative dispute resolution, including 
mediation, including arbitration and any other processes that 
are available, but I just firmly believe that those should--
that those selections should be made after the dispute arises 
and not before the dispute arises.
    So could I get some response, please?
    Mr. Donovan. Congressman, maybe I am one of the few class 
action trial attorneys in the country, but I have had the honor 
of trying four class actions in the last 4 years, successfully 
each time, and I can tell you this. The need to have--there is 
a psychological benefit that is a civic benefit as well to 
people believing that they obtained justice in a public way; 
and it happens not just for the plaintiff who may succeed, but 
it is also for the defendant and for the members of the jury.
    It is remarkable how empowered and important and good they 
feel about being part of the American fabric and of the 
American community by participating in what is, in essence, the 
most American thing you can participate in, and that is a jury 
trial. Even if you lose, I think everyone comes out of a jury 
trial feeling that, Well, look, I got a fair shake; I got a 
fair chance at justice. And this is, in essence, the American 
dream to present your case and to hear it and have it judged 
fairly with an American jury.
    With respect to how that contrasts with what has happened 
in arbitration, I think the proof is in the pudding that 
arbitration is so--let me start with this, sir:
    I, too, believe in mediation and in arbitration. In fact, 
in most of our cases, we resolve them by using mediators from 
the American Arbitration Association, from JAMS; and those are 
retired judges, and they mediate and resolve the cases, and we 
have used them. The difference is, we have decided to do so 
voluntarily, and each side approaches it with that idea, and 
they work out fine. We pay for it, and we think we have 
obtained justice.
    However, when that decision has been made in advance, all 
of my clients who have experienced that arbitration process 
have felt wronged. They have felt disgusted and dirty by the 
process because that forced arbitration is not American. That 
forced arbitration is a perversion of justice, and the proof is 
in the pudding.
    There are some instances in which courts have ordered cell 
phone companies and credit card companies to proceed in 
arbitration on a class-wide basis. In fact, I have had several 
cases where a court has said, Okay, you can go to arbitration, 
credit card company, defendant company, but you are going to go 
to arbitration on a class-wide basis--in other words, the 
arbitrator will decide class certification.
    What has the defendant done in every one of those 
instances? No, no, no. We waive our right to arbitration. Why? 
Because they know that that would be unfair to them, at least 
in their perception.
    So the whole goal of the proarbitration group is to do one 
thing, and that is to deny access to justice to American 
consumers. That is the only, sole goal for proarbitration in 
consumer credit card contracts, to deny access to justice; and 
I just think that is unpatriotic and wrong.
    Mr. Cohen. Thank you for your questions, Mr. Johnson.
    I now recognize the gentleman from California, Mr. Issa, 
for 5 minutes.
    Mr. Issa. Thank you, Mr. Chairman.
    I will try to get the name right. Professor Drahozal.
    Mr. Drahozal. Very good.
    Mr. Issa. Last week--or actually, I guess it was last week 
at this point--we passed a reform bill out of the House 
overwhelmingly, that included changes as to whether contracts 
could, in fact, be changed at will.
    Are you familiar with the legislation leaving the House?
    Mr. Drahozal. I know of the legislation. I cannot claim to 
be familiar with it.
    Mr. Issa. Well, would you say that it was consistent with 
limitations that we can place on government or, as government, 
on the private sector to say that a contract that is to be 
changed must be changed with notice and that that might have 
been a reasonable reform that would have responded to some of 
the other witnesses' statements that they made earlier, that 
this was an outrageous trend to sign binding arbitration and to 
have changes made without notice?
    Mr. Drahozal. Certainly--I mean, to the extent the concern 
is that consumers do not know what is happening, a notice 
requirement would be a direct response to that, absolutely.
    Mr. Issa. So, looking at binding arbitration changes versus 
changes in what we allow to be in the contract or in the 
fairness of contract in the first place, which would you prefer 
that we do, since it appears as though we have bills for both?
    Mr. Drahozal. Yes. I mean, given my role with the Searle 
task force, I am not really in a position to state a preference 
for what you all should do.
    Clearly, there are alternatives to getting rid of consumer 
arbitration, through pre-dispute or otherwise. Altogether 
changing notice provisions would be one. I know Senator 
Sessions has, in the past, introduced a bill that would set out 
various procedural requirements to be followed in a consumer 
arbitration.
    I mean, the other alternative, frankly, is that courts do 
actively police these, in particularly, class arbitration 
waivers. It is sort of striking. Increasingly courts are--when 
they are troubled by those sorts of clauses, stepping in and 
holding them unconscionable or otherwise unenforceable.
    So there are other--I mean, we are not sort of comparing an 
anything-goes system to getting rid of predispute arbitration 
clauses. There are other, sort of intermediate steps.
    I guess the final thing, just to mention briefly, is that 
at least some arbitration providers, like the American 
Arbitration Association, which is part of what we focus on in 
our study, have their own private fairness standards, which are 
similar anyway to the ones that were in Senator Sessions' bill, 
which they do effectively apply.
    Mr. Issa. Thank you.
    Mr. Donovan, you know, you probably are a plaintiffs' trial 
lawyer.
    Mr. Donovan. Yes.
    Mr. Issa. So I will not call you a hostile witness, but I 
will say you are predetermined to give certain answers and, 
perhaps, fair to give others.
    If, in fact, we were to eliminate the preemption, the 
Federal preemption that we are dealing with and allow the 
States to each have authority over credit card disputes, would 
you generally favor that as a plaintiffs' trial lawyer?
    Mr. Donovan. Well, you are talking to the lawyer who argued 
Smiley v. Citibank before the United States Supreme Court, and 
that was, of course, the case that said that, contrary to 190 
years of history, late fees will now be deemed interest, 
because the OCC redefined ``late fees'' to be interest so as to 
preempt every State's law that limited late fees.
    No. No. I think, with regard to credit card contracts, that 
it is appropriate to have a certain amount of uniformity under 
the Truth in Lending Act and certain centralized regulation.
    What is wrong is for the Federal Arbitration Act to 
basically nationalize 50 States' laws and preempt those laws 
when it comes to contractual doctrines like unconscionability. 
Right now, the problem--and this is the reason why Congress 
needs to act. You have certain States that have said, 
California and the Second Circuit in New York have said, Well, 
these certain provisions of credit card arbitration clauses are 
unconscionable, and they are unenforceable.
    You have other States that say, Oh, we are sorry. We 
understand you have a very legitimate claim, ma'am, and you 
have a really good case, but--and we do not care how 
unconscionable the clause is, Federal law preempts.
    Mr. Issa. Let me do one follow-up for Professor Frankel.
    A hypothetical: If we were to continue to allow States to 
reach different conclusions--and let us say that Visa or 
MasterCard or both chose not to do business in that State 
because it became punitive--even if competition came in and set 
up a one-State credit card system, would that be in the best 
interest of commerce to have essentially 49 States with one 
system, one with another, and no way for somebody to take their 
credit card and traverse the world?
    Mr. Frankel. I mean, honestly, I do not see a realistic 
prospect of that happening. I think--that comes up in every 
situation, I think, where there is a request made to have 
Federal preemption in legislation that you cannot have this 
patchwork of different State laws. But I think the risk of that 
is more myth than reality, and there is not really much 
empirical evidence in that respect; and I think----
    Mr. Issa. Well, Mr. Chairman, if I could just broaden the 
question to anyone who wants to answer it. We have that in 
insurance, and insurance companies in many cases do not operate 
in California or in other States. So, if we assume for a moment 
that we mirror States' use in insurance and that occurs, is 
that in the best interest, from this side of the dais, to allow 
it to occur?
    Anyone who wants to answer on that.
    Mr. Donovan. The only difference is, in certain respects, 
Congressman, that does prevent systemic failures, as we saw 
with unregulated insurance companies like AIG and other 
activities that are not covered by State regulations. So, in 
that respect, you will prevent systemic failures.
    In the credit card industry, I do not think it is 
realistic, because we do have a fair amount of uniformity in 
terms of national banking; and that was a system that was set 
up after the Civil War and in the midst of the Civil War.
    I think what needs to be prevented----
    Mr. Issa. That was before I came to Congress.
    Mr. Donovan. Yes. Me, too.
    What needs to be prevented is this patchwork of arbitration 
decisions that you are now seeing, where some States are saying 
that you cannot have arbitration for credit card contracts and 
where other States are saying that you can, so that the person 
in Texas gets no justice and the person in California gets all 
the justice.
    And that is what has really happened right now, so Congress 
needs to step in.
    Mr. Issa. Thank you.
    Thank you, Mr. Chairman.
    Mr. Cohen. Thank you, Mr. Issa.
    I now recognize the Subcommittee Chairman on criminal law, 
the distinguished gentleman from Virginia, Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    My friend from California's opening remarks mentioned 
centuries of jurisprudence, suggesting that credit card issuers 
may have an absolute right to these binding arbitration 
agreements.
    Can somebody speak to the centuries of jurisprudence and 
how they apply to these claims, especially on adhesion 
contracts and antitrust, to demonstrate that we, consistent 
with centuries of jurisprudence, do have the authority to 
regulate these contracts?
    Mr. Donovan. I hate to be hogging the floor, but it is my 
job, Congressman. Yes, I can speak to that.
    You are alluding to the Second Circuit's decision in Ross 
v. American Express where that court has now allowed claims, 
that the credit card industry has conspired to all include 
arbitration clauses in their agreements, to go forward.
    The fact of the matter is that there is a lot of evidence 
of that, because I saw the meetings. The lawyers for the credit 
card companies would get together at the American Bar 
Association meetings and come to agreements on what language 
they would include in credit card contracts, and they would all 
use that same language in their arbitration clauses. And they 
all got together and said: Oh, yes, yes, let us use this; this 
is good language.
    Now, what they are trying to do is to provide, you know, a 
fine print opt-out. So, if the consumer receives this 25-page 
credit card agreement and does not opt out within 20 days of 
receiving it, that will be deemed consent to participate in 
arbitration. I mean, how silly is that?
    I mean, that is ridiculous, but that is what--we are 
talking about people who are paid hundreds of thousands of 
dollars and who have earned major league MBAs to see how they 
can get $30 additional out of each one of their cardholders, 
because that brings $30 million to the bottom line this month.
    That is what the reality of it is, and that is what they 
do. They go to school for it, and they get trained for it, and 
that is what is happening.
    Now, in terms of 100 years or 200 years of jurisprudence, 
there has been 200 years of jurisprudence that has prohibited 
unfair, unconscionable, adhesive contracts. Those are contracts 
that are offered by the stronger party that take unfair 
advantage of the weaker party.
    The definition of an ``adhesive, unconscionable contract'' 
is a credit card contract with an arbitration clause. And I am 
not the only one who says that; the California Supreme Court 
has said it, the Ninth Circuit Court of Appeals has said it. 
The only court that has not come out and directly said that is 
the United States Supreme Court, and the reason basically is 
that, until now, it basically has not had to confront that 
issue because, to the extent that it ever gets to that point, 
the credit card industry is wise enough to say, Okay, we give 
up, we settle; here is your $105 million. So that is basically 
it.
    But the problem, Congressman, is that there are courts that 
will enforce these provisions. I mean, the Fifth Circuit 
enforces arbitration clauses, the Fourth Circuit enforces 
arbitration clauses; until recently, the Third Circuit Court of 
Appeals, my own court in Philadelphia, enforced arbitration 
clauses that required people with foreclosure disputes to go 
both before an arbitrator while their home was being foreclosed 
upon by a court. And this split-forum effect was that people 
had to have--you know, had to go to two different places at the 
same time to save their houses. They were enforcing those.
    The reason why we need this Congress to act is because that 
is wrong. It is just not right. It should not happen, and the 
Arbitration Fairness Act should be passed.
    I also want to say thank you to Congressman Johnson for 
pursuing this each year. I appreciate it.
    Mr. Scott. So the point is, there is nothing inconsistent 
with centuries of jurisprudence? It is in no way inconsistent 
with centuries of jurisprudence?
    Mr. Donovan. Not at all.
    Mr. Scott. Mr. Arkush, can you tell me the status of the 
case that is pending, the Komarova case that you mentioned in 
your statement? Where is it procedurally?
    Mr. Arkush. I believe, actually, that she has finally 
managed to get the award against her thrown out.
    Mr. Scott. And is that a final decision, do you know?
    Mr. Arkush. I believe so. Does anybody else know? I believe 
so.
    Mr. Drahozal. That would not surprise me because ground for 
vacating an award is if you never agreed to arbitrate in the 
first place. But I do not know the case.
    Mr. Scott. Thank you.
    Finally, Mr. Donovan, can you just make a quick statement? 
You have talked around this.
    If a company comes up with a scheme where you rip off and 
defraud millions of people of a couple of dollars, what does 
prohibition against the class action do to those claims?
    Mr. Donovan. Well, it basically prevents anybody from 
pursuing those claims.
    But, you know, the real question here, Congressman, is 
there is a fine-line difference between, you know, a banker and 
a bank robber. A banker, if you take $1 from a million people, 
you are called a ``banker,'' but if you take $1 million from 
one bank, you are called a ``bank robber.'' Really, if, in 
fact, the 1 million people had as much clout as the banks have 
had, well, then those people would have outlawed this type of 
bank robbery.
    Mr. Cohen. Thank you, Mr. Scott.
    We are ready for our second round.
    Mr. Franks.
    Mr. Franks. Well, Mr. Chairman, I hardly know where to 
start. I have learned that a Federal trial is the most American 
thing we can do. You know, sometimes I think I want to step 
back here for a moment and ask myself, What are we really 
discussing here?
    Really, what we are discussing is the agreement on the part 
of the credit card companies. They put in their agreements 
that--because there are oftentimes people who do not pay their 
bills, they put in the contract clause something that would 
require, as part of receiving the credit card, that people 
subject themselves to agreed binding arbitration.
    My fear is that, if we do away with that, we will end up 
hurting a lot of people where they just do not get credit, 
because sometimes I think that my dear friends on the other 
side of the aisle feel that somehow, in Congress, we can repeal 
the laws of cause and effect in mathematics.
    We saw that, I think, in the whole housing situation where 
well-motivated, well-intentioned efforts to help people have 
homes put great pressure on banks to make subprime loans and 
things like this that simply could not withstand the test of 
reality; and we ended up, I think, having largely a government-
incented economic meltdown because of it.
    If we continue to put more and more and more load on the 
economy and on the businesses and on the private sector here 
that are trying to make things happen that are ultimately good 
for everyone, I think we are going to wake up some morning and 
realize that we are kind of under all of it.
    So I guess, Mr. Drahozal, I will just go ahead and ask you. 
The bottom line of your study, that consumer arbitrations you 
examined were faster than litigation, were cheaper than 
litigation and were essentially fair, was that pretty much the 
bottom line of your study?
    Mr. Drahozal. I cannot say quite that strongly at this 
point without the second phase of the study because, as you 
sort of--the comparison we have not yet done. Certainly, we 
found evidence that costs to the consumer, the up-front costs, 
actually are even lower than the low-cost arbitration rules 
provide for the AAA, and that the proceedings seemed to go at a 
fairly quick rate. There was certainly no evidence of any 
repeat player bias, as I discussed before.
    So I guess I would agree with your statement with the 
caveat that we are not yet able to compare it to litigation, 
but that that phase will be coming.
    Mr. Franks. Okay. Well, do you think it would be helpful to 
do additional research then in the process of doing that?
    Mr. Drahozal. Absolutely. Again, I have been very pleased 
with the focus that the Committee and commentators have had on 
empirical work, and it really seems to me important to know 
what you are getting into before you do it. And as you noted, 
the work is in progress, and we will be doing it as quickly as 
we reasonably and sort of conscientiously can do.
    Mr. Franks. This is, rather, an obvious question, but when 
there are class actions on behalf of a group of consumers, 
isn't it true that most consumers receive a very, very, very 
small pittance amount for their part of the class action?
    Mr. Drahozal. There certainly are class actions like that. 
I mean, that seems to me to be actually another area where more 
detailed knowledge would be useful to know exactly how often, 
how much, and what consumers get and to what degree.
    There was a recent study on employment arbitration, which 
obviously isn't directly applicable, but that compared what 
employees got in class actions to studies of what employees got 
in arbitration. And there are some issues with the study, but 
the study basically found that employees got more in 
arbitration than they did in class actions.
    So that type of study would certainly be very useful to do 
in the consumer setting.
    Mr. Franks. We have been told that there is a fine line 
here between bankers and bank robbers this morning. I am 
wondering, what group is favored the most with these class 
actions? Who makes the most money out of it?
    Mr. Drahozal. Well, with that one, I am not in a position 
to say. There are obviously various parties that make money, 
the lawyers probably on both sides. Presumably, the bankers do 
not make money through the class actions.
    Mr. Franks. I would not think so.
    Mr. Drahozal. But, again, that is not something I can 
answer sort of definitively because it is beyond my area of 
expertise.
    Mr. Franks. Well, it sounds like in class actions the 
consumers do not make a lot of money and the bankers do not 
make a lot of money, but it seems that it is pretty clear that 
the lawyers make a great deal of money.
    I am being, you know, a little facetious here, but I felt 
like there had to be some response to some of the comments made 
here. So I guess the bottom line, Mr. Chairman, is that when we 
inject ourselves into the private market and say that you 
cannot make these kinds of agreements--because that is really 
what we are doing here.
    There is nothing that forces arbitration on anyone that 
they do not agree to say, ``Yes, I agree that I will subject 
myself to arbitration''; and to take that tool away from 
business is not only to clog our courts, but to make credit 
harder and more difficult to make available for the very people 
who need it most.
    With that, I yield back.
    Mr. Cohen. Thank you, sir.
    Professor Drahozal, do you see a virtue in class action 
suits in general?
    Mr. Drahozal. Certainly, in theory, they are a very 
sensible way to resolve disputes if you aggregate small 
disputes.
    Mr. Cohen. Does the class action attorney serve somewhat as 
a private attorney general in terms of showing up some defect 
in the business, the contract of the relationship, which could 
then be cured by the imposition of a large class action 
judgment?
    Mr. Drahozal. Again, that certainly is the theory behind 
class actions as well as attorneys' fees--shifting statutes and 
so forth. There are various ways that the justice system has 
structured things to try to give private parties incentives.
    Mr. Cohen. So is there a way that you can see where you 
could have arbitration for smaller cases, individual cases, but 
still permit class action suits, so that when there is a 
uniform--not an individual but a uniform policy or activity 
that is taking place, such as the changing of the address on 
the barcode--that justice could be had through the civil 
courts?
    Mr. Drahozal. It seems to me there are two possibilities. 
One is a number of courts, as I noted earlier, have, in fact, 
refused to enforce class arbitration waivers, which has had the 
effect of the cases proceeding as class actions. I mean, that 
is, under the current structure of the Federal Arbitration Act, 
a permitted approach, and State courts have increasingly been 
doing that.
    A second alternative would be arbitration on a class basis, 
which--I think, the AAA has several hundred cases now that it 
is administering on a class-wide basis. So there are ways in 
which arbitration can coexist with class relief.
    Mr. Cohen. Professor Frankel, is there a way to have a 
bifurcated system where certain claims can go to class actions 
and jury trials and where others might be still limited to 
arbitration?
    Mr. Frankel. I think that is certainly preferable to the 
system that we have now.
    Just to build on what Professor Drahozal said in terms of 
courts that are refusing to enforce class action bans, I do not 
think that is an adequate substitute, because what is happening 
now is that credit card companies will write in, in their 
contracts, to apply that their contracts must be governed by 
the laws of States that will enforce class action bans. So they 
are getting around that by the way that they draft their 
contracts. So I do not think that is going to be an adequate 
substitute.
    I think, you know, how you deal with their--there are 
still, I think, potential problems that some of the other 
witnesses have mentioned about individual cases, but I think 
removing sort of the class action types of cases in either 
saying, those can proceed in a class-wide arbitration or can 
proceed in class actions is certainly a benefit, but you have 
to make sure that there are the procedural protections that 
occur in class actions also.
    Mr. Cohen. Thank you.
    Mr. Donovan, you heard as I heard the statement that was 
repeated, I think, by quite a few Congress people, ``plaintiff 
class action attorney,'' as if, you know, I guess, it is 
redundant. I guess you could be a defense class action 
attorney; I do not know.
    In your case where the credit card company was changing the 
address, now, you were capable of going to court because that 
jurisdiction or that circuit does not recognize the ban; is 
that correct?
    Mr. Donovan. Several of these cases preexisted the 
imposition of class prohibitions in arbitration or preexisted 
arbitration clauses in the credit card contracts. The credit 
card contracts basically started having arbitration clauses 
installed in them in about 2002. That is when the industry met 
at an ABA meeting and decided, ``Let's put arbitration clauses 
in all of these contracts in order to destroy these claims that 
the industry was confronting.''
    So Providian predates that and the Rossman v. Fleet case 
where they said they promised no annual fee, but then they 
imposed an annual fee on everybody within 3 months. A lot of 
those cases predated arbitration. The subsequent cases are 
cases that emanate out of California where the California 
courts have found arbitration clauses that prohibit class 
actions to be unconscionable. So those proceed that way.
    Mr. Cohen. In your particular case, what jurisdiction were 
you in?
    Mr. Donovan. For the Fleet case, we were in Philadelphia. 
We were in the Federal court in Philadelphia and the Third 
Circuit Court of Appeals.
    Mr. Cohen. So that was a preexisting situation?
    Mr. Donovan. Correct.
    Mr. Cohen. What was their defense? Did they say it was a 
mistake or did they just say, ``We screwed people''?
    Mr. Donovan. Well, in the Providian matter, the Providian 
matter was, you cannot bring any State law claims because they 
are all preempted by Federal law. In Federal law, the Truth in 
Lending Act allows us to do this, and, Oh, by the way, we are 
allowed to charge these late fees because they are permitted by 
the Truth in Lending Act. They basically had a preemption 
defense to that claim.
    Mr. Cohen. I am talking about the one where they changed 
the address on the barcode.
    Mr. Donovan. With changing the address on the barcode, we 
did not get to hear the defense because, once we pointed that 
out and the witness who testified about it, they settled.
    Mr. Cohen. Never did they claim it was an accident?
    Mr. Donovan. No, they never claimed it was an accident. In 
fact, there was a memo saying, Well, if we have everything sent 
to this, we will increase revenues by this amount.
    Mr. Cohen. Under the system we have today, could you bring 
that action under a fraud charge and get around this, or would 
you be barred under the arbitration act?
    Mr. Donovan. I do not think we would bring it as a fraud 
charge per se because fraud charges are hard to get certified 
as a class action. What you bring it as is a violation of the 
Truth in Lending Act. You bring it as a breach of contract. You 
bring it as an unfair, deceptive practice because there really 
was not a representation, a promise that said, Oh, by the way, 
this barcode says it is going to the right address, because 
nobody can read barcodes, so you cannot really have a fraud 
claim, but you could have an omission claim, and you could have 
that certified.
    Could you bring that in an arbitration case? What it took 
was--it actually took a fair amount of forensic, you know, 
analysis. We had to spend the money to find out that is what 
was happening, because we could not figure out, Why are people 
sending these things 2 weeks in advance, but the bank is saying 
we did not get them? We finally figured it out, and then 
finally they came clean that, Oh, yes, we intentionally did 
that.
    So--and then, you know--and then changing, you know, the 
Fleet case. What Fleet said was, Oh, yes, when we sent out the 
promotional rate that said ``no annual fee,'' 3 weeks later the 
Federal Reserve increased interest rates, so therefore we have 
to put the annual fee on because otherwise our revenues will 
not be enough.
    They sent out a letter saying, Because the Federal Reserve 
increased interest rates, we are going to impose an annual fee; 
and the court said, Uh-uh, ``no annual fee'' means at least no 
fee for the first year. Otherwise, it is a breach of contract.
    Now, if there was an arbitration clause, you know, we 
were--Ballard Spahr was defense counsel. They were a very good 
firm, honorable, decent. They defended the case, and they came 
up with a lot of good arguments, preemption and everything. One 
individual person could not beat those lawyers; they are good 
lawyers. If they did not have other counsel, they would have 
lost. So you had to pursue that as a class case.
    This happens--you know, look. The reality of it is that 
Citibank, Bank of America, Wells, they hire the best, brightest 
lawyers in the Nation. Included among them is Sidley & Austin. 
I mean, you know, the Sidley & Austin firm defends the tax 
evasion, you know, the tax shelter cases, you know, where 
everybody said they got hit by the IRS because of tax shelters 
that were disallowed, and they bring claims against the 
accountants and the lawyers.
    Well, the first thing that the defendants do in those cases 
is say, Oh, arbitration; oh, yes, we know we did not sign the 
arbitration clause, but a third party that we are related to, 
you know, by second-cousin status signed one, so we are subject 
to that arbitration clause.
    And that is what the defendants do.
    Mr. Cohen. Thank you, sir.
    Mr. Donovan. So this has to be passed. The Arbitration 
Fairness Act has to be passed.
    Mr. Cohen. Mr. Delahunt.
    Mr. Delahunt. Yes. Thank you, Mr. Chairman.
    If there is a provision in a credit card contract that says 
at the end of the terms and conditions that the credit card 
company or issuer can change the terms at any time they want, 
and all the terms and conditions that were enumerated 
previously, would that fit the definition of an ``adhesion 
contract''?
    Mr. Donovan. Well, that is what the credit card contracts 
are now. Yes, they are adhesion contracts because they are 
take-it-or-leave-it contracts. You either take it or you leave 
it. That is what the adhesive thing is.
    The thing that is different about the credit card 
contract--and they try to justify this because it is a 
revolving line of credit--is that they can change any term at 
any time for any reason. So if you are counting on having this 
money at 6 percent interest for a year, because that is when 
the date of your expiration on your card is----
    Mr. Delahunt. Mr. Donovan--and my point is and I obviously 
agree with you and I understand that, but to call that a 
``contract'' is, you know, flattery taken to a different level. 
I mean, that is just--that is a joke. That is what it really 
is. Of course, it is an adhesion contract.
    When I hear that, Well, you have contractual obligations, 
that is not a contract. It just is not a contract.
    In terms of class actions, one aspect of the rationale for 
class action suits is to serve as a deterrent to bad practices. 
In other words, it is not just simply above compensating or 
redressing those members of the class, but it is preventing bad 
behavior post the ruling, the decision in the case.
    Am I stating it accurately, Mr. Donovan?
    Mr. Donovan. The way I like to look at it, Your Honor, is--
because we always talk about this from the perspective of 
consumers or homeowners or anything. It is a moral hazard. This 
device imposes a moral hazard on credit card companies to ``do 
not do this, or else you are going to increase the cost on you 
alone.'' So it imposes a moral hazard on the whole thing so 
others who are observing it will not do that, too.
    The benefit is that that helps investors to have confidence 
to buy these securities that are backing up the credit card 
product; and the moral hazard is then presented on the bad 
actor alone, pinpointed, and the others get to observe, and 
they are deterred from engaging in the same bad practice.
    Mr. Delahunt. Thank you. That is all I have.
    Mr. Cohen. Mr. Johnson, do you have any further questions?
    Mr. Johnson. Not at this time, Mr. Chairman. I would be 
happy to yield the balance of my time to either one of my 
colleagues here, Mr. Delahunt or to, of course, Mr. Scott.
    Mr. Cohen. Thank you, sir.
    Mr. Scott, you are recognized with the balance of Mr. 
Johnson's time.
    Mr. Scott. Thank you, Mr. Chairman.
    I do not have any questions, but I would just thank the 
panel, particularly Mr. Donovan, for pointing out that adhesion 
contracts do not have to be enforced, and that is absolutely 
consistent with centuries of jurisprudence.
    Furthermore, if you conspire with others to put the same 
provisions in a contract, that violates that antitrust law so 
that what we are doing with these bills--what we are doing is 
absolutely consistent with centuries of jurisprudence. What the 
bills would do would be to add some consistency, so regardless 
of what State you are in, you can benefit from reasonable 
consumer law.
    I would yield back.
    Mr. Cohen. Thank you, Mr. Scott.
    I do not know if we need another round or not but, Mr. 
Franks, do you have any further questions?
    If not, I think we have had a very healthy discussion, and 
I think there has been the best attendance that we have had at 
this Subcommittee. I want to thank the witnesses on the issue 
for eliciting that. We thought we had to call the fire marshal 
at one point--too many Members up here--but we did not, so I 
would like to thank you all for your testimony and for your 
attemtiveness.
    Without objection, Members have 5 legislative days to 
submit any additional written questions, which we will forward 
to the witnesses and will ask you to answer as promptly as you 
may, and it will be made part of the record.
    Without objection, the record will remain open for 5 
legislative days for the submission of any other additional 
materials.
    I thank everyone for their time and patience. This hearing 
of the Subcommittee on Commercial and Administrative Law is 
hereby adjourned.
    [Whereupon, at 12:04 p.m., the Subcommittee was adjourned.]


                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

   Response to Post-Hearing Questions from Michael D. Donovan, Esq., 
               National Association of Consumer Advocates












                                

   Response to Post-Hearing Questions from Richard H. Frankel, Esq., 
               Drexel University Earle Mack School of Law










                                

Response to Post-Hearing Questions from Christopher R. Drahozal, Esq., 
                   University of Kansas School of Law














                                

  Response to Post-Hearing Questions from David Arkush, Esq., Public 
                                Citizen












                                 
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