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


 
                    MANDATORY BINDING ARBITRATION: 
                       IS IT FAIR AND VOLUNTARY? 

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 15, 2009

                               __________

                           Serial No. 111-57

                               __________

         Printed for the use of the Committee on the Judiciary


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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             HOWARD COBLE, North Carolina
DANIEL MAFFEI, New York              DARRELL E. ISSA, California
ZOE LOFGREN, California              J. RANDY FORBES, Virginia
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

                              ----------                              

                           SEPTEMBER 15, 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 John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, Chairman, Committee on the 
  Judiciary, and Ranking Member, Subcommittee on Commercial and 
  Administrative Law.............................................     4

                               WITNESSES

The Honorable Linda T. Sanchez, a Representative in Congress from 
  the State of California
  Oral Testimony.................................................     6
  Prepared Statement.............................................     9
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in 
  Congress from the State of Georgia, and Member, Subcommittee on 
  Commercial and Administrative Law
  Oral Testimony.................................................    17
  Prepared Statement.............................................    18
Ms. Alison E. Hirschel, National Consumer Voice for Quality Long-
  Term Care, Washington, DC
  Oral Testimony.................................................    19
  Prepared Statement.............................................    21
Mr. Stuart T. Rossman, National Consumer Law Center, Boston, MA
  Oral Testimony.................................................    24
  Prepared Statement.............................................    27
Mr. Stephen J. Ware, University of Kansas, School of Law, 
  Lawrence, KS
  Oral Testimony.................................................    74
  Prepared Statement.............................................    76
Mr. Cliff Palefsky, National Employment Lawyers Association, San 
  Francisco, CA
  Oral Testimony.................................................    86
  Prepared Statement.............................................    88

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, 
  Chairman, Committee on the Judiciary, and Ranking Member, 
  Subcommittee on Commercial and Administrative Law..............     4

                                APPENDIX
               Material Submitted for the Hearing Record

Response to Post-Hearing Questions from Alison E. Hirschel, 
  National Consumer Voice for Quality Long-Term Care, Washington, 
  DC.............................................................   158
Response to Post-Hearing Questions from Stuart T. Rossman, 
  National Consumer Law Center, Boston, MA.......................   170
Response to Post-Hearing Questions from Stephen J. Ware, 
  University of Kansas, School of Law, Lawrence, KS..............   181
Response to Post-Hearing Questions from Cliff Palefsky, National 
  Employment Lawyers Association, San Francisco, CA..............   187
Material submitted by the Honorable Trent Franks, a 
  Representative in Congress From the State of Arizona, and 
  Ranking Member, Subcommittee on Commercial and Administrative 
  Law............................................................   194
Prepared Statement of Bruce Yardwood on behalf of the American 
  Health Care Association (AHCA) and the National Center for 
  Assisted Living (NCAL).........................................   266
Prepared Statement of Public Citizen.............................   271
Prepared Statement of AARP.......................................   282
Prepared Statement of the National Association of Home Builders..   294
Prepared Statement of Richard W. Naimark on behalf of the 
  American Arbitration Association...............................   299
Prepared Statement of the American Association of Homes and 
  Services for the Aging (AAHSA).................................   304

                        OFFICIAL HEARING RECORD
      Material Submitted for the Hearing Record but not Reprinted

Enclosures to Cliff Palefsky's Response to the Post-Hearing Questions 
    have been retained in the official Committee hearing record 
    available at the Subcommittee.

Report by the Searle Civil Justice Institute Consumer Arbitration Task 
    Force, Consumer Arbitration Before the American Arbitration 
    Association, March 2009. This report is available at the 
    Subcommittee and can also be accessed at:

    http://www.searlearbitration.org/p/full_report.pdf

Enclosures to the Prepared Statement of Public Citizen have been 
    retained in the official Committee hearing record available at the 
    Subcommittee.

Enclosure to the Prepared Statement of Bruce Yardwood on behalf of the 
    American Health Care Association (AHCA) and the National Center for 
    Assisted Living (NCAL) has been retained in the official Committee 
    hearing record available at the Subcommittee.


                    MANDATORY BINDING ARBITRATION: 
                       IS IT FAIR AND VOLUNTARY?

                              ----------                              


                      TUESDAY, SEPTEMBER 15, 2009

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

    The Subcommittee met, pursuant to notice, at 1:17 p.m., in 
room 2141, Rayburn House Office Building, the Honorable Steve 
Cohen (Chairman of the Subcommittee) presiding.
    Present: Representatives Cohen, Conyers, Watt, Maffei, 
Johnson, Scott, Franks, and Coble.
    Staff present: (Majority) Norberto Salinas, Counsel; Adam 
Russell, Majority Professional Staff Member; and (Minority) 
Daniel Flores, Counsel.
    Mr. Cohen. My apologies for being late. This hearing of the 
Committee on the Judiciary Subcommittee on Commercial and 
Administrative Law will now 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. This 
past May, this Subcommittee held a hearing focused on the 
credit card industry's use of arbitration. Today's hearing is 
not focused on a specific industry. Instead this Subcommittee 
will examine the use of arbitration in employment contracts, 
long-term care facility admission contracts and other consumer 
contracts.
    Also, the witnesses will update us on the recent 
developments in the last 4 months which necessitate us having a 
further discussion on the use of mandatory arbitration. We are 
looking at many changes to the realm of arbitration. The 
National Arbitration Forum has abandoned its consumer 
arbitration practice, and the American Arbitration Association 
has halted its practice of arbitrating debt collection cases.
    Bank of America has chosen not to seek enforcement of 
arbitration agreements with specific customers and American 
Express is re-evaluating its arbitration policy.
    The Federal Trade Commission is examining this process as 
well, and President Obama's administration is urging a new 
Federal agency be able to regulate the use of arbitration in 
consumer transactions.
    While all of these changes are a positive step, it is 
unclear what impact they may have on the arbitration process. 
As a Nation that has championed civil rights and consumer 
protection laws, we must balance the needs for quicker and 
inexpensive resolution for disputes with upholding a consumer's 
right to choose.
    According to my colleagues on the other side, the Supreme 
Court has interpreted the FAA to permit challenges to an 
arbitration agreement if that challenge is based on generally 
applicable state contract law. As a result, they contend that 
courts around the country routinely strike down arbitration 
agreements that do not provide consumers with fair notice or 
fair procedures.
    While some courts have struck down arbitration agreements, 
and decisions, it certainly hasn't happened routinely. Courts 
have done so only for the most egregious examples, such as 
where there is evidence that the arbitrators were corrupt or 
where the arbitration agreements were unconscionable.
    And as we all know, it is difficult to prove corruption 
without expending enormous resources, which most employees and 
customers don't have the resources to carry that type of suit 
to conclusion. Further, most states have a very narrow view of 
what constitutes unconscionability. Thus the system does not 
protect consumers.
    While arbitration may offer benefits, and certainly it 
does, and I understand that, and I have talked to many people 
about it, and they can facilitate the correction of certain 
problems and in an inexpensive and timely manner, I still have 
concerns about the use of mandatory binding arbitration 
agreements in any context in light of the lawsuit against the 
National Arbitration Forum.
    Certainly sensitive to the importance of the arbitration 
process and how it can be helpful in resolving issues, but 
adhesion contracts cause me a problem and have since I learned 
about them in law school. Nevertheless, there are instances in 
which the process may not always be the best in the interest of 
the consumers or employees because sometimes they are adhesion 
contracts, and sometimes it doesn't allow them to get the 
proper redress of injuries they may suffer.
    We must be sure the arbitration process is fair and 
voluntary so that all parties to a dispute can reap the 
benefits of arbitration. Accordingly, I look forward to 
receiving today's testimony, and I now recognize my colleague 
Mr. Franks, the distinguished Ranking Member for his opening 
remarks.
    Mr. Franks. Well, thank you, Mr. Chairman, and Mr. 
Chairman, I would like to welcome the two Members here, Mr. 
Johnson and Ms. Sanchez. I had the privilege of seeing Ms. 
Sanchez's addition to her family, and I have this sneaking 
suspicion it may be a little Democrat. But I tell you, it was a 
precious, precious little boy, and it kind of gives the rest of 
us hope here.
    Mr. Chairman, in all due deference to probably the opposing 
viewpoints at the table here, I guess I would start out by 
saying, you know, arbitration, I believe is a critical tool in 
our society because it makes justice prompt and accessible for 
millions of Americans, and without it too many citizens would 
be left out in the cold by overburdened courts and overpriced 
lawyers.
    I feel strongly enough about this that I circulated a 
letter yesterday to all my colleagues seeking to set the record 
straight on arbitration, and because I believe that record is 
so full of myths that it can be hard for us to see the issue 
clearly.
    Many times, for example, I hear claims that the voluntary 
use of pre-dispute arbitration agreements somehow undercuts 
consumers' indelible rights to jury trials, but I think that 
can be hardly further from the truth.
    Jury trials are remote prospects in the vast majority of 
consumer lawsuits in the first place. The norm for these cases 
in court is not jury trial, but dismissal on pre-trial motions 
or disposition on summary judgment.
    Many cases, of course, are settled, perhaps most 
significantly in consumer class actions. But class actions 
routinely leave consumers with pennies on the dollar for their 
claims. It is the wealthy trial lawyers who bring these cases, 
not the consumer plaintiffs, who reap the profits from 
litigation.
    Still worse, the right to trial jury is simply hollow for 
those whose claims are too small for a lawyer to make. Millions 
upon millions of Americans who have claims that are clearly 
meritorious don't generate enough legal fees to attract a 
lawyer. These citizens face tall odds when they go it alone in 
court. It is the simple, flexible, inexpensive procedures of 
arbitration that allow them to seek and obtain meaningful 
relief.
    Now, the second myth is that the courts have interpreted 
the Federal Arbitration Act to trump state laws, leaving 
consumers little recourse in the few cases in which arbitration 
might be unfair. But the Supreme Court has interpreted the act 
to permit anyone to challenge an arbitration agreement if the 
challenge is based on generally applicable state contract law.
    In applying this standard, courts around the country 
regularly apply legal principles, such as state 
unconscionability law to strike down arbitration agreements 
that do not provide consumers with fair notice or fair 
procedures.
    And the third myth is that arbitration involves high 
administrative fees and unduly limits discovery. The truth 
again is to the contrary. The American Arbitration Association, 
for example, limits consumers' fees to only $125 for 
arbitration claims seeking less than $10,000. The AAA's 
consumer due process protocol, meanwhile, calls for consumers 
to have access to discovery that is legally obtainable and 
relevant to their case.
    Recently there has been one incident that has led to 
renewed calls for restrictions on mandatory binding 
arbitration, and that was the National Arbitration Forum's 
withdrawal from consumer arbitration. NAF's action followed a 
lawsuit over the Forum's debt collection relationships. But Mr. 
Chairman, this incident shows that problems are already being 
solved in the one sector that has been the poster child for 
enemies of arbitration.
    NAF's debt collection experience provides no basis for 
reaching out to prohibit mandatory binding arbitration across 
the board. Too often Congress specializes in legislating 
unnecessary, quote, ``solutions'' to nonexistent problems. Such 
legislation typically serves only to strengthen special 
interests such as the plaintiff's trial bar.
    I hope that Congress does not pursue an unnecessary 
solution to the mythical problems with arbitration. That 
legislation would come at a huge price, the sacrifice of one of 
the practical means that millions of Americans have to obtain 
justice. And with that, Mr. Chairman, I respectfully yield 
back.
    Mr. Cohen. Thank you, and I thank you for your statement.
    And I now recognize Mr. Conyers, distinguished Member of 
the Subcommittee and the congressperson from the state that has 
a football team, once again, for an opening statement.
    Mr. Conyers. Thank you, Mr. Chairman. We welcome the 
witnesses, but particularly our two Members of the Committee 
who have been making very important and unique contributions on 
the subject. This debate started in 1925 when we passed the 
first Federal Arbitration Act, but here is what brings us here 
today.
    Arbitration has not always been beneficial to all parties. 
Arbitration has not been fair to all parties, and arbitration 
has sometimes eviscerated protection of some Federal consumer 
and civil rights statutes. I commend Ms. Sanchez, a former 
Subcommittee Chair herself, for her targeting and focus on one 
particular area of nursing homes, and that is critical, and 
that to Hank Johnson. His approach is a wider one.
    Now, there are some more problems that have cropped up. The 
claim, well, there is secrecy in arbitration awards so we don't 
know who needs--we sometimes need to change the law and we 
don't get a chance to do it because the awards are required not 
to be published. So there is some wrongdoing that sometimes 
escapes our attention and ultimately harms everybody.
    And then originally, arbitration was conceived of as one 
organization or organizations in the same industry. For 
example, if General Motors and Chrysler ended up in arbitration 
there would be some balance. The question, though, is what 
happens when it is an employee going up against an employer? 
That is a different situation.
    And I am sorry to report that arbitrators have not always 
been found to be neutral, and that as a matter of fact there 
has been established relationships with parties on one side of 
the dispute or other that have made it unlikely to get a fair 
result.
    And then mandatory provisions have escalated. They are in 
every kind of contract and it is a ``take it or leave it'' 
deal. It is in there. What is the matter with you? You don't 
like arbitration? What is your problem?
    Credit card companies are infamous in the way they do this. 
Cell phone providers, again, that dictate their consumer 
product sales and service contracts have mandatory arbitration 
clauses, and so millions of consumers and employees are left 
with little or no way to change or modify or negotiate an 
arbitration clause, so----
    I am looking at some studies by Public Citizen, Christian 
Science Monitor, Center for Responsible Lending, the Minnesota 
attorney general's decision, and I want to start this hearing. 
We have got some fine University of Michigan law school people 
here, and I want to get them up, as well as our distinguished 
Members of the Committee. Thank you, very much.
    [The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative 
  in Congress from the State of Michigan, Chairman, Committee on the 
 Judiciary, and Member, Subcommittee on Commercial and Administrative 
                                  Law
    During the Congressional debates on arbitration more than 70 years 
ago, witnesses testified about the potential benefits of this form of 
resolving disputes without judicial intervention.
    They noted, for example, that when arbitration is properly used, it 
can help parties avoid the delay and costs of protracted litigation. 
And arbitration can serve to relieve the burden on courts to decide 
disputes.
    Their testimony led Congress to pass the Federal Arbitration Act, 
which empowered courts to enforce arbitration agreements.
    As we have since learned during the last 20 years, however, 
arbitration is not always beneficial to all parties, and it may 
eviscerate the protection of some federal consumer and civil rights 
statutes.
    Others claim that the secrecy of arbitration awards hinders the 
development of the law, and awareness of wrongdoing by businesses, 
which ultimately harms all consumers and employees.
    Still others assert that arbitration providers and arbitrators are 
not always neutral and, in fact, may have cozy relationships with 
parties on one side of these disputes.
    Nevertheless, the use of mandatory provisions in various 
contractual agreements has rapidly escalated in recent years and, as a 
result, has become virtually ubiquitous.
    Many businesses--from credit card companies to cell phone 
providers--dictate that their consumer product sale and service 
contracts include mandatory arbitration clauses. Similarly, many 
employers demand that their workers agree to arbitrate employment 
disputes as a condition of their employment.
    As a result, millions of consumers and employees across our Nation 
are legally bound to mandatory arbitration clauses in contracts with 
little or no ability to negotiate them.
    To those who wonder why these mandatory arbitration clauses are 
fundamentally unfair to consumers and employees, here are just a few 
reasons.
    First, those who are charged with determining arbitration disputes 
may not really be neutral and independent.
    For many years, former arbitrators, consumers, and employees have 
contended that arbitration providers tend to favor their business 
customers. Specifically, they assert that arbitrators often decide in 
favor of businesses and, in the rare instances when they rule in favor 
of consumers or employees, they often award damages lower than what was 
requested.
    Indeed, this Subcommittee has heard from several witnesses 
supporting these assertions, as well as considered studies and analyses 
by Public Citizen, the Christian Science Monitor, and the Center for 
Responsible Lending that reached similar conclusions.
    But it was not until this summer, when a lawsuit filed by the 
Minnesota Attorney General helped to focus a national spotlight on 
these serious allegations, that we learned how true they were.
    The lawsuit alleged that the National Arbitration Forum, a major 
arbitration provider claiming that it is independent, neutral, and 
unaffiliated with any party to a dispute, was actually encouraging 
companies to insert arbitration agreements in their consumer contracts, 
and to appoint the Forum to arbitrate their disputes.
    Worse, the complaint alleges, the Forum blackballed arbitrators who 
ruled against its favored businesses, and had financial ties to some 
businesses that were parties to disputes it arbitrated.
    Obviously, arbitration under these circumstances could not be 
considered fair. The Forum quickly agreed to a settlement, which 
included its complete withdrawal from arbitrating consumer cases.
    After this settlement, the American Arbitration Association, 
another major arbitration provider, promptly announced that it would 
cease arbitrating certain consumer disputes.
    Despite these developments, nothing currently prevents other 
arbitration providers from providing services that are not independent.
    Minnesota's lawsuit certainly calls into question whether 
arbitration proceedings are consistently conducted by neutral 
arbitrators.
    But consumers and employees should not have to rely on governmental 
lawsuits to ensure that arbitration proceedings are fair.
    Accordingly, I urge Congress to consider legislation that would 
restore integrity to the arbitration process, or limit the 
enforceability of mandatory arbitration clauses, or both.
    Clearly, in the absence of governmental oversight, arbitration 
providers and businesses have established relationships that benefit 
them financially at the expense of consumers and employees.
    Second, mandatory arbitration clauses are particularly unfair to 
consumers and employees, because they often lack any bargaining power 
over whether these clauses are included in contracts with their 
business counterparties.
    It should come to no surprise that many of these clauses, when 
included in consumer and employment contracts, favor businesses.
    By virtue of these clauses, consumers and employees legally lose 
their constitutional right to a jury trial. In addition, some of the 
procedural requirements these clauses impose can make it difficult, 
even cost-prohibitive, for consumers to protect their rights under the 
law.
    Congress should not restrict the rights and options of consumers 
and employees to resolve disputes. Rather, arbitration should be one 
option among many to resolve disputes. It should not be the only 
option.
    Third, the courts have greatly expanded the scope of the Federal 
Arbitration Act to apply to consumers and employees in respects not 
originally intended by the Act's drafters.
    As we have learned, the Federal Arbitration Act was conceived to 
give courts the authority to enforce arbitration awards, and Congress 
intended for the Act to apply only to disputes between merchants of an 
equal bargaining position. The Act was not intended to apply to workers 
or consumers.
    Nevertheless, the Supreme Court has substantially broadened the 
reach of the Act, which has, in turn, encouraged the inclusion of 
mandatory arbitration clauses in nearly every type of consumer and 
employment contract.
    The Court's decisions have very much weakened the impact of Federal 
and State consumer protection laws and employee rights laws. As a 
result, many Americans have been denied their day in court.
    Congress should therefore consider legislation clarifying the Act's 
original intent and spirit.
    Legislation that protects consumers and employees is a common-sense 
solution for all Americans.
    My colleagues, Representatives Linda Sanchez and Hank Johnson, each 
have introduced legislation that make positive steps toward a solution.
    Their proposals will allow consumers, employees, franchisees, 
residents of long-term care facilities, and others to opt for 
arbitration, rather than have arbitration imposed on them as a pre-
condition for service or employment. Their legislation would help 
ensure a fairer arbitration process because the terms of arbitration 
will not be dictated by one party to the dispute.
    If Congress fails to be more assertive in protecting consumers and 
employees and guaranteeing the right to a jury trial, I fear that more 
Americans will be on the losing end when they have to arbitrate a 
dispute.
    I thank the witnesses for being here today, and look forward to 
hearing their testimony.
                               __________

    Mr. Cohen. Cheer, cheer for Michigan, da, da--thank you for 
the gentleman's statement. Without objection other Members' 
opening statements will be included in the record and first I 
would like to--we have a panel of congresspeople.
    And I do welcome Ms. Sanchez, the former Chairperson of 
this particular Committee, and Mr. Johnson, the Chairperson of 
another distinguished and important Subcommittee of the 
Judiciary Committee. And I welcome each of them to the 
Committee, and I would recognize the former Chairlady, Ms. 
Sanchez, for her statement.

 TESTIMONY OF THE HONORABLE LINDA T. SANCHEZ, A REPRESENTATIVE 
            IN CONGRESS FROM THE STATE OF CALIFORNIA

    Ms. Sanchez. Thank you, Chairman Cohen and Chairman Conyers 
and Ranking Member Franks and Members of the Committee for 
allowing me the opportunity to testify today about a very 
important piece of legislation, which also has a very deeply 
personal meaning for me.
    Last Congress, when I chaired this Subcommittee, we held 
several hearings to investigate the fairness and usefulness of 
arbitration agreements. We learned among other things that 
arbitration is a very useful alternative to the court system, 
but especially when the parties agreeing to arbitrate have 
about the same level of knowledge and the same amount of 
sophistication regarding it.
    On the other hand, we also found that in certain 
circumstances arbitration agreements can be forced on 
vulnerable parties who have little knowledge about what they 
are signing, and quite frankly, little choice, if any choice, 
in the matter at all.
    I want to be very clear that I strongly support the 
principles of arbitration and the arbitration process. 
Arbitration can clear court dockets, provide swift resolution 
and reduce legal fees. But because it can also limit evidence 
and damages and deny the possibility of a jury trial, it must 
be willingly entered into by both parties, not just the party 
with the superior economic power.
    Checking a parent or other relative into a nursing home or 
other long-term care facility is a perfect example of a time 
when one party has no real power or choice in the matter. And 
for these reasons I introduced H.R. 1237, the Fairness in 
Nursing Home Arbitration Act, to make pre-dispute, mandatory 
arbitration clauses in long-term care contracts unenforceable 
and to restore to residents and their families their full legal 
rights.
    This legislation would allow families and residents to 
maintain their peace of mind as they look for that perfect 
long-term care facility.
    By 2040, the demand for long-term care services will more 
than double in this country and the long-term care industry is 
increasingly requiring patients or their guardians to sign 
binding, pre-dispute arbitration clauses as a prerequisite to 
admission.
    Unfortunately, the inclusion of such mandatory clauses adds 
a confusing and legally binding complication to an event that 
is already difficult enough and sometimes even very 
heartbreaking. For desperate families who are unable to provide 
adequate care at home, the need for an immediate placement for 
their loved one makes the ``take it or leave it'' choice no 
choice at all.
    Families who are in the midst of a very painful decision to 
place a parent in a nursing home rarely have the time or 
wherewithal to fully and thoughtfully consider mandatory 
arbitration clauses. They are in no position to adequately 
determine what agreeing to such a clause will mean for their 
loved one should the unthinkable happen.
    Instead of some future dispute, what is real and immediate 
is the prospect of needing care for a loved one now. The 
emotional toll and the sense of vulnerability when moving a 
loved one into the care of strangers at a nursing home is 
something that I am familiar with. My father, who has been 
struggling with Alzheimer's for a number of years, took a turn 
for the worse in the past year, to the point where we could no 
longer provide safe and adequate care at home for him.
    One of the last things that I wanted to worry about when 
searching for a perfect placement was whether or not he was 
forgoing his legal rights. Instead, I wanted to focus solely on 
the quality and the range of services that each facility had to 
offer. As it turned out, my family chose a facility that met 
other requirements but also had a mandatory pre-dispute 
arbitration clause in its contract.
    This bill that I have introduced is for the families across 
the Nation who face similar decisions at a time when they are 
least prepared to make them. As we learned last year, average 
consumers are totally unfamiliar with the concept of 
arbitration. They may not even be aware of the rights that they 
are signing away when they agree to it. In short, I believe 
that Congress should act to protect these vulnerable families.
    I want to also clarify that not all nursing home operators 
use mandatory, binding arbitration agreements upon admission. 
Some do try to protect vulnerable families, for instance, by 
offering arbitration on a voluntary basis. Others do admit 
patients immediately but give them time to consider whether 
arbitration is right for them.
    This bill is fundamentally about fairness. It promotes 
fairness for families experiencing the trauma of a parent in 
declining health by making unenforceable mandatory, binding 
arbitration agreements that families were essentially forced to 
sign whether they wanted to or not.
    Fairness demands that parties to a contract should have a 
legitimate choice, not a forced one, about whether or not to 
arbitrate their disputes. I am proud to note that several 
significant groups who advocate on behalf of seniors and 
consumers, including AARP, the National Senior Citizens Law 
Center, the Alzheimer's Foundation of America and the National 
Association of Consumer Advocates, all support H.R. 1237.
    In closing, I just want to mention one thing because I have 
been accused of being anti-arbitration. What this bill seeks to 
do is just take away the unequal bargaining power in a pre-
dispute situation. There is nothing that would take it away in 
a post-dispute, which means that parties after a dispute arises 
could agree to have their dispute settled in binding 
arbitration if they so choose.
    But it would not force people into that scenario when they 
haven't had adequate time to recognize what they are signing 
when they sign a mandatory, pre-dispute, binding arbitration 
clause. I think you very much for the opportunity to testify 
today and I hope that you will join me in supporting this 
legislation.
    [The prepared statement of Ms. Sanchez follows:]
Prepared Statement of the Honorable Linda T. Sanchez, a Representative 
in Congress from the State of California, and Member, Committee on the 
                               Judiciary

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               __________

    Mr. Cohen. Thank you, Congresswoman Sanchez. We welcome you 
back to your old home and thank you for your coming here.
    Our next witness is Representative Hank Johnson, who 
represents Georgia's 4th Congressional District. He is a 
regional whip, and he also serves on the House Democratic 
leadership. He is on Armed Forces and Judiciary and Chairman of 
the Courts and Competition Policy, a distinguished Member of 
this Subcommittee and my dear friend.
    You are recognized.

 TESTIMONY OF THE HONORABLE HENRY C. ``HANK'' JOHNSON, JR., A 
      REPRESENTATIVE IN CONGRESS FROM THE STATE OF GEORGIA

    Mr. Johnson. Thank you, Chairman Cohen, and I have always 
tried to be as great a Member as you have set the example for 
me. But I want to get into this. Forced arbitration has been a 
concern of mine for many years, and I firmly believe that the 
Congress must act in this instance to protect consumers.
    In the 100----
    Mr. Cohen. Mr. Johnson, it has been suggested that you 
might need to pull the mike a little closer because some of us 
don't hear as well as we did 20 years ago.
    Mr. Johnson. All right. Okay. In the 110th Congress I 
introduced the Arbitration Fairness Act, a bill that would 
prevent all forced pre-dispute arbitration clauses. That bill 
passed favorably out of this Subcommittee, and I reintroduced 
the legislation in this Congress, and I am proud to have the 
Chairman of the full Judiciary Committee and three other fine 
Members of this Subcommittee as original co-sponsors.
    In fact, this bipartisan bill already has 90 co-sponsors. 
H.R. 1020, the Arbitration Fairness Act, does not eliminate all 
arbitration; 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 not 
before.
    As Chairman of the Judiciary Committee, Judiciary 
Subcommittee on Courts and Competition Policy, I believe it is 
vital that consumers continue to have access to the courts and 
not be foreclosed from litigation by the constraints of pre-
dispute forced arbitration clauses. Major arbitration 
companies, including the National Arbitration Forum and the 
American Arbitration Association, have recently stopped 
arbitrating consumer claims.
    However, pre-dispute arbitration clauses remain in many of 
the consumer, franchisee and employment contracts. This means 
that the NAF and the AAA's grand gestures do not actually 
mitigate the harmful impact of forced arbitration clauses on 
consumers.
    Another company will eventually fill the void and begin to 
arbitrate consumer claims again. There is no reason to think 
that the arbitration process will be any fairer to consumers 
when this occurs.
    Just a few weeks ago, Bank of America voluntarily dropped 
its mandatory arbitration program for credit card disputes, 
deposit account disputes and disputes involving loans for 
automobiles, recreational vehicles and boats.
    This is very noble of Bank of America, and it is the kind 
of reform we need, but we cannot count on companies to 
voluntarily remove arbitration clauses when so many of the 
companies benefit tremendously from them.
    I recently wrote a letter to the attorney general of the 
state of Georgia addressing the need for close scrutiny of 
arbitration clauses in home builder contracts. The personal 
harm alleged by several of my constituents shows how difficult 
it is for consumers to prevail in the arbitration process.
    The abusive practices that harm these victims are 
indicative of a much larger problem where consumers are forced 
to agree to arbitration clauses that strongly favor the company 
to the detriment of the consumer.
    You know, it is okay to, across the backyard fence, to lie 
to your neighbor about the length and weight of the fish that 
you caught or about your previous career as an actor or a model 
or something like that.
    I mean, you can do that. But in court, at the courthouse, 
you must take an oath of office and swear to tell the truth, 
and that promise or that oath is enforceable through the 
criminal laws of this Nation and various states. But we have no 
kind of fundamental check and balance on arbitration 
proceedings with respect to having to tell the truth.
    And secondly, well, I am not going to go into all the 
particulars. I know that our witnesses to come will go into 
various aspects of forced arbitration and why we need to take 
action as a legislature to correct this imbalance which has 
existed. Thank you.
    [The prepared statement of Mr. Johnson follows:]
 Prepared Statement of the Honorable Henry C. ``Hank'' Johnson, Jr., a 
   Representative in Congress from the State of Georgia, and Member, 
           Subcommittee on Commercial and Administrative Law
    Thank you, Chairman Cohen, for the opportunity to testify today 
before the Commercial and Administrative Law Subcommittee. Forced 
arbitration has been a concern of mine for many years and I firmly 
believe that Congress must act in this instance to protect consumers.
    In the 110th Congress, I introduced the Arbitration Fairness Act, a 
bill that would prevent all forced pre-dispute arbitration clauses. 
That bill passed favorably out of this Subcommittee. I re-introduced my 
legislation in this Congress, and am proud to have the Chairman of the 
Full Judiciary and three other fine members of this Subcommittee as 
original cosponsors. In fact, this bipartisan bill already has over 90 
cosponsors.
    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 not before.
    As Chairman of the Judiciary Committee Subcommittee on Courts and 
Competition Policy, I believe it is vital that consumers continue to 
have access to the courts and not be foreclosed from litigation by the 
constraints of a pre-dispute forced arbitration clause.
    Major arbitration companies, including the National Arbitration 
Forum and American Arbitration Association have recognized that the 
arbitration process, in its mandatory form, is unfair to consumers. 
Recently, Bank of America voluntarily dropped its mandatory arbitration 
program for credit-card disputes, deposit account disputes and disputes 
involved loans for automobiles, recreational vehicles and boats.
    These small steps towards eliminating forced arbitration clauses 
only underscores the need for Congress to enact my legislation along 
with Representative Sanchez's Fairness in Nursing Home Arbitration Act. 
Pre-dispute forced arbitration agreements are nearly always the product 
of unequal bargaining power between the consumer and the business. The 
scales of justice ought not to be so weighted.
    I recently wrote a letter to the Attorney General of the State of 
Georgia addressing the need for close scrutiny of arbitration clauses 
in home builder contracts. The personal harm alleged by several of my 
constituents pertains to just one company's abuse of the arbitration 
process. However, the abusive practices that harmed these victims of 
arbitration is indicative of a much larger problems where consumers are 
forced to sign arbitration clauses that strongly favor the company to 
the detriment of the consumer.
    Arbitration agreements remain in many other consumer, employment, 
and franchisee agreements. Congress must act to prohibit forced 
arbitration before consumers suffer any more harm.
    Again, I thank Chairman Cohen for the opportunity to testify before 
the Commercial and Administrative Law Subcommittee today.
                               __________

    Mr. Cohen. Thank you, Mr. Johnson. I appreciate the 
witnesses. Is there any Member of the panel that would like to 
ask a question of our colleagues? If not, we thank you for your 
testimony and your work in authoring these bills, and we will 
have hearings and obviously you are welcome to attend or go to 
the recesses of your office and watch by the magic of 
television.
    So we now dismiss the first panel and welcome the second 
panel.
    I thank the witnesses for participating in today's hearing. 
Without objection, your written statement will be placed in the 
record, and we would ask that you limit your oral remarks to 5 
minutes. You have got a lighting system, and the green means 
you are within the first 4 minutes.
    When it is yellow it means you need to be starting to think 
about the fact that, in 1 minute or less, you will have a red 
light, which means you are supposed to stop. If you do stop at 
that point, you will be one of our best witnesses. Subcommittee 
Members will be permitted to ask questions subject to the same 
5-minute limit, which is rarely kept.
    Our first witness is Ms. Alison Hirschel. Professor 
Hirschel serves as the ``elder'' law attorney--oh, I guess that 
is for older people. Yes, I didn't think it fit you--at the 
Michigan Poverty Law Program, a statewide back-up center for 
legal services programs, where her practice includes 
litigation, legislative and administrative advocacy and 
professional and community education efforts.
    Prior to coming to Michigan in 1997, she spent 12 years at 
Community Legal Services in Philadelphia as a staff attorney, 
co-director there of the Elderly Law Project, and finally as 
deputy director. Thank you for being here, Professor Hirschel, 
and you may begin your 5 minutes.

 TESTIMONY OF ALISON E. HIRSCHEL, NATIONAL CONSUMER VOICE FOR 
             QUALITY LONG-TERM CARE, WASHINGTON, DC

    Ms. Hirschel. Thank you very much, Chairman Conyers, 
Chairman Cohen, Ranking Member Franks----
    Mr. Cohen. You need to pop your button on, I guess, to get 
audio.
    Ms. Hirschel. Okay. Chairman Conyers, Chairman Cohen, 
Ranking Member Franks and Members of the Subcommittee, thank 
you for inviting me here today to speak on behalf of NCCNHR: 
The National Consumer Voice for Quality Long-term Care.
    For the past 24 years, I have been a public interest lawyer 
representing long-term care consumers, and I know from my 
practice that residents and families often sign admissions 
agreements when they are under enormous stress. Frequently, 
because of a medical crisis or the loss of the caregiver, the 
resident needs immediate placement and the facility to which 
they are being admitted might be the only option they have.
    Most consumers who sign admissions contracts don't realize 
that they include an arbitration clause, and even if they 
notice them, they don't know that arbitrators are often 
industry lawyers with an incentive to favor the facility, or 
that arbitration can be costly for consumers, or that awards 
are generally significantly lower than jury awards, and that 
there is virtually no appeal.
    The last thing on most consumers' minds at the time of 
admissions is how they will seek a remedy if something goes 
wrong. Consumers enter a long-term care facility looking for 
care and compassion, not arbitration or litigation. Even if the 
consumer understands the provisions, most won't challenge them.
    No resident or family wants to get off on the wrong foot 
with a facility that will hold the resident's very life in 
their hand. No one wants to be marked a troublemaker before the 
resident has even entered the facility, especially about a 
legal provision in the admissions contract that they hope will 
never apply to them.
    Unfortunately, sometimes things do go grievously wrong. In 
the case of Vunies B. High, a 92-year-old Detroit area woman 
who happened to be the sister of the legendary boxer Joe Louis, 
she had dementia, and her family admitted her to an assisted 
living facility where they thought she would be safe.
    Unfortunately, on a frigid night in February of last year, 
when the staff failed to properly supervise her, she wandered 
out of that facility wearing only her pajamas and froze to 
death. Only then did her family discover that the admissions 
agreement contained a mandatory binding arbitration provision.
    It stated, like many of these provisions, that in case of 
any dispute, the provider has the sole and unfettered option to 
resolve the dispute in binding arbitration. The provider would 
choose the location for the arbitration. The provider would 
choose the rules, and the provider retained its rights to any 
action against Ms. High in court though she was required to 
give up that right if she had an action against the facility.
    Fortunately, the Federal court in that case determined that 
the contract was unenforceable for a number of reasons, 
including the unequal bargaining power of the parties, the lack 
of discussion of the provision with Ms. High or her family, Ms. 
High's obvious confusion, and the fact that the agreement was 
presented to Ms. High and her family after she had already 
moved into the facility, and was, in fact, never signed.
    The High family was lucky the arbitration agreement was 
invalidated. Courts routinely enforce onerous arbitration 
clauses signed under the most coercive conditions. When 
arbitration agreements are enforced, harrowing abuse or neglect 
may never be brought to light, and that is an important 
incentive for facilities to provide quality care, and it is 
lost when those things don't come to light.
    As Yale law professor, Judith Resnik, notes in a 
forthcoming book, secretiveness in outcomes is often a 
signature of arbitration. She notes that ``arbitration is often 
a set of procedures without transcripts, public observers or 
reported outcomes.''
    At the same time we are seeing a dramatic rise in the 
number of mandatory arbitration clauses, government surveys and 
studies continue to provide disturbing evidence of serious 
neglect and avoidable injuries and deaths in nursing homes. 
This is particularly shocking in an industry that receives $75 
billion in taxpayer money each year through Medicare and 
Medicaid.
    Proponents of forced pre-dispute arbitration agreements 
lament that funds that should be spent on resident care are 
allegedly diverted to pay for litigation and liability 
insurance.
    But I want to be clear about two points: First, what really 
costs taxpayers unfathomable sums of money is poor care itself. 
Poor care leads to unnecessary and frequent hospitalization for 
conditions that never should have arisen and to surgery, 
specialists' visits, medications and durable medical equipment 
to address ills that never should have been suffered.
    Second, even if providers are spared the expense of 
litigation and increased premiums should those occur, there is 
no guarantee that those savings will be used to improve 
resident care or do anything that benefits residents. Nothing 
prevents providers from simply using those funds to increase 
their investors' returns.
    As testimony in several congressional hearings has 
disclosed, nursing home corporations are setting up complex 
operating and financing structures that hide ownership, bleed 
funding out of facilities, limit accountability and reduce 
nursing staff and quality of care.
    We should be limiting corporate abuse of public funds, not 
residents seeking justice. And finally, let me just note that I 
am not anti-arbitration. I am only opposed to pre-dispute, 
binding, forced arbitration.
    Arbitration wasn't intended as an end-run around justice or 
a way to keep wrongdoing out of the public eye. And in cases in 
which consumers already suffered grievous harm, Congress should 
not permit long-term care facilities to add the bitter burden 
of denial of the fundamental right of access to the court.
    Thank you.
    [The prepared statement of Ms. Hirschel follows:]
                Prepared Statement of Alison E. Hirschel
Chairman Conyers, Chairman Cohen, Ranking Member Franks and members of 
the Subcommittee:

    Thank you for inviting me to speak on behalf of NCCNHR: The 
National Consumer Voice for Quality Long Term Care.\1\ For more than 30 
years, NCCNHR has provided a national voice for long-term care 
residents, their families, ombudsmen, and consumer advocates, such as 
the Michigan Campaign for Quality Care which I represent. Thirty years 
ago, I started my career as an intern at the House Select Committee on 
Aging. And for the past 24 years, I have been a public interest lawyer 
representing long term care consumers on issues ranging from their 
initial admissions to facilities to their sometimes tragic experiences 
of abuse or neglect in those facilities.
---------------------------------------------------------------------------
    \1\ NCCNHR (formerly the National Citizens' Coalition for Nursing 
Home Reform) is a nonprofit membership organization founded in 1975 by 
Elma L. Holder to protect the rights, safety and dignity of America's 
long-term care residents
---------------------------------------------------------------------------
    Residents and families often sign admission agreements at times of 
enormous stress in their lives and when they feel they have very 
limited options. Seeking admission to a facility is rarely a slow and 
deliberative process in which consumers carefully evaluate the quality 
and services at numerous facilities and ponder every page of the often 
voluminous admissions package to compare it to admission agreements of 
other nearby facilities. Frequently, the admission occurs after a 
medical crisis or the loss of a caregiver when the resident needs an 
immediate placement. Indeed, sixty percent of nursing home admissions 
are directly from a hospital. The facility to which the applicant is 
being admitted will often be the only facility that has a bed, will 
accept the resident, or is close to the resident's family and friends.
    Most consumers who sign these contracts are unaware that they 
include an arbitration clause, and they may not understand the 
provisions even if they notice them. They don't know that the 
arbitrators are often health care industry lawyers who have an 
incentive to find for the facility and limit awards so that they will 
be hired by the provider for future disputes. They don't understand 
that arbitration can be very costly for the consumer, that arbitration 
awards are generally significantly lower than jury awards, and that 
there is no real ability to appeal. Moreover, the last thing on most 
consumers' minds at the time of admission is how they will seek a 
remedy if something goes wrong. They enter a long term care facility 
looking for care and compassion, not litigation or arbitration.
    Even if the long term care facility explains the binding 
arbitration clause, most consumers will not challenge it. First, 
nothing about the long term care admissions process is like a 
negotiation between two equal parties. Consumers may not have any other 
options and they generally sign whatever paperwork is presented to 
them. Second, no resident or family wants to get off on the wrong foot 
with a facility that will hold the fragile resident's life in its 
hands. No one wants to be marked a troublemaker before the resident has 
even entered the facility, especially about a legal provision 
applicants do not expect to ever affect them.
    Unfortunately, sometimes things do go grievously wrong as they did 
for Vunies B. High, a 92 year old Detroit area resident with dementia. 
She was the sister of the legendary boxer Joe Louis, a graduate of 
Howard University, an accomplished woman who served as a long time 
English teacher and counselor in Detroit public schools. Ms. High's 
family placed her in an assisted living facility because they thought 
she would be safe there. On a frigid night in February of last year, 
staff of the facility failed to notice when Ms. High wandered out of 
that facility wearing only her pajamas. She froze to death. Her family 
then discovered that the admissions agreement contained a mandatory, 
binding arbitration provision. It, like many mandatory arbitration 
clauses, stated that in the case of any dispute:

          The provider had the sole and unfettered option to 
        choose to resolve the dispute in binding arbitration;

          The provider would choose the location for the 
        arbitration;

          The provider would choose the rules (the rules of the 
        American Arbitration Association or of the American Health 
        Lawyers Association Alternative Dispute Resolution Service 
        Rules of Procedure for Arbitration);

          And the provider retained its right to institute any 
        action against Ms. High in any court of competent jurisdiction, 
        though Ms. High was required to forego that option as well as 
        her right to a jury trial in any matter that was litigated in 
        court.

    In addition, the agreement contained a limitation of only $100,000 
in damages, in addition to medical costs incurred, a provision Ms. 
High's family also did not recall. When Ms. High's family sought 
redress for her tragic and preventable death, the facility, relying on 
the arbitration agreement, moved to dismiss the case. Fortunately, the 
federal court determined that the contract was unenforceable for a 
number of reasons including:

          The unequal bargaining power of the parties;

          The lack of discussion of the provision with Ms. High 
        or her family;

          Ms. High's obvious limitations and confusion;

          The unilateral nature of the arbitration provision;

          The fact that the agreement was presented to Ms. High 
        and her family after she had already moved into the facility; 
        and

          The context of presenting the agreement in an elder 
        care facility.

    The High family was lucky the arbitration agreement was 
invalidated. Courts routinely enforce onerous arbitration provisions 
signed under the most coercive conditions. When arbitration agreements 
are enforced, harrowing abuse or neglect may never be brought to light 
and an important incentive for facilities to provide quality care is 
therefore lost.
    As Yale Law Professor Judith Resnik notes in a forthcoming book, 
``[S]ecrecy about both processes and outcomes is often a signature of 
[arbitration]. . . .'' \2\ She cites a federal court decision that 
observes that confidentiality is part of the character of arbitration 
itself to prevent it from having precedent and gaining the trappings of 
adjudication.\3\ And that secrecy often includes banning disclosures by 
participants, barring attendance by third party observers, and 
excluding or limiting the media.\4\ As Professor Resnik concludes, 
``The [Alternative Dispute Resolution] packet . . . is often a set of 
procedures without transcripts, public observers, or reported 
outcomes.'' \5\
---------------------------------------------------------------------------
    \2\ See Chapter 14 in Judith Resnik and Dennis Curtis, REPRESENTING 
JUSTICE: THE RISE AND FALL OF ADJUDICATION AS SEEN FROM RENAISSANCE 
ICONOGRAPHY TO TWENTY-FIRST CENTURY COURTHOUSES (Yale University Press, 
forthcoming 2010).
    \3\ Id. citing Iberia Credit Bureau, Inc. v. Cingular Wireless, 379 
F. 3d 159, 175 (2005).
    \4\ Id.
    \5\ Id
---------------------------------------------------------------------------
    At the same time we are seeing a dramatic rise in the number of 
mandatory arbitration clauses, government studies continue to provide 
disturbing evidence of serious neglect and avoidable injuries and 
deaths in nursing homes. According to a Government Accountability 
Office (GAO) report in 2007, twenty percent of nursing homes have been 
cited for putting their residents at risk of serious injury or death--a 
shockingly high figure in an industry that receives more than $75 
billion taxpayer dollars through Medicare and Medicaid each year. And 
the GAO says that state surveys understate the actual jeopardy and harm 
residents are experiencing.
    It is true that we have an elaborate nursing home enforcement 
system. But that enforcement system is, like many nursing homes 
themselves, seriously understaffed and enormously challenged by its 
vital responsibilities. In my home state, a shortage of surveyors has 
meant that complaints take weeks, months, and sometimes as long as a 
year to investigate. In that period, records are lost or altered, 
witnesses and evidence disappear, and surveyors are no longer able to 
substantiate even extremely serious and legitimate complaints. And when 
the neglect or abuse cannot be substantiated, no penalty can be 
imposed.
    Moreover, while surveyors miss a lot at nursing homes, licensed 
assisted living facilities--which do not have the benefit of federal 
regulation--are inspected even less often and less rigorously, and 
regulators in my state have few remedies if problems are discovered. 
And there is no enforcement in unlicensed facilities like the one in 
which Ms. High resided. Thus, an overburdened enforcement system in 
nursing homes, a limited system in licensed assisted living, and a 
nonexistent enforcement system in unlicensed homes cannot be an 
adequate substitute for litigation in egregious cases.
    Proponents of forced pre-dispute arbitration agreements lament that 
funds that should be spent on resident care are allegedly diverted to 
pay for litigation and liability insurance. But I want to be clear 
about two points: First, what really costs taxpayers unfathomable sums 
of money is poor care itself. Poor care leads to unnecessary and 
frequent hospitalization for conditions that never should have arisen, 
and to surgery, specialists' visits, medications, and durable medical 
equipment to address ills that never should have been suffered. When a 
Wisconsin nursing home ignored for more than five days Glen Macaux's 
doctor's orders to inspect and assess his surgical site, the resulting 
infection caused septic shock, excruciating pain, severe depression, 
and total disability--as well as hospital bills of almost $200,000.
    Second, even if providers were spared the expense of litigation and 
increased insurance premiums--by tipping the playing field very much in 
their own favor--there is no guarantee that savings will be invested in 
adequate staffing, training, supplies, or in creating safe and 
appealing environments. Nothing prevents providers from using those 
funds to increase investors' returns instead of improving residents' 
care and lives. The Government Accountability Office showed that when 
Congress increased Medicare funding for skilled nursing facilities 
specifically to improve nurse staffing levels, the amount of nursing 
care residents received was virtually unchanged. And the Centers for 
Medicare and Medicaid Services recently reduced Medicare funding to 
nursing homes because it concluded that some of the therapy Medicare 
paid for was given by aides, not licensed physical therapists, and that 
it was often given to residents concurrently in groups while the 
government was billed for individual treatments. Moreover, as testimony 
in several Congressional hearings has disclosed, nursing home 
corporations are setting up complex operating and financing structures 
that hide ownership, bleed funding out of the facilities for corporate 
profits, limit accountability, and reduce nursing staff and quality of 
care. We should be concerned about corporate abuse of public funds, not 
with residents seeking justice in the courts when they become victims 
of neglect and abuse that is often caused by corporate greed.
    Finally, let me note that we are not anti-arbitration. We are only 
opposed to pre-dispute, binding, forced arbitration. Arbitration was 
not intended as an end run around justice or a way to keep wrongdoing 
out of the public eye. In cases in which consumers have already 
suffered grievous harm, Congress should not permit long term care 
facilities to add the bitter burden of denial of the fundamental right 
of access to the courts.
    Thank you.
                               __________

    Mr. Cohen. Thank you, Professor Hirschel, and you did good 
on your red light.
    Our second witness is Mr. Stuart Rossman. He is another 
University of Michigan attendee, I believe, while in 
undergraduate school. He is a National Consumer Law Center 
staff attorney directing litigation efforts there. He has 13 
years in private practice and we welcome him here.
    He has founded and chaired the attorney general's Abandoned 
House Task Force, a project ready to assist municipalities and 
community groups in seeking solutions to abandoned properties. 
Thank you, sir, we welcome your testimony.

 TESTIMONY OF STUART T. ROSSMAN, NATIONAL CONSUMER LAW CENTER, 
                           BOSTON, MA

    Mr. Rossman. Mr. Chairman, Members of the Committee, thank 
you very much for inviting me here. As was noted, I am Director 
of Litigation for the National Consumer Law Center, which is a 
40-year-old national organization representing the interests of 
low income and elderly consumers in the areas of access to 
credit, affordable home ownership and utility rights.
    We are dedicated to enforcing the substantive rights of 
consumers and we are proud supporters of the Arbitration 
Fairness Act that has been filed.
    In my practice, arbitration clauses are ubiquitous. They 
show up in credit cards. They show up in bank accounts. They 
show up in telephone and cell phone contracts. They appear in 
personal, home and car loans, utility agreements and in student 
financing.
    They are particularly prevalent in predatory products where 
we are dealing with the most vulnerable consumers, items such 
as payday loans, rent-to-own contracts and subprime mortgages 
and credit cards all contain the forced arbitration clauses.
    Forced arbitration clauses prevent access to the 
constitutionally protected judicial system. It prevents people 
from having access to the rules of evidence, the rules of civil 
procedure, appellate review and their right to jury.
    You are well aware of the problems which have been 
discussed and will be discussed this afternoon, but ostensibly 
we are dealing with issues where the arbitration provisions 
show up as contract of adhesion with no choice between 
alternative products.
    They are required prior to the dispute no one can even 
imagine what the problems could be down the road. There is a 
lack of transparency and secrecy. There is a lack of 
accountability with a right of review.
    There is a bias toward the merchant as the repeat user, the 
repeat player bias that we have heard about. There is 
susceptibility for conflict of interest and then there is the 
expense to the consumer.
    As has been noted, there have been two major developments 
this past month in this area. First is as a result of a suit 
brought by the Minnesota Attorney General's Office, the 
National Arbitration Forum has dropped doing all consumer 
arbitration cases. They are no longer accepting new arbitration 
cases or processing them.
    The claims that were brought by the Minnesota Attorney 
General's office dealt with conflicts of interest, but there 
were also issues involving the level and the quality of the 
service that was being provided and whether it was biased.
    Then, in response to a letter from the Minnesota Attorney 
General's Office or otherwise, the American Arbitration 
Association announced that it was suspending its debt 
collection arbitrations pending further consideration of 
appropriate safeguards.
    And then the Bank of America and JPMorgan Chase both 
announced that they would be dropping arbitration clauses in 
all of their credit card agreements. Bank of America went 
further to indicate that it was dropping it in its deposit 
agreements and its automobile loans.
    That is a welcome development as a first step, but is not 
enough, and Federal legislation still is needed. With the debt 
collection, the problem is not the actor, the bad apple so to 
speak, but the system itself.
    The opportunity for abuse and for profiteering are inherent 
in the relationship. It is an intrinsic flaw where the 
arbitration company draws its income from satisfying the debt 
collector or risk losing that account. Private justice where 
the funds are being paid for by private parties is inherently 
going to end up being biased.
    The fact that NAF is no longer in the business does not 
mean that there are not plenty of pretenders to the throne 
waiting in the wings to take over this very lucrative business. 
The American Arbitration Association did in fact drop debt 
collection arbitration, but it did not drop the enforcement of 
forced arbitration clauses against plaintiffs, when they 
brought their own cases.
    Furthermore, we have no idea what safeguard would be put in 
place, when they would be put in place and, most important, who 
will enforce them. Without enforcement, they are just pieces of 
paper.
    And finally, Bank of America and JPMorgan Chase should be 
congratulated for dropping the credit card requirements, but 
that still means that eight out of the ten largest credit cards 
companies in the United States still have mandatory arbitration 
clauses and the banks can always reverse their policies. As has 
been seen recently on a number of occasions, banks announce 
policies and can easily reverse them a year or two later down 
the road.
    Congress created consumer rights and enforcement under the 
Fair Debt Collection Practices Act and Fair Credit Reporting 
Act, Truth in Lending and other statutes, but I am particularly 
interested, as a civil rights lawyer, in the access to fair 
credit. And I would be very concerned if under the Equal Credit 
Opportunity Act or the Equal Credit Opportunity Act my clients 
were no longer able to assert their rights under those 
statutes.
    For 10 years I filed suit against the automobile finance 
industry for claims of discrimination. We were able to get 
systemic change in those industries as a result of those 
lawsuits. I would not have wanted to tell my clients, Betty 
Cason or Edwin Borlay that they did not have their day in court 
to assert their ECOA claims because of an arbitration clause, 
when they couldn't possibly have known about the discrimination 
at the time that they entered into their loan agreements.
    At NCLC we say that economic justice is a civil right and I 
would ask this Committee and Congress to sustain those civil 
rights by passing the Arbitration Fairness Act and all other 
consumer litigation intended to protect consumers from forced 
arbitration clauses. Thank you very much.
    [The prepared statement of Mr. Rossman follows:]
                Prepared Statement of Stuart T. Rossman

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               __________

    Mr. Cohen. Thank you, sir, we appreciate your testimony.
    Our third witness has a positive and a negative to me, his 
great first name Stephen, Mr. Stephen Ware. He is a professor 
at the University of Kansas School of Law, which brings back 
pangs from 1\1/2\ years ago.
    He teaches at the school there, doesn't take SATs for his 
basketball players, taught six different law schools including 
Samford's Cumberland School of Law, which started in Tennessee 
and was a faculty member there for 2 years.
    He is the author of two books, several other publications 
and a frequent speaker at academic conferences, continuing 
legal education programs and a ``Rock Shock Jayhawk.'' You are 
welcome.

 TESTIMONY OF STEPHEN J. WARE, UNIVERSITY OF KANSAS, SCHOOL OF 
                       LAW, LAWRENCE, KS

    Mr. Ware. Thank you very much, Chairman Cohen, Ranking 
Member Franks, Members of the Subcommittee.
    Although I am a professor of law at the University of 
Kansas, I speak to you today not on behalf of my university or 
anyone else, but on my own as an individual scholar who 
specializes in arbitration law.
    Thank you for inviting me to testify. As someone who has 
spent the last 16 years focused on arbitration, it is a real 
honor for me to get the chance to talk to the elected officials 
who ultimately control the future of arbitration in this 
country.
    And my suggestion and request to you is to please proceed 
with caution because arbitration does a lot of good, including 
a lot of good for ordinary citizens. For example, I am a 
consumer, and I like to see arbitration clauses in the 
contracts of the companies I do business with.
    That tells me that the company is saving money on legal 
fees because arbitration tends to be a quicker and cheaper 
process and competition over time will force the company to 
pass on some of those savings to me. And if I ever have a claim 
against one of those companies, I would like to save my own 
time and money by having access to the quicker and cheaper 
process.
    So if arbitration and litigation tend to reach similar 
outcomes, and by outcomes I mean who wins and how much money 
they win, but arbitration reaches those outcomes quicker and 
cheaper than litigation, then arbitration is good for 
everybody.
    It is good for the business and it is good for the consumer 
or employee or whoever has a dispute with the business. And 
that is basically the conclusion I have reached in my career of 
studying arbitration.
    Sure the trial lawyers who feel threatened by arbitration 
can tell stories of particular consumers and employees who did 
not fare well in a particular arbitration, but people can also 
tell stories of particular consumers and employees that did not 
fare well in litigation.
    So we shouldn't be comparing arbitration to some ideal 
imaginary dispute resolution process. We should be comparing 
the reality of arbitration with the reality of litigation, as 
those are the two options available to parties today. And when 
the comparison moves beyond stories, beyond anecdotes, to 
serious empirical studies arbitration looks very good for 
consumers and employees overall.
    So what is at issue here in the bills before Congress? 
Basically you are being asked what should be the law on 
arbitration clauses in consumer contracts, employment contracts 
and similar contracts, and there are at least three possible 
answers to that question.
    One answer is none of these arbitration clauses should be 
enforced and that is the answer of the Arbitration Fairness 
Act. If you enact that bill or something similar, you will say 
none of these arbitrations clauses shall be enforced. At the 
other extreme would be laws saying all of these arbitration 
clauses should be enforced. Nobody is advocating that and that 
is not what current law does.
    What current law does under the Federal Arbitration Act is 
enforce some of these arbitration clauses. The Federal 
Arbitration Act instructs courts to enforce the fair ones, 
don't enforce the unfair ones, and courts frequently decline to 
enforce arbitration clauses.
    Courts have spent generations developing legal doctrine 
that are sensitive to the case-by-case variations in the facts 
of a case. Arbitration agreements can be written in a wide 
variety of ways, and the consent parties give to arbitration 
agreements can incur under a wide variety of circumstances.
    I suggest that courts, being sensitive to those factual 
differences, courts resolving cases individually, is a better 
approach than legislation which necessarily paints with a broad 
brush. I thank you for your attention and look forward to any 
questions.
    [The prepared statement of Mr. Ware follows:]
                 Prepared Statement of Stephen J. Ware

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                               __________
    Mr. Cohen. Thank you, sir. Appreciate your testimony, 
Professor Ware.
    Mr. Ware. I stayed within the 5 minutes, too.
    Mr. Cohen. Right, you did, you beat the 5-minute clock. 
Beulah didn't have to hit the buzzer.
    Our final witness is Mr. Cliff Palefsky. He is a civil 
rights and employment lawyer and a partner in the San Francisco 
law firm of McGuinn, Hillsman and Palefsky, co-founder of the 
National Employment Lawyer's Association and co-chair of their 
Mandatory Arbitration Task Force.
    He has been involved in many arbitration decisions. He has 
been involved in state and Federal legislative efforts dealing 
with mandatory arbitration of civil rights claims. Mr. 
Palefsky, welcome.

   TESTIMONY OF CLIFF PALEFSKY, NATIONAL EMPLOYMENT LAWYERS 
                 ASSOCIATION, SAN FRANCISCO, CA

    Mr. Palefsky. Thank you very much, Mr. Chairman. I think I 
should start with presenting my bias here.
    I am an employment lawyer. We are the folks that Congress 
has asked to help enforce your civil rights laws and your 
whistleblower laws and your wage and hour laws. I believe that 
I have an ethical obligation to my clients to get their cases 
resolved as quickly as possible without even filing a complaint 
if I can, because that is what people in the employment context 
need.
    That is my bias. You will have a hard time finding anyone 
in this country who is a bigger proponent of ADR than me, a 
bigger user of ADR than me. We have led the Nation in 
encouraging the use of mediation for employment disputes.
    Let me tell you what I have learned over the past 20 years. 
Civilizations are evaluated by the quality of their civil 
justice systems. We are still lecturing, today, other countries 
about the rule of law, while in contemporary America, American 
workers and consumers are being sent to secret tribunals with 
no right of appeal.
    It is extraordinary that we sit here and debate the right 
of terrorists to access a Federal court, when the victims of 
sexual harassment and whistleblowers are denied that 
opportunity and are told that they must not only go to secret 
tribunals with no right of appeal, but they must pay for that 
privilege.
    The notion that arbitration and our public constitutional 
court system are equivalent is the modern day version of 
separate but equal. It would be malpractice for any practicing 
attorney to equate the two systems and to not understand the 
differences.
    In every single material defining respect, they are the 
exact opposites. Public versus private, free versus pay, full 
discovery versus no discovery or limited discovery, a judge who 
is required to follow the law versus not follow the law, the 
right to appeal versus the right not to appeal and a judge 
whose economic future is dependent on satisfying the repeat 
user.
    Arbitration is a dispute resolution system. It is not a 
justice system. It cannot be confused as a justice system. In 
the employment context, it is important to realize that none of 
these notions that Professor Ware talks about in terms of 
voluntariness apply.
    Our laws, the Norris-LaGuardia Act, the National Labor 
Relations Act, say it is the public policy of this country to 
recognize that individual workers do not have the ability to 
freely negotiate terms of labor.
    Ever since the 13th amendment, we have recognized that the 
free market has failed to protect employees. The notion that if 
you don't like this arbitration clause, quit, give up your job, 
give up your health insurance is a proper way to regulate the 
workplace, has been discredited.
    What is at stake here is the integrity of the laws that you 
have passed. You have passed the civil rights laws and we 
cannot enforce them. They are being undermined. You have passed 
whistleblower laws and we cannot enforce them. If you blow the 
whistle and no one hears, you are not a whistleblower, you are 
a sitting duck. You are a sucker.
    If you want to know what America would look like if all sex 
harassment claims were sent to arbitration, look at the 
securities industry in the 1970's and 1980's, when movies like 
``Bonfire of the Vanities'' and ``Working Girl'' were held up 
as models of how accurate they are.
    If you want to know what America would look like if all 
whistleblower claims went to arbitration, look at the 
securities industry where they have compelled arbitration of 
whistleblower claims up to the present date.
    If you want to know what America would look like if 
subprime lending claims go to arbitration, look at what 
happened here until last year or 2 years ago, when Freddie Mac 
and Fannie Mae said they would not longer buy loans with 
mandatory arbitration clauses.
    What is going on, in fact, is do-it-yourself tort reform. 
Congressman Franks, I would love to address what you believe 
are myths. In fact all state regulation of the arbitration 
relationship essentially has been preempted. Your own state of 
Arizona has specifically excluded employment contracts from 
your arbitration statute. That has been preempted.
    The notion that courts all over the country are enforcing 
unconscionability arguments is simply not true. We have had 
that success in California, but all over the country courts are 
not striking down clauses. They are finding the most egregious 
clauses to be just fine because it clears their dockets.
    What is going on is a scandal in the house of justice and 
the Judiciary Committee must recognize--don't worry about 
statistics. You would never suggest to any other country that 
justice is provided in secret conference rooms by judges who 
have to please the repeat user. For-profit justice has never 
worked. It will never work. Thank you very much.
    [The prepared statement of Mr. Palefsky follows:]
                  Prepared Statement of Cliff Palefsky

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                              ATTACHMENT A

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                              ATTACHMENT B

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                              ATTACHMENT C

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                               __________

    Mr. Cohen. Thank you, sir. We will now have 5-minutes of 
questions. Same rules on the clock, and I will begin. Mr. Ware, 
you stated that you like to go to stores that have arbitration 
agreements. Do you read those arbitration agreements before you 
go into a store?
    Mr. Ware. Well, when I receive a credit card or a cell 
phone contract, I often look to see the arbitration clause, and 
I am pleased to see when there is one in there.
    Mr. Cohen. That is kind of like the ``Good Housekeeping 
Seal of Approval'' to you?
    Mr. Ware. Well, no, it is a plus for the reason I gave 
earlier. I----
    Mr. Cohen. And the reason was because they will save money, 
and they pass the savings on to you?
    Mr. Ware. Yes, it is the more efficient way of resolving 
disputes, and I am confident that over time anything that saves 
businesses money will be helpful to consumers.
    Mr. Cohen. So do you also suggest consumers, and you should 
go to stores that maybe don't recycle because they save money, 
and they can pass the savings on to you or maybe employ people 
at very low wages or get their products from Asia where they 
have children and women working in sweatshops?
    Mr. Ware. Well, obviously, Chairman Cohen, we all want 
retailers and other businesses to follow all the laws you 
referred to there and those laws should be enforced. If the 
conduct----
    Mr. Cohen. But you don't--no. You don't have to recycle, 
and you can buy goods from Asia where they pay people $1 an 
hour, and they don't have kind of rights, but you would get a 
cheaper product.
    Mr. Ware. And each individual consumer ought to be able to 
decide if he or she doesn't want to support a business that 
engages in those sorts of activities, and I think arbitration 
is importantly distinct from those examples in that arbitration 
has not shown to be harmful to consumers and employees.
    Mr. Palefsky says don't look at statistics. Don't worry 
about statistics because when you move past anecdotes and get 
to statistics, arbitration looks pretty darn good for consumers 
and employees.
    Mr. Cohen. Well, if you like it, which obviously you do and 
you like that, you could always do it voluntarily. Why should 
it be compulsory?
    Mr. Ware. Oh, well, that is a hugely important point, 
Chairman Cohen, the distinction between pre-dispute arbitration 
agreements and post-dispute arbitration agreements.
    And the fact of the matter is after a dispute arises the 
business can consult its lawyer and ask itself which forum 
would be more favorable to it for that particular dispute, 
arbitration and litigation, and the business can't be expected 
to act against its self-interest at that point and agree post-
dispute to arbitration, when that would be the more favorable 
process for the consumer. Similarly a consumer can consult a 
lawyer and will choose the process that is more favorable to it 
post-dispute.
    So we don't see many post-dispute arbitration agreements. 
It is very rare. And this is through no fault of arbitration, 
but just the fact that litigation is the default. That is what 
happens when the parties don't both agree to arbitrate, and it 
is very rare that they are going to both see arbitration after 
the fact as more favorable to them.
    Whichever party sees advantages to litigation, whether it 
be a jury or greater discovery, the more expensive motion 
practice, et cetera, that party can be expected to choose 
litigation.
    Mr. Cohen. Thank you, sir. Mr. Rossman and Palefsky seemed 
equally passionate, and I will recognize Mr. Palefsky first, 
since your name was mentioned. Do you have any thoughts on that 
testimony?
    Mr. Palefsky. Well, absolutely. First of all, I did not 
mean to suggest that statistics don't bear us out. Statistics 
do bear us out. In California, we were able to pass a statute 
that required arbitration providers to post the results of 
consumer employment arbitration, and those results were 
profound.
    Employees win a fraction of the time compared to what they 
win in court. The mean damage award of all cases is only 9 or 
10 percent. The statistics actually support dramatically what 
we have been saying, that the laws that you have passed are 
being undermined, and that arbitration is not an equal forum.
    The statistic that you must focus on is the huge cost of 
arbitration. It can cost $40,000, $50,000, $80,000 to bring a 
sex harassment case to arbitration. Really, this is a form of 
double taxation. Americans are already paying for a public 
justice system. There is no precedent in American jurisprudence 
to force someone to pay a judge to have a law enforced.
    So the notion that arbitration is cheaper for most 
plaintiffs is simply not true. The filing fees alone at the 
American Arbitration Association can be $13,000, just to file 
before the arbitrators start charging $400 or $500 per hour.
    Mr. Cohen. Let me ask you this, sir, you and if Ms.--if 
anybody else wants to jump in, you are allowed to, the class 
actions are prohibited. What kind of an injustice happens when 
people can't bring class actions for small claims?
    Mr. Palefsky. If people can't bring class actions for small 
claims you are basically allowing people to cheat, to steal 
people's rights and steal people's money, if there is no way to 
vindicate the smaller claims.
    It simply is not economical to bring a claim for $100 
either in arbitration or in court, so the only way your 
consumer protection laws and the only way justice will ever be 
reached in certain small claims is through the class action 
procedure. That is why Federal law has specifically designated 
class action procedures in various consumer statutes.
    And in the wage and hour context, in the Fair Labor 
Standards Act, you specifically created a collective action 
process recognizing that individual workers can't afford to 
bring claims for their small wages that are owed for their 
overtime; that they fear retaliation.
    So without the ability to bring class actions for smaller 
claims you are basically giving a ``Get Out of Jail Free 
Card,'' and it is an invitation to cheat and to steal.
    Mr. Cohen. Mr. Ware, is there a way to take your love for 
arbitration cases but also have group love and have class 
actions?
    Mr. Ware. Yes, Mr. Chairman, absolutely. You can have class 
actions in arbitration. And so the question of whether 
consumers should be allowed to sign away their right to class 
action is really a separate question from whether that class 
action is going to proceed in litigation or arbitration.
    And it is important, it seems to me, to recognize that from 
the consumers' standpoint class actions are something of a 
mixed bag. In other words, if I win a class action, what do I 
win, maybe a $5 coupon to buy more services from a company that 
I am already having a dispute with and don't want to deal with 
them anymore.
    Whereas, if I give up that right to class action in favor 
of arbitration, then when I have a real dispute, a dispute I 
care about as opposed to one a plaintiff's lawyer brought on my 
behalf, I may have the better access to justice in the quicker, 
cheaper process.
    So to me it is a very mixed question whether consumers 
should want to give up that right to class action. If, however, 
you conclude that they should not be able to, then you have got 
a separate issue from arbitration as a whole. Arbitration 
Fairness Act reaches far more broadly than class action.
    Mr. Cohen. But don't you think there are times when the 
class action tends to change the policies and the practices of 
the merchant and that is a benefit to everybody, even in you 
just got the $5 coupon you don't want to use, that they don't 
continue to use those same unscrupulous practices that got them 
a judgment rendered against them?
    Mr. Ware. Yes, Mr. Cohen, I agree with you that that would 
go into the cost benefit analysis of whether it is a worthwhile 
right. And again, if you disagree with my assessment of those 
pros and cons, you can tackle class action separately in a much 
more narrow bill than the ones that have been considered in 
Congress.
    Mr. Rossman. I just--if you don't mind Mr. Chairman----
    Mr. Cohen. Sure, Mr. Rossman.
    Mr. Rossman. Listening to the concerns, particularly the 
fact is that Congress has already taken care of the issue of $5 
coupons and the Class Action Fairness Act was passed 4 years 
ago and that class actions are, in fact, the sole way that many 
consumer laws can be enforced.
    In the Equal Credit Opportunity Act cases that I was just 
mentioning to you, the remedy that we sought was to get 
systemic change in the way that automobile loans were being 
handled across the country, which were leading to 
discrimination against African Americans and Hispanics.
    We were seeking future injunctive relief to change those 
policies. You cannot get that relief in arbitration. It was 
only by being able to try cases, in Tennessee as a matter of 
fact, that we were able to get those changes made across the 
industry. That authority was required from the United States 
Federal District Court judge.
    I am also somewhat confused by the professor talking about 
making informed judgments. It would seem to me being able to 
make a choice, whether you are the merchant or the consumer, 
after dispute arises, and you can make the cost benefit 
analysis knowing what is at stake, certainly makes more sense 
than making that cost benefit analysis in a vacuum where you 
don't even know what the dispute is. You can't even conceive of 
it.
    As I said to you beforehand, I doubt very much that Mrs. 
Cason, when she went in to buy her Nissan car was thinking 
about preserving her civil rights, preventing discrimination at 
that point in time and how she was going to be enforcing it 5 
years down the road.
    I think that it proves the case. You should have the 
opportunity to consult with counsel, knowing what your full 
rights are and knowing what the dispute is when you make that 
decision, not buying a pig in poke.
    Mr. Cohen. Thank you. And Ms. Hirschel, you gave the 
example of the nursing home situation. My father had to go into 
a nursing home, and it was a very difficult time. He had 
Alzheimer's, and we were lucky to get a nursing home to take 
him, and most people are fortunate. Sixty percent of admits 
come from hospitals, and that is kind of the rules. It is 
tough.
    Is there a way to have a process whereby the people have a 
little bit more opportunity, you know, to render independent 
judgment rather than, you know, ``Oh, my God, my loved one 
needs this care, I am lucky to have a bed, and let us move 
on?''
    Ms. Hirschel. If you are asking if there is some sort of 
compromise that is available, my answer to that would 
unfortunately be no, because the longer a resident is in a 
nursing home the more vulnerable those people feel. The more 
they understand that every aspect of their life, from the meals 
that they need to going to the bathroom, is dependent on the 
staff in that facility.
    So if you say, well, after 30 days they should be more 
comfortable, at that point we can talk about arbitration. It is 
still a situation in which the person is very vulnerable and 
unwilling to create a problem by resisting an arbitration 
agreement.
    In addition, you know many nursing home residents don't 
even now have access to a telephone. Many nursing homes don't 
have any involved family. Nursing home residents don't have any 
involved family. They are hardly in a position to consult a 
lawyer 30 days or 60 days after they enter a nursing home for 
advice about what the implications of the arbitration agreement 
with a mandatory arbitration would be.
    And they are simply not in a position--the majority of 
nursing home residents have some form of cognitive impairment. 
They are simply not in a position to understand what the 
implications of that clause would be.
    Mr. Cohen. Thank you.
    And with that I recognize the Ranking Member, Mr. Franks, 
for questioning.
    Mr. Franks. Thank you Mr. Chairman. Mr. Ware, I guess 
sometimes it is good to restate the obvious, and that is 
binding arbitration in the context that we have discussed is 
something that people sign up for ahead of time.
    This is not something that is imposed upon them later and 
sometimes, you know, it occurs to me it gives them at least an 
initial option to say whether I would rather subject myself to 
binding arbitration or a court system that I may have some of 
the same questions as to the ultimate justice that may come out 
of that.
    And you have made some, I think, very compelling statements 
related to the similar outcome, but I was struck by Mr. 
Palefsky's comments that seem to diverge significantly from 
yours. I thought the one about the terrorist was kind of 
interesting.
    I am not sure we could get terrorists to sign a binding 
arbitration agreement. It might go against some of their own 
philosophical persuasions, and I am not sure if they did that 
they would hold themselves accountable to it in the long run.
    But can you give me some idea as to why it seems that Mr. 
Palefsky's remarks are so divergent from your own?
    Mr. Ware. Thank you, Mr. Franks. Mr. Palefsky, when he 
backed away from his statement about ``don't worry about 
statistics,'' he then picked the one empirical study that 
supports his side of the case in contrast to several that cut 
the other way.
    The one empirical study he is referring to was the Colvin 
article he attached to his testimony, and the Colvin article 
even cites all the other studies and says, oh, these are 
surprising results and they contradict what we have seen in the 
other studies.
    More importantly, the Colvin study, at least what Palefsky 
attached to his testimony is a--it is not even a published 
article, and the way of course scholarship works, empirical 
studies are published, and then other scholars have a chance to 
look at them and critique them and debate develops. So it is 
clearly a reach by Mr. Palefsky to pull the one study that 
contradicts the norm and then act as if it is the only study.
    Mr. Franks. The one area I found myself somewhat fascinated 
was that sometimes I am afraid in the last couple of years this 
Committee has in some cases granted more constitutional and 
legal deference to terrorists than they have American citizens, 
but that is another subject entirely.
    What conclusion do you draw from the recent legal action 
against the National Arbitration Forum for its debt collection 
processes and practices?
    Mr. Ware. Well, as the Minnesota attorney general's 
investigation revealed, which scholars in the field had known 
already, is that debt collection, whether it be through 
arbitration or litigation, debt collection raises a set of 
issues unique to debt collection.
    It has a lot to do with the defendant, the debtor being 
hard to serve with process and to give notice of the dispute, 
and then a lot of debtors in that situation don't show up to 
court and for arbitration to defend the case so a default 
judgment arises.
    Those issues peculiar to debt collection, in fact, have 
caused the FTC to have a series of events around the country 
studying both arbitration and litigation of debt collection 
issues because they recognize how unique those issues are.
    And in the arbitration context, obviously the recent 
developments with the National Arbitration Forum and the 
American Arbitration Association have largely put those issues 
aside so that that has been taken care of, the concerns about 
that have been taken care of and those issues are simply 
inapplicable when we are talking about other consumer and 
employment arbitration.
    Mr. Franks. On one of the written statements that you have, 
this is pointed out here, in your statement you make the 
argument that ``contractually agreed to mandatory binding 
arbitration is actually more voluntary than litigation.'' Could 
you explain that detail? Do you think that, as you have said, 
that arbitration remains generally as fair as litigation?
    Mr. Ware. Well that is just a simple point that arbitration 
doesn't happen unless there is a contract theme that is going 
to happen, and sometimes the contract--even pre-dispute 
consumer, even the sort of things that would be covered by the 
Arbitration Fairness Act--everyone would agree is voluntary.
    For example, I have formed a contract with a home builder 
where the home builder, the builder and I, both agree to put an 
arbitration clause in the contract. I don't think anybody would 
dispute the voluntariness of that pre-dispute consumer 
transaction, yet the AFA made that unenforceable.
    So those aren't the kind of transactions I think Members 
are concerned about. I think the form contract, which is often 
not read or understood by consumers, and those problems are 
problems or issues that go far beyond arbitration.
    Lots of form contracts have lots of clauses that courts 
sometimes find unconscionable. So my point, again, is let us 
handle this as we do now on a case-by-case basis in the courts, 
where courts are sensitive to the particular clauses and the 
particular facts of the case.
    Mr. Franks. Mr. Chairman, I have one more question, but I 
am out of time, so I yield back.
    Mr. Cohen. If you would like to take it, I will go ahead 
and yield to you.
    Mr. Franks. Okay, thank you. Just briefly, opponents of 
arbitration claim that if we eliminate pre-dispute arbitration 
agreements consumers will still be able to agree to arbitrate 
their disputes after the disputes arise. Now, I understand you 
have already addressed that to a degree, but help--just restate 
it in a way that the Committee can understand as to why that is 
fairly unlikely?
    Mr. Ware. It is highly unlikely. It doesn't happen now and 
there is no reason why it is going to happen a lot in the 
future, simply because at that point, once there is a dispute 
both sides can look at the dispute and say what is in my self-
interest for this dispute?
    So even if arbitration has lower process costs, it is 
quicker and cheaper than litigation, there will often be 
usually one party who says I don't want those quicker and 
cheaper lower process costs. I would rather have the forum that 
is better for me for whatever tactical reasons in that case, 
and you can't expect lawyers and their clients to think any 
other way. We have an adversary system where each side is 
supposed to look after their own interests.
    Mr. Franks. Thank you.
    And thank you, Mr. Chairman.
    Mr. Cohen. You are welcome.
    Mr. Johnson, do you seek recognition?
    Mr. Johnson. Yes, I do, Mr. Chairman. Thank you very much. 
Is it--well, you have been studying the arbitration process for 
14 years you said?
    Mr. Ware. Sixteen now, Mr. Johnson.
    Mr. Johnson. Sixteen, and have you gotten some idea out of 
that study as to the success rate for the merchants or the 
commercial interest that has the consumer locked into it? Do 
you know what the rates are in terms of how many times the 
consumers win and how many times they lose, the percentage?
    Mr. Ware. Yes, Mr. Johnson. Those are the empirical studies 
we were discussing earlier, and Mr. Palefsky and I were 
referring to the employment arbitration studies. In the 
consumer arbitration side there has been a little less study 
but----
    Mr. Johnson. And that is what I want to know is of the 
small amount of study that has been done are you aware of the 
results of those studies?
    Mr. Ware. Yes sir, I think the most reliable one is the 
recent study by my faculty colleague at the University of 
Kansas, Chris Drahozal. His study which he testified about here 
recently, shows very comparable results in consumer actions in 
arbitration and litigation, again, supporting the general 
conclusion that arbitration and litigation do about as well for 
consumers in terms of outcomes as each other.
    Mr. Johnson. All right. Thank you.
    And Mr. Palefsky, do you have any response to the kind 
professor from Kansas?
    Mr. Palefsky. I think that he is wrong. I know that many 
studies in the past try to find out how can you find out what 
happened in arbitration because no one was making those results 
available. They were secret, but now that we have the 
California statistics--once those statistics were posted online 
by the providers, that is where we learned that the National 
Arbitration Forum credit card cases were going 99 percent where 
the banks win.
    That is where we learned that employees were winning 
between 12 and 20 percent. So I think that some of the older 
studies didn't have the kind of accurate information and out of 
fairness to Professor Colvin, he did publish a paper.
    It is cited in his paper--what we have attached here is an 
updated version, and Mr. Colvin, Professor Colvin's statistics 
are directly from the providers. So we know that the system is 
not working. And if it was in fact a better system for 
consumers you know the companies would not be tripping over 
themselves to force it on them.
    Mr. Johnson. All right. Thank you sir.
    And Mr. Ware, is it true that you don't have to take an 
oath of office, excuse me, an oath before testifying, an oath 
to testify truthfully in an arbitration proceeding?
    Mr. Ware. Well, different arbitration----
    Mr. Johnson. Yes or no, if I could, because I am going to 
run out of time shortly. Is that true or is that false?
    Mr. Ware. It varies.
    Mr. Johnson. I mean well, what public officer with the 
authority to administer an oath on behalf of the government 
would be available for an arbitration proceeding?
    Mr. Ware. None, but perjury is a ground for courts vacating 
an arbitration award.
    Mr. Johnson. Well, but perjury does require an oath that 
you take to tell the truth, the whole truth and nothing but the 
truth, under penalty of perjury, and that is the legal route to 
address issues of lying.
    Mr. Ware. Yes, Mr. Johnson, but Federal Arbitration Act 
Section 10 allows courts to vacate arbitration awards when 
there is corruption in the arbitration process such as someone 
lying.
    Mr. Johnson. And then, you know, is it true the arbitration 
costs are almost unbearable for the consumer?
    Mr. Ware. No. In the vast majority of cases the arbitration 
costs are very low. The fees to file a claim in arbitration, 
for example the AAA Consumer Due Process Protocol, very low 
fees comparable to the fees paid in court.
    Mr. Johnson. But oftentimes the proceeding is held in a 
city different from the one that the consumer lives in and 
where the dispute arose. Is that correct?
    Mr. Ware. No, I think that is quite rare that an 
arbitration clause requires the consumer to travel far.
    Mr. Johnson. Well, that was carefully worded now. I mean it 
really puts--average arbitration clause doesn't put any 
restrictions on where the arbitration proceeding would take 
place. It is so broad that it leaves that up to the commercial 
interest to decide what is in their best interest.
    But oftentimes I understand that, you know, these 
arbitration proceedings actually take place--like if I live in 
Atlanta, and I signed up for a cell phone agreement in Atlanta, 
and something happened in where--and if you are like my momma 
you don't like anybody taking a nickel or a penny away from 
you, and they don't deserve it.
    She will pursue matters like that to the end of the earth, 
but you would have to sometimes go to the end of the earth to 
deal with the location of the arbitration hearing.
    Mr. Ware. And courts have held unconscionable the few 
arbitration clauses that have required the consumer to travel a 
long way, while now many consumer arbitration agreements are 
written to say that the arbitration will be in the county or 
judicial district where the consumer resides.
    Mr. Johnson. Thank you. I will yield back.
    Mr. Cohen. Thank you.
    And now I recognize the gentleman in his Carolina blue, Mr. 
Coble.
    Mr. Coble. Thank you sir. Professor Ware, the Chairman and 
Mr. Franks and Mr. Johnson commenced their examination with 
you. I don't want you to feel slighted so I will make you my 
lead-off hitter as well.
    I was going to ask about the Minnesota case, but I think 
you pretty well addressed that. Let me ask you this, Professor, 
to your knowledge, has the American Arbitration Association 
ever stated that pre-dispute contractual agreements to 
arbitrate are generally unfair to consumers?
    Mr. Ware. No, definitely not. That is an important 
distinction that the AAA has only, and maybe even temporarily, 
refrained from taking new debt collection arbitration cases. 
But they have not said that the problems that the concerns 
about debt collection reached beyond that to other consumer and 
employment arbitration.
    Mr. Coble. Thank you, sir.
    Mr. Palefsky, are there any aspects of binding arbitration 
that you feel are effective and should be permitted or 
retained?
    Mr. Palefsky. Oh, I think binding arbitration can be a 
great way to resolve many disputes, sir. Contract disputes 
between parties of equal bargaining power. In my practice, 
executives fighting over severance, I think voluntary 
arbitration can be a very effective method.
    I do believe that mediation is a much better way. And if I 
might correct Mr. Ware, the American Arbitration Association 
refuses to accept pre-dispute clauses in the health care field 
and the American Arbitration Association issued a press release 
in 1997 saying that employment arbitration should be voluntary.
    Mr. Coble. Well, let me--I am on a race with a red light so 
let me interrupt you. Let me put another question to you, Mr. 
Palefsky. Do you believe, Mr. Palefsky, there are instances--
or, strike that. Are there any instances where consumers can 
voluntarily consent to binding arbitration?
    Mr. Palefsky. Of course. I think knowing and voluntary 
consent is all that is required to make it a valid arbitration 
agreement. I don't have any problem with the current--all 
right, here is the problem. The only check and balance that was 
ever contemplated to keep arbitration fair was voluntariness, 
that the parties themselves ensured fairness.
    This notion that a consumer has to run to court and 
litigate unconscionability, which would cost you $20,000, and 
if you win, it goes on appeal for 2 years, it is going to cost 
a consumer $50,000 in 2 years to challenge an unfair 
arbitration clause in court.
    Mr. Coble. Well----
    Mr. Palefsky. That serves nobody's interest. Make it 
voluntary, and the marketplace will ensure fairness.
    Mr. Coble. Ms. Hirschel, if nursing homes cannot utilize 
binding arbitration, how would this affect that industry?
    Ms. Hirschel. Well, I know that there is often an expressed 
concern about the cost that nursing homes would suffer, but 
there are two things that I would like to say about that. One 
is that if you are looking at liability insurance premiums, the 
Center on Medicare Advocacy did a study in 2003 that showed 
that liability insurance premiums were not tied to insurance 
pay-out.
    The second thing is if you are looking at litigation costs, 
there was a study in Florida that showed that only a very small 
number of nursing homes were repeatedly sued, and that those 
were the facilities that were entirely predictable because they 
were the facilities that were cited over and over for egregious 
violations.
    So I think that both the liability insurance costs and the 
litigation costs are costs that are not necessarily going to go 
up or are clearly tied to ending mandatory pre-dispute binding 
arbitration.
    Mr. Coble. Mr. Rossman, I don't want you to feel----
    Mr. Rossman. Thank you.
    Mr. Coble [continuing]. Ignored. Is it your view that 
binding arbitration is an ineffective venue for consumers?
    Mr. Rossman. Well, once again, that is a sweeping response. 
I think that pre-dispute is ineffective because there is no way 
that a consumer can make a considered and informed judgment 
when they are just entering into a transaction as to any 
conceivable dispute that would arise under that contract.
    If after they have entered into the contract a dispute 
arises and they are given an opportunity to choose between 
going through arbitration or through litigation, I think that 
it is a perfectly acceptable choice at that point in time, but 
at that point they know what they are buying.
    Mr. Coble. Let me go to my lead-off man and let him sum up.
    Mr. Ware. Well, my response to that last point is again, 
when I and my home builder put an arbitration clause in our 
contract pre-dispute, we were making a deal that we both 
thought was going to save us money, and this bill we are 
discussing would take money out of our pockets and put it in 
the hands of trial lawyers.
    Mr. Rossman. Congressman, if I could just a second, you are 
using the home builder there. Are there other home builders you 
could conceivably go to? What do you do when all but one mobile 
telephone company in the United States requires mandatory pre-
dispute arbitration? What do you do if now eight out of ten 
credit card companies require that you have mandatory pre-
dispute arbitration clause and prior to August it was 10 out of 
10.
    Mr. Ware. If the consumer really prioritizes avoiding 
arbitration, the consumer can pick the cell phone or credit 
card company that doesn't require it, and for the bulk of the 
consumers who don't pay attention to that and get an 
arbitration clause, they are getting what courts are saying in 
a case-by-case basis is a fair process, or if it is not fair, a 
court will hold it unconscionable in that case.
    Mr. Coble. Mr. Rossman, I was going to brag to my Chairman 
from Tennessee at beating the red light, but you cost me that 
favor, so I yield back.
    Mr. Rossman. I apologize, and I beg your forgiveness.
    Mr. Cohen. Thank you, Mr. Coble.
    Mr. Scott from Virginia is recognized.
    Mr. Scott. Thank you. Mr. Rossman, could you explain the 
legal concept of adhesion contracts and explain why all of 
these just aren't thrown out based on that legal principle?
    Mr. Rossman. Well, the adhesion contract is a contract 
where there is a clause that is a mandatory or a required 
portion and it is a ``take it or leave it.'' Either you take 
the contract with the arbitration clause or you don't take the 
contract.
    If in fact we are dealing in a marketplace where the 
alternative is really not between taking the contract with the 
arbitration clause or not taking the contract, but rather the 
situation of having access to the service or not having access 
to the service, that is no choice at all.
    The reality of it is that, you know, until recently, unless 
you were a member of the AFL-CIO or a member of AARP, you could 
not get a credit card in the United States without a mandatory 
arbitration clause.
    If you want to get a cell phone right now in the United 
States, you have to accept it with a mandatory arbitration 
clause, unless you are with the one carrier with limited 
coverage in the United States that doesn't require it.
    I would argue that in our modern society that access to 
credit cards, access to mobile phones, have become virtual 
necessities, and that it is no choice whatsoever. It is a 
``take it or leave it'' under those circumstances.
    And although there are, in fact, laws that find that 
clauses can be unconscionable, the reality is that there are 
different levels of unconscionability depending on what state 
you are in. If you are in California or in Massachusetts, you 
may find that there is a much higher level of unconscionability 
or less of a tolerance for unconscionability.
    But it is not the same across the United States, and there 
are many places where that will, in fact, be allowed, and, in 
fact, there have been cases that have allowed it throughout the 
United States. That kind of checkered enforcement is 
inexcusable. Where I live shouldn't determine whether or not I 
have a choice between credit cards or phone service.
    Mr. Scott. Are there other anti-trust implications, Mr. 
Rossman?
    Mr. Palefsky. Absolutely. Pre-dispute clauses that 
designate a single provider are, in every definition, contracts 
in restraint of trade. They eliminate competition in the 
providing of ADR services. They lock you into perhaps the most 
expensive--I can get an arbitrator to arbitrate without any 
filing fee at all. Or I can go the American Arbitration 
Association and pay a $13,000 filing fee and arbitrators who 
charge $500 an hour.
    It is absolutely inappropriate to allow one party to 
contract in advance, not only with the consumer to mandate the 
use of a single provider, but they work out deals with the 
providers themselves to get special arrangements in the 
administration of their case loads.
    It is not uncommon for these major arbitration providers to 
have case managers assigned to a particular company no matter 
where the arbitration arises. One person in that organization 
is charged with keeping the customer satisfied.
    It is an invitation to abuse. And if consumers had the 
ability to choose the arbitration provider, it would do wonders 
to improving the fairness of the system and reducing the cost. 
There is no reason in the world--ADR used to be a noble 
endeavor undertaken by people who really were concerned with 
solving problems.
    In the labor arbitration field, they would charge $100 an 
hour to resolve a dispute. Those very same arbitrators, when 
they are doing my sex harassment cases, are charging $500 an 
hour because they can. And that is exactly the result of these 
pre-dispute restraints of trade.
    Mr. Scott. Could you explain what the EEOC thinks of 
mandatory arbitration?
    Mr. Palefsky. The EEOC unanimously, the Republican and 
Democrat commissioners, passed a policy statement which is 
probably the best thing ever written on mandatory arbitration. 
They say that it has structural biases against the claimants.
    They say it interferes with their ability to enforce the 
law, to do the job that you have asked them to do. They point 
to the high costs. They point to the limited discovery. They 
point to the private hearings, and the EEOC has stated 
unequivocally--again, it is a shame that this has turned into a 
partisan issue.
    Justice need not be a Democrat or Republican issue. The 
EEOC unanimously has a policy statement which is attached to my 
testimony which I urge you all to read because you cannot say 
you support civil rights and support mandatory arbitration of 
civil rights claims.
    The reason we passed the civil rights laws was to provide 
access to a Federal court and a judge who was obligated to 
apply the law. Arbitrators do not need to know or follow the 
law. That is not acceptable for laws of Congress. That is not 
acceptable for civil rights laws.
    We are talking about the Lilly Ledbetter Fair Pay Act where 
we had to fix Supreme Court decisions. We can't enforce that. 
Arbitrators don't need to know the law or enforce it or respect 
the acts of Congress. That is not acceptable. We cannot be a 
Nation of laws if there is no place to go to enforce the laws.
    What does it mean to live in a constitutional democracy if 
Congress can pass a law and the people you are trying to 
protect don't have the right to have the law enforced? The 
Supreme Court has built a fiction that arbitration is just 
another forum with no impact on substantive rights. That is 
simply false as a matter of fact, because you lose the right to 
have the law enforced.
    Here is the law, on appeal, that ``an arbitration award has 
to be confirmed even if there are errors of law or fact on the 
face of the award that result in a substantial injustice.'' 
Think about that for a second, that our courts are obligated to 
put their imprimatur on a judgment that is false on its face in 
the enforcement of this Nation's civil rights laws. Is that 
what you had in mind?
    Mr. Scott. Thank you.
    Mr. Cohen. Thank you, Mr. Scott. Would you like to go on 
any further?
    Mr. Scott. Well, yes, can you say a word about the 
structural biases in the arbitration that the EEOC pointed out?
    Mr. Palefsky. Right. The structural biases deal with one, 
the privacy makes it difficult for witnesses to gather access 
of similar treatment, pattern and practice. Who else was 
discriminated against? Who else was harassed?
    The cost: most people can't afford their day-to-day life. 
You can't afford $20,000 or $30,000 to bring the case. You 
cannot--discrimination cases are different than a lot of other 
cases. There are a lot of small consumer cases where you don't 
need a lot of discovery, but in discrimination cases, I am 
trying to prove someone's state of mind. I cannot do that 
without depositions.
    In the employment case, all of the witnesses, all of the 
documents are under the control of the employer. Ethical rules 
preclude me from getting that information informally. I simply 
cannot sustain my burden of proof without adequate discovery.
    In many arbitration forums, they don't even permit 
depositions. In the securities industry, in FINRA arbitrations, 
I represent whistleblowers, and I am not allowed to take a 
single deposition.
    That is like saying, tie your hands behind your back and 
come out fighting and argue your case to arbitrators selected 
by the securities industry who know that if they find against 
this firm, they will never sit again.
    There is a reason that we appoint judges for life. There is 
a reason that we have financial disclosures for our judges. You 
cannot design a system where the decision maker has a financial 
interest in pleasing the repeat user. As a concept it does not 
work and it cannot work.
    And it is incredible that anyone in this room on this 
Committee would suggest that for-profit justice where the 
decision maker has an economic interest in the outcome of the 
case is equivalent to our constitutional system of justice.
    I wanted to point out to you that in the Declaration of 
Independence, Thomas Jefferson listed the grievances against 
the king that justified this revolution, and we know that he 
said ``for depriving us of the benefit of trial by jury.'' But 
he was also concerned about the repeat user.
    In the Declaration of Independence he said, ``He has made 
judges dependent on his will alone for the tenure of their 
offices and the amount in payment of their salaries.'' Those 
words are truer today. At the turn of the last century, 
arbitration was so disfavored because of the very abuses that 
we see occurring today, that courts were not even permitted to 
enforce pre-dispute clauses.
    Everything that we are seeing happening today happened 100 
years ago. The FAA was passed in 1925 to permit Federal courts 
to once again be able to enforce arbitration clauses between 
merchants. It was never intended to apply in the adhesion 
context. It was specifically never intended to apply to 
employment claims.
    And that is how it was interpreted in the courts for 70 
years, and it was certainly never intended to apply to 
statutory claims for the laws that you pass to encourage people 
to blow the whistle. If you don't want people to blow the 
whistle, take the laws off the books.
    If you don't like the civil rights laws, take them off the 
books. But do not pretend you want to enforce those laws and 
say that we can't bring those to a free court to a judge who is 
obligated to follow the law.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Cohen. Thank you, I appreciate it. We have finished our 
first round. We are not going to have a second round. I think 
we have a pretty good idea about where Mr. Ware and Mr. 
Palefsky stand. I am going just allow the other two witnesses 
to have, like, 2 minutes if you would like to have anything 
further to say.
    Ms. Hirschel?
    Ms. Hirschel. Thank you very much. All I want to say is 
that this really is a gross injustice, especially in the 
nursing home context, and it is an injustice that only Congress 
can solve, and I ask you to do that. Thank you.
    Mr. Cohen. Thank you.
    And Mr. Rossman?
    Mr. Rossman. Just once again, thanking the Committee for 
allowing us to testify today. The issue here is whether or not 
consumers are going to be able to enforce the rights that this 
Congress has given each and every one of them, to allow them a 
right to seek a full and fair hearing where they have the right 
to be able to have an impartial arbitrator determine their 
claims is one that I think that is one that is both 
constitutional as well as a hallmark of our system of justice.
    By going forward and having a system, as Mr. Palefsky says, 
where one party is literally paying for the cost of the 
arbitrator, One thing I do want to clarify, and I will end on 
this note, I think it has been passed around what the cost of 
arbitration is, and I think somewhere in the testimony I saw 
someone said that the filing fee was $125. I believe--
Professor, you may correct me on that--I believe that is for a 
documents-only filing.
    And the reality of it is that, whether it be a labor case 
or a consumer case, you are not going to be able to file these 
on the papers. We have to do discovery and we have to go 
through hearings on this and when the arbitrator has to decide 
a case is being paid by the hour, I suspect that he has very, 
or she, has very little incentive for doing it as expeditiously 
as would be the case with a Federal district court judge who is 
on the mandate from the chief judge of the district to clear 
the docket as quickly as possible.
    So you have a system that is inherently not only more 
expensive when you actually assert your rights, but it is in 
the interest of the arbitrators to drag it out and move it 
along as much as possible to get as much fees as they possibly 
can under the circumstances.
    Mr. Cohen. Thank you, sir.
    And Mr. Palefsky, I want to ask one last question. You 
distinguish employment law and statutory violations as areas 
where you don't think the laws of arbitration should apply in a 
unique way. Any there any other type of cases that would fit 
into the category that you think should be maybe carved out?
    Mr. Palefsky. I think that every American citizen has the 
constitutional right to access to the right of petition, to the 
right of due process and to the right to trial by jury, and 
that right should not be waived unless it is waived knowingly 
and voluntarily.
    The answer to your question is yes. I don't think adhesion 
contracts are an appropriate way to waive constitutional 
rights. I think an adhesion contract is a privilege that we 
extend to business to allow them to conduct routine commercial 
transactions where the rights that are being exchanged come 
from the parties.
    It is not an appropriate way to waive constitutional 
rights, and it is certainly not an appropriate way to waive the 
protections of statutes that Congress passes after the free 
market has failed to protect those consumers, nursing home 
victims, workers, investors on Wall Street.
    Mr. Franks. Mr. Chairman, could we ask Mr. Ware--the other 
three got final thoughts. Would you be willing to let him have 
a final thought?
    Mr. Cohen. Sure.
    Mr. Ware. Just----
    Mr. Cohen. Gentlemen, you are not in Kansas anymore.
    Mr. Ware. Thank you, Mr. Chairman, just to say very quickly 
that we should not be comparing arbitration to this mythical 
vision of litigation where everything is wonderful. We need to 
compare it to the reality of litigation and the practical 
effect on consumers and employees's access to justice.
    Mr. Cohen. Thank you, Mr. Ware.
    I thank all the witnesses for their testimony today and the 
Members who attended. Without objection, Members will have 5 
legislative days to submit any additional written questions 
which are forwarded to the witnesses. I ask you to respond, 
unlike certain people that have come to us from the state of 
New Jersey, in a timely manner, they will be made part of the 
record.
    Without objection, the record will remain open for 5 
legislative days from the submission of any other additional 
material. Again, I thank everyone for their time and patience. 
The hearing of the Subcommittee on Commercial and 
Administrative Law is adjourned.
    [Whereupon, at 2:53 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 Alison E. Hirschel, 
   National Consumer Voice for Quality Long-Term Care, Washington, DC

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

      Response to Post-Hearing Questions from Stuart T. Rossman, 
                National Consumer Law Center, Boston, MA

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

       Response to Post-Hearing Questions from Stephen J. Ware, 
           University of Kansas, School of Law, Lawrence, KS

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Response to Post-Hearing Questions from Cliff Palefsky, 
       National Employment Lawyers Association, San Francisco, CA

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


 Material submitted by the Honorable Trent Franks, a Representative in 
Congress From the State of Arizona, and Ranking Member, Subcommittee on 
                   Commercial and Administrative Law

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

 Prepared Statement of Bruce Yardwood on behalf of the American Health 
  Care Association (AHCA) and the National Center for Assisted Living 
                                 (NCAL)

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                  Prepared Statement of Public Citizen

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                       Prepared Statement of AARP

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Prepared Statement of the National Association of Home Builders

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

       Prepared Statement of Richard W. Naimark on behalf of the 
                    American Arbitration Association

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


      Prepared Statement of the American Association of Homes and 
                     Services for the Aging (AAHSA)

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 
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