[Senate Hearing 112-177]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 112-177



                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION


                            OCTOBER 13, 2011


                          Serial No. J-112-47


         Printed for the use of the Committee on the Judiciary

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                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin                 CHUCK GRASSLEY, Iowa
DIANNE FEINSTEIN, California         ORRIN G. HATCH, Utah
CHUCK SCHUMER, New York              JON KYL, Arizona
DICK DURBIN, Illinois                JEFF SESSIONS, Alabama
AMY KLOBUCHAR, Minnesota             JOHN CORNYN, Texas
AL FRANKEN, Minnesota                MICHAEL S. LEE, Utah
CHRISTOPHER A. COONS, Delaware       TOM COBURN, Oklahoma
            Bruce A. Cohen, Chief Counsel and Staff Director
        Kolan Davis, Republican Chief Counsel and Staff Director

                            C O N T E N T S




Blumenthal, Hon. Richard, a U.S. Senator from the State of 
  Connecticut....................................................     4
Cornyn, Hon. John, a U.S. Senator from the State of Texas........     4
Franken, Hon. Al, a U.S. Senator from the State of Minnesota.....     1
    prepared statement...........................................   108
Grassley, Hon. Chuck, a U.S. Senator from the State of Iowa, 
  prepared statement.............................................   111
Klobuchar, Hon. Amy, a U.S. Senator from the State of Minnesota..    12
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, 
  prepared statement.............................................   112


Bland, F. Paul, Senior Attorney, Public Justice, Washington, DC..     9
Drahozal, Christopher R., John M. Rounds Professor of Law, 
  Associate Dean for Research & Faculty Development, University 
  of Kansas School of Law, Lawrence, Kansas......................    14
Pierce, Deborah, M.D., Associate Director, Department of 
  Emergency Medicine, Einstein at Elkins Park Hospital, Elkins 
  Park, Pennsylvania.............................................     7
Schwartz, Victor E., Esq., Partner, Shook, Hardy & Bacon LLP, 
  U.S. Chamber Institute for Legal Reform, U.S. Chamber of 
  Commerce, Washington, DC.......................................    12
Swanson, Lori, Attorney General, Minnesota, St. Paul Minnesota...     5

                         QUESTIONS AND ANSWERS

Responses of Christopher R. Drahozal to questions submitted by 
  Senators Cornyn and Grassley...................................    37
Responses of Victor E. Schwartz to questions submitted by 
  Senators Grassley and Cornyn...................................    45

                       SUBMISSIONS FOR THE RECORD

American Arbitration Association (AAA), Richard W. Naimark, 
  statement......................................................    50
AARP, Washington, DC, statement..................................    54
Bland, F. Paul, Senior Attorney, Public Justice, Washington, DC, 
  statement......................................................    59
Drahozal, Christopher R., John M. Rounds Professor of Law, 
  Associate Dean for Research & Faculty Development, University 
  of Kansas School of Law, Lawrence, Kansas, statement...........    87
Fair Arbitration Now, Washington, DC, October 12, 2011, letter...   106
Miscellaneous Organizations, May, 2011, joint letter.............   114
National Employment Lawyers Association (NELA), Washington, DC, 
  October 13, 2011, letter.......................................   118
Pierce, Deborah, M.D., Associate Director, Department of 
  Emergency Medicine, Einstein at Elkins Park Hospital, Elkins 
  Park, Pennsylvania, statement..................................   119
Santoni, Jane, Attorney at Law, Williams & Santoni, LLP, Towson, 
  Maryland, October 14, 2011, letter.............................   148
Schwartz, Victor E., Esq., Partner, Shook, Hardy & Bacon LLP, 
  U.S. Chamber Institute for Legal Reform, U.S. Chamber of 
  Commerce, Washington, DC, statement............................   151
Swanson, Lori, Attorney General, Minnesota, St. Paul Minnesota, 
  statement......................................................   164
Watts, Craig, Fairmont, North Carolina, letter...................   170



                       THURSDAY, OCTOBER 13, 2011

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:05 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Al Franken, 
    Present: Senators Franken, Whitehouse, Klobuchar, 
Blumenthal, and Cornyn.

                       STATE OF MINNESOTA

    Senator Franken. The hearing will come to order. I want to 
thank all the witnesses for being here today and thank everyone 
for being here.
    We are in the middle of a vote, I believe, so some of my 
colleagues will be joining me shortly. I want to thank Chairman 
Leahy for giving me the opportunity to chair this hearing. And 
a special thanks again to the witnesses for sharing your time 
and expertise with this Committee. Before I introduce today's 
witnesses, I would like to take a few moments to clarify my 
intent in calling today's hearing.
    The topic of mandatory arbitration is much more interesting 
than its dry-sounding title might suggest to people who do not 
know much about it, which includes almost everyone, every 
consumer and every employee. Today we are likely to discuss 
such wide-ranging legal issues as Federal preemption, statutory 
construction, and class actions in situations as varied as 
chicken farmers to cell phone users to auto dealers. To the 
extent possible, I would like to keep today's hearing focused 
on mandatory arbitration as opposed to other voluntary types of 
alternative dispute resolution, or ADR. I am not aware of any 
introduced legislation to ``ban arbitration.'' I think everyone 
in this room can agree that there are some circumstances in 
which ADR, including post-dispute arbitration, should be 
encouraged. So let us focus our attention today on mandatory 
arbitration, which raises the most concern for me.
    I would also like to use this hearing to broadly highlight 
all of the efforts that have been made over the years to 
properly limit the use of mandatory arbitration. I am far from 
the first Senator to champion this issue. Senator Feingold, a 
former colleague on this Committee, was a true pioneer, and 
Senator Feingold partnered with fellow Committee members to 
bring relief to certain groups particularly affected by 
mandatory arbitration.
    The Ranking Member of this Committee, Senator Grassley, led 
the charge in limiting the use of mandatory arbitration clauses 
for poultry and livestock producers in contracts with their 
processors. He was able to secure the passage of a provision in 
the 2008 farm bill. I would like to submit for the record a 
letter from Craig Watts, a Fairmont, North Carolina, chicken 
farmer. He is one of many farmers who, under this law, has 
chosen to opt out of the arbitration clause in the contract he 
signed with his chicken processor. He notes that in his 20 
years in contract poultry: ``I know of no examples of anyone 
ever taking a dispute to the `court of arbitration.' For a 
farmer it is just too expensive .  .  . But in the 2008 farm 
bill, Congress recognized how unconscionable these mandatory 
arbitration clauses were .  .  . and it resulted in the farmer 
getting to choose to keep it or opt out .  .  . it has not led 
to a wave of lawsuits as many had said .  .  . but I do believe 
it is an incentive to do business above board.''
    Another member of this Committee, Senator Hatch, led a 
similar effort to provide relief for auto dealers. In the 
Senate, this bill had 66 cosponsors. Thanks to Senator Hatch's 
efforts, America's auto dealers are now on a level contractual 
playing field with the big auto manufacturers.
    These efforts all preceded my work on limiting forced 
arbitration for employees of defense contractors. They also 
preceded my introduction of the Arbitration Fairness Act this 
Congress and the bill I recently introduced with Senator 
Blumenthal, the Consumer Mobile Fairness Act. These bills, like 
the ones that have come before it, seek to limit the use of 
forced arbitration clauses in contexts where one party suffers 
from a substantially weaker bargaining position. These 
particular bills focus on consumers and workers who sign form 
contracts with corporations.
    Critics may argue that these contracts were entered into 
voluntarily and that we are compelled to honor forced 
arbitration clauses or risk abolishing entirely the freedom to 
contract. I think several of today's witnesses can speak to 
this issue better than me.
    I am very honored today to introduce Minnesota's Attorney 
General and my friend, Lori Swanson. In 2009, Attorney General 
Swanson sued the National Arbitration Forum on behalf of 
Minnesota consumers. At the time, the National Arbitration 
Forum was the country's biggest arbitrator of consumer credit 
disputes. In the course of her investigation, Attorney General 
Swanson revealed that the NAF, which presented itself to the 
public as a neutral arbitration company, was, in fact, working 
behind the scenes with the companies, against the best interest 
of consumers. In fact, the NAF boasted to the companies, 
``customers don't know what to expect from arbitration and are 
more willing to pay,'' and that ``customers ask you to explain 
what arbitration is then basically hand you the money.'' But I 
will leave it to Attorney General Swanson to tell the rest of 
the story.
    We are also pleased to have with us Dr. Deborah Pierce, 
currently the Associate Director of Emergency Medicine at 
Einstein at Elkins Park Hospital. She will share her experience 
from a previous employer and the subsequent arbitration process 
that she endured after bringing a gender discrimination claim 
against that employer. Her story illustrates many of mandatory 
arbitration's serious problems, which have led me to question 
the merits of our current system.
    We are joined also today by Paul Bland, a senior attorney 
at Public Justice. Mr. Bland has devoted nearly his entire 
career to representing consumer clients in countless cases 
around the country. He has a true wealth of knowledge on a 
range of issues, particularly consumer arbitration. Mr. Bland's 
experience litigating consumer cases after Concepcion will give 
us a realistic and, I think, sobering look at the prospects for 
consumer-enforced corporate accountability going forward.
    We also welcome Professor Christopher Drahozal--I was so 
nervous about getting that pronunciation correct.
    Senator Franken. It does not mean I will get it right the 
next time. Professor Drahozal is the John M. Rounds Professor 
of Law and Associate Dean for Research and Faculty Development 
at the University of Kansas School of Law. Professor Drahozal 
has written extensively on the law and the economics of 
    We also welcome Victor Schwartz, who is a partner at the 
firm of Shook, Hardy & Bacon LLP, and of the U.S. Chamber of 
Commerce and the U.S. Chamber Institute for Legal Reform. Thank 
you, all of you, for joining us.
    Before I turn it over to today's witnesses, we are going to 
need to take a recess. I am sorry about that. I know that you 
are all eager to testify. I can see you almost frothing. But we 
are going to have to take a quick recess so I can go to the 
floor and vote. I should be back in 10 to 15 minutes, and by 
then I think we will have the other members who are down there, 
no doubt voting, too. We have two votes. That is what has 
occasioned this brief recess.
    So the hearing stands in brief recess.
    [Recess at 2:14 p.m. to 2:35 p.m.]
    Senator Franken. I want to thank all of the witnesses for 
indulging us. We voted, and so we are back in session, and 
before I turn it over to the Ranking Member and the witnesses, 
I want to reiterate my sincere goal that today we can find some 
common ground. We may not all agree on the best ways to move 
forward and on which legislative proposals are needed, but I 
hope we can walk away with a few areas of agreement. I will 
suggest the obvious: that there is a role for Federal courts in 
our justice system.
    This past August, Justice Kennedy replied to a reporter's 
inquiry about the Court's current docket, and he said this: 
``The docket seems to be changing .  .  . A lot of big civil 
cases are going to arbitration. I don't see as many of the big 
civil cases.'' Personally, I am troubled that our private 
arbitration system is, at least in part, eclipsing the United 
States Supreme Court, the highest Court in the land. Perhaps 
today's hearing can help us determine whether there is a sound 
middle ground--one where we use arbitration to the fullest fair 
extent, but allow our Supreme Court to fulfill its role as the 
true final arbiter.
    And now to my friend, the Ranking Member, Senator Cornyn.


    Senator Cornyn. Well, thank you, Mr. Chairman. I am old 
enough to remember why alternative dispute resolution came of 
age and of interest, primarily because people found that the 
time that it took to get cases litigated and then appealed and 
get a final resolution and the cost of litigation gave rise to 
the demand for a more expeditious and a less costly means of 
resolving disputes.
    Of course, it is not for everything. But what it means as a 
practical matter is that sometimes arbitration is the only 
cost-effective means of resolving a dispute because you cannot 
find a lawyer to take your case because you may be a person of 
modest means, may not be able to recover attorneys' fees. So 
there is an important role for arbitration.
    I think there are just a few other points I want to make 
quickly. In my view, the scholarship and research uncovers 
several myths about arbitration. First of all, most arbitration 
is contractual. It is agreed to ahead of time. It is not 
imposed. It is agreed to. And, of course, when it is not agreed 
to--let us say there is some fraud in the inducement of the 
contract--there are remedies to void arbitration agreements. 
But most of them are a convenience to the parties and, as I 
said earlier, a more cost-effective and more timely way of 
resolving relatively small and including some larger disputes. 
But studies show that arbitrators have no discernible bias in 
favor of business interests or against consumers and employees.
    Second, it is a myth that consumers have no meaningful 
choice about submitting an arbitration due to inferior 
bargaining power.
    Third, it is a myth that arbitration procedures lack due 
process protections.
    Fourth, it is a myth that consumers and employees still 
will have access to arbitration even if pre-dispute arbitration 
agreements are barred.
    So I look forward to hearing the testimony of the witnesses 
and their suggestions, if they are critics of the Federal 
Arbitration Act or contractual agreements to arbitrate disputes 
that arise, what their suggestions are to us for making it 
cost-effective in the sense that it is within the reach of 
ordinary consumers who may be people of modest means. And it 
also is something that could be done on a timely rather than a 
protracted basis. Cost and time are the reasons why alternative 
dispute resolution came in vogue and why I think it still has 
an important role to play. But I look forward to hearing from 
the witnesses.
    Senator Franken. Thank you, Senator Cornyn.
    As my distinguished Ranking Member was voting, he missed my 
opening statement, in which I said that we are all in agreement 
that arbitration can be very important and definitely has its 
place. And today I would really like to confine--we do not have 
to confine, but focus on mandatory arbitration. And I know that 
Senator Blumenthal would like to make a statement.

                      STATE OF CONNECTICUT

    Senator Blumenthal. Thank you, Senator Franken, and I want 
to thank Senator Franken for his leadership, thank the 
witnesses for being here today, particularly my former 
colleagues, the Attorney General of Minnesota, Attorney General 
Swanson, and thank her for her excellent work in this area.
    I agree with our distinguished Ranking Member that cost and 
time are greatly to be valued. Saving them is a profoundly 
important objective, and it is an objective well served by 
alternative dispute resolution and even by arbitration in many 
cases, but not when it is abusively applied and made mandatory, 
often without sufficient information to consumers, often 
imposed on them, as is the case in some of the instances where 
Attorneys General have taken action to protect consumers. And 
protecting consumers and employees is indeed the objective of 
two measures that I have supported with Senator Franken: the 
Arbitration Fairness Act and the recently introduced Consumer 
Mobile Fairness Act, designed to protect cell phone consumers 
from abusive practices.
    So I am very interested in what you will tell us today, and 
I am very grateful to you for being here and for your work in 
this area, whatever your point of view. There is a legitimate 
debate on this issue, but most important, there is the 
legitimate goal of protecting consumers against the 
increasingly pervasive use of mandatory binding arbitration 
clauses. These can be a scourge on consumers when they are 
imposed and applied abusively, and I hope that the Congress can 
take action to provide more tools to law enforcement, such as 
our Attorneys General and our Federal authorities, to protect 
employees and cell phone users and homeowners and others from 
the potential excesses in this area, so thank you very much.
    Senator Franken. Thank you, Senator Blumenthal.
    Senator Blumenthal has partnered with me on the Consumer 
Mobile Fairness Act, which is about consumers. The Arbitration 
Fairness Act is about both consumers and employees. We have 
both represented here today.
    Before we come to the witnesses, I would quickly like to 
take the opportunity to submit documents for the record. First 
is the letter from poultry farmer Craig Watts, which I 
mentioned in my opening statement. I have letters of support 
from a coalition of more than 40 advocacy groups for the 
Arbitration Fairness Act and the Consumer Mobile Fairness Act.
    [The letters appears as a submission for the record.]
    Senator Franken. The AARP has also submitted a statement 
for the record in support of the Arbitration Fairness Act that 
highlights the effects of forced arbitration on America's 
    [The AARP statement appears as a submission for the 
    Senator Franken. I also have a statement for the record 
from Chairman Leahy, who was not able to join us today.
    [The prepared statement of Chairman Leahy appears as a 
submission for the record.]
    Senator Franken. Now I will turn it over to today's 
witnesses, beginning with Minnesota's Attorney General, Lori 

                      ST. PAUL, MINNESOTA

    Ms. Swanson. Well, good afternoon. Thank you, Mr. Chairman, 
for your leadership and, Senators, it is good to be here. I 
appreciate yours as well.
    You know, the right to have disputes resolved through an 
impartial judge or jury is something that is deeply embedded in 
our American values and in our culture, yet millions of 
American consumers have given up that right to have their day 
in court without even knowing it through fine-print language 
contained in various customer agreements.
    Many large corporations, ranging from banks to phone 
companies to utilities, have put into the fine print mandatory 
arbitration clauses through which the consumer waives in 
advance the right to have their day in court, to have their 
dispute resolved in court. The consumer waives this right even 
if they do not notice the clause and even if they did not have 
any meaningful opportunity to negotiate the clause.
    In 2009, our office filed a lawsuit against the National 
Arbitration Forum. The Forum was the largest arbitration 
company for consumer disputes in the country. It handled more 
than 200,000 arbitration claims a year, and according to its 
own statement, it said that it was listed as the arbitrator in 
hundreds of millions--hundreds of millions--of consumer 
    The lawsuit alleged that the forum deceptively represented 
to consumers and the public that it was independent and 
neutral, operated like an impartial court system, was not 
affiliated with any party, and did not take sides between the 
parties. In fact, the National Arbitration Forum had extensive 
ties to the collection industry and was, in essence, an arm of 
the collection industry.
    The forum, despite its public statements to the contrary, 
worked behind the scenes alongside companies and creditors 
against the interests of ordinary consumers to convince credit 
card companies and other debt buyers and other corporations to 
insert mandatory pre-dispute arbitration clauses into these 
hundreds of millions of contracts and then to appoint the forum 
to decide the disputes, essentially putting itself as part of 
the collection process. It encouraged creditors and 
corporations to file claims, essentially to file lawsuits, 
against consumers whose claims it would then adjudicate. It 
sometimes drafted the arbitration claims--in other words, 
essentially drafted the lawsuit that was going to be filed 
against the consumer--and referred creditors to the debt 
collection firms which then went after the consumers.
    It also had extensive financial ties to the collection 
industry. A group of New York private equity funds engineered 
two transactions in which they simultaneously took control of 
one of the country's largest debt collection enterprises and 
affiliated itself with the forum through an infusion of $42 
million, essentially being on both sides of the equation. The 
forum went to lengths to conceal these ties to the public and 
to consumers.
    The case ultimately settled with a consent judgment barring 
the forum from the business of arbitrating credit card and 
other consumer disputes. And although that case dealt with a 
problem company, it did not and cannot deal with the systematic 
problems with consumer arbitration and mandatory binding 
    Through our investigation of the forum, we conducted 
interviews of over 100 consumers, talked to arbitrators, and 
talked to employees of the forum, and those conversations told 
us that consumers are not getting a fair shake and due process 
of law with these types of claims.
    First, there is unequal bargaining power between consumers 
and large corporations that present the consumer with take-it-
or-leave-it contracts. In almost every interview we did of 
consumers, people told us, ``We did not know about the clause, 
we were not aware of the clause, nor did we feel we could do 
anything about the clause.''
    The forum's own documents describe it this way. They say, 
``The customer does not know what to expect from arbitration 
and is more willing to pay.'' Or ``Consumers ask you to explain 
what arbitration is and then basically hand you the money.'' 
Those were marketing documents that the forum gave to creditors 
convincing creditors to put clauses like these in.
    In addition, the forum's own documents said, ``Well, we 
have to insert these clauses in because consumers will not 
agree after the fact to arbitration.'' No, I think a lot of 
consumers would not agree after the fact to arbitration if they 
feel they are not getting a fair shake and due process of law.
    It was also apparent that arbitrators have a powerful 
incentive to favor the dominant party in arbitration. The 
arbitration company knows who is bringing it the business, who 
is filing claims, and they have an incentive to favor that 
corporation. We heard from arbitrators who were deselected or 
not given more business after ruling in favor of the consumer, 
arbitrators who were not given more business after refusing to 
award attorney fees against the consumer, and we heard from 
employees who said they were told to assign certain arbitrators 
to certain cases who would be friendly to the creditor or not 
put the creditor to the proof and require the creditor to 
submit evidence that would sustain an arbitration award.
    In addition, to make matters worse, it is often not the 
original creditor that files the arbitration claim. In today's 
world debt buyers will buy debt from cell phone companies and 
credit card companies and then resell that debt many times 
over. And so oftentimes the person filing the arbitration claim 
is a debt buyer many times removed from the initial 
transaction, and consumers told us because they did not know 
who the arbitration company was, oftentimes they did not even 
appear or respond to the papers because they were not aware 
they had agreed to it, did not recognize the name of the 
arbitration company.
    Only the U.S. Congress, because of court rulings, has 
authority to make meaningful reform to this area of the law, 
and I appreciate your leadership in having this hearing.
    [The prepared statement of Ms. Swanson appears as a 
submission for the record.]
    Senator Franken. Thank you, Attorney General.
    Now we go to Dr. Pierce.


    Dr. Pierce. Thank you. Chairman Leahy, Chairman Franken, 
Ranking Member Cornyn, and distinguished members of the 
Committee, thank you for the invitation to speak to you today 
about my experience with mandatory arbitration.
    My name is Deborah Pierce. I am currently the associate 
director of emergency medicine at Einstein at Elkins Park 
Hospital and the assistant residency director of the emergency 
medicine residency at Albert Einstein Medical Center in 
    In June of 2004, I began working on a part-time basis with 
a physician practice group in suburban Philadelphia in a 
community hospital emergency department. After working 
successfully on a part-time basis for a year, I was offered a 
full-time position. The salary they offered me was much less 
than what I had been making, but the Chairman of the practice 
assured me that I would recoup my initial loss in salary after 
I became a partner in 2 years' time.
    When I signed my employment agreement, I was unaware that 
it contained a mandatory arbitration clause. Even if I had 
known to look for such a provision, it would have meant nothing 
to me. I am an E.R. doc. I take care of people. I love doing 
that. I was offered a job that was giving me the opportunity to 
do what I love to do. And my choice was either to accept the 
terms of my contract or to not get the job.
    During my 2 full-time years with the practice, my job 
performance was never questioned, and there were no concerns 
expressed to me about being voted into partnership. Every male 
physician before me had made partner after their first 2 years. 
Yet at the end of 2006, the Chairman told me that the partners 
had voted to deny me partnership and not renew my contract.
    Four months later, a male physician with less experience 
and a history of performance problems came up for partner. 
Instead of being granted partnership, he was given an 
additional 9-month probationary period to improve what the 
Chairman testified were serious problems with his clinical 
practice. After the 9 months, he was made a partner. No such 
extension was granted to me, and in addition, I learned of 
other females who had been denied the promotion in a similar 
manner. This evidence was presented during my arbitration.
    At the time I worked for the practice, it was a virtually 
all-male partnership where 17 out of 18 of the partners were 
men, and the pattern has not changed since I was denied 
partnership. The sole female partner left, and the practice 
remains an all-male partnership.
    I brought my gender discrimination claim before the EEOC, 
and it determined that the practice violated Title VII in not 
affording me the same treatment as it did my male counterpart. 
The EEOC determination letter is attached to my written 
    Because of the arbitration clause, my only recourse was to 
arbitrate my claim before the American Health Lawyers 
Association, otherwise known as AHLA. I expected the 
arbitration process to be fair and assumed my case would be 
heard by an unbiased arbitrator with knowledge of employment 
discrimination law. What I experienced was the exact opposite.
    From the very first day of the arbitration, I had serious 
doubts that my arbitrator would be unbiased and fair. There 
were indications that the arbitrator had a previous 
relationship with the hospital and the practice. Also, 
arbitration was far more costly than I could have ever 
anticipated. I was required to pay half of the arbitrator's 
$450-an-hour fee, and the entire process cost me more than 
$200,000, forcing me to take out a home equity loan. Employees 
of lesser income could never afford to arbitrate their claim.
    The costs were also driven up because the arbitrator let 
the practice get away with behavior that, in my understanding, 
would have been sanctioned in a courtroom. The practice 
withheld and destroyed evidence that was critical to proving my 
claim. My attorneys filed sanctions motions, which were 
granted. For one of the motions, though, the arbitrator awarded 
me $1,000 in sanctions and then charged me more than $2,000 in 
fees for his time deciding on the motion. It is my 
understanding that this would not happen in a court of law.
    I lost the arbitration, and the content of the arbitrator's 
ruling demonstrated that he neither applied applicable law to 
the facts in my case nor considered the majority of the 
evidence in my favor. After the arbitration, my attorneys wrote 
to AHLA, arguing that it failed to provide to me the services 
for which I have paid significant sums and that AHLA and the 
arbitrator failed to meet their obligations as described in 
AHLA's Rules of Procedure and Code of Ethics. AHLA responded by 
asserting that it does not certify or attest to the abilities, 
competence, or performance of its arbitrators and does not make 
any ``warranties about the ability of the arbitrator to weigh 
facts and law.'' And I have attached to my statement both 
copies of those letters.
    For me, the mandated arbitration process took away my faith 
in a fair and honorable legal system which is supposed to 
protect the rights of citizens. Mandatory arbitration is 
allowing employers to ignore this country's civil laws, civil 
rights laws, and never to be held accountable. I hope this 
process today results in a much needed change in the law so 
that no one who follows me has to endure what I experienced.
    Thank you.
    [The prepared statement of Dr. Pierce appears as a 
submission for the record.]
    Senator Franken. Thank you, Dr. Pierce.
    Now we go to Paul Bland.

                        WASHINGTON, D.C.

    Mr. Bland. Thank you very much, Senator Franken.
    Mandatory arbitration is a very unfair system in America 
for at least four reasons.
    First of all, you have disputes between corporations and 
individuals in which you have one side--the corporation, who 
writes the contract--basically picking the company who picks 
the arbitrator who is going to decide the dispute. So you have 
a battle, you have a dispute, and one side is essentially 
picking who the judge is who is going to decide that. That is 
    Second, it is not a transparent system. It is very 
secretive. It is hard to find out what happens in arbitrations. 
They are closed. Most of them issue decisions but there is no 
written decision. It is very hard for a consumer to find out 
what has happened in previous cases. Unlike the court system, 
there is no public accountability. It is secretive.
    Third is that there is no judicial review. No one ever 
looks over to see whether or not someone is getting it right. 
So if an arbitrator makes even a blatant error of law--some 
courts have said things like ``wacky decisions of law'' by 
arbitrators are not reviewable by a court. That is really a 
    Fourth, after the Supreme Court decision last spring in the 
Concepcion case, where the Supreme Court overturned about 15 
State Supreme Courts and literally over a hundred different 
lower-court decisions and invented a new rule of Federal law, 
now supposedly the Federal Arbitration Act prevents individuals 
from joining together in a class action in almost any 
circumstances, and there is a dispute about quite how broadly 
that should be read, but it is very hard to have a class action 
arbitration now.
    Corporations uses these arbitration clauses as a shield 
against any kind of liability even if they break the law. Now, 
different companies use them as a shield in different ways. 
First, you have companies where the way they use them as a 
shield is to try to make it impossible for anyone to really 
bring an effective individual case against them. So, for 
example, most arbitrators are lawyers, and generally the people 
who show up on the arbitrators list that you get from the major 
companies are all lawyers who have worked for an industry. We 
just heard about the lawyer from the American Health Lawyers 
Association is going to be deciding a dispute against a health 
company. Similarly, I have had cases, for example, against a 
title insurance company. You get a list of arbitrators, and 
every one works for title insurance companies or for law firms 
who principally represent title insurance companies. That is 
not a very fair deal.
    In the employment setting, there is a huge amount of data, 
and the employment data shows, first of all, that compared to 
court, employees who go to arbitration end up winning far fewer 
cases than they would win in court. A professor named Alexander 
Colvin has done a comprehensive study of the employment data of 
the American Arbitration Association over many thousands of 
cases and found that.
    Second, even for the employees who do win something, they 
tend to win, on average, significantly less sums in arbitration 
than they would have won in court. It simply does work in that 
area. Now, there is not anywhere near the same kind of data for 
consumer cases because there are so few cases that consumers 
take to arbitration, but in the employment area the data is 
pretty clear.
    With nursing homes, the trade associations just openly 
admit that the reason that they want mandatory arbitration 
clauses is to hold down liability. It is much harder to win a 
case when you are taking a case in front of a lawyer from the 
American Health Lawyers Association than a jury because the 
lawyer principals represents health companies and they are 
going to be more likely to find for the nursing home.
    So there are some companies that try to use arbitration to 
win the individual case. There are other types of companies, 
really big companies, that do mass consumer businesses where 
what they are interested in is just trying to ban the class 
actions. For them, they are actually fine with having a fair 
individual arbitration because hardly any cases actually go to 
individual arbitration.
    Now, there are a lot of consumer cases where class action 
is not appropriate. The case is big enough, or there are lots 
of consumer cases involving identity theft or lemon laws or 
this kind of thing that are individual cases. But there are a 
lot of types of cases where the only way a case can be brought 
is as a class action. So, for example, you get a lot of scams, 
hidden overcharges hidden deep in the bill, formulas that are 
rigged so that people end up not getting the sort of rebate 
that they are supposed to get, bait-and-switches where people 
are promised one interest rate and get a different interest 
rate, things where contracts are broken, you are promised 
something and you do not get it, where it is the same for 
everybody, the exact same contract is broken in the same way or 
the same practice violates the same law for millions of people. 
And the vast majority of those people never figure it out 
because the nature of most consumer scams is that it is buried 
in the fine print in a way that people do not know about it. So 
there are not going to be a whole lot of cases.
    In that sort of setting, say a million people are cheated 
out of $50, perhaps 100 of them figure it out. You know, from 
the perspective of a big company, from an AT&T or from a Bank 
of America, if all 100 consumers who figure it out out of the 
million get their money back, they have not lost anything, 
because for the other 999,900 people they just get to keep the 
money. So for them, they can have a really fair arbitration 
system, but the point is that by banning class actions, they 
keep many of these cases from going forward.
    I looked at Professor Drahozal's testimony. He talked about 
in 1 year there were less than 1,000 cases in the entire United 
States that were handled by the American Arbitration 
Association where a consumer sued a business, in the entire 
United States. The small claims court in Silver Spring that I 
walk past every day on my way to the Metro to go downtown 
handles more than that many cases every month.
    Last year I had three class action settlements where we got 
sent checks out to cheated consumers, where we sent checks to 
more than 100,000 consumers. The entire United States, all the 
arbitrations brought by consumers in America were less than 
1,000? So by myself last year I was involved in--not by myself. 
I had a bunch of other lawyers working with me. But, anyhow, my 
team of lawyers, we had three cases where we got a hundred 
times as many consumers their money back as the total number of 
people who even went to the American Arbitration Association?
    The point of consumer arbitration is to suppress claims, 
and that is just an extremely unfair way, and it is bad for 
America. It encourages business to cheat people and get away 
with it.
    Thank you.
    [The prepared statement of Mr. Bland appears as a 
submission for the record.]
    Senator Franken. Thank you, Mr. Bland.
    Now we go to Mr. Schwartz.
    Oh, I am sorry. Mr. Schwartz, hang on 1 second. I 
apologize. Senator Klobuchar has just arrived, and she has to 
go, so I would like to give her--you have only 30 minutes.

                          OF MINNESOTA

    Senator Klobuchar. Thank you. I will actually stay for the 
rest of the witnesses, but I did want to just thank Attorney 
General Swanson for being here. What great work you do on 
behalf of consumers in Minnesota. We have worked together for a 
long time, and I just want to thank you for being here, and 
thank you for holding this hearing, Mr. Chairman.
    Senator Franken. Mr. Schwartz.


    Mr. Schwartz. Mr. Chairman and Ranking Member Cornyn and 
Mr. Blumenthal, thank you for having me here today. It may 
count against my time--I hope it does not--but, Senator, about 
20 years ago you and I had a phone conversation. Somebody told 
you that I had a sense of humor and could do good imitations, 
and you heard them and you said, ``Mr. Schwartz, I think you 
should stick to your day job.'' So I did, and I hope I do it 
all right today.
    Senator Franken. Something tells me I wish you had not.
    Senator Franken. Anyway, I am glad you are here, and it 
does not count against your time.
    Mr. Schwartz. My background is pretty simple. For 40 years 
I have been involved in the litigation system. I have had the 
privilege to represent plaintiffs and defendants. I was a law 
professor and a dean. I write a casebook that is used in most 
American law schools. Today I am testifying on behalf of the 
U.S. Chamber Institute for Legal Reform, which is an affiliate 
of the U.S. Chamber of Commerce. But my views, as Senator 
Cornyn and others have heard me before now, are strictly my 
    A minister I knew named Albert Sikkelee, a very brilliant 
man, gave me a piece of wisdom that I never forgot. He said ``.  
.  . something that is not in context is pretext.'' And to look 
at either the litigation system or the pre-dispute arbitration 
agreements that way alone is not very good. You have to look at 
them together. In some of Senator Cornyn's remarks, he did just 
    People are going to differ about this, but I agree with 
Professor Ware that no one is really forced to sign an 
arbitration agreement. Even with cell phones, there are some 
cell phone companies that do not make you sign a pre-
arbitration agreement. And the way it is in our competitive 
world, if people really wanted to sell something and they could 
do better by not having the agreement in there, they would do 
it. Now, the product might cost more or the service might cost 
more, but that is a factor of our marketplace.
    There is a lack of awareness sometimes, but our system of 
justice I think should encourage awareness, encourage people to 
look. And one benefit of this hearing and work you have done is 
to let people realize that they should look carefully when they 
buy. Professor Drahozal has some very good things to say about 
    I think eliminating pre-dispute arbitration agreements is 
going to really benefit lawyers. That I know. In my own firm, 
if they get rid of all litigation, Shook, Hardy & Bacon would 
have to turn to some alternative employment. And the 
plaintiffs' lawyers who are on the other side, they have 
lobbied for legislation that would abolish pre-dispute 
arbitration agreements. If I were stylie plaintiff's lawyer, I 
probably would, too. Litigation is profitable. That is part of 
their business. Contingency fees can reach 50 percent. That is 
what they do.
    Consumers do not really benefit from litigation. Lawsuits 
are not fun. Maybe some people in this room have been in them. 
You have some Attorneys General here. But being in court is not 
what it is on television. It is a woe. Learned Hand said, 
``Short of disease, a lawsuit is a person's worst nightmare.'' 
That is the alternative we are talking about. And getting a 
plaintiffs' lawyer to help you is getting more and more 
difficult. When I practiced, we rarely took a case that would 
be less than $25,000. Today, on average, it is up to $60,000. 
So if there is no pre-arbitration agreement, the person is not 
going to get a lawyer in many, many cases.
    Professor Drahozal's data shows even more challenge for 
employees to get a lawyer to help them when they have been 
fired and I have seen that in my own life experience. Somebody 
who has been fired from his job calls me, he cannot afford a 
lawyer, they do not have an arbitration agreement. They go 
    Class actions have been, we could be here for hours 
debating about them, but they are not always a rose petal for 
consumers. A recent one involved Bluetooth. I did not even know 
what a bluetooth was, but it something you stick in your ear 
and you can hear things better. Anyway, people claimed that the 
Bluetooth did not warn them boldly enough that if you turn it 
up too high, it would affect your hearing adversely. A class 
action was brought. What was the result? A hearing loss society 
got $100,000. The attorneys got $850,000. The people who had 
the Bluetooth that was allegedly too loud got nothing. So up it 
went to the Ninth Circuit, and there is a group called the 
Center for Class Action Fairness. It is very small, but they 
intervened and they got the Ninth Circuit to overturn the 
district court, but still no money has been granted to those 
who used the Bluetooth.
    Now, taking one case of arbitration or taking one case of 
class action does not give you the whole picture. But the fact 
is that class actions are not good for all people all the time. 
Sometimes consumers lose.
    There are benefits to pre-dispute arbitration. They are 
usually faster, they are usually cheaper, and they can produce 
results that are helpful to individuals who are involved in 
them if you look at it as a whole.
    There are predatory practices, but we heard from a 
distinguished Attorney General there are a lot of cops on the 
beat to stop wrongful behavior. And there is individual 
bargaining power, somebody saying, ``I simply will not do it.''
    Some have suggested that after a dispute arises, that is 
the time for arbitration. At least in my experience it is when 
people on each side of a dispute game the system. If the claim 
is inexpensive, defendents simply will not pay. If it is big, 
they plaintiffs to the litigation system. You do not reach 
agreement or having the dispute go.
    I am glad these hearings are being held. I do not think the 
problems with pre-dispute arbitration are ones that have to be 
handled through legislation. All forms of dispute resolution 
have problems. Class actions have problems. Litigation has 
problems. But here there are self-correctives to the system, 
and I think they are the best approval.
    [The prepared statement of Mr. Schwartz appears as a 
submission for the record.]
    Senator Franken. Thank you, Mr. Schwartz. What was the 
impression that you did for me on the phone?
    Mr. Schwartz. This is what I said: ``I am going to tell you 
this right now. I think it is something you should be 
encouraged to do.''
    Senator Franken. I got it. Mario Cuomo.
    Senator Franken. Professor Drahozal.


    Mr. Drahozal. Thank you, Mr. Chairman. I cannot do 
impressions, and I will not even try, so I apologize in 
    Mr. Chairman, Ranking Member Cornyn, members of the 
Committee, thank you for giving me the chance to be here today 
to talk about consumer and employment arbitration.
    What I am going to focus on in my remarks is what I focused 
on in my statement, which is empirical research on consumer 
arbitration. And I am going to talk about consumer arbitration 
because that is what my research has focused on.
    A couple of clarifications to Mr. Bland's comment on what 
the AAA caseload looks like, just to start with. First is the 
AAA had its own class arbitration caseload at the time, and so 
comparing class actions in court to the AAA's consumer 
individual caseload is not really the right comparison. And I 
do not know what the numbers are of how many parties were 
involved in the class arbitrations, but that comparison does 
not work.
    And the other thing that does not quite work is if you look 
at small claims courts, the vast majority of those dockets are 
debt collection cases, and a very small part of this AAA 
caseload was debt collection cases. The majority, 60, 70 
percent, were individual consumer cases brought by consumers as 
claimants. So it is clearly not a huge docket, but the 
comparisons understate the importance, I think, of the cases 
that are being dealt with.
    I very much appreciate Mr. Bland's highlighting of the 
empirical evidence in the employment arbitration setting. 
Again, my particular expertise where I have done the research 
is consumer cases, but frankly, most of what I have found I 
think is consistent with what the employment studies have 
found, and I will talk about that as well.
    I do think it is important that we talk about empirical 
research because anecdotal cases are useful, and highlight 
things that happen or can happen, but only when you look 
systematically across types of cases, types of disputes, the 
legal system as a whole, do you get a sense of how important or 
unimportant certain things are. And so, again, I was heartened 
to hear Mr. Bland referring to empirical studies because I do 
think they are a very important part of this undertaking.
    A couple of points to highlight from the empirical research 
that I have done. The first is that in evaluating arbitration--
and Mr. Schwartz made this point as well--you need to compare 
it to something. You need to have a control group. And the 
logical control group is the court system. And so if you look, 
for example, at arbitration cases, in the debt collection 
context particularly, it is absolutely true that businesses win 
the vast majority of cases, 94 or 96 percent. But when you 
compare that to the control group--courts, small claims courts, 
other courts--the win rate is at least as high, if not higher, 
in court for businesses. Again, this does not necessarily mean 
arbitration is fair, but it means you need to have a baseline 
for comparing the results to. You cannot just look at 
arbitration and say, yes, it is good, yes, it is bad.
    Similarly, you have to compare like cases in arbitration 
and in court. It can be really hard to do that. Comparing debt 
collection cases is a place where I think you can do a pretty 
good job. They are relatively consistent. The challenge with 
employment arbitration--Professor Colvin's study is a very good 
study, but even he recognizes the cases that are in arbitration 
are probably different from the ones in court. And following up 
on Mr. Schwartz's comment, if, in fact, arbitration is more 
accessible for lower-income employees, what you would, in fact, 
expect to see is lower amounts awarded in arbitration because 
there are different claimants in arbitration than there are in 
court. And Professor Colvin acknowledges that possibility and 
suggests that his data is, in fact, consistent with that 
    Similarly, the businesses that were studied were ones that 
had their own dispute resolution process where they dealt with 
cases before they got to arbitration. It would not surprise me 
at all if those businesses, in fact, settled the hard cases and 
only arbitrated the easy cases. And if that is the case, again, 
you would expect to have a lower win rate in arbitration, not 
because arbitration is unfair but because the cases that are in 
arbitration are different. So you have to be very cautious in 
interpreting empirical results.
    The second point is as a general matter--and you all have 
experienced this as much as I have, I am sure--legal changes 
cause changes in parties' behavior. Parties respond to changes 
in the rules. And so if there is a change in the legal rules 
governing the enforceability of pre-dispute arbitration 
agreements, I would expect businesses to respond. One way I 
would expect them to respond is by increasing prices or 
lowering wages or not raising wages as much in the employment 
context. And in particular, in the credit card context, which I 
have done some recent work on, I would expect that the effect 
would be harshest or strongest on the highest-risk customers, 
the ones who have the fewest other options for getting credit, 
because if you look at the factors that explain why credit card 
issuers use arbitration clauses, the riskiness of their credit 
card portfolio is an important factor. Credit card issuers are 
more likely to be involved in litigation if they have credit 
card bills that are not paid. And so, not surprisingly, the 
issuers turn to arbitration in that setting. If they cannot 
turn to arbitration, one response that they might take is just 
not to lend money to these folks at all--that is not 
necessarily the case, but a possible consequence.
    Then the final point, which is consistent with the 
empirical evidence, which is also something Mr. Schwartz 
suggested, is to the extent that lower-income consumers/
employees are better able to bring claims in arbitration, if 
arbitration is not there, those agreements are not going to 
happen after the dispute arises. The vast majority of 
arbitrations arise out of pre-dispute clauses, and that is true 
not just in settings of unequal bargaining power. It is true 
between businesses and big businesses. In international 
arbitration, the vast majority of claims arise out of pre-
dispute clauses, and that is because once there is a dispute, 
the Mr. Schwartzes and Mr. Blands of the world cannot agree 
that they want to go to arbitration, so they just stay in 
court, which is the default.
    I am looking forward to having the chance to answer the 
Committee's questions, and, again, I appreciate the opportunity 
to be here.
    [The prepared statement of Mr. Drahozal appears as a 
submission for the record.]
    Senator Franken. Thank you, Professor Drahozal.
    Well, I guess I will start the questioning. Attorney 
General Swanson, the testimony you gave is that basically the 
fix was in with the National Arbitration Forum right?
    Ms. Swanson. I think that is a fair assessment.
    Senator Franken. OK. And they were the biggest arbitrator 
of consumer arbitration?
    Ms. Swanson. Biggest arbitrator of consumer arbitration in 
the country.
    Senator Franken. OK. Now, I reviewed some of Mr. Schwartz's 
past writings, and in them he criticized State Attorneys 
General for engaging in lawsuits on behalf of injured persons 
in their States, saying that it was ``a subversion of 200 years 
of law,'' and that it violated the idea of equal protection 
under the law.
    Attorney General Swanson, if State Attorneys General like 
yourself could not bring claims on behalf of your citizens and 
those same citizens were required to submit to arbitration, 
what type of redress would those Minnesotans have available to 
them, or would the wrongs simply go unaddressed?
    Ms. Swanson. Mr. Chairman, Senators, I think in many cases 
the wrongs would go unaddressed. We live in a world where 
consumers, unfortunately, often find they are dealt an unfair 
hand by large corporations. The reality of the world we live in 
is that many private lawyers charge more by the hour than a lot 
of our citizens make in a week. And so if you are that 
individual citizen, it can be oftentimes very hard for you to 
be able to get an attorney, and I think that Attorneys General 
play a very important role in enforcing the law, holding 
wrongdoing accountable, making sure that we have a fair 
marketplace and a level playing field for businesses that do 
follow the law.
    I saw some of Mr. Schwartz's other testimony at one point 
when he was trying to stave off regulation. I noticed he said, 
well, we do not need certain regulations because we have 
Attorneys General on the beat. And I think it is important that 
we have Attorneys General on the beat in order to enforce the 
laws. You know, what we are talking about is making sure that 
consumers get a fair shake.
    In the recent Supreme Court case involving AT&T, in the 
majority opinion Justice Scalia said, ``The times in which 
consumer contracts were anything other than adhesive are long 
past.'' The reality of these fine-print contracts is that they 
are very long and they have gotten longer. They are very dense. 
I think our original Constitution is 4,000 words, and some of 
these consumer contracts are 20,000 words or more, drafted with 
terms that are very much lopsided against the consumer and to 
give every advantage to the company.
    Senator Franken. Adhesive contracts or contracts of 
adhesion are really where you have no choice.
    Ms. Swanson. Where you have no choice. They are presented 
to the consumer, take it or leave it. The reality is if you are 
trying to do business, they are presented to you. You are not 
going to negotiate; you are not going to red-line out a term. 
You are going to take it or not. And so when mandatory pre-
dispute arbitration clauses are put into contracts, it is 
basically asking the consumer to give up their legal rights, 
their fundamental American legal right to have their day in 
court, without oftentimes knowing it, and as we have seen with 
our case involving the National Arbitration Forum, sometimes in 
ways that are very detrimental and unfair to the consumer.
    Senator Franken. Dr. Pierce, thank you for appearing before 
us today and sharing your, frankly, horrific story. Mr. 
Schwartz wrote in his testimony, ``It is important to remember, 
and not gloss over the fact, that arbitrators such as those in 
the AAA and other organizations are professionals. They are 
independent legal experts who abide by a comprehensive set of 
rules and procedures .  .  .''
    I was wondering how that squares with the response you 
received from the American Health Lawyers Association after you 
complained that the arbitrator assigned to your case lacked the 
knowledge and experience to adequately handle your claim. The 
association wrote, and I quote, ``In the process of selecting 
an arbitrator, the AHLA ADR service makes no warranties about 
the ability of the arbitrator to weigh facts and law.''
    Does Mr. Schwartz's claim that these are legal experts who 
abide by a comprehensive set of rules and procedures make sense 
to you? Does it jive with your experience?
    Dr. Pierce. No, that was exactly not my experience. My 
experience started out with the first day of the arbitration, 
which was held in the arbitrator's office, we were given the 
library space to use and walked into the library space and 
noticed that two rows of binders in the library had the name of 
the hospital that I had the issue with on the binders and 
clearly demonstrated that his law firm had done business, what 
looked like significant business to me, with the hospital in 
the past.
    One day we actually got to the law offices early and found 
the chairman of the department, of the emergency department, 
walking out of the arbitrator's office with a cup of coffee, 
clearly having just had coffee with the arbitrator prior to us 
getting there.
    And then during the actual arbitration--I am not an 
attorney. I honestly cannot probably represent all of the 
legalese correctly, but during the arbitration there were 
multiple times that my attorneys told me that decisions were 
made and people's testimony changed and things happened that 
would never have happened in a court of law. We had one 
physician who had given a deposition, and during the 
arbitration she gave the exact opposite testimony, and it was 
very significant testimony. It was about this probation vote 
and whether or not they had done one for me. And she completely 
changed her idea, and the arbitrator said--or my attorneys 
asked her if she had changed her testimony, and she 
acknowledged she did and said--when they asked why, she said, 
``Well, I have subsequently talked to my attorneys and talked 
to the Chairman of the department and realized that the story 
was different than I thought.'' And they challenged this to the 
arbitrator, and the arbitrator said essentially--and forgive my 
paraphrasing, but essentially that is fine, I am glad her 
memory is better.
    Senator Franken. OK. Well, I think we get the idea. This 
was a guy who worked for a firm that had obviously done cases 
for the people you were arbitrating against, and when the AHLA 
says that they do not have to appoint anyone who has the 
ability to weigh facts and the law, I think that tells a lot.
    I will go to the Ranking Member.
    Senator Cornyn. Well, I think we would all agree that not 
only must a process for dispute resolution be fair in fact but 
that there has to be an appearance of fairness, too, for people 
to have confidence in the outcome. But I want to quote another 
famous Minnesotan besides the distinguished Chairman and the 
Attorney General of Minnesota, and that is Warren Burger. 
Warren Burger was recognized as one of the primary advocates of 
alternative dispute resolution, and he said in one quote, ``The 
notion that most people want black-robed judges, well-dressed 
lawyers, and fine-paneled courtrooms as the setting to resolve 
their dispute is not correct. People with problems, like people 
with pain, want relief, and they want it as quickly and as 
inexpensively as possible.''
    So I happen to agree with Professor Drahozal that it is 
important that we not make judgments here, just as in an 
arbitration or in a court of law, based on anecdote, and some 
of what we have heard from Dr. Pierce and Attorney General 
Swanson and others is very deeply concerning. But I do think 
the courts are equipped, by and large, to deal with those 
because, of course, even under the Federal Arbitration Act of 
1925, the court can still invalidate an arbitration contract on 
the basis of fraud, duress, or unconscionability. You mentioned 
contracts of adhesion, one type of those.
    But I guess I would like to get a clarification, General 
Swanson. You are not suggesting by your testimony that 
contracts to arbitrate should be unenforceable as a general 
rule, are you?
    Ms. Swanson. Mr. Chairman, Ranking Member Cornyn, I think 
right now the law is such that contracts that are in consumer 
contracts generally are held by courts to be enforceable. What 
I have tried to do with my testimony is explain some of the 
problems we have seen with arbitration when it comes to 
consumers who do not have much clout, do not have much power 
against a big corporation that does, and some of the unfairness 
that we have seen result from that when it comes to making sure 
that people have their legal rights protected.
    Senator Cornyn. We have three former Attorneys General here 
on the panel, it just happens, so all of us have had the 
experience of heading up a consumer protection division and 
finding recourse for people who need justice to be done. But 
what I do not understand is, are you suggesting that they 
should be unenforceable? Or is the ability of a court to set 
aside an arbitration, a contract to arbitrate pre-dispute on 
the basis of fraud, duress, or unconscionability? Are those not 
adequate to address the injustices that you have seen?
    Ms. Swanson. Mr. Chairman, Ranking Member Cornyn, no, I do 
not believe those are adequate to address the types of abuses 
that we have seen. You know, the Arbitration Fairness Act has 
been introduced by Senator Franken based upon all of the 
interviews and evidence that my office has seen with consumers 
and arbitrators as well as employees of the National 
Arbitration Forum who were told basically do not assign certain 
arbitrators, make sure whatever arbitrator you put on a claim 
is anti-consumer or, by gosh, let us make sure that an 
arbitrator does not ask for evidence. Based upon all of that, I 
certainly support the Arbitration Fairness Act that would 
eliminate pre-dispute mandatory arbitration clauses in, among 
other consumer contracts.
    Senator Cornyn. So what recourse would a consumer have if 
they have, let us say, a $100 dispute? Would they have to hire 
a lawyer on an hourly basis at $450 an hour or $100 an hour? 
Would they have to find a way to get a lawyer to represent them 
on a contingency fee? But $100 is not enough money really to 
enable you to find a lawyer to help you litigate that.
    Ms. Swanson. Mr. Chairman, Senator Cornyn, under the 
Arbitration Fairness Act, I do not believe anything would 
prohibit a consumer from agreeing after the fact to arbitration 
if they wanted to. The kinds of abuses I am talking about are 
in these pre-dispute arbitration clauses when consumers waive 
their legal rights beforehand, before a dispute arises. I think 
they would always be at liberty to agree in an arm's-length 
transaction to arbitration or to file a claim in small claims 
court. I know those differ from State to State. In our State I 
think you can file claims up $7,500, and they would be at 
liberty to do that as well.
    Senator Cornyn. Well, I guess the difference that I would 
have with you is you apparently do not agree that contracts 
should be enforced when they require arbitration. That is your 
    Ms. Swanson. Well, Mr. Chairman, Senator Cornyn, I think 
the courts, by and large, have enforced contracts where they 
require arbitration as the U.S. Supreme Court just did. My 
position would be that the law should be changed by the U.S. 
Congress, that the Congress is the only body that can change 
the law, and that it ought to change the law to be more 
protective of consumers.
    Senator Cornyn. Mr. Schwartz, I just happen to be old 
enough that I remember practicing law in San Antonio, Texas, 
when I was a district judge, when listening to the call of 
Warren Burger and others who complained about the cost and the 
delay associated with getting resolution of claims called for a 
new system of alternative dispute resolution. And, actually, we 
would have courts hold--we created a settlement week where 
people could mediate or arbitrate or otherwise resolve their 
legal disputes short of a full-blown jury trial with all of the 
attendant costs and delay related to that.
    How do we reconcile, in your view, the concerns that have 
been expressed, which I am sympathetic to, that in some 
instances these contracts to arbitrate are not done on an equal 
bargaining basis or that they do not actually serve the ends of 
    Mr. Schwartz. There are, as you suggested, Senator, means 
to address those. If an arbitration agreement has you have to 
arbitrate in another city and it is far far away, it is 
unenforceable. If they try to eliminate punitive damages, it is 
unenforceable. And I think there are individual cases where 
people can complain about the system, but there are avenues in 
existence to remedy those. And when Attorney General Swanson 
went after a bad company, she remedied it. In response to 
Senator Franken's earlier observation about my discussion about 
Attorney General roles, I believe that enforcing the laws of 
your own State against fraud is absolutely the role of the 
Attorney General. If the Attorney General goes into tort law 
and tries to be a plaintiff's attorney, I do not think that is 
a good idea.
    So I think there are avenues in existing law to provide for 
the bad apples. The good apples are, as you are suggesting, for 
thousands of people who cannot get representation for small 
claims. If it is an after-dispute situation, the companies are 
not going to just mail a person a check. They have sort of got 
the person over a barrel, and that is why eliminating pre-
dispute arbitration is not a good idea. More people will suffer 
than would gain.
    Senator Cornyn. Thank you, Mr. Chairman. I am going to have 
to leave, unfortunately, because of the joint address to 
Congress. The President of South Korea is here addressing 
Congress. But thank you very much for holding the hearing.
    Senator Franken. If you have a second before you leave, I 
just would like to bet you a steak dinner that you cannot find 
before 4 o'clock the mandatory arbitration clause in here.
    Senator Cornyn. I do not know what that is you are handing 
    Senator Franken. I am sorry. It is terms and conditions for 
a checking and savings account in a bank.
    I am kidding. You do not have to do that. I would not do 
that to you.
    Senator Cornyn. Well, my point is, Mr. Chairman, that even 
though consumers may not know there is an arbitration provision 
in the contracts, there is a positive societal good for having 
an expeditious and inexpensive way to have these small claims 
resolved without litigation. I have spent most of my 
professional life in a courtroom, and like others here on the 
panel who have as well, giving someone a guarantee to a jury 
trial for a small dispute when they cannot find a lawyer to 
represent them, with tremendous delays associated with 
repetitive appeals, is not my ideal of justice. We need to 
provide an opportunity for people to have a forum that is fair 
and involves efficient resolution of disputes appropriate to 
the nature of the dispute and subject to the existing law. That 
is my position.
    Thank you.
    Senator Franken. Thank you. I understand that.
    We will go now to Senator Blumenthal.
    Senator Blumenthal. Thank you, Senator Franken, and thank 
you for your leadership in this area, which I think has been 
very, very valuable. Attorney General Swanson, you can tell the 
people of Minnesota that they are well served by Senator 
Franken's leadership.
    I want to ask you first, part of the problem in the 
National Arbitration Forum practices resulted from the 
arbitration clauses essentially being concealed or obfuscated. 
Is that correct?
    Ms. Swanson. Mr. Chairman, Senator Blumenthal, that is part 
of the problem. The National Arbitration Forum actually 
employed a vice president of clause placement who was in part 
paid commissions to go out to large corporations and convince 
them to put clauses in the agreements. It would help write the 
clauses that would go into the agreements and then afterward 
would actually help file and write the claims that would be 
used against consumers. But, absolutely, that was one of the 
problems, is the clauses were concealed and not very obvious.
    Senator Blumenthal. And you would agree, Mr. Schwartz, that 
that kind of practice really is abusive and should be illegal?
    Mr. Schwartz. If the laws in Minnesota were violated, they 
should be prosecuted.
    Senator Blumenthal. Well, in your view, you would condemn 
such practices, would you not?
    Mr. Schwartz. The type of things that the Attorney General 
spoke of on their surface--I have not looked at the whole 
case--do sound like that they are illegal.
    Senator Blumenthal. Would you agree that clauses that are 
not fairly explained and indeed are concealed or obfuscated 
requiring arbitration are abusive and should be illegal?
    Mr. Schwartz. Well, fairness is in the eyes of the 
beholder, so I have difficulty answering that question at that 
degree of generalization.
    Senator Blumenthal. So that a clause that is concealed in 
fine print, deliberately hidden from consumers, would be OK 
with you?
    Mr. Schwartz. That is a ``When did you stop beating your 
wife? '' question. I mean, if somebody deliberately makes it so 
obscure that no reasonable person could find something, then 
you walk into unconscionability, sir.
    Senator Blumenthal. Well, isn't the problem really today in 
the wireless and the cable industry and many industries where 
there really is effectively no consumer choice, that not only 
is there a lack of what you have called ``equal bargaining 
power'' but also that consumers cannot, even with due care, 
discern that there is a mandatory pre-dispute arbitration 
clause? Isn't that part of the problem today?
    Mr. Schwartz. I think that there should be, and there are, 
alternative as--when we talk about cell phones, some companies 
do not require mandatory arbitration agreements, and that 
market forces should be used to have people have situations 
where they have a choice. And if there is just no market for 
it, then there is no market for it.
    Again, I am not talking about something where somebody is 
engaged in behavior that violates a State law. That was 
something that the Attorney General went after. But fine print 
is part of our lives. There is fine print on a lot of things, 
and that alone is not, to me, an unlawful practice.
    Senator Blumenthal. Well, I do not disagree with you that 
fine print is not unlawful. The question is how the fine print 
is depicted, and I would be willing to say, without knowing the 
answer--and I learned as a prosecutor never to ask a question 
if I did not know the answer--that you have defended and 
prosecuted cases where there were in effect unfair practices 
that may not have violated the law but your feeling was they 
should have violated--there should be a law to prohibit them.
    Mr. Schwartz. I have not had the privilege that you have 
had to be Attorney General of a State or a prosecutor. I have 
been a plaintiffs' lawyer, and I have done defense work. But I 
have not engaged in criminal practice of law on either----
    Senator Blumenthal. But there are many contracts that you 
have encountered that essentially were misleading if they were 
not properly explained?
    Mr. Schwartz. This is just my personal life. I have not 
encountered that type of thing, and if I ever have, I simply 
would not deal with that merchant or deal with that service 
provider. But that would be--that is a personal answer in my 
    Senator Blumenthal. But, in fact, in many instances of 
consumer life, consumers may have no choice, even if there is 
no gun pointed to their head, which is, again, the phrase you 
used, but to use a service or buy a good where pre-dispute 
mandatory arbitration is imposed. And we are not talking about 
arbitration that is knowingly entered into after there is a 
dispute. We are talking about mandatory pre-dispute arbitration 
without in any way dismissing your arguments that there may be 
benefits to knowing and informed arbitration clauses after the 
dispute has arisen.
    Mr. Schwartz. I want to know more about--and you can share 
with me, or this hearing is not the end of all hearings on this 
subject--precisely the type of situation that you are talking 
about where the person absolutely needs the service. I mean, a 
surprise to some in this room, I lived in a world where there 
were no cell phones, and I kind of made it. I was all right. So 
that is why I want to get a little bit more specific. If 
somebody cannot eat or cannot buy food in a supermarket, that 
is something I would want to think about. But I do not think 
where I go to Shopper's Food Warehouse--maybe they will give me 
a discount for mentioning them--that there is some agreement 
when I am buying those groceries that I cannot sue them if the 
food is bad.
    Senator Blumenthal. Well, my time has expired. I appreciate 
    Senator Franken. We will do a second round.
    Senator Blumenthal. I appreciate your testimony, and I am 
grateful that there will be a second round. Thank you. And in 
the meantime, I am going to try to find the arbitration clause 
in here, although I have not been promised a steak dinner.
    Senator Franken. If you can find it, you will have a steak 
    Senator Blumenthal. Thank you.
    Senator Franken. And that goes for you, Mr. Schwartz. Would 
that be fair to you to ask you to find the arbitration clause 
in that document?
    Mr. Schwartz. I think that would be fine, but I do not want 
to do it here because I do not want to interfere with the 
President of South Korea. I will do it----
    Senator Franken. I think he will be done with his speech 
before you find it.
    Senator Franken. Senator Whitehouse.
    Senator Whitehouse. Thank you, Chairman. First of all, let 
me thank you for holding this hearing. I think Americans today 
are the people in the history of the planet who are most 
bedeviled by fine print, and it is an unfortunate and noxious 
part of most of our daily lives. As Mr. Schwartz had pointed 
out, it is not illegal for there to be fine print, but, 
nevertheless, we do find that there is an enormous amount of 
mischief that is often buried in the fine print. Indeed, your 
Attorney General who is here discovered really a systematic 
racket run for the purpose of cheating consumers by not just 
some little fly by-night corporation but by the largest 
arbitration company in the country.
    So it is hard to deny that this is a really significant 
issue when you look at how bad the practices are, how one-sided 
the negotiating posture is, and just the plain experience of 
it. I mean, you can just stack up people like Dr. Pierce over 
and over again who have had miserable experiences with 
arbitration, did not know, for instance, that the companies 
that appeared before the arbitrators all the time got to pick 
who the arbitrators were; and if you ruled against them, they 
could knock you out. It is like picking a panel. If you do not 
get a hanging judge, you throw them out until you have got all 
hanging judges, and because you are coming in case after case, 
you can basically filter out anybody who will decide for 
consumers. Unless you are that lucky person who got that 
arbitrator for the first time, who decided for you before they 
came in and swept you out for having had the temerity to decide 
for a consumer. And the problem of take-it-or-leave-it 
contracts makes it just so much worse, and I think Mr. Schwartz 
was stretching the credulity of this Committee a little bit 
when he suggested that one could get by in this modern age, 
particularly in a busy life, as he has, without access to, say, 
a cell phone. Maybe you have a lot of staff people who can run 
around with you and answer the phone, but I think for most 
Americans, a cell phone is a pretty basic thing, and I do not 
think anybody feels they have negotiating leverage in that 
    Take a look at a credit card contract. Those used to be a 
page or two long. Now they are 20 pages long. We have an entire 
agency that has had to be built to try to cope with the tricks 
and the traps that were built into the credit card contract, 
such as declaring the day over at 11 in the morning so that 
when they opened the mail after 11 in the morning, mail that 
came in that day was late, and the consumer could be whacked 
with a significant interest rate increase. That is the kind of 
practice that creeps into the fine print. And so I think it is 
really important that we do this.
    My observation on this is the following: The Bill of Rights 
provides, ``In suits at common law, where the value in 
controversy exceeds $20, the right of trial by jury shall be 
preserved.'' Fairly strong, clear language.
    The Bill of Rights also provides in the Second Amendment 
that, ``A well regulated militia, being necessary to the 
security of a free state, the right of the people to keep and 
bear arms, shall not be infringed.''
    I would be interested in how many of my colleagues on the 
other side of the aisle would be willing to concede that in 
hidden language in a pre-dispute contract you could be obliged 
to give up your Second Amendment rights. I think we would hear 
pretty strong blowback from some very big organizations and 
from a lot of folks. And yet for some reason the individual 
right to a trial by jury does not seem to have the same 
energetic defense. And that was interesting because we just had 
in the Judiciary Committee Justice Scalia and Justice Breyer 
for kind of a novel discussion about the role of the Court, and 
they both agreed how important the jury was not just as a 
little machine that sat in the judicial system to do fact 
finding, but in the overall plan of the American system of 
Government, it was part of the architecture that the Founders 
put together of bicameral legislature, of independent 
judiciary, of separate executive, and of a jury where, when all 
else failed, you could get heard by a jury of your peers. And 
it strikes me that there is a lot more at stake here than just 
settling disputes when the right to the jury that is in the 
Constitution is so readily dealt away.
    Attorney General Swanson, your reaction?
    Ms. Swanson. Mr. Chairman, Senator Whitehouse, I agree with 
that. I think that it is very much a strong part of our 
American history and culture as well as in the Constitution 
that people ought to have their right to have their day in 
court. Yet millions upon millions of consumers in America are 
losing that right to have their day in court before a jury in 
the fine print of these outrageously long contracts without 
even knowing it and without having meaningful choice. As we 
have seen in our case involving the National Arbitration Forum, 
often that has resulted in a tremendous injustice where 
essentially the little guy, the consumer, ends up not getting a 
fair shake. And, you know, in the case of the National 
Arbitration Forum, you essentially had that arbitrator who by 
his own words was in hundreds of millions of consumer contracts 
in America acting as the judge, the jury, the law clerk, and 
almost the plaintiff all in one. And it engaged in conduct that 
would never be tolerated in a court of law, that would not be 
allowed in a court of law, going out there hustling clients to 
sign up with it so they could then deprive people of their 
legal rights.
    Senator Whitehouse. What industries are the worst offenders 
in terms of--I should not say ``worst offenders.'' What 
industries do American consumers engage with who are the most 
frequent contracts that American consumers enter into? Cell 
phones, credit cards. Who else?
    Ms. Swanson. Mr. Chairman, Senator Whitehouse, it runs 
across the table. In addition to the ones you mentioned, it is 
utilities, it is satellite television services, virtually--pick 
a service contract that has--you know, the 20-, 30-page service 
contracts, it is in there. You know, in the financial services 
industry, they will put arbitration clauses in.
    An area that is increasingly a problem are these debt 
buyers. It is oftentimes not just the initial creditor now who 
is pursuing a claim, but credit card companies, cell phone 
companies, others will sell debt for pennies on the dollar, 
maybe 3 cents on the dollar. Billions of this debt is bought 
and sold every day in this country. Debt buyers will generally 
only buy a data stream of electronic records of consumers who 
might owe money, and so we have seen many abuses where debt 
buyers, who oftentimes are the third or fourth debt buyer 
removed from the initial contract, pursue people who either do 
not owe the money--maybe they have a similar-sounding name or a 
similar address; maybe they were a victim of identity theft; 
maybe they paid back the money long ago. Yet arbitration has 
even been used as a sword against them.
    And so imagine the surprise of a consumer who was handed a 
20- or 30-page fine-print contract from an original creditor, 
only to have that creditor sell the debt ad nauseam down the 
stream to companies they have never heard of and then to get 
hauled into arbitration by an arbitration company they have 
never heard of in a faraway State. We heard from people like 
that, and they said, ``We did not feel we had a fair shake. We 
did not even respond to the arbitration claim because we did 
not think it was for real. We had not heard of the plaintiff, 
and we had not heard of the arbitration company.'' And that is 
not giving the American consumer a fair shake.
    Senator Whitehouse. Well, thank you, Chairman, for your 
efforts to see that American consumers do get a fair shake.
    Senator Franken. Thank you, Senator Whitehouse.
    I was really struck by what you said about the Constitution 
because, in fact, this is a bank contract, and on page 86 of 
this contract, you do give up your right to bear arms.
    Senator Franken. I mean, it is an amazing coincidence about 
that, and I think that it is too bad our colleagues are not 
here to be as upset about that as they would be.
    I was also struck by your talking about--picking up on what 
Mr. Schwartz said about having lived in a world without cell 
phones. In fact, in your written testimony you testified that, 
``Consumers and employees voluntarily enter into these 
contracts.'' And I would submit that they do not know their--I 
do not think this is voluntary. And Dr. Pierce did not know, 
and Dr. Pierce is probably--how many degrees do you have? A 
few. How many? Just give me some idea of what they are.
    Dr. Pierce. I have a bachelor's in chemical engineering, a 
master's in biochemistry, and a doctorate, medical doctorate.
    Senator Franken. OK. So you are probably in the top, you 
know, 50 percent of education in this country.
    Senator Franken. Right?
    Dr. Pierce. I hope so.
    Senator Franken. OK. And you were not aware that you had an 
arbitration agreement. OK. Mr. Schwartz testified that, 
``Consumers and employees voluntarily enter into these 
contracts. It may seem extraterrestrial, but I have lived in a 
world where people did not have cell phones or the gadgetry we 
see in our daily lives. Folks did survive.''
    Mr. Bland, this seems to me to suggest that if consumers do 
not like mandatory arbitration clauses, they should just avoid 
them, and this strikes me as kind of dubious. In your opinion, 
is it really possible to live a normal, 21st century life and 
manage to avoid arbitration clauses? What would they have to 
live like, exactly?
    Mr. Bland. Well, these clauses are in everything. I mean, 
they are in everything. I have seen a mandatory arbitration 
clause in an organ donor transplant contract. I have seen 
mandatory arbitration clauses in pet kennel contracts. You want 
to take your cat in while you go out of town. You cannot buy a 
new car in the United States without signing an arbitration 
clause because the car finance company has made all the new car 
sellers--at least if you finance the car. To get a car you have 
to have an arbitration clause. The major cell phone companies 
all have arbitration clauses.
    There is almost nothing you can buy on the Internet--if you 
want to buy a computer--almost any service or good you want to 
get on the Internet, you click a box, and if you open up the 
box and scrolled and scrolled and scrolled and scrolled and 
scrolled and scrolled, et cetera, you know, at some point you 
would find the arbitration clause buried way in there. It is 
ubiquitous throughout American society now.
    The idea that, yes, you know, you have a choice to live in 
a world where you do not have a phone or a credit card or a car 
or play computer games or have, you know, children who eat----
    Senator Franken. The Unabomber could have avoided a 
mandatory arbitration clause.
    Mr. Bland. And he was a very free man out there, you know. 
He enjoyed all sorts of freedoms in that cabin, I am sure. But, 
yes, exactly, it is completely unrealistic. And the idea that 
it would be an organ donor transplant or that it is a 
requirement before you can get into a nursing home, you know, 
the vast majority if not over 90 percent of nursing homes in 
America have mandatory pre-dispute binding arbitration clauses. 
I talked to a ton of people who were in these homes who had no 
idea that that was there. They signed something. A lot of these 
people are in pain. I represented a client who was a stroke 
victim who they got to sign one of these arbitration clauses. 
She had no idea. Actually, I should not pick her out like she 
is particularly--I mean, even though she is particularly 
vulnerable, I have talked to over 1,000 consumers doing case 
intakes for consumer cases. I have never met a consumer who 
knew that the arbitration clause was there before a lawyer had 
told them, usually me. It is like being an oncologist giving 
people bad news. They say, ``Do I have a lawsuit here? '' It is 
like, ``Actually, you probably do not have a lawsuit because 
there is an arbitration clause that is going to bar you from 
suing, and you have to go to someone who they pick.'' And 
people cannot believe it. They are furious. They are outraged. 
The idea that all these people chose to do this, this idea that 
there is this voluntary choice, that all these Americans are 
out there saying, ``Gosh, what I was really hoping to do was be 
forced into mandatory arbitration in front of this company in 
Minnesota.'' You know, I do not meet those people in my real 
life, and I answer my phone a lot.
    Senator Franken. Professor Drahozal in his testimony talks 
about empirical evidence. In service of empirical evidence, he 
says that 82.9 percent or 247 of 298 credit card users do not 
use mandatory arbitration clauses, which I think implies to 
anyone who reads it that mandatory arbitration is not 
widespread. But that does not reflect the number of credit card 
users, does it? So when we are using empirical research, there 
are numbers and then there are damn lies, right?
    Mr. Bland. Yes, Senator.
    Senator Franken. I am sorry. That was----
    Mr. Drahozal. I would be happy to talk about those numbers, 
but I am not going to take up your time.
    Senator Franken. OK.
    Mr. Bland. A tiny number of banks control nearly all the 
credit cards in America. If you take Citi and American Express 
and Discover and Chase and so forth, if you get about seven or 
eight credit card issuers, you are up over 90 percent, if not 
over 95 percent----
    Senator Franken. So, in other words, the big issuers are 
the ones with the arbitration contracts--mandatory 
    Mr. Bland. Although right now at the moment, four of the 
biggest credit card issuers do not have the arbitration clauses 
or class action bans because there is an antitrust suit which 
alleged that they had all gotten together and agreed to have 
essentially the same arbitration clause. And so to settle the 
antitrust case, four of the biggest banks in America are sort 
of taking a time-out in which they agreed to a settlement and 
which they said that they would not use mandatory arbitration 
for 3\1/2\ years. And then, you know, of course, on the 181st 
day of the fourth year they are going to rush and put these 
things back in. And then you will have upwards of 95 percent of 
all American credit card holders having arbitration clauses 
    Senator Franken. OK. Well, I think it is important to be 
careful how we use empirical data. I would like to go to 
Senator Blumenthal.
    Senator Blumenthal. Thank you.
    Professor, I wanted to ask you about some of the empirical 
work that you have done. Have you focused specifically on 
mandatory pre-dispute----
    Mr. Drahozal. Yes, there are two different types of studies 
that you do. One is you look at the arbitration proceedings and 
see how the arbitrators decide things, and the vast majority of 
those proceedings arise out of pre-dispute agreements. So the 
proceedings are the result of arbitration clauses in form 
contracts. And then the other type of study is to actually look 
at the contracts, so the credit card data that Chairman Franken 
referred to is data I collected from a Federal Reserve web page 
that now has available every credit card, supposedly anyway, 
virtually every credit card contract in the country, and those 
are all pre-dispute.
    Senator Blumenthal. Do you divide your research into 
clauses that are mandatory and clauses that offer some choice?
    Mr. Drahozal. When looking at the arbitration clauses, a 
lot of credit card issuers do not have arbitration clauses at 
all, but they tend to be small banks or credit unions. So there 
are choices out there for consumers. So there are lots of 
choices in that sense, although not many consumers take them up 
on it.
    Within the clauses themselves, some of them have opt-out 
provisions that are similar in result to the poultry contracts 
that the Chairman referred to earlier, where the contract shows 
up and the consumer has the option under the terms of the 
contract to opt out. So those in a sense have a choice, at 
least formally.
    Senator Blumenthal. Do you know what proportion of 
mandatory arbitration clauses--or strike that. Do you know what 
proportion of arbitration clauses are mandatory and are pre-
dispute as opposed to post-dispute?
    Mr. Drahozal. By definition, all arbitration clauses are 
pre-dispute because they are clauses in a contract. There are 
arbitration agreements that are entered into post-dispute, and 
I do not know of any evidence of the number of those 
    Senator Blumenthal. Well, there by definition would be 
decisions made post- or pre-dispute to enter into arbitration. 
Is that correct? In other words, you can decide after the 
dispute arises to enter into the arbitration or you can agree 
    Mr. Drahozal. Right. In the latter case, there is no good 
evidence on how many agreements there are, post-dispute 
agreements, but there are very few arbitrations that arise out 
of post-dispute agreements.
    Senator Blumenthal. And have you looked at what the costs 
are relatively to those arbitration clauses that are agreed to 
after the dispute as opposed to mandated pre-dispute?
    Mr. Drahozal. In the evidence I have looked at and the 
evidence I have seen, both in the employment context and in the 
consumer context--there are just not enough cases----
    Senator Blumenthal. And the reason is that there are very 
few instances where consumers are offered any real choice. 
Isn't that correct?
    Mr. Drahozal. I guess I would say there are very few 
circumstances in which parties after a dispute arises can agree 
to arbitrate, because at that point it is in one party's 
interest to be in court. It is either going to be in the 
business's interest if they want to try to go to an expensive 
forum that the consumer will not be able to bring a claim in, 
or it is going to be in the consumer's interest if they have a 
claim that they think that they want to get before a jury, for 
    So you are right, I agree. After a dispute arises, parties 
cannot agree. But I think it is because of the litigation 
dynamics at that point that they just cannot come to an 
agreement to arbitrate. They will just plow ahead in court, 
which is the default.
    I am sorry. I may not be understanding your question. I 
    Senator Blumenthal. No, I think you have answered the 
question that there really is not enough data to show that the 
costs and the time that we are trying to save really are the 
result, necessarily the result of mandatory pre-dispute 
arbitration clauses because the others are relatively rare, for 
whatever reason.
    Mr. Drahozal. I would say it is the other way around, 
though. You are not going to get the cost savings in 
arbitration if you limit it to post-dispute because nobody is 
going to agree post-dispute.
    Senator Blumenthal. And you may be right----
    Mr. Drahozal. So the cost savings are pre-dispute.
    Senator Blumenthal. You may be right, but you do not have 
research to show it as you sit here.
    Mr. Drahozal. The research, the data that are available 
suggest very rare incidence of post-dispute agreements.
    Senator Blumenthal. Because they are relatively rare.
    Mr. Drahozal. Yes, absolutely.
    Senator Blumenthal. In other words, almost all of the 
clauses are mandatory pre-dispute clauses that are imposed by 
companies like AT&T or the bank--and I do not want to single 
out the bank that--and I have read it, and quite honestly--and 
I have had some litigation experience myself.  .  .  . I cannot 
really understand it.
    Mr. Drahozal. Credit card contracts are actually much 
better, for what it is worth. They have a lot of bold print 
about arbitration in general, and you can actually search them 
on the Federal Reserve web page. My guess is we could find it 
fairly quickly if we had Google and could do it electronically. 
But, yes, they are long contracts, and there is a lot of stuff 
in them. Agreed.
    Senator Blumenthal. Thank you.
    Senator Franken. Senator Whitehouse.
    Senator Whitehouse. It strikes me, Professor Drahozal, that 
there is a lot of import to the statement that you made--I 
think I have it exactly right because I wrote it down just as 
you said it--``nobody is going to agree post-dispute to an 
arbitration clause.''
    Mr. Drahozal. I guess I would say very rarely, but yes. You 
probably quoted me right, but very rarely----
    Senator Whitehouse. When you have a post-dispute 
arbitration, it is between two construction companies that have 
an issue, and they do not want to hassle it out, they do not 
want to be in court, they do not want the lawyers involved. 
They are going to have a long-term relationship. They are 
friends. The CEOs probably play golf together. They need this 
sorted out. They bring in an arbitrator, and they agree 
whatever the outcome is going to be, that is what it is. But 
they are big players, and that is the sort of archetypal post-
dispute arbitration agreement----
    Mr. Drahozal. No, no. Actually, most big businesses that 
use arbitration agree in contracts as well. If you look at the 
data on international arbitrations, which are big players----
    Senator Whitehouse. No, no. I am asking about post-dispute.
    Mr. Drahozal. They have very few post-dispute arbitration--
    Senator Whitehouse. And they tend to be big companies that 
are trying to sort out some problem, right?
    Mr. Drahozal. No, actually--I mean, the rates are similar.
    Senator Whitehouse. What do they tend to be?
    Mr. Drahozal. The rates are similar between consumers, 
employees, and big businesses. Nobody uses post-dispute 
arbitration--again, I am exaggerating, ``nobody.'' It is very 
    Senator Whitehouse. But you are saying that for effect, and 
I understand you did not mean that to be 100 percent true.
    Mr. Drahozal. I was being a little sloppy.
    Senator Whitehouse. But there is a point that is buried in 
there, which there is a reason that nobody is going to agree 
post-dispute. It is because these are one-sided agreements that 
somebody loses advantage by virtue of this. Otherwise, they 
would be empirically just as willing to agree post-dispute as 
pre-dispute. No?
    Mr. Drahozal. Yes, and the advantage varies depending upon 
the case. Sometimes it is the consumer who loses, sometimes it 
is the business who would lose. And since it is pre-dispute, 
they can work it out and they do not know----
    Senator Whitehouse. How often do you suppose it is the 
business in a large-scale consumer arbitration clause that--
empirically, how often do you think it is the business that 
loses as the result of that rather than the consumer once the--
    Mr. Drahozal. That is hard to know. There actually is----
    Senator Whitehouse.--dispute arises?
    Mr. Drahozal. There are no systematic data either way as to 
how often it is the consumer or how often it is the business. 
There actually is a case involving the motor vehicle franchise 
arbitration statute, which makes unenforceable arbitration 
clauses between car dealers and manufacturers. There actually 
is a recent case where the car dealer wanted to arbitrate, and 
the business said, No, the statute says these agreements are 
unenforceable. So you do see it. It is hard to know how often, 
I agree, but that is a lack of data, and there are attempts to 
find out the answers to those questions. But it certainly 
happens, absolutely.
    Senator Whitehouse. And if you have one of these consumer 
take-it-or-leave-it arbitration clauses that are in a general 
contract, are they limited to small dollar amounts, or do they 
have a threshold so that if it turns out to actually be a 
really big deal for somebody, they still have their right to 
get before a jury and that this is really just a way of sort of 
clearing the decks of the small clutter, the $100 disputes here 
and there? Is there a cap on them once the dispute gets to a 
certain point you actually get to go back to the jury again?
    Mr. Drahozal. No, it is usually the other way around. There 
is a floor. The American Arbitration Association's policy is 
that consumers can always go to small claims court. An 
increasing number of credit card contracts have that as well. 
So it is in some ways the other way around, that up to a 
certain point for very small claims, whatever the threshold is 
for small claims court, which varies by State, consumers or 
businesses both can still go to court.
    Senator Whitehouse. But if it is a bigger claim and, 
therefore, more dangerous to the company, then that is when 
they push you toward arbitration under the clause?
    Mr. Drahozal. Well, I would say there is probably an in-
between category--these were the cases that Mr. Schwartz would 
be talking about--where the claims are big enough--and, again, 
there is some data that is consistent with this--that the 
claims are big enough that they could be brought in 
arbitration, but they are not big enough to get a lawyer to 
justify going to court. But then beyond that----
    Senator Whitehouse. But that was not my question. My 
question was: In terms of the way these arbitration clauses are 
structured, your testimony is that the structure is that they 
tend to kick in for higher-dollar claims and let you out for 
lower-dollar claims. They give you a right to small claims 
court, but if it is a more significant claim than small claims 
court, that is where you really are barred by the arbitration 
clause. Do I have that correct?
    Mr. Drahozal. I would say there are three categories. There 
are the very small claims where you can go to small claims 
court under the clauses. There are the mid-sized claims which 
are not big enough to justify going to court, but that you 
could bring in arbitration. And then there are the very big 
claims that you would want to go to court for. And the theory 
or the argument is--and, again----
    Senator Whitehouse. And the arbitration clause covers both 
of the latter two?
    Mr. Drahozal. Both of the latter two. And so the implicit 
deal that you can make in pre-dispute arbitration that you 
cannot make in post-dispute arbitration is the consumer gets 
the right to bring the mid-sized claims in arbitration in 
exchange for giving up the right to bring the big claims in 
court. And, again, there is some data consistent with that, but 
it is a hard thing to study.
    Senator Whitehouse. And one last question, if I might, for 
the Attorney General. You have looked at a lot of this. You are 
pretty expert. You brought the case against the arbitration 
company, your office did. If you are in one of these consumer 
contracts, like a telephone or a credit card or other type of 
contract, how variable is the nature of the claims themselves? 
Does it tend to be that each one is its own type of claim and 
it would be really hard to aggregate them? Or would it be more 
likely that they would be the type of claim that you could 
actually probably get a couple hundred consumers together 
because they are all being screwed the same way, to be blunt 
about it, and, therefore, if you did not have the arbitration 
clause, you would actually have no trouble getting a lawyer and 
getting into court even if you were in Professor Drahozal's 
second category because so many other people are being treated 
just the same unfair way you are that you can aggregate it and 
you can actually get some justice that way? What is your take 
on that?
    Ms. Swanson. Mr. Chairman, Senator Whitehouse, my take on 
that is that they tend to fall into the latter category. In 
other words, there is a lot of commonality oftentimes between 
the claims. It might be a corporation engaged in a systemwide 
deceptive trade practice where consumers are basically cheated 
out of smaller amounts of money, but cheated in the same way 
oftentimes using the fine-print language of the contract to 
first cheat the consumer or deceive the consumer, but then they 
are using the contract language to try to take away their 
rights. So my impression is there is a lot of commonality. In 
fact, some of the claims that we as State Attorneys General 
bring, obviously not being able to represent a private 
individual, we have to bring cases where the public interest is 
affected, and I think certainly a lot of the cases that we 
bring could be claims that people could also bring on their own 
potentially because of the uniformity.
    Senator Whitehouse. And by definition, if it is systematic 
deception by the company, it is going to sweep a large number 
of consumers into the same category of deceived consumer.
    Ms. Swanson. That is exactly right, thousands, tens of 
thousands, or more consumers similarly situated.
    Senator Whitehouse. OK. Thank you very much again, 
Chairman. I think this has been a very helpful hearing, and I 
appreciate that you----
    Senator Franken. What do you mean ``been'' ?
    Senator Whitehouse. Well, I have to leave now so it is 
going to be less interesting after I am gone.
    Senator Franken. That is for sure.
    Senator Franken. I am sticking around for a third round. I 
am not sure if you have to go. You do? OK. Well, you just got 
    Senator Blumenthal. But I would like to thank the witnesses 
very much for being here. You have been excellent, and this has 
been very informative, and I really appreciate your work, Mr. 
Chairman. Thank you very much.
    Senator Franken. Thank you. I am going to just ask a few 
more questions.
    Mr. Bland, in terms of the last question that Senator 
Whitehouse asked and that General Swanson spoke to, the 
commonality of small kinds of ripoffs, essentially, can you 
give us maybe one or two examples of those kinds of things?
    Mr. Bland. Sure. AT&T added onto its monthly bill $3 for 
roadside assistance. I do not know if you know what it is. The 
idea, I guess, is that if you get lost, you know, AAA would be 
able to find you because they could use the GPS on your cell 
phone. They do not ask people whether they want this or not. 
They do not get any approval. They do not get any prior 
authorization. You just suddenly have this new service you did 
not order which costs $3. They do this for millions of people.
    So we had a class action in Florida saying that they should 
not be allowed to charge people for some hidden charge in the 
bill that people did not authorize, did not agree to. It breaks 
the contract. It is a deceptive trade practice and so forth.
    Senator Franken. But according to Concepcion, can you file 
    Mr. Bland. Well, we argued--I represented the plaintiffs in 
this case. We argued that Concepcion had an exception that in 
limited cases where you can prove that without a class action 
that people would not be able--that they would be completely 
shut out and get no justice, the catch phrase in the Supreme 
Court is they would not be allowed to ``effectively vindicate'' 
their rights, that if you could prove with evidence that 
without a class action people would not be able to effectively 
vindicate their rights, that the class action ban should be 
struck down.
    The Eleventh Circuit Court of Appeals ruled against us, and 
they said in their decision--which I think is wrong, but you 
have seen a lot of courts doing this in the wake of Concepcion. 
The Eleventh Circuit said that we have proven that only an 
infinitesimal number of consumers would ever be able to get 
their rights under the consumer protection laws vindicated, and 
everyone else would be out of luck, even if everything that had 
happened to them was illegal, but that still, according to the 
Supreme Court in Concepcion, the way this Federal court of 
appeals read Concepcion meant that the class action ban had to 
be enforced and the arbitration clause had to be enforced and 
the case was thrown out.
    So you have a bunch of people who are scammed all in the 
exact same way, and only an infinitesimal number of people are 
going to be able to go forward under arbitration in individual 
cases to get their money back, and everyone else is out. And so 
AT&T basically is rewarded because they have done something 
that is a scam----
    Senator Franken. Let me get this right. So the court ruled 
that because an infinitesimal number of people could get their 
money back, their $3 a month back, then you could not go to 
    Mr. Bland. It is not clear if this court----
    Senator Franken. Because infinitesimal was good.
    Mr. Bland. Yes, that was good.
    Senator Franken. It was better than zero.
    Mr. Bland. Well, you know, it is possible----
    Senator Franken. It had to be zero?
    Mr. Bland.--if it had been zero we still would have lost. I 
mean, they basically said that the Supreme Court wants these 
class action bans enforced so strongly, you know, even if we 
had been able to prove that no one ever, no matter what, could 
ever get through to arbitration, if the arbitration had been 
on--you know, the class action had to be on Mars on Leap Day or 
something, I still think that that court was going to say that 
the Supreme Court was telling it that you always have to 
enforce the contract.
    Senator Franken. You told me also about American Express or 
    Mr. Bland. Yes. We represent a guy who is an accountant and 
extremely involved in math, and he got an American Express card 
because he wanted the rebate. You are supposed to be able to 
get up to 5 percent back. So he goes out and spends a bunch of 
money on his American Express card, and he checks the rebate. 
It takes him pages to try and figure out the formula that is 
set out in their contract, and he realizes that the rebate is 
much, much smaller than the formula that is set out in their 
contract. And he tries to get information from the bank, and 
they stonewall him and so forth. We end up bringing a class 
    It turns out that American Express just routinely cheats 
people on the rebate. The rebates are much smaller than they 
are supposed to be. You have a formula that is promised to you 
up to 5 percent. Nobody gets 5 percent. And you never get what 
the formula promises you. They simply have rigged a lower 
formula that gives you less than the rebate.
    So we had a case in which we proved in court that this case 
could not be brought in an individual action. Almost nobody 
except for our accountant math whiz client even would ever 
figure this out that they were being cheated from this sum. But 
even say there were another 100 people like him who figured it 
out, they would not ever be able to find a lawyer. So even if 
they figured out how they were scammed and they figured out 
that you go to arbitration, they would not know how to bring 
the right kind of claims under the consumer protection acts and 
sort of get their actual remedies back. But the point is that 
American Express is doing this to millions of people, and we 
have a Federal district judge in New Jersey who says it does 
not matter if nobody will ever get their money back from being 
cheated here, that the point of arbitration clauses is 
supposedly in 1925 Congress loved arbitration so much that it 
loved it way more than contract law, which does not let you 
have exculpatory clauses, and loved it way more than consumer 
protection laws, and that the Arbitration Act just wipes this 
all away. That is the way that Court reads Concepcion. So we 
are appealing. We think that that is a little extreme. It goes 
beyond that Concepcion is terrible but not that terrible. But, 
you know, there is a bunch of cases like this in which courts 
are throwing out class actions where it has been proven that 
without the class action no one will get any remedy. It is 
incredibly unfair.
    Senator Franken. OK. I believe one of the witnesses, either 
Mr. Schwartz or Mr. Drahozal--I think it was Mr. Schwartz--said 
that one of the myths is there is not due process. There were 
several myths that were listed, and one of them was that there 
is not due process in arbitration.
    General Swanson, would you like to speak to that? Is there 
discovery? Is there appeal? What can you do?
    Ms. Swanson. Well, arbitration is very different than a 
court of law. First of all, you start with this selection bias 
where the people who are appointing the arbitrator are the 
corporations that draft the arbitration clause, and they get 
the power of deciding essentially what company will serve as 
the arbitration company, so they compose the panel of deciders, 
if you will, for that case. So that is sort of the first step 
along the way of the due process problems.
    In addition to that, we have heard from many consumers when 
they do get hauled into an arbitration forum with an unknown 
company where they did not even know they had agreed to 
arbitration, they will ignore the paperwork, not respond to it 
because they do not think it is for real. They think it is a 
scam, and they simply throw it away, and then a judgment ends 
up being entered in their name without any ability on their 
part to appear.
    In addition to that, no transparency. In court the dockets 
are generally open. You know where the filings are. You can 
read the record. In arbitration they are not, and so there is 
no transparency. They are secret proceedings, generally no 
appellate rights from arbitration, and so you are stuck with 
whatever the ruling is, and if you have one of those unfair 
arbitrators, then generally there is no ability to appeal it as 
you would in court. Everyone has a right to appeal final 
judgment of a district court, and that does not exist in 
    Then, in addition to that, oftentimes arbitrators do not 
provide written records or written orders. A judge will usually 
elaborate and give a written order in terms of their rationale, 
what the findings are, why they ruled a certain way. Oftentimes 
arbitrators do not do that. It is simply you win/you lose, and 
that really can undermine consumers' confidence, 
understandably, in the integrity of the process. They do not 
know why they lost. They just know they lost. And so a lot of 
those due process protections that are just fundamental to a 
court of law can be lacking in arbitration.
    Senator Franken. And there is no written decision, I mean, 
you do not have to produce a written decision in arbitration.
    Ms. Swanson. There is no requirement usually that a written 
decision be produced. An arbitrator could, but usually not. And 
so usually it is just judgment entered for corporation, $5,000, 
without any reasoning.
    Senator Franken. That hardly seems like due process.
    Mr. Bland, I just want to read Professor Drahozal's 
conclusion because he talks about--and I think he spent a great 
deal of his career studying the empirical evidence here. Is 
that correct?
    Mr. Drahozal. A fair bit.
    Senator Franken. A fair bit of your career. So your 
conclusions--these are the conclusions: ``To reiterate: my view 
is that sound public policy should be based on careful 
empirical study and not simply anecdotal reports. The available 
empirical evidence does not support the view that arbitration 
is necessarily unfair to consumers. Rather, that evidence 
suggests that pre-dispute arbitration clauses make some, if not 
many, consumers better off''--it suggests that--``and that 
broad-ranging restrictions on arbitration may well be counter-
    Does that seem like pretty thin gruel to you?
    Mr. Bland. It reminds me of the people who say that we have 
to keep studying global warming until it is too late to do 
anything or the people who used to say that you had to study, 
you know, whether or not whether cigarette smoking was bad for 
children. I mean, at some point there is a certain level of 
common sense, I think, that the Congress can act on. Here we 
have got a system in which one side to a dispute is essentially 
picking the judges in a non-transparent system where you cannot 
bring a class action even if everyone is treated the same and 
it is a small amount of money and that means it shut down 
everything, and you also have no meaningful judicial review.
    I do not know why you need empirical evidence to get the 
idea that that is not a fair system. I do not see why you 
cannot apply some principled understanding as to what a justice 
system should be like. When the Founding Fathers said things 
like, well, we want to have a right to a jury trial, or they 
set out a variety of things you get to confront witnesses and 
so forth, they did not first go in and do studies to see, well, 
gee, you know, we are going to convict more people where you 
could not confront a witness or not. They could tell it was a 
fair idea. The idea of saying that you are going to have a 
system where one side picks the judges essentially, I think 
that that is clearly unfair in general. What happens is you 
have got the stronger party to a dispute setting up a system 
that systematically, repeatedly, predictably, and, in fact, in 
reality always ends up favoring them--or not always ends up 
favoring them, but the vast majority of the time ends up 
favoring them. And the idea that we need to study that more, I 
mean, we can always study everything. We could hire 100 
professors to do studies forever. And is the chamber ever going 
to come in and say, you know, ``It turns out it is not that 
fair to let our guys write the contracts on how to do disputes, 
you know, the studies finally proved scientifically that 
letting us pick the judges turns out to favor us'' ? You know, 
I do not think we have to wait for that day because for one 
thing I will be dead, it will be so far from now. No matter 
what they do with the genome project, I will be dead by then. 
It is just never going to happen in our lifetime that they are 
going to admit that there is finally enough evidence.
    You have enough evidence to tell that this is unfair. I 
think the Congress should act. I think your bill is great. I 
think you are a hero to the consumer movement with pushing this 
cause, and we are really grateful for it.
    Senator Franken. Well, thank you for saying that. We have 
been here a long time, and I do not want to try everyone's 
patience. I just want to thank you all for your testimony. I 
think you are right, Mr. Schwartz, that this is not the end of 
this, I am sure. And I want to thank you all for coming today.
    The hearing will stand adjourned, and we will keep the 
record open for 1 week. Thank you.
    [Whereupon, at 4:20 p.m., the Committee was adjourned.]
    [Questions and answers and submissions follow.]

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