[Senate Hearing 112-177]
[From the U.S. Government Publishing Office]
S. Hrg. 112-177
ARBITRATION: IS IT FAIR WHEN FORCED?
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HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
OCTOBER 13, 2011
__________
Serial No. J-112-47
__________
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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
SHELDON WHITEHOUSE, Rhode Island LINDSEY GRAHAM, South Carolina
AMY KLOBUCHAR, Minnesota JOHN CORNYN, Texas
AL FRANKEN, Minnesota MICHAEL S. LEE, Utah
CHRISTOPHER A. COONS, Delaware TOM COBURN, Oklahoma
RICHARD BLUMENTHAL, Connecticut
Bruce A. Cohen, Chief Counsel and Staff Director
Kolan Davis, Republican Chief Counsel and Staff Director
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
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
WITNESSES
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
ARBITRATION: IS IT FAIR WHEN FORCED?
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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,
presiding.
Present: Senators Franken, Whitehouse, Klobuchar,
Blumenthal, and Cornyn.
OPENING STATEMENT OF HON. AL FRANKEN, A U.S. SENATOR FROM THE
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.
[Laughter.]
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
arbitration.
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.
STATEMENT OF HON. JOHN CORNYN, A U.S. SENATOR FROM THE STATE OF
TEXAS
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.
STATEMENT OF HON. RICHARD BLUMENTHAL, A U.S. SENATOR FROM THE
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
seniors.
[The AARP statement appears as a submission for the
record.]
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
Swanson.
STATEMENT OF HON. LORI SWANSON, ATTORNEY GENERAL, MINNESOTA,
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
contracts.
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
clauses.
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.
STATEMENT OF DEBORAH PIERCE, M.D., ASSOCIATE DIRECTOR,
DEPARTMENT OF EMERGENCY MEDICINE, EINSTEIN AT ELKINS PARK
HOSPITAL, ELKINS PARK, PENNSYLVANIA
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
Philadelphia.
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
statement.
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.
STATEMENT OF F. PAUL BLAND, SENIOR ATTORNEY, PUBLIC JUSTICE,
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
unfair.
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
problem.
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.
[Laughter.]
STATEMENT OF HON. AMY KLOBUCHAR, A U.S. SENATOR FROM THE STATE
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.
STATEMENT OF VICTOR E. SCHWARTZ, ESQ., PARTNER, SHOOK, HARDY &
BACON LLP, U.S. CHAMBER INSTITUTE FOR LEGAL REFORM, U.S.
CHAMBER OF COMMERCE, WASHINGTON, D.C.
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.
[Laughter.]
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
own.
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
that.
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
that.
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
nowhere.
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.
[Laughter.]
Senator Franken. Professor Drahozal.
STATEMENT OF CHRISTOPHER R. DRAHOZAL, JOHN M. ROUNDS PROFESSOR
OF LAW, ASSOCIATE DEAN FOR RESEARCH & FACULTY DEVELOPMENT,
UNIVERSITY OF KANSAS SCHOOL OF LAW, LAWRENCE, KANSAS
Mr. Drahozal. Thank you, Mr. Chairman. I cannot do
impressions, and I will not even try, so I apologize in
advance.
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
conclusion.
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
position.
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
justice?
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
me.
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
life.
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
your----
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.
[Laughter.]
Senator Franken. If you can find it, you will have a steak
dinner.
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.
[Laughter.]
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
contract.
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.
[Laughter.]
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.
[Laughter.]
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
arbitration----
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
again.
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
agreements.
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
before?
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
example.
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
apologize.
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
rare.
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.
[Laughter.]
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
me.
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
that?
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
court?
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
something?
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
action.
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
arbitration.
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-
productive.''
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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