[Senate Hearing 113-373]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 113-373

 
THE FEDERAL ARBITRATION ACT AND ACCESS TO JUSTICE: WILL RECENT SUPREME 
 COURT DECISIONS UNDERMINE THE RIGHTS OF CONSUMERS, WORKERS, AND SMALL 
                              BUSINESSES?
=======================================================================


                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY

                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           DECEMBER 17, 2013

                               __________

                          Serial No. J-113-44

                               __________

         Printed for the use of the Committee on the Judiciary




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                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
DIANNE FEINSTEIN, California         CHUCK GRASSLEY, Iowa, Ranking 
CHUCK SCHUMER, New York                  Member
DICK DURBIN, Illinois                ORRIN G. HATCH, Utah
SHELDON WHITEHOUSE, Rhode Island     JEFF SESSIONS, Alabama
AMY KLOBUCHAR, Minnesota             LINDSEY GRAHAM, South Carolina
AL FRANKEN, Minnesota                JOHN CORNYN, Texas
CHRISTOPHER A. COONS, Delaware       MICHAEL S. LEE, Utah
RICHARD BLUMENTHAL, Connecticut      TED CRUZ, Texas
MAZIE HIRONO, Hawaii                 JEFF FLAKE, Arizona
           Kristine Lucius, Chief Counsel and Staff Director
        Kolan Davis, Republican Chief Counsel and Staff Director



                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Franken, Hon. Al, a U.S. Senator from the State of Minnesota.....     1
Grassley, Hon. Chuck, a U.S. Senator from the State of Iowa......     3
    prepared statement...........................................    43
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     3
    prepared statement...........................................    44
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, 
  prepared statement.............................................    45
Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode 
  Island, prepared statement.....................................    47

                               WITNESSES

Witness List.....................................................    41
Overton, Leslie C., Deputy Assistant Attorney General for Civil 
  Enforcement, Antitrust Division, U.S. Department of Justice, 
  Washington, DC.................................................     5
    prepared statement...........................................    49
Carlson, Alan S., Owner, Italian Colors Restaurant, Oakland, 
  California.....................................................    13
    prepared statement...........................................    53
Gilles, Myriam, Professor of Law, Benjamin N. Cardozo School of 
  Law, Yeshiva University, New York, New York....................    15
    prepared statement...........................................    57
Teske, Vildan A., Partner, Crowder, Teske, Katz & Micko, PLLP, 
  Minneapolis, Minnesota.........................................    18
    prepared statement...........................................    66
Parasharami, Archis A., Partner & Co-Chair, Consumer Litigation 
  and Class Actions Practice, Mayer Brown LLP, Washington, DC....    20
    prepared statement...........................................    82
Rutledge, Peter B., Associate Dean for Faculty Development, 
  Herman E. Talmadge Chair of Law, University of Georgia School 
  of Law, Athens, Georgia........................................    22
    prepared statement...........................................   134

                               QUESTIONS

Questions submitted by Senator Franken for Myriam Gilles.........   201
Questions submitted by Senator Franken for Vildan Teske..........   202
Questions submitted by Senator Franken for Archis Parasharami....   203
Questions submitted by Senator Grassley for Archis Parasharami...   204
Questions submitted by Senator Grassley for Peter Rutledge.......   205
Questions submitted by Senator Hatch for Myriam Gilles...........   206
Questions submitted by Senator Hatch for Peter Rutledge..........   207

                         QUESTIONS AND ANSWERS

Responses of Myriam Gilles to questions submitted by Senators 
  Franken and Hatch..............................................   209
Responses of Vildan Teske to questions submitted by Senator 
  Franken........................................................   226
Responses of Archis Parasharami to questions submitted by 
  Senators Franken and Grassley..................................   232
Responses of Peter Rutledge to questions submitted by Senators 
  Grassley and Hatch.............................................   250

                MISCELLANEOUS SUBMISSIONS FOR THE RECORD

American Antitrust Institute, Washington, DC, Albert A. Foer, 
  President, and Randy M. Stutz, Senior Counsel, December 24, 
  2013, letter...................................................   256
Amalgamated Bank, Noel Beasley, Chairman, New York, New York, 
  December 19, 2013, letter......................................   259
Civil Justice Through the Courts, Law Student Clinic Members, New 
  York, New York, December 17, 2013, letter......................   261
Coalition of Organizations, December 16, 2013, letter............   272
Constitutional Accountability Center, Douglas T. Kendall, 
  President, Washington, DC, December 16, 2013, letter...........   276
COSAL (Committee to Support the Antitrust Laws), statement.......   279
Cox, James D., Professor of Law, Duke Law, Durham, North 
  Carolina, October 30, 2013, letter on behalf of a group of 
  professors from 19 law schools.................................   285
DiNapoli, Thomas P., New York State Comptroller, Albany, New 
  York, December 16, 2013, letter................................   290
Doss, Jason, President, Public Investors Arbitration Bar 
  Association, statement.........................................   292
Duran, Bernardita, Client of Legal Services NYC, New York, New 
  York, statement................................................   295
Home Owners for Better Building, Janet Ahmad, National President, 
  San Antonio, Texas, December 23, 2013, letter..................   302
Kilgore, Matthew, Rohnert Park, California, statement............   309
Leadership Conference on Civil and Human Rights, Wade Henderson, 
  President & CEO, Washington, DC, statement.....................   313
Mahoney, Jeff, General Counsel, Council of Institutional 
  Investors, Washington, DC, December 11, 2013, letter...........   315
Non-U.S. Institutional Investors Group, December 17, 2013, letter   319
Rothman, Mike, Commissioner of the Minnesota Department of 
  Commerce, on behalf of the North American Securities 
  Administrators Association (NASAA), statement..................   323
Simpson, Anne, Senior Portfolio Manager, CalPERS, Sacramento, 
  California, December 12, 2013, letter..........................   334
Sternlight, Jean R., Professor of Law, UNLV, Boyd School of Law, 
  Las Vegas, Nevada, statement...................................   336
Szalai, Imre Stephen, Professor, Loyola University of New Orleans 
  College of Law, New Orleans, Louisiana, statement..............   344
U.S. Institutional Investors Group, December 17, 2013, letter....   353


THE FEDERAL ARBITRATION ACT AND ACCESS TO JUSTICE: WILL RECENT SUPREME 
 COURT DECISIONS UNDERMINE THE RIGHTS OF CONSUMERS, WORKERS, AND SMALL 
                              BUSINESSES?

                              -----------


                       TUESDAY, DECEMBER 17, 2013

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:30 p.m., in 
Room SD-226, Dirksen Senate Office Building, Hon. Al Franken, 
presiding.
    Present: Senators Franken, Whitehouse, Klobuchar, 
Blumenthal, Hirono, Grassley, Hatch, and Lee.

 OPENING STATEMENT OF HON. AL FRANKEN, A U.S. SENATOR FROM THE 
                       STATE OF MINNESOTA

    Senator Franken. This hearing will come to order.
    In 1925, Congress passed the Federal Arbitration Act to 
facilitate the use of arbitration as a fair and efficient 
alternative to litigation in appropriate cases, typically those 
involving competing corporations of equal bargaining power.
    In the hands of today's Supreme Court, however, the Federal 
Arbitration Act has been reshaped into something quite 
different. It has become a virtual grant of immunity for large 
corporations, which now can opt out of the criminal justice 
system.
    I think that Alan Carlson, a small business owner who is 
with us today, puts it really well when he says in his written 
testimony, ``In America, I thought we all had the right to 
pursue justice in court, but it turns out that Big Business 
gets to write its own rules.''
    This, in my view, has potentially disastrous consequences 
for workers, consumers, small businesses, and for middle-class 
Americans, and that is the focus of today's hearing. For me, 
this is all about making sure that there is access to justice 
when everyday people are cheated by giant corporations.
    In 2011, I chaired a hearing on mandatory pre-dispute 
arbitration. What we learned in that hearing is that 
corporations make consumers and workers sign contracts with 
mandatory arbitration clauses as a condition to getting a 
product or a service or a job. The corporation can write the 
rules for the arbitration. The arbitrator often comes from the 
same industry as the corporate defendant.
    Everything is done in secret. There are no public rulings 
and precedents like there are in courts. Discovery is limited, 
if there is any at all. So the plaintiff cannot always get the 
evidence that he or she needs to prove her case. And there is 
no meaningful judicial review, so there is not much an 
individual can do if the arbitrator just gets it all wrong.
    But that is not all. My 2011 hearing followed on the heels 
of AT&T v. Concepcion in which the Supreme Court said that 
corporations can use their arbitration clauses to prohibit 
class actions, even if applicable State law says that these 
class action waivers are unconscionable. So under Concepcion, 
not only can a corporation force an individual into arbitration 
with all of its shortcomings, but the corporation can force the 
individual to go it alone. Just the prospect of a class action 
gives corporations a real incentive to follow the law. They 
know that there will be real consequences if they do not. 
Concepcion removed that important check on corporate power.
    Not surprisingly, corporations are taking advantage of this 
new rule. Preliminary results from the Consumer Financial 
Protection Bureau's Arbitration Study indicate that nearly 100 
percent of outstanding credit card loans and insured deposits 
now are subject to class action bans. As Mr. Parasharami, one 
of today's witnesses who is testifying in favor of mandatory 
pre-dispute arbitration, has written, ``In light of Concepcion 
and subsequent developments in law, consumer and employment 
arbitration agreements are now more attractive to businesses 
than ever.'' Mr. Parasharami and I probably do not agree on 
much when it comes to arbitration law, but I do agree with him 
on that.
    And just when you thought it could not get any worse, it 
did when the Supreme Court decided American Express v. Italian 
Colors during its last term.
    Since at least the Mitsubishi Motors case in 1985, we have 
had something called the ``effective vindication rule,'' which 
says that an arbitration clause is invalid if it is so bad that 
it prevents an individual from enforcing his or her federal 
rights. In other words, the effective vindication rule 
prevented a corporation from drafting its arbitration clause in 
a way that implicitly forced consumers, workers, and small 
businesses to waive their federal rights. But in the recent 
Italian Colors case, the Court did away with that rule, and the 
Court was not really shy about it either. Justice Scalia wrote 
that, ``The FAA's command to enforce arbitration agreements 
trumps any interest in ensuring the prosecution of low-value 
claims.''
    In other words, in his opinion, corporate arbitration 
clauses simply are more important than the rights of consumers, 
workers, and small businesses.
    I could not disagree more. The Concepcion and Italian 
Colors decisions stack the deck in favor of corporations and 
against consumers and workers, as if the deck were not stacked 
enough already. Giant corporations now can use arbitration 
clauses to stifle enforcement of federal laws, the antitrust 
laws, the minimum wage laws, the civil rights laws. You name 
it.
    As the law has gotten worse, the need for reform has become 
more obvious and more urgent. I introduced the Arbitration 
Fairness Act to undo some of the damage that we have seen to 
the civil justice system, and I would like to invite my 
colleagues to join me in this effort; 24 Members of the Senate 
and 71 Members of the House already have. The Arbitration 
Fairness Act would amend the Federal Arbitration Act to 
prohibit the use of mandatory pre-dispute arbitration clauses 
in civil rights, employment, consumer, and antitrust cases--
cases in which one party has superior bargaining power and 
where adhesion contracts are common.
    I want to be clear. The bill does not prohibit arbitration. 
If a consumer or a worker or a small business owner wants to 
take his claim into arbitration, then by all means he or she is 
free to do so, provided the corporation itself is willing to do 
so. But if the consumer or worker or small business wants to go 
to court, he or she will have that option available again.
    This is not a radical proposal. The bill just restores the 
Federal Arbitration Act to its original purpose and scope. 
Simply put, this is about reopening the courthouse doors to 
workers, consumers, and small businesses because the courthouse 
doors never should have been closed in the first place.
    I would like to thank Chairman Leahy for inviting me to 
hold this hearing. I know that this issue is important to him, 
and I understand that he has a statement, which I will submit 
for the record.
    [The prepared statement of Chairman Leahy appears as a 
submission for the record.]
    Senator Franken. Ranking Member Grassley, it is a pleasure 
to serve in this capacity with you, and would you like to give 
any opening remarks.

 OPENING STATEMENT OF HON. CHUCK GRASSLEY, A U.S. SENATOR FROM 
                       THE STATE OF IOWA

    Senator Grassley. I am just going to refer to a small part 
of my statement and put the whole statement in the record.
    I look forward to hearing from our witnesses today. 
Particularly I look forward to testimony explaining what we can 
expect following the Supreme Court decision in the American 
Express case. Absent class action provisions, will consumers 
really lack the ability to have their dispute adjudicated? And, 
also, what direction will we see arbitration clauses move going 
forward as a result of that decision? In the wake of American 
Express and the AT&T Mobility cases, I hope the witnesses can 
separate myth from reality and give us a clear picture of what 
is next.
    I will put the rest of my statement in the record.
    [The prepared statement of Senator Grassley appears as a 
submission for the record.]
    Senator Hatch. Mr. Chairman? Mr. Chairman?
    Senator Franken. Senator Hatch.
    Senator Hatch. I would like to make a short statement.
    Senator Franken. Yes.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
                       THE STATE OF UTAH

    Senator Hatch. I have to leave, but I wanted to make just a 
short statement, and I appreciate your graciousness.
    Mr. Chairman, I wish I could stay, but I am unable to. I 
did want to at least briefly stop by to say that this is a very 
important issue and to ask if I could submit written questions 
to the witnesses.
    Senator Franken. Without objection.
    Senator Hatch. These questions emphasize that litigation is 
the alternative to arbitration. The bill before us would not 
only prohibit arbitration but actually terminate arbitration 
agreements that parties have already entered into. Before 
taking a dramatic step like that, we must consider whether the 
alternative of litigation would be even worse in various 
respects than what critics say about arbitration.
    Is the case against arbitration so complete and the 
alternative of litigation so much better that we should 
prohibit arbitration clauses altogether?
    I am very skeptical about the answer, but would want to 
explore that with the witnesses through the written questions I 
will submit, and I appreciate answers as quickly as you can.
    [The questions and statement of Senator Hatch appear as a 
submission for the record.]
    Senator Hatch. Thank you, Mr. Chairman. I appreciate you--
--
    Senator Franken. You are welcome, Senator Hatch. I have 
tremendous respect for you. I just want to just make it clear 
to everyone that there is no intention here to remove all 
arbitration clauses, just mandatory pre-dispute arbitration 
clauses, which are, I feel, in so many cases the cause of 
adhesion.
    Senator Hatch. I understand.
    Senator Franken. And that is what today's hearing is about. 
There is no attempt here to ban arbitration at all, as I said 
in my opening.
    Does anybody else want to make an opening statement? Then 
we will go to our first witness. I would ask that Deputy 
Assistant Attorney General Leslie Overton, who is here with us 
sitting at the witness table, stand and take the oath after I 
introduce her. So stay where you are because I am going to 
introduce you properly.
    I am pleased that the Deputy Assistant Attorney General is 
here to see us today--Ms. Overton. She has served in her 
current position since the summer of 2011 following stints as 
counsel to the Assistant Attorney General and as a partner in 
Jones Day's Washington, D.C., office. Deputy Assistant Attorney 
General Overton has received several awards in recognition of 
her outstanding legal talents. She is one of several 
signatories to the Federal Government's amicus brief in the 
Italian Colors case, which we will be discussing today, and I 
have invited her here to discuss that brief with the Committee.
    As is customary at the Senate Judiciary Committee, I will 
begin by administering the oath, so would you mind standing? Do 
you affirm that the testimony you are about to give the 
Committee will be the truth, the whole truth, and nothing but 
the truth, so help you God?
    Ms. Overton. I do.
    Senator Franken. Thank you. Please be seated.
    Deputy Assistant Attorney General Overton, welcome, and 
thank you for being here. I appreciate your taking the time out 
from your very busy schedule. Please go ahead with your opening 
statement.

   STATEMENT OF LESLIE C. OVERTON, DEPUTY ASSISTANT ATTORNEY 
    GENERAL FOR CIVIL ENFORCEMENT, ANTITRUST DIVISION, U.S. 
             DEPARTMENT OF JUSTICE, WASHINGTON, DC

    Ms. Overton. Thank you, Chairman. Chairman Franken, Senator 
Grassley, and distinguished members of the Committee, I 
appreciate this opportunity to share the United States' 
position in its amicus brief in the Supreme Court in American 
Express v. Italian Colors Restaurant.
    The United States' brief reflects its concern that the 
effect of the mandatory arbitration agreement in the facts of 
that case would prevent the respondents, the merchants, from 
being able to effectively vindicate their rights under the 
antitrust laws.
    My written testimony discusses the brief in detail, so I 
will now provide background and summarize the points the United 
States made.
    In Italian Colors, the named plaintiffs in a consolidated 
set of putative class actions were merchants who accept 
American Express cards. The merchants alleged that Amex 
violated Section 1 of the Sherman Act by engaging in an 
unlawful tying arrangement using its market power in corporate 
and personal charge cards to compel the merchants to accept 
Amex's credit and debit cards at elevated merchant fee rates.
    Amex's standard form contract for merchants governed the 
relationship. This card agreement required all disputes between 
the parties to be resolved by arbitration, precluded any right 
or authority for any claims to be arbitrated on a class action 
basis, barred multiple merchants' claims from being joined in 
one arbitration proceeding, did not permit the prevailing party 
to shift its costs to the other party, and prohibited 
disclosure of information obtained in arbitration. The class 
action complaints were consolidated, and Amex moved to compel 
arbitration.
    The Federal district court held that the parties' dispute 
fell within the scope of the card agreement's mandatory 
arbitration clause, granted Amex's motion, and dismissed the 
suits.
    The court of appeals reversed and remanded. The merchants 
presented expert evidence demonstrating that they would bear 
expert fees and expenses of at least several hundred thousand 
dollars and possibly more than $1 million. However, the 
estimated damages for the merchant with the largest volume of 
Amex transactions amounted to $12,850, the largest recovery 
only $38,549 when trebled, as provided under the antitrust 
laws.
    The court of appeals accordingly concluded that ``the class 
action waiver in the Card Acceptance Agreement cannot be 
enforced in this case because to do so would grant [American 
Express] de facto immunity from antitrust liability by removing 
[the merchants'] only reasonably feasible means of recovery.''
    The United States' brief observed that under the Supreme 
Court's precedents, agreements to arbitrate federal statutory 
claims are enforceable if, but only if, ``the prospective 
litigant effectively may vindicate its statutory cause of 
action in the arbitral forum.''
    While the Federal Arbitration Act establishes a generally 
applicable federal policy favoring the creation and enforcement 
of agreements to arbitrate, the effective vindication rule 
reconciles this policy with the policies of a wide range of 
federal statutes that confer substantive rights and authorize 
private suits by aggrieved persons. The rule allows contracting 
parties to agree that their disputes will be resolved by an 
alternative adjudicator, while denying enforcement of an 
arbitration agreement in circumstances where its function would 
be, in practical effect, a prospective waiver of substantive 
rights.
    The brief explained that the arbitration agreement in 
Italian Colors effectively precluded the merchants from 
asserting their antitrust claims by making it prohibitively 
expensive for them to do so. No rational actor would attempt to 
bring a claim when a negative recovery is a certainty. Under 
these circumstances, an order compelling arbitration would 
preclude the merchants from effectively vindicating their 
federal claims.
    The brief lays out the United States' concern that 
companies could use a combination of class action and joinder 
prohibitions, confidentiality requirements, and other 
procedural restrictions to increase the likelihood that a 
plaintiff's cost of arbitration would exceed the projected 
recovery. Companies could then require acceptance of such 
unwieldy procedures as a condition of doing business, getting 
hired, or purchasing products. That would deprive a range of 
federal statutes of their intended deterrent and compensatory 
effect.
    This concludes my discussion of the United States' brief. I 
am happy to answer questions.
    [The prepared statement of Ms. Overton appears as a 
submission for the record.]
    Senator Franken. Thank you, Deputy Assistant Attorney 
General, and thanks again for being here today.
    The members will now have 7 minutes to ask their questions, 
and I will start.
    Deputy Assistant Attorney General Overton, why did the 
Justice Department decide to get involved in the Italian Colors 
case lawsuit in the first place? What was the public's interest 
here?
    Ms. Overton. Thank you for your question. Private antitrust 
actions are a vital supplement to the Government's civil 
enforcement efforts under the federal competition laws as well 
as our criminal enforcement. They are also an important 
component of a range of other statutory schemes, and the United 
States filed its brief because of our concern that the effect 
of the mandatory arbitration agreement in the facts of this 
case would prevent the respondents from being able to 
effectively vindicate their rights under the antitrust laws. 
And our brief also identifies the United States' substantial 
interest in ensuring that arbitration agreements are not used 
in a way to prevent private parties from obtaining relief----
    Senator Franken. Can you just talk about how the Italian 
Colors decision undermines enforcement of our Nation's 
antitrust laws?
    Ms. Overton. The concern we expressed in our brief was that 
the incentives of companies could be impacted, that the 
effective vindication rule creates incentives for companies to 
craft arbitration agreements in a manner that allows 
realistically for small claims to be brought under the federal 
laws. However, we expressed concern in our brief that, absent 
that safety valve, companies could have incentives to craft 
arbitration agreements in a manner that effectively serves as a 
prospective waiver of substantive rights----
    Senator Franken. By making it so hard to recover, by making 
it so costly to arbitrate, by having to operate alone, that you 
cannot effectively vindicate yourself, you cannot have 
effective vindication, and that is what this is all about. This 
was overturning--that is what Italian Colors is about, 
overturning the precedent that had been in Mitsubishi about 
effective vindication, right?
    Ms. Overton. We cited in our brief that the effective 
vindication rule had been recognized in Mitsubishi almost 30 
years ago, in 1985, and had been reaffirmed by the Court since.
    Senator Franken. So Justice Kagan made the same argument in 
her dissent when she wrote that arbitration could be used to 
``block the vindication of meritorious federal claims and 
insulate wrongdoers from liability.''
    Can you explain how the Italian Colors decision really just 
gives corporations license to use arbitration clauses to get 
consumers and workers and businesses to essentially waive their 
rights?
    Ms. Overton. Well, the brief lays out our concerns that 
companies could use a combination of class action and joinder 
prohibitions, confidentiality requirements, and other 
procedural restrictions to increase the likelihood that a 
plaintiff's cost of arbitration would exceed its projected 
recovery and would function as a prospective waiver, and 
prospective waivers are generally presumed to be invalid. So we 
were concerned about the incentives that could be created, and 
we noted that the effective vindication rule has created 
incentives for companies to have arbitration procedures that 
allow plaintiffs to bring----
    Senator Franken. To deprive the civil----
    Ms. Overton. Exactly, to bring----
    Senator Franken [continuing]. Lawsuit. Now, which people on 
the other side of this will argue, well, you know, the 
Government can always step in to enforce the law. I think that 
argument is made by some of the witnesses here. But in its 
brief, the Government wrote, you wrote, ``Private actions are a 
vital supplement to government enforcement not only under the 
antitrust laws but also under a wide range of other federal 
statutes.'' Can you just elaborate on this and explain the role 
that private enforcement plays in this?
    Ms. Overton. Yes, thank you, Chairman. Private enforcement 
under the antitrust laws as well as under a number of other 
statutes is a vital supplement to our Government enforcement 
efforts, and the federal antitrust laws are, as you are aware, 
enforced by the Department of Justice Antitrust Division as 
well as the Federal Trade Commission. But private antitrust 
suits add to the deterrent value and provide compensation for 
aggrieved persons. And we noted in our brief that there is a 
range of other statutes where private enforcement is such a 
vital supplement to government enforcement, and we provided 
examples such as the Servicemembers Civil Relief Act, Title 7 
of the Civil Rights Act of 1964, and the Fair Labor Standards 
Act, among others.
    And we noted in our brief that while claims under such 
statutes may generate small damages for any particular 
plaintiff, these statutes offer important protection against 
practices that are broadly harmful. And we also noted in our 
brief that such statutes reflect congressional judgment that 
such private enforcement is an important part of the statutory 
scheme.
    Senator Franken. Well, that brings me to sort of the 
activism of this Court. This is another 5-4 decision, and this 
was--you know, can you give the Committee an overview of the 
precedents that establish the effective vindication rule?
    Ms. Overton. We noted in our brief that the effective 
vindication rule was set out in the Mitsubishi case in 1985 and 
has been reaffirmed a number of times since.
    Senator Franken. It seems to me that in this case the 
Roberts Court once again went out of its way to overturn 
precedent in a way that actually benefits large corporations 
over consumers and small businesses and employers, because I am 
talking about Italian Colors here. I do not want you to comment 
on that. I just want to note that that has been a concern of 
mine since I came to the Senate.
    I would like to thank you again for your service and for 
your testimony today. I know you have a busy schedule. I would 
like to turn it over to the Ranking Member.
    Senator Grassley. Thank you, Ms. Overton, for your 
testimony.
    The Department of Justice brief in American Express noted 
at least one positive result from the AT&T Mobility decision. 
Specifically, companies have modified their agreements, which 
contain class action waivers, in order to encourage consumers 
to bring low-value claims into arbitration. Such modifications 
include cost and fee shifting. Page 29 of that Department brief 
noted that this leaves ``consumers better off under their 
absolutely agreement than they would have been in class 
litigation.''
    Question: Can arbitration be an effective way for 
individuals to have low-value claims adjudicated?
    Ms. Overton. Thank you for your question, Senator Grassley. 
Our brief made the point that the effective vindication rule 
could reconcile the policies in a number of federal statutes 
that confer substantive rights and authorize private suits. And 
we noted that the effective vindication rule does create 
incentives for companies to craft arbitration agreements in a 
manner that allows for low-value claims to be brought, for 
persons to pursue those federal rights.
    We expressed concern in our brief that when an arbitration 
agreement forecloses a plaintiff from seeking redress for those 
violations, the effect of the agreement would not result in 
arbitration pursuant to those procedures but would instead 
cause the plaintiff to abandon the claim.
    Senator Grassley. The Department's brief in American 
Express argued that the mandatory arbitration agreement 
prevented the plaintiffs from being able to effectively 
vindicate their rights under the antitrust laws. The brief 
argued that the restrictions contained in the arbitration 
agreement foreclosed alternative mechanisms such as cost 
sharing. As you know, the Court disagreed factually whether the 
American Express agreement prohibited alternative mechanisms 
like cost sharing.
    Two questions. Does the Department agree with a point both 
the majority and the dissent made in the American Express case 
specifically that a class action is not the only way to 
vindicate claims; in other words, alternatives such as cost 
sharing can be effective?
    Ms. Overton. Senator, in our brief we identified a number 
of mechanisms that in the context of that case might have been 
used by the plaintiffs to pursue their small claims, but our 
brief notes that those options were foreclosed to the 
plaintiffs. But we identified a number of options, and the card 
agreement in that case prohibited class action, arbitration, 
cost sharing, and had confidentiality agreements.
    Senator Grassley. Is it fair to say that at a minimum 
arbitration clauses prohibiting class actions must contain some 
mechanism for sharing or shifting costs? And if that is the 
case, then the Department would agree that a claim can be 
effectively vindicated?
    Ms. Overton. Senator Grassley, we took the position in 
addressing the specific facts that were before us in the case 
of Italian Colors, and in that situation our concern was that 
the merchants did not have any opportunity before them, they 
did not have a realistic ability given the mandatory 
arbitration agreement and the procedural restrictions in place, 
they did not have a reasonable ability to pursue their 
statutory rights because the cost of arbitration would far 
exceed any recovery they could hope to obtain.
    Senator Grassley. I will yield back my time.
    Senator Franken. Thank you. And just in case there is any 
confusion, Italian Colors and American Express are the same 
case. It was American Express v. Italian Colors or vice versa, 
and we will be hearing from the proprietor, the chef, and owner 
of Italian Colors in the next panel.
    Senator Whitehouse.
    Senator Whitehouse. Thank you very much, Chairman Franken, 
for holding this hearing. I have a statement. I would like to 
ask unanimous consent to put the whole statement in the record.
    Senator Franken. Absolutely.
    Senator Whitehouse. Thank you.
    [The prepared statement of Senator Whitehouse appears as a 
submission for the record.]
    Senator Whitehouse. The point that it makes is a fairly 
basic one, and it begins with, I think, an uncontroversial 
proposition that the civil jury as an institution was vitally 
important to the Founding Fathers. It was a core casus belli 
that led to the revolution when the English tried to limit 
rights to a jury, when the Crown tried to limit rights to a 
jury. And I think it is also noncontroversial that, dating back 
to William Blackstone, one of the functions of the jury, the 
reason that the Founding Fathers put the jury into our system 
of government as a government institution just like the 
executive branch, judicial branch, and legislative branch 
separation was that it stood as a protection for the 
individual, not just against the Government but also against 
wealthy and powerful citizens. Indeed, Blackstone described the 
civil jury as specifically that, a way for people to be 
protected from the encroachments of wealthy and powerful 
citizens.
    So now in America the most wealthy and powerful citizens 
are corporations, big corporations. And if you are a big 
corporation, you want no part of a jury. You want to go talk to 
the Governor whose campaign you have supported and surrounded 
by his lobbyists and friends. You want to go to Congress where 
your lobbyists prowl the hallways, your super PACs influence 
policy. The idea of standing as a big corporation on equal 
terms with a regular person in front of a civil jury? It is 
offensive to them. They do not like it. They fight back very 
hard, and there is an entire campaign by corporate America to 
deprecate and degrade the civil jury, and it would astound the 
Founding Fathers for whom this was such an important 
institution and such an important value.
    I think it is important that we keep these arbitration 
agreements in mind in light of that corporate impulse. They 
would like very much to not ever have to answer to what in the 
old days would be called ``12 good men and true'' and now are 
more like ``6 to 12 good men and women and true.'' And the 
desire to kind of shunt as much as they can into arbitration 
avoids them having to meet the civil jury, dodges that 
institution of government. And in some cases, when I was 
Attorney General, the Attorney Generals went after one of the 
main arbitration organizations, filed an action against it 
because it was so one-sided, so fundamentally crooked, that it 
simply was not giving consumers a fair shake. And there are all 
sorts of problems baked into arbitration in terms of tending to 
be one-sided, tending to have, you know, people from the 
corporate world who come in every time and who--it was so bad, 
I think if--I am saying this from memory, so do not hold me to 
it, but I think it was so bad that the arbitrators would be 
stricken under the old rule if somebody objected to them. Well, 
who is going to object to an arbitrator? Not somebody who is 
there once. The person who is going to object is the credit 
card company that is there day after day after day after day. 
So by selectively striking arbitrators, they were able to cook 
up a panel that I think by the time the dust settled, 98 
percent of the decisions went their way. Again, I am making up 
that number.
    But I am really glad for all of these reasons that Chairman 
Franken has brought this issue to light, and my point is there 
is more here than just an injustice to the consumer. There is a 
real blow to the Constitution and to the constitutional 
structure that our forefathers fought, bled, and died for. And 
we need to keep that in mind.
    So thank you very much, Chairman Franken.
    Senator Franken. Thank you, Senator Whitehouse.
    Senator Lee.
    Senator Lee. Thank you, Mr. Chairman, and thank you, Ms. 
Overton, for joining us today.
    You stated in your written testimony today that the basis 
for the Department's position in its amicus brief was that the 
arbitration agreements at issue in the Amex case violated the 
effective vindication rule due to the absence of some mechanism 
for sharing or shifting costs. What do you think such a 
mechanism might look like if we were to put something like that 
in place?
    Ms. Overton. Thank you, Senator. I am not in a position--
with all due respect, I am not in a position to comment on 
policy that is the purview of Congress, but I would 
respectfully clarify that in our brief we noted a variety of 
restrictions, and so the contract agreement between American 
Express and its merchants required all the disputes to be 
resolved by arbitration, it precluded any class action 
adjudication, it barred joinder, it did not allow cost 
shifting, and it did not allow sharing of information in an 
arbitration hearing.
    We identified several that might have potentially provided 
an opportunity for the merchants to reasonably, feasibly 
vindicate their federal claims had they not been foreclosed. We 
were concerned about the effects of the mandatory arbitration 
agreement in the facts of that case with all of those facts.
    Senator Lee. So is it safe to say that the concerns 
expressed by the Department in the Amex case could perhaps be 
vindicated by a remedy short of just the wholesale invalidation 
of these kinds of agreements? It is theoretically possible, at 
least, that you could satisfy them by some means other than the 
wholesale invalidation of all such agreements?
    Ms. Overton. Again, thank you, Senator. Again, I am not in 
a position to comment on any policy. I can only note, again, 
what we identified in the brief, in the context of that case, 
our concerns.
    Senator Lee. Okay. To your knowledge, has the U.S. 
Department of Justice in this administration advocated for the 
validation of pre-dispute arbitration agreements generally?
    Ms. Overton. I am not aware--the administration has not 
taken a position on--I am not aware.
    Senator Lee. On what kind of reform might be necessary?
    Ms. Overton. I am not aware of a position. Again, I am here 
testifying about our brief in the context of the antitrust laws 
and its impact and the concerns we expressed, but, of course, 
we remain happy to work with the Congress on issues.
    Senator Lee. Okay. But to your knowledge, the Department of 
Justice has not endorsed any currently pending legislation that 
would limit the effect of these kinds of agreements?
    Ms. Overton. I am not aware of such a position, no.
    Senator Lee. Okay. Thank you very much, and thank you, Mr. 
Chairman.
    Senator Franken. I again want to thank you, Ms. Overton. I 
know you have--oh, I am sorry. That is terrible. I am awful. 
Thank you. Senator Hirono, excuse me. I am very sorry.
    Senator Hirono. Thank you very much, Mr. Chairman.
    The general proposition in our country is that people 
should have the right to access our courts to seek redress and 
justice. So it is not the norm that all of these matters should 
be handled through arbitration clauses that basically head off 
consumers, head off small businesses, head off shareholders, 
and any other individuals or groups from seeking such redress 
in the courts. And I think the American Express case, basically 
the way I see this case, because it really goes far in saying 
these kinds of arbitration clauses are okay, even so far as to, 
in effect, preempt in this case federal antitrust law. Isn't 
that what the Court said? A private entity, American Express, 
can preempt federal law and the provisions in the federal law 
that allowed this small businessperson to seek redress?
    Ms. Overton. Thank you. Thank you, Senator. The concerns 
that we expressed in our brief were that, under the 
circumstances of that case, the merchants could not advocate, 
they could not pursue their rights under the federal antitrust 
laws because the cost of doing so, given the mandatory 
arbitration agreement and other restrictions, would have been 
prohibitively expensive. It would have far exceeded the 
recovery that they could hope for.
    Senator Hirono. So, in effect----
    Ms. Overton. The Supreme Court did not adopt our position.
    Senator Hirono. So, in effect, with this kind of a ruling, 
private entities can trump federal law. And you mentioned some 
other federal laws where there is a private cause of action 
alternatives that an individual or aggrieved parties could 
pursue. So you mentioned several examples of how other kinds of 
clauses could be put into arbitration clauses that would make 
it pretty tough for anyone to seek redress in our courts, which 
is, you know, the general proposition in our country, but for 
decisions like this--which, by the way, interpreted federal 
law, so since there is no constitutional right to arbitration, 
it behooves our Committee and the Congress to look at what is 
going on and making sure that there is a balance here.
    I am not against arbitration clauses per se, but when they 
go this far basically to trump federal law, I think that we 
need to address the situation.
    That was not a question.
    Ms. Overton. Okay.
    [Laughter.]
    Senator Hirono. Thank you, Mr. Chairman.
    Senator Franken. Thank you, Senator Hirono, and that is 
exactly why we are here today and what we are talking about 
today. In American Express v. Italian Colors, basically what I 
believe we saw was the Court overturned precedent, effective 
vindication, which is that in these mandatory arbitration 
clauses, when a plaintiff was absolutely by definition of the 
circumstances unable to recoup anywhere near their expenses 
because they are prohibited from joining with other plaintiffs 
or they were prevented from class action, where the expenses--
they proved the expenses were going to be so much more than 
anything they would recoup, so it would become irrational to 
actually go into arbitration that there was no effective 
recourse, no effective vindication. And that is what this was. 
It was an overturning of a precedent. And we as Congress can do 
something about that, and that is what our discussion is about 
here today.
    I want to thank you for your testimony, and the witness is 
now dismissed. Thank you.
    Ms. Overton. Thank you.
    Senator Franken. All right. And, again, I apologize, 
Senator Hirono. I really do.
    Senator Franken. I would like to invite the witnesses on 
our second panel to come forward, and stay standing, I guess, 
because we are going to administer the oath, as is customary. 
Do you affirm that the testimony you are about to give before 
the Committee will be the truth, the whole truth, and nothing 
but the truth?
    Mr. Carlson. I do.
    Ms. Gilles. I do.
    Mr. Teske. I do.
    Mr. Parasharami. I do.
    Mr. Rutledge. I do.
    Senator Franken. Thank you. You may be seated. Welcome to 
each of you. I will introduce the witnesses, all of them, and 
then Mr. Carlson will begin his testimony.
    The first witness is Alan Carlson, the owner of Italian 
Colors Restaurant in Oakland, California. Mr. Carlson has been 
in the restaurant business since he was a teenager when he 
washed dishes at a diner. He graduated from the Culinary 
Institute of America in 1979 and then traveled across the 
country working with chefs. Today Mr. Carlson is not only an 
outstanding chef, he is also a successful businessman operating 
several restaurants in the Bay Area.
    Our next witness is Professor Myriam Gilles from Cardozo 
Law School. Before joining the faculty at Cardozo, Professor 
Gilles taught at Princeton and at the University of Virginia. 
Professor Gilles has written and spoken extensively on the 
Federal Arbitration Act and access to justice.
    Our next witness is Vildan Teske. Ms. Teske is a partner at 
Crowder, Teske, Katz & Micko, PLLP, a Minneapolis-based law 
firm where she represents consumers and servicemembers. In 
addition to her duties at the firm, Ms. Teske also serves on 
the Steering Committee of the National Association of Consumer 
Advocates' Military Consumer Justice Project. Earlier this 
year, Ms. Teske received the Federal Bar Association's Robyn J. 
Spalter Outstanding Achievement Award in recognition of her 
tireless and effective advocacy for consumers.
    Our next witness is Archis Parasharami, the head of the 
Consumer Litigation and Class Actions practice at Mayer Brown. 
Mr. Parasharami is the co-editor of Class Defense, a blog about 
key issues affecting class action law and policy. He 
represented AT&T in the Concepcion case, and he has received 
numerous awards for his work.
    Our final witness is Professor Peter Rutledge, an associate 
dean and the Herman E. Talmadge Professor at the University of 
Georgia. Professor Rutledge has authored several books and 
academic articles on arbitration, and he has testified before 
Congress on arbitration issues before. He also was selected to 
participate in the American Arbitration Association's 
delegation to the United Nations Working Group on Arbitration.
    I would like to ask each of you to give 5 minutes of 
testimony to make your opening statements. Your complete 
written testimony will be included in the record.
    Mr. Carlson, we will start with you.

STATEMENT OF ALAN S. CARLSON, OWNER, ITALIAN COLORS RESTAURANT, 
                      OAKLAND, CALIFORNIA

    Mr. Carlson. Thank you, Chairman Franken, distinguished 
Committee members. My name is Alan Carlson. I am the chef and 
owner of Italian Colors Restaurant, a small business located in 
Oakland, California. I was born in a suburban region of Detroit 
and have been working in the restaurant business in one way or 
another since I was 14 years old.
    Twenty years ago I opened Italian Colors Restaurant with my 
wife, Diane Cohen Carlson, and business partner, Steven 
Montgomery. I am incredibly proud to say that 2 decades later, 
we are still open, serving our community and employing more 
than 30 people.
    Like most restaurants, our profit margins are razor thin. 
We survive by fostering client loyalty, keeping prices low, 
cooking quality food, giving great service. We also operate in 
a credit card-driven world and could not survive without 
accepting credit cards as payment.
    To customers, one form of payment is as good as another, 
but for small businesses, that is far from reality. A 
significant percentage of our earnings comes from customers who 
use American Express cards. American Express imposes special 
rules on small businesses who must accept their cards as 
payment. For example, in order to accept any American Express 
card, my restaurant has to accept all types of American Express 
cards--even cards that carry rates and fees that are higher 
than other forms of payment. American Express also does not 
allow me to offer cash discounts or to encourage customers to 
pay with a form of payment that actually works better for my 
business. I cannot encourage my customers to pay in cash or 
offer discounts or other incentives.
    If I could offer discounts to my customers or be able to 
say which cards make sense for me to accept, without being 
forced to accept all cards, I would increase my earnings and be 
able to hire more employees. Being forced to make a decision 
that is bad for my business just is not right. After describing 
my situation to my friend and long-time customer and attorney, 
Edward Zusman, I learned that American Express may be violating 
our country's antitrust laws. When I started with American 
Express in the early 1990s, my first agreement did not have an 
arbitration clause. To this day, I have not actually seen an 
arbitration agreement, but I have been told by my attorney, 
Edward, that one was included in their contracts in the late 
1990s.
    Edward explained that forced arbitration means American 
Express cannot be held accountable in court and that I will not 
be able to join with other small business owners to help defray 
the costs of enforcing our rights. Instead, if I want to hold 
American Express accountable, I would have to do it in an 
individual, private arbitration designed by American Express.
    Needless to say, I was shocked. And even if I knew the 
clause was in the fine print of the contract, American Express 
contracts are offered on a take-it-or-leave-it basis.
    As we figured out how to move forward, we discovered that 
the cost of individual forced arbitration was so high that even 
if a small business won, it would lose. An expert economist 
explained that it would not be cost-effective for any small 
business owner in the same situation to pursue an individual 
arbitration claim against American Express. In fact, it would 
cost more to bring their claim than they could recover. In 
short, if I cannot be part of a class action to enforce my 
rights against American Express, I have no way of enforcing 
those rights. I do not have the money to take on American 
Express by myself.
    So you can imagine my disappointment and shock when the 
U.S. Supreme Court issued its decision in favor of American 
Express and forced arbitration. Essentially the Court said it 
did not matter that a small businessman could not pursue 
important rights against a big business.
    Coming here today to testify before the Committee was 
difficult because I just opened a new restaurant 6 weeks ago. 
And reflecting on it, I realized how important it was for me to 
be here to speak on behalf of all small business owners who are 
struggling to stay in business and live the American dream.
    This does not have to be the end of the story. Congress can 
act to help protect small businesses across America and ensure 
we have the same access to the justice system as large 
corporations.
    Senator Franken's Arbitration Fairness Act would restore 
the rights of small businesses like mine to enforce our rights. 
Small businesses are the lifeblood of America, and we play an 
essential role in creating good jobs. Small businesses, our 
customers, and really, our neighborhoods and communities are 
the ones who lose when large corporations get to push us 
around.
    Everyone in D.C. says that small businesses are important, 
and here is a real opportunity for Congress to actually do 
something to protect us.
    Thank you for taking the time to listen to me today, and I 
look forward to answering any questions.
    [The prepared statement of Mr. Carlson appears as a 
submission for the record.]
    Senator Franken. Thank you, Mr. Carlson. Thank you for 
making the trip all the way from Oakland, and good luck in the 
new restaurant.
    Professor Gilles, please.

   STATEMENT OF MYRIAM GILLES, PROFESSOR OF LAW, BENJAMIN N. 
 CARDOZO SCHOOL OF LAW, YESHIVA UNIVERSITY, NEW YORK, NEW YORK

    Ms. Gilles. Chairman Franken, other distinguished Members 
of the Senate, thank you so much for inviting me here today to 
talk about this issue that I have spent a lot of time over the 
past 8 years thinking and writing about--forced arbitration 
clauses which mandate one-on-one arbitration of all legal 
disputes and ban multiple claimants from pooling their claims. 
That is what we are talking about today.
    These arbitration clauses, which we can now find in just 
about every kind of contract you can imagine, prevent 
consumers, workers, and small businesses from vindicating the 
rights that are guaranteed to them by the common law and by 
federal and State law, and they immunize companies from 
accountability for widely dispersed small-dollar injuries that 
they can inflict on people who have no choice, no voice, no 
bargaining power in the market.
    For a long time, State and federal judges, Democrats and 
Republicans, in courts all around the country regularly struck 
down these arbitration clauses as unfair, finding them against 
public policy where they prevented people from actually 
vindicating the rights legislatures have given them. But all 
that changed in 2011 with the AT&T decision that we have 
already talked about, and it has only gotten worse this past 
term with American Express v. Italian Colors because the Court 
there just broadly upheld the use of a remedy-stripping 
arbitration clause, rendering it really beyond legal challenge. 
It simply does not matter, as Justice Scalia wrote for the 
majority in Concepcion, that countless cases will ``slip 
through the legal system.'' It does not matter. All that 
matters for this very slim majority of the Supreme Court is 
that a 1925 statute is followed, that arbitration clauses are 
enforced exactly as companies have written them up.
    As Justice Kagan wrote in her blistering dissent in the 
American Express case, the majority's response to the public 
policy implications of enforcing these remedy-stripping 
arbitration clauses, the reality that no rational individual 
small business owner, consumer, or employee will ever seek to 
arbitrate one-on-one claims against massive and well-funded 
corporations, the majority's response to that real-world 
implication is simply, ``Too darn bad.'' ``Too darn bad.'' So 
Congress enacted a remedial statute that gives you rights, but 
you cannot vindicate those rights? ``Too darn bad.'' That is 
basically the majority's response.
    Now, ``too darn bad'' might be a perfectly fine response 
for the Supreme Court when it is applying legal rules, but this 
body is doing policy. And so ``too darn bad'' just cannot be 
this body's response to this decision. I think this body, this 
Congress, has already recognized the public policy implications 
of this debate. Congress has tried to outlaw mandatory 
arbitration clauses and payday loan and consumer credit 
contracts with military families and in residential mortgage 
agreements. If these groups deserve protection from mandatory 
forced arbitration, so do all consumers and employees.
    And I think the Supreme Court's decision has pretty much 
squarely put this issue here before you, before this body. The 
Court has repeatedly made clear they will rigorously enforce 
these remedy-stripping terms that companies insert into their 
arbitration clauses. Never mind the consequences unless the FAA 
is overridden by you, by Congress.
    So the time is now, and honestly I cannot think of a better 
time, because these arbitration clauses are proliferating far 
beyond what any of us could have imagined just a few years ago.
    The CFPB Arbitration Study, which was just released last 
Wednesday, makes clear that these clauses have become standard 
in credit card company contracts, checking account contracts, 
payday lenders use them, and those are just the groups that the 
CFPB studied. I mean, we are seeing these contracts in all 
sorts of other agreements, with insurance companies, airlines, 
landlords, gyms, rental car companies, parking facilities, 
schools, camps, shippers. Even HMOs and nursing homes regularly 
use these contracts. In fact, the nursing home industry is very 
straightforward about the fact that they all use mandatory 
forced arbitration in their contracts, basically making it 
impossible for individuals to bring individual claims in court 
or to band together to hold them responsible for systemic 
harms.
    I think these remedy-stripping clauses are affecting 
everyone. All of us in this room are bound by one or more 
arbitration clauses that we may or may not know anything about. 
I want to tell you about one case. It is in my written 
testimony, but I wanted to just highlight it for you.
    There is a young Florida man named Kevin Ferguson who 
enrolled in a medical assistant program in Miami, Florida, just 
trying to make his life better, trying to increase his 
opportunities for getting a job. And he enrolls in this course. 
It is offered by one of these for-profit educational groups, 
promising him the sun and moon and stars but, of course, 
misrepresented just about everything about the educational 
program, everything from their graduates' employment statistics 
to the ability to get financial aid to the actual quality of 
the program.
    Kevin enrolls. He does really, really well. He graduates 
with great grades, but finds himself unable to get a job. He 
does some more investigation, and he talks to more graduates, 
and he realizes lots of people feel that they have been duped 
by this for-profit educational organization and that they have 
engaged in some pretty fraudulent recruitment practices over 
the years.
    Kevin brings a claim, but get this? Kevin is not just suing 
for damages. Kevin is bringing what we call a ``true private 
attorney general claim.'' He wants to bring a claim to have a 
court, a public court, declare that this educational group has 
been lying. They have been falsely advertising graduation 
statistics. They have been defrauding the public. He wants an 
injunction, and he wants some order stopping this group from 
continuing to engage in this horrible practice.
    But Kevin's enrollment contract had an arbitration clause 
in it, so the district court, faced with the defendant's 
inevitable motion to compel arbitration to drag Kevin's claims 
out of the public court and into the private, sequestered 
universe of arbitration, the district court said, ``Whoa, whoa, 
whoa, this is a public injunctive claim. So Kevin cannot 
arbitrate this claim. This claims belongs in a public court.'' 
Denied the motion to compel arbitration.
    But then Concepcion and American Express were decided, and 
on appeal, the Ninth Circuit felt its hands were tied, and it 
reversed the district court. So now, you know, Kevin cannot get 
justice, but Kevin also cannot prevent injustice to others.
    And so I think this is a really serious problem----
    Senator Franken. Professor, you are going to have to wrap 
up.
    Ms. Gilles. Wrap up, I am. I had one paragraph left.
    Senator Franken. Okay.
    Ms. Gilles. So that is just one of many examples. Forced 
arbitration is literally foreclosing millions of Americans from 
vindicating their rights. And as the remedial statutes enacted 
by this body and by the legislatures of the 50 States are 
thwarted, I think ``too darn bad'' is just not going to cut it. 
So I urge this body and this Congress to enact the Arbitration 
Fairness Act.
    Thank you.
    [The prepared statement of Ms. Gilles appears as a 
submission for the record.]
    Senator Franken. Thank you, Professor. I noticed you used 
air quotes on ``for profit.'' The air quotes do not belong 
around the ``for profit.''
    Ms. Gilles. ``Educational.''
    Senator Franken. Yes.
    [Laughter.]
    Ms. Gilles. You are right. Sorry.
    Senator Franken. They are definitely ``for profit.''
    Ms. Teske.

 STATEMENT OF VILDAN A. TESKE, PARTNER, CROWDER, TESKE, KATZ & 
              MICKO, PLLP, MINNEAPOLIS, MINNESOTA

    Ms. Teske. Good afternoon, Chairman Franken, distinguished 
members of the Committee. Thank you for allowing me to testify 
today. I will share with you my perspective as an advocate 
representing consumers and servicemembers in individual and 
class action cases.
    As a result of the recent Supreme Court decisions in 
Concepcion and Italian Colors, many of my clients are no longer 
able to bring their claims in a court of law using our 
country's judicial system because of forced arbitration.
    In my practice, I have had the privilege of representing 
our brave military men and women in matters dealing with 
consumer financial issues. Congress provided important, very 
strong protections for our servicemembers and their families 
through a federal law known as the Servicemembers Civil Relief 
Act, or SCRA. The explicit purpose of the law was to enable our 
servicemembers ``to devote their entire energy to the defense 
needs of the Nation.''
    With the large number of deployments over the past decade, 
the financial crisis our country has experienced in the last 6 
years, and the reckless business practices violating 
servicemember rights, unfortunately SCRA claims have been more 
common than in previous years. My colleagues and I have brought 
several SCRA cases as class actions on behalf of a number of 
servicemembers. These servicemembers' rights were violated by 
the same creditor in the same way.
    In the past, we were able to recover millions of dollars 
for thousands of servicemembers who were able to join together 
to hold corporations accountable for violating their rights. 
Many of the hundreds of military class members that we have 
spoken with did not know their rights. The few that knew that 
their creditor was likely breaking the law did not have the 
time to pursue the claim or the resources to hire an attorney 
to take the case on.
    Unfortunately such cases on behalf of classes of 
servicemembers are now almost impossible to bring due to the 
Supreme Court's decisions and because of a number of underlying 
contracts out there that have forced arbitration clauses.
    Consider my recent case representing a servicemember whose 
mortgage lender foreclosed on his home while he was on active 
duty serving our country. The lender held a sheriff's sale and 
sold our client's home in Minnesota while he was being deployed 
to Iraq, in violation of the SCRA requirements. Some months 
later, he learned he lost his home, but at the time he did not 
know he was protected by federal law from this unlawful 
foreclosure.
    While investigating the facts of his case, we found a 
report that said that a review of a sample of foreclosures 
conducted by this same national lender revealed a number of 
other servicemembers that were subject to the protections of 
the SCRA. So our client made the decision to file his case as a 
class action and as a representative of all the other 
servicemembers to get justice for himself and the others.
    Much to our client's surprise, the lender brought a motion 
to take the case out of our judicial system and force him to 
arbitrate. It turned out that in the thick stack of documents 
at the time of his closing years before, there was a forced 
arbitration clause with a class action ban. Based on the 
Supreme Court's rulings on arbitration clauses, he lost his 
right to his day in court, the ability to represent his 
military brothers and sisters, and his constitutionally 
guaranteed right to present the facts to a jury. One cannot 
escape the irony that while he was serving our country and 
protecting our freedoms, he had lost his freedoms and rights 
under our Constitution.
    It is not sound public policy to require our armed forces 
members to submit to individual arbitrations that take time 
away from their service to our country and from their families 
in order to vindicate their rights. Yet this is exactly what 
has to happen when there is a class action ban in a consumer 
contract. Or more likely what would happen is that the 
servicemember has to forgo vindicating his rights altogether 
and the wrongdoer is not brought to justice. In fact, a 2006 
Department of Defense report to Congress came to the same 
conclusion. In my practice I have seen time and again how 
forced arbitration harms the lives of American families and our 
Nation's servicemembers.
    Another example is a case in California against a national 
lender that repossessed active-duty servicemembers' vehicles 
without court order, in direct violation of the SCRA. The 
National Guard sergeant was deployed to Iraq, and when--excuse 
me--he was in Iraq when his car was repossessed. Even after the 
military legal assistance office sent a letter to this lender 
and asked them to return the car, the lender refused. So he 
brought a class action on his behalf and on behalf of all the 
other servicemembers that this had happened to. But one can 
guess what happened next. There was a forced arbitration 
clause, and there could be no class action.
    This, of course, meant that hundreds if not thousands of 
other servicemembers had their rights violated potentially, but 
they were left unprotected, and the company got away with 
breaking the law.
    Unfortunately, with the proliferation of forced arbitration 
clauses, these scenarios will continue to play out for 
servicemembers as well as all other consumers.
    Our servicemembers deserve better. Our American consumers 
deserve better. So do the employees, the investors, the small 
businesses, and seniors deserve better. They need access to 
justice in our public court system.
    Thank you for inviting me to testify today, and I look 
forward to your questions.
    [The prepared statement of Ms. Teske appears as a 
submission for the record.]
    Senator Franken. Thank you, Ms. Teske.
    Mr. Parasharami.

    STATEMENT OF ARCHIS A. PARASHARAMI, PARTNER & CO-CHAIR, 
  CONSUMER LITIGATION AND CLASS ACTIONS PRACTICE, MAYER BROWN 
                      LLP, WASHINGTON, DC

    Mr. Parasharami. Thank you, Mr. Chairman and distinguished 
members of the Committee. Good afternoon. My name is Archis 
Parasharami, and I am a partner in Mayer Brown LLP, where I am 
co-chair of the Consumer Litigation and Class Actions practice. 
I want to thank the Committee for giving me the opportunity to 
testify today, and I thank the Chairman for making my more 
extensive written statement part of the record.
    My legal practice involves defending businesses against 
class action lawsuits in courts around the country. And, in 
addition, I counsel businesses on adopting fair arbitration 
programs, and I represent them in litigating over the 
enforceability of those arbitration programs. So I have 
firsthand experience with how arbitration agreements work and 
also how class actions function in reality.
    Based on that experience, my view is that arbitration 
provides consumers and employees with a fair and accessible way 
of resolving their disputes, and it does so more effectively 
than litigation in court. Those benefits of arbitration, in my 
view, are the primary reason why the Arbitration Fairness Act 
should not be adopted.
    Despite its title, the bill would effectively eliminate any 
realistic access to arbitration for consumers and employees 
with modest-sized claims. And for the ordinary consumer or 
employee, the elimination of arbitration will do more harm than 
good.
    What does the evidence show? Empirical studies have 
repeatedly demonstrated that arbitration is at least as likely, 
if not more so, than litigation in court to bring benefits and 
more positive outcomes for consumers and employees. It is also 
more user friendly than litigating in court. Access to this 
fair, inexpensive, and simple system of dispute resolution is a 
significant benefit for consumers and employees.
    Now, perhaps the most common objection to arbitration--and 
I think we have heard it from some of my colleagues today--is 
that arbitration typically takes place on an individual basis 
instead of through class actions. But these objections to 
arbitration rest on inaccurate, theoretical assumptions about 
how this alternative of class actions actually functions. And 
in reality, the bulk of class actions do not provide benefits 
for the vast majority of consumers and employees.
    My firm recently conducted an empirical study of 148 class 
actions involving employee class actions and consumer class 
actions filed in federal court, and that is attached to my 
written testimony as Exhibit A. Here is what we learned from 
that study:
    Most of these class actions were dismissed either by the 
courts or voluntarily by the named plaintiff who had sought to 
represent the class. Of the remainder, the relatively few cases 
that did settle, the available evidence about the distribution 
of benefits from those class actions showed that usually class 
actions resulted in little to no benefit to employee and 
consumer class members. In other words, class actions are not 
particularly effective at delivering relief. And I think that 
most people who have received a class action notice or a $2 
check in the mail have had that experience, that they simply 
have not gotten a lot out of the class action of which they 
were a member.
    By contrast, arbitration does afford consumers and 
employees an opportunity to pursue their claims effectively on 
an individual basis. We were lucky enough to have the Assistant 
Attorney General testify before, and I think that her testimony 
about the Government's brief was illuminating. And Justice 
Kagan's dissent in the American Express v. Italian Colors case 
really tracked the Government's arguments. And what Justice 
Kagan concluded, while disagreeing with the majority, was that 
still ``non-class options abound'' for pursuing claims in 
arbitration, pursuing federal antitrust claims in arbitration.
    In addition, arbitration agreements are increasingly 
becoming more favorable to individual consumers and employees. 
More and more companies are paying either all or most of the 
costs of arbitration. Often a consumer or employee pays nothing 
to arbitrate. Companies routinely select the nonprofit American 
Arbitration Association to serve as the arbitration 
administrator, and the AAA has set up due process mechanisms to 
ensure that impartial, unbiased arbitrators serve as the 
arbitrators and the neutral decisionmakers and that arbitration 
procedures are simple and easy to use. We are now seeing 
increasing numbers of consumers and employees that are making 
use of arbitration.
    The Chairman was kind enough to mention an article that I 
wrote at the start of the hearing, and one thing that I would 
like to mention is that that article urges companies, in order 
to have enforceable arbitration agreements, to adopt 
arbitration agreements that are consumer friendly, to adopt 
arbitration agreements that follow the model of the arbitration 
agreement considered in Concepcion, which the Court described 
as leaving consumers arguably better off than they would be in 
class actions.
    Now, especially given these developments, in my view the 
elimination of arbitration would be bad for individual 
consumers and employees as well as businesses. Consumers and 
employees would be far worse off from losing the ability to 
pursue claims that they would have that are small and 
individualized, claims that could not be pursued in class 
action, and cannot practically be pursued in court because 
lawyers simply will not take those cases.
    The primary beneficiaries of eliminating arbitration would 
be lawyers--lawyers on the plaintiff side, but also defense 
lawyers like me who receive large legal fees for defending 
companies in class actions. In short, the only clear winners of 
an increase in class action litigation and the elimination of 
arbitration are the lawyers.
    Thank you again for the opportunity to testify before the 
Committee, and I look forward to answering your questions.
    [The prepared statement of Mr. Parasharami appears as a 
submission for the record.]
    Senator Franken. Thank you.
    Professor Rutledge.

  STATEMENT OF PETER B. RUTLEDGE, ASSOCIATE DEAN FOR FACULTY 
  DEVELOPMENT, HERMAN E. TALMADGE CHAIR OF LAW, UNIVERSITY OF 
             GEORGIA SCHOOL OF LAW, ATHENS, GEORGIA

    Mr. Rutledge. Chairman Franken, Senator Hirono, Senator 
Lee, and members of the Committee, thank you for the 
opportunity to testify today, and thank you, Chairman Franken, 
for making my entire written statement part of the record.
    In an abundance of caution, just to repeat one statement 
from that written remark, the views here expressed today are my 
own. One of my co-authors is a consultant to the Consumer 
Financial Protection Bureau, and it is important to me that 
everything that I say today be imputed only to me and not 
directly to him or indirectly to the CFPB.
    With my written statement part of the record, let me make 
two brief points in the time that you have given me.
    First, I wish to thank you and your fellow lawmakers for 
shifting the terms of the debate over arbitration away from 
legislation by anecdote and toward policymaking grounded in 
sound, empirical evidence. Earlier iterations of this debate 
risked reacting to particular cases, irrespective of whether 
those cases were representative of the system as a whole and 
irrespective of whether the reforms truly benefited those whom 
they were designed to protect. Now the debate is firmly 
anchored in empirical research and should remain so.
    Just as an example, Chairman Franken, as you know from the 
2011 hearing, one important contribution to that debate was the 
Searle study, with which you are quite familiar, that found, 
among other things, that the consumer win rate in arbitration 
was over 50 percent, that the disposition time from filing to 
conclusion of the arbitration was 6 months, a fraction of what 
it would be in our system of civil litigation, and that 
prevailing consumers who sought attorneys' fees received them 
over 60 percent of the time.
    And to Senator Lee's question earlier, I would draw your 
attention to an initiative that the State Department has been 
involved in with the Organization for American States which is 
looking at the question of how to resolve cross-border disputes 
between consumers and businesses, and one of the proposals that 
is being considered by OAS at the suggestion of the United 
States is consumer arbitration. So the record is there. It is 
certainly not complete.
    My second point, consistent with my first observation, is 
to approach with caution claims that in a flight to arbitration 
will follow a particular Supreme Court decision. Empirical 
research that I and others have undertaken does not validate 
those predictions. To elaborate, in working with your staffs, 
Chairman Franken and others, they asked me to speak, and I have 
appended to my testimony a recent article that I co-authored 
with Professor Drahozal entitled ``Sticky Arbitration 
Clauses,'' where we tracked in the franchise industry the 
extent to which there was a flight to arbitration after the 
Concepcion decision. And what we found was that there was not. 
Depending on the relevant metric, the use of arbitration 
clauses has shifted from approximately 40 percent to 45 percent 
or from 62 percent to 63 percent.
    And the recent preliminary results by the CFPB echo our 
findings. You have referred to them already, Chairman Franken, 
and that is, 17 percent of institutions issuing credit cards 
are using arbitration clauses, and 3 percent of credit unions 
are doing so.
    Now, I acknowledge what we are about to talk about, 
Chairman Franken, is that part of the reason why that figure is 
currently low is because there was a period of time where a 
certain number of issuers refrained in using those arbitration 
clauses as pursuant to terms of settlement. That is about to 
expire. And I would recognize, too, that if that settlement 
were to go away, the number of issuers would go up. However, 
credit unions would continue not to use them.
    Now, it is important, of course, to have an apples-to-
apples discussion because, in addition, we cannot simply look 
at the use of arbitration clauses with respect to issuers. We 
can also look to it with respect to the amount of credit card 
debt, and perhaps we can elaborate on that in the hearing.
    The last point I wish to make, Chairman Franken, is this: 
In my view, the flight to arbitration often predicted in 
connection with the Supreme Court decisions, including 
Concepcion, has not come to pass. While it is simply too early 
to predict the effect of the Italian Colors case given the 
recency of the decision, the historical disconnect between the 
rhetoric and the reality that Senator Grassley referred to 
earlier counsels caution.
    Thank you for the opportunity to testify, Chairman Franken, 
and I would be happy to answer your and any other Committee 
member's questions.
    [The prepared statement of Mr. Rutledge appears as a 
submission for the record.]
    Chairman Franken. Thank you all.
    Mr. Carlson, thanks for being here and for sharing your 
story with the Committee. I just want to be clear about 
something you mentioned in your opening statement. Did you have 
a choice to opt out of the arbitration clause that American 
Express had you sign?
    Mr. Carlson. No, I did not. I have never signed anything 
with American Express.
    Senator Franken. And did you have any say when it came to 
the rules of the arbitration?
    Mr. Carlson. No, I did not.
    Senator Franken. And then the Supreme Court concluded that 
you had no right to go to court, that you had no choice but to 
abide by the arbitration agreement, no say over the arbitration 
procedures, and no right to go to court. Correct? So what did 
you do when the Supreme Court ruled against you?
    Mr. Carlson. Business as normal, but, you know, I was 
saddened by it, but there was nothing I could do.
    Senator Franken. You withdrew the case.
    Mr. Carlson. Oh, yes, I withdrew the case, correct.
    Senator Franken. Right?
    Mr. Carlson. Right. Correct.
    Senator Franken. And when you say you never--I noticed in 
your testimony you never saw--you had been working with 
American Express, and they put this mandatory arbitration 
agreement in the contract like 10 years into your contract.
    Mr. Carlson. Correct.
    Senator Franken. And did they tell you they were doing 
that?
    Mr. Carlson. No, they never told me anything.
    Senator Franken. Okay. So you never had a chance to have 
your claims heard either in arbitration or in court. How would 
things have been different if you had the option to go to 
court, do you believe?
    Mr. Carlson. I think we could have gotten a group of other 
restaurateurs that are as unhappy with the situation as I am 
and gotten a class action together.
    Senator Franken. Okay. Well, that is what this is all about 
to me, is just having access to justice. Basically in this, you 
know, Justice Scalia said that it did not matter that you were 
not able to vindicate your claims, but the most you would have 
gotten is about triple the damages to you, which would have 
been $30,000. But you had to individually arbitrate, which you 
proved would have cost you hundreds of thousands or maybe even 
a million dollars, right?
    Mr. Carlson. Correct.
    Senator Franken. Okay. Well, had my bill been law, you 
could have chosen to go to court where you could have joined 
forces with other small businesses, and your case could have 
been heard, and maybe this would be different.
    Ms. Teske, one of the things I found remarkable in your 
written testimony--and you talked about it a little here--was 
the comparison you made between the way things used to be and 
the way things are now. Years ago you were able to recover 
millions of dollars for servicemembers whose rights had been 
violated. Today it seems like it is nearly impossible to bring 
cases to enforce laws that protect our men and women in 
uniform. Can you comment on this?
    Ms. Teske. Absolutely. The majority of the consumer 
financial contracts that servicemembers have entered into in 
the last few years--and I assume that will continue in the next 
few years--have these forced arbitration clauses. We have heard 
already about credit card contracts and the variety of other 
types of contracts, like cell phone services or car loan 
contracts. Whereas before we might have been able to get relief 
for the class members for violations of the Servicemembers 
Civil Relief Act as a class action, in those situations we are 
no longer able to. Each servicemember would have to file their 
own individual arbitration. They would, first of all, have to 
know the intricacies of the Servicemembers Civil Relief Act and 
know that there was a violation, then file their own individual 
arbitration, take the time and effort to do that, and they 
would not be able to bring a representative case to represent 
the hundreds if not thousands of other servicemembers that had 
the same thing happen to them. So it is night and day compared 
to before forced arbitration clauses and now.
    Senator Franken. Okay. You told one story in your testimony 
that really illustrates the problem. I went back and looked at 
some of the court documents for that case, and, frankly, I just 
think it shocks the conscience. The Servicemembers Civil Relief 
Act says, among other things, that banks cannot foreclose on 
servicemembers who are on active duty without first getting 
permission from a judge. The idea is that we cannot expect our 
troops to fight the enemy abroad while fighting off bank 
foreclosures or an eviction notice at home.
    I think we can all agree that that is a good law. 
Literally, we can all agree. This law passed by unanimous 
consent.
    You testified about a soldier from Minnesota, from my 
State, who earned several honors during the course of his 
service, including the Army Commendation Medal. On the same day 
that this soldier was ordered to report for active duty, his 
lender initiated foreclosure proceedings against him.
    So the soldier goes off to Iraq to serve his country, and 
meanwhile the bank is trying to take his house away from him 
without first going to a judge for permission. That is a 
blatant violation of law. And it gets worse.
    The lender falsified an affidavit swearing under oath that 
the bank knew that this man was not in military service, which 
was completely untrue. Using that false affidavit, the lender 
got the sheriff to put the soldier's house up for sale, and the 
house was sold while the owner of the house was in Iraq, in 
Balad, at Camp Anaconda. Right? I have been to Camp Anaconda 
four times. It was called ``Mortaritaville'' because they got 
mortared so much.
    Guess who ended up buying that house? The lender. The bank 
that foreclosed. It got a heck of a deal. It paid between a 
quarter and a third of the value of the house for the house 
that it foreclosed on illegally. Great deal for the bank. Not a 
good deal for our soldier in Balad.
    Now, my understanding, Ms. Teske, is that the soldier 
wanted to file a Servicemembers Civil Relief Act case to seek 
justice not for himself but also for other soldiers who had 
been foreclosed upon by the same bank. And it was really 
important for him to know that other soldiers knew that they 
had legal rights and that those rights might have been 
violated. You mentioned in your testimony that there was some 
indication that your client was not alone, that there might 
have been other victims out there, so the soldier filed a case 
for himself and for other soldiers who had been foreclosed upon 
by this bank.
    What happened next?
    Ms. Teske. He did not get his day in court. Because of the 
forced arbitration clause, the judge went ahead and ordered 
arbitration, and we ended up settling the case, and he was not 
able to represent the other servicemembers. So rather than 
having a class action that could go forward where others and he 
could get relief in our public court system, in the public eye, 
none of those things happened.
    Senator Franken. Okay. I am out of my time. We will come 
back. We are going to have a second round for anyone who wants 
to stick around. But that to me is just an outrage. That is an 
outrage.
    We will go to Senator Lee.
    Senator Lee. Thank you, Mr. Chairman, and thanks to all of 
you for joining us today.
    Mr. Parasharami, I would like to ask you a couple of 
questions. The CFPB in its preliminary findings notes that it 
intends to ``assess the possible impact of arbitration clauses 
on the price of consumer financial products.''
    I believe you indicated in your written testimony that 
consumers and employees might well benefit through the 
systematic reduction of litigation-related transaction costs 
which leads to lower prices and higher wages.
    Can you explain for us sort of what you mean by that and 
where that comes from, how you get there?
    Mr. Parasharami. Sure, Senator. So class actions and 
litigation in court are not free. They come with a cost--and, 
in fact, massive costs. The costs of litigation are high. The 
costs of electronic discovery are high. The costs of paying 
plaintiff's lawyers if the case settles are high. The costs of 
paying me and my colleagues and other law firms on the defense 
side to litigate the case, that happens in every case. So there 
are extraordinary legal costs associated with class actions and 
litigation in courts. Arbitration is a lot cheaper and quicker 
and more efficient, so the costs are lower.
    Now, where do these costs go? You know, they do not just 
kind of vanish into the ether. A company that experiences these 
litigation costs in a competitive market will pass them along 
to consumers or reduce wages for employees or otherwise not 
hire more workers. These costs are passed along in some form or 
another, and typically in a consumer context, it is passed 
along in the form of--if you save those costs, they are passed 
along in the form of lower prices. If you can experience those 
cost savings, they are passed along by lowering prices.
    So the point is that--and let me just say that scholars who 
have looked at this have said that it is simply a matter of 
basic economics, that cost savings that come from the use of 
arbitration are passed along in competitive markets to 
consumers.
    Senator Lee. Okay. Another thing that you stated in your 
written testimony was that businesses are unlikely to offer 
post-dispute arbitration, meaning once the dispute arises, they 
are not likely to raise that as a possibility.
    Why is that the case? Why is it the parties are rarely 
going to be entering into that kind of arrangement?
    Mr. Parasharami. So in the pre-dispute context, pre-dispute 
arbitration agreements, the ones that would be affected by this 
proposal, both sides, the consumer or employee and the 
business, are committing in advance to use arbitration. And so 
when a company implements an arbitration program, it commits to 
taking on a ton of incremental costs that it would not bear in 
court. Under most arbitration agreements, such as the ones that 
are governed by the American Arbitration Association's consumer 
rules, a business will have to cover filing fees, these amount 
in consumer cases to $1,500. And they also agree to pay the 
arbitrator's compensation in full. And arbitration agreements 
like the ones that I advise companies to adopt often agree that 
they will pay even more substantial costs. Sometimes they will 
pay the full costs of arbitration.
    The businesses agree to take on these high incremental 
costs because overall they experience the cost savings from 
reducing the litigation costs associated with class action 
litigation and litigation in court, the costs we just talked 
about. And because they save primarily on e-discovery costs and 
lawyer fees, the lawyers like me and the lawyers like my 
colleagues on the other side, it benefits them to pay all of 
these incremental costs for an arbitration program.
    But if you were in a regime where only post-dispute 
agreements were permitted, where either side could choose only 
after the dispute arises, then companies really would not want 
to have that two-track system because they would have to both 
pay the cost of maintaining an arbitration program as well as 
all the costs of maintaining the litigation system in court. 
And so they simply will not want to pay twice. It will not be 
realistic. If companies are only allowed to have post-dispute 
arbitration and are required to defend claims in court, they 
simply will not allow for arbitration. And this would actually 
be very detrimental to consumers and employees who would not 
have realistic claims to bring in court because if they cannot 
hire a lawyer because they have a small, individualized claim 
that will not lead to a class action, they are just out of 
luck.
    Senator Lee. Okay. Mr. Rutledge, in your written testimony, 
you talk about the importance of relying on sound empirical 
research before proceeding with legislation in this area. What 
are the risks involved in legislating in this area without an 
adequate, robust, empirical basis for doing so?
    Mr. Rutledge. Thank you for the question, Senator. I would 
identify two.
    The first would be the lack of a proper apples-to-apples 
comparison. So, for example, oftentimes arbitration is 
criticized and then the response becomes, ``Compared to what?'' 
So, for example, one of the frequent dynamics in the debate is 
that we should not have arbitration and in lieu of it should be 
class actions. And as I indicated in my testimony, a number of 
individuals have written, including my colleague at the 
University of Georgia, Jaime Dodge, that it is not clear that 
in the aggregate the class action apple is superior to the 
arbitration apple. For example, the settlement that the class 
action may generate may have a relatively low take rate, which 
is simply the rate at which the members who are brought into 
the class actually redeem the benefit. And at the same time, if 
they do not redeem the benefit, and yet they are bound by the 
decision in the class, they are effectively precluded from 
bringing their own claim at that point. So that would be the 
first concern.
    The second concern would be that there may be instances in 
which the regulation goes on to harm the very individuals whom 
it is designed to protect.
    So as you may be aware, one of the early iterations of 
incremental legislation that sought to invalidate pre-dispute 
arbitration agreements concerned contracts between automobile 
dealers and manufacturers. And many of the arguments that you 
hear today were raised in that debate. It turned out that there 
was one reported instance after that legislation was enacted 
where the dealer wanted to arbitrate and yet the legislation 
precluded the dealer from doing so.
    And so those are the two risks that I would draw to your 
attention in the time that I have. Thank you.
    Senator Lee. You seem to not believe that it is certain 
that we are going to have a flood of arbitral class waivers, we 
are not necessarily going to see a mass migration to arbitral 
class waivers. Help us understand what factors influence that 
thinking.
    Mr. Rutledge. Sure, and I think it is important for me to 
clarify something in my testimony, because this is a complex 
issue. What my testimony is suggesting and what I think the 
CFPB preliminary report indicates at page 19, for example--
excuse me, page 21, is that simply because the Supreme Court 
hands down a decision that seems to approve of a particular 
type of contracting practice in a given industry, that firms in 
that industry will not necessarily flock to that practice. In 
my paper that is attached to my testimony, that is the point we 
make about franchise contracts and I think in the CFPB report, 
again, taking into account the settlement that Senator Franken 
and I were sort of exchanging over a little while ago, at least 
at present for the credit card industry.
    Now, I want to differentiate that from a different 
situation that I talk about in my testimony, which is the use 
of class waivers among those entities that do employ 
arbitration clauses. And here I wish to acknowledge that where 
the empirics lead us is that both in the franchise context and 
in the credit card context, for those companies that do use 
those clauses, that there is an increased incidence in the use 
of the class waiver.
    My point is simply this: that the debate often occurs on 
sort of homogeneous terms, that industries can be sort of 
compared and that practices of firms within industries can be 
compared. And what I think the empirical research reveals is 
that is not necessarily true. There are certain industries, to 
the extent we have access to the data, where this is used more 
frequently than others, and there are certain firms within 
given industries where we have access to the data where the use 
appears more or less likely. And my point simply to you and 
your colleagues is to understand the dynamics that are driving 
those decisions before generalizing from a particular case or a 
particular firm's activity as to how an industry or how a 
particular set of firms is behaving.
    Thank you.
    Senator Lee. Thank you.
    Senator Franken. Thank you, Senator Lee.
    I think part of the exchange that we had, which was me 
smiling at something you said, was talking about apples to 
apples. And I thought that when you were talking about some of 
the CFPB results, you were not comparing apples to apples. When 
you said 17 percent, only 17 percent of--I will get to that in 
some questioning, but I think that when we talk about sound 
empirical research, we should--the word ``sound'' is very 
important.
    We will go to Senator Whitehouse.
    Senator Whitehouse. Thank you very much. First of all, Mr. 
Carlson, I am sorry for your experience, but I thank you for 
coming here to testify and to share your experience with us.
    It strikes me that if the ability of individual consumers 
to aggregate their claims is eliminated, and whether that is 
done by Congress deciding that we are just not going to allow 
small claims to go forward, or whether that is done by the 
corporate malefactor sneaking something into a contract, a 
consumer contract that prevents them from exercising what would 
otherwise be their legal rights, it strikes me that that 
creates a zone where fraud is encouraged, where it is basically 
given a free pass.
    It is interesting that we should be here today, because 
this very morning we had the hearing on the patent troll 
legislation. In that case, in that hearing, the issue was the 
so-called patent trolls who engage in frivolous litigation and 
threaten companies, and the argument there is that the cost of 
litigating with the patent troll makes it irrational to fight 
back and so people concede to settlements. And the room was 
filled. Everybody was excited about that notion. And here we 
have legitimate victims of what somebody has found to be 
wrongful or fraudulent behavior who try to engage in legitimate 
litigation to vindicate their rights against the fraudster, and 
here the cost of litigating would make it irrational to fight 
back. And it is almost the flip side.
    Let me ask you, Professor Gilles, what is your observation 
about what message corporate America would take from the 
ability to have no redress for low-dollar but large-scale 
frauds that they commit? Let us say that the telephone company 
figures out a way to put a bogus $1 charge on every single bill 
that you make, and by the time you figure it out, you know, 
maybe for a year they did it, so you are owed 12 bucks. They 
cheat millions of people, so they earn millions of dollars. Who 
is going to stand up for them when the only possibility of 
return is 12 bucks back?
    Ms. Gilles. Thank you for the question, Senator Whitehouse. 
No one is going to stand up for them.
    Senator Whitehouse. Stand up against them.
    Ms. Gilles. Stand up against them. No one can be the voice 
of the consumer who is subject to a hidden cost, a fee that 
they do not even notice, you know, whether it is 1 month in or 
12 months in, they do not even notice it; and when they do, it 
is of such a small value, such a small amount, that it is not 
worth it to them to arbitrate these claims.
    Senator Whitehouse. So if we allow the corporations 
themselves to put these tricks and traps into their consumer 
contracts, we are basically giving them open season for low-
dollar, high-volume fraud on consumers.
    Ms. Gilles. We are. That is exactly what we are doing. It 
is a mandate to violate the law, and----
    Senator Whitehouse. It is not a mandate. A permission.
    Ms. Gilles. A permission, right. The Supreme Court's 
decisions I think are certainly a mandate.
    And I do want to respond a little bit to what my colleagues 
at the end of the table said just a little bit ago. Mr. 
Parasharami noted, in response to Senator Lee, that the class 
actions have no value. Class actions, let us remember, 
everyone, that class actions desegregated schools. They made 
workplaces fair and equal. They have prohibited problematic 
police practices. They have uncovered and detected all sorts of 
consumer frauds. Class actions have done a tremendous amount of 
good, and I think that Mr. Parasharami's memo--I would not call 
it an empirical study because it is just 148 cherry-picked 
class actions that Mayer Brown thinks did not provide enough 
value to consumers. I think that is not a real study. The real 
study we have is the CFPB report, which really takes a very 
good look at the number of arbitration clauses that we are 
seeing in these agreements.
    And just again on Professor Rutledge's testimony, it is 
not--first of all, I think that 43 and 63 percent are quite 
high numbers to find in franchise agreements. But setting that 
aside, the CFPB finds that we are looking at 9 out of 10 
contracts in the consumer finance area with these forced 
arbitration clauses, which means that consumers cannot bring 
these claims because these claims are inherently collective 
claims. So when Alan has a problem because he thinks that Amex 
is charging him too high a rate and he would like to get 
together and pool resources with other restaurateurs and small 
businesses, independent book stores, hardware stores, to bring 
a claim under the Sherman Act against American Express, the 
only way he can do that, the only way he can afford a $1 
million expert report on antitrust impact and injury is if he 
is able to bring it as a class.
    So Amex, by putting this class action ban in their card 
acceptance agreement, is basically ensuring that they will 
never be held accountable under the Sherman Act. And this is 
really interesting for Amex, of course, because just last 
Friday Judge Gleason in the Southern District approved a 
settlement in a claim against Visa and MasterCard, a class 
action, for exactly the same behavior. So Visa and MasterCard 
are paying $7 billion--so that is worthwhile class relief--$7 
billion, a record settlement. Amex is getting away without 
anything because they happened to put some magic words in their 
arbitration agreement. I think that is very unfair.
    Senator Whitehouse. As somebody who has now spent a term of 
6 years in the Senate and begun to observe some of the behavior 
around here, I wonder what the response would be like if 
corporations in consumer contracts down in the fine print, in 
tricks and traps, instead of taking away consumer rights, 
particularly consumers' rights protected by the Seventh 
Amendment, were, say, taking away gun rights protected by the 
Second Amendment. I think you would have a completely different 
story, and that suggests to me----
    Ms. Gilles. I think the room would look like it did this 
morning, right? It would be full.
    Senator Whitehouse. It would look very different, and you 
might actually see different positions taken by the different 
sides. I think a lot depends on whose ox is being gored here, 
and right now it is the consumer's.
    Ms. Gilles. But the truth is that really there is nothing 
to keep a corporation from inserting all sorts of remedy-
stripping terms in its arbitration provisions. The Supreme 
Court's language----
    Senator Whitehouse. The Supreme Court has announced no 
limit----
    Ms. Gilles. No limit.
    Senator Whitehouse [continuing]. On what corporations can 
do----
    Ms. Gilles. The FAA protects everything. It is sacrosanct. 
So if I am a corporation, I am going to put a lot of stuff in 
there.
    Senator Whitehouse. Go for it. Why not?
    Ms. Gilles. I am going to violate Title VII. I am going to 
violate the ADA.
    Senator Whitehouse. Chairman, my time is----
    Ms. Gilles. Sorry.
    Senator Whitehouse [continuing]. Concluded, so thank you 
very much.
    Senator Franken. You are doing so well.
    Senator Hirono.
    Senator Hirono. Thank you, Mr. Chairman.
    My series of questions really related to the extent of 
these arbitration clauses because they are, I think, becoming 
more and more prevalent, and it seems to me that if you are a 
corporate lawyer or an in-house counsel, it would be 
practically malpractice not to advise your clients, your 
corporate clients, to have these kinds of remedy-stripping 
clauses in their contracts. Would you agree, Ms. Gilles?
    Ms. Gilles. Absolutely, and obviously Mr. Parasharami can 
speak to this more than I can, but I think he----
    Senator Hirono. I think I heard him say he advised his 
clients----
    Ms. Gilles. Yes, he probably does, and though he tells us 
in his testimony that he advises his clients, which are all, 
you know, Fortune 500 companies, to put fair, consumer-friendly 
arbitration clauses in their contracts, let us be clear. A 
class action ban is inherently not consumer friendly, because a 
consumer cannot bring a collective claim when there is a class 
action waiver.
    So, really, it does not matter how many cost-shifting 
provisions, how many promises to pay a bounty or a premium are 
put in these arbitration provisions. The truth is Alan is not 
going to go arbitrate one on one against Amex. It would just be 
too expensive no matter what the company puts in the agreement.
    So, yes, I think at this point the next interesting case to 
watch is the malpractice claim that is brought against a 
transactional attorney for failure to put one of these in a 
clause.
    Senator Hirono. Mr. Carlson, thank you very much for being 
here because you have been through a lot in pursuing your 
claims. We did hear testimony that arbitration clauses are good 
because they save money and these savings are passed on to 
consumers. But in your case, you wanted to pass on some 
discounts, et cetera, to your customers at your restaurant, but 
because of this tying arrangement, which is basically 
practically a per se antitrust violation, you did not have that 
freedom to do that, so your consumers, your customers suffered 
for that.
    Mr. Carlson. Was that a question there?
    Senator Hirono. I guess that may have been a rhetorical 
question.
    I have another question for Professor Gilles. This bill 
that we are considering, basically, you know, the language says 
that no pre-dispute arbitration agreement shall be valid or 
enforceable if it requires arbitration of an employment 
dispute, a consumer dispute, antitrust dispute, or civil rights 
dispute.
    Now, what about shareholder disputes? Do you think that 
this language covers those kinds of disputes?
    Ms. Gilles. I do. I think that investors are consumers, and 
I think that there is a lot of support out there for providing 
investors with the opportunity to go to court as opposed to 
going to arbitration. So I think so.
    Senator Hirono. Well, I would not be so sure that consumers 
could be deemed--that investors could be deemed consumers. 
Perhaps we need to make sure, because I am holding letters from 
over 200 major domestic and foreign institutional investors who 
are very concerned that the SEC has not promulgated a rule that 
would disallow forced arbitration clauses in shareholder 
disputes. So perhaps we need to make that clear, because these 
200 major entities include just about every State's retirement 
and pension funds. That is a lot of people. We are talking 
about some collectively managing assets that exceed $4.9 
trillion, and they are concerned that there are these forced 
arbitration clauses in their contracts with their brokers or 
whoever, and they cannot go to court.
    Ms. Gilles. Well, you know, I think you could certainly 
clarify the language. I think of investors as consumers because 
when you are talking about these sort of public pension funds, 
you are talking about firefighters and teachers and other 
ordinary folks who look just like a lot of the other consumers 
that we are talking about today. But I applaud the Committee's 
effort here, and if you want to go further and be clearer that 
you are also covering investors, I think that would probably 
save a future court a lot of time.
    Senator Hirono. That would certainly make me feel a lot 
better knowing that there are so many different ways that these 
arbitration clauses can be written to head people off at the 
pass.
    Thank you, Mr. Chairman.
    Senator Franken. Thank you, Senator.
    Senator Blumenthal.
    Senator Blumenthal. Thank you, Mr. Chairman.
    As you may have gathered, I think the majority of members 
of this panel who are here today agree that arbitration 
sometimes violates basic fairness and sometimes even 
constitutional rights. But the members of the panel who are not 
here might not be part of that consensus. And, likewise, 
Members of the Senate may not be in agreement that we need to 
change the law to restrict arbitration, although I have been a 
long-time advocate of making sure that consumers are protected 
from arbitration clauses that may not be clear or conspicuous, 
hidden in the fine print, as one of you observed.
    So I think we have political obstacles to overcome here, 
and not the least of them are the interests of corporations 
that are loathe to go to court to be subjected to claims based 
on liability for violations of law related to financial 
practices or product defects or a range of violations of 
consumer rights.
    But I think there is one area where there ought to be total 
and complete consensus, and that is that our servicemen and 
servicewomen should be protected not only in name and rhetoric, 
but also in reality, which, Ms. Teske, your testimony I think 
powerfully supports. And, in fact, regrettably, going back to 
reports from the Department of Defense and others since then, 
many servicemen and servicewomen have been victims of 
violations of rights, whether it is in foreclosure of their 
homes, repossession of vehicles or other personal property, 
protections against judgments, where they may not even have 
appeared, evictions. The whole idea is that when they are on 
active duty they often cannot focus on these areas of life, not 
to mention appear in court or in proceedings preliminary to 
court proceedings or arbitration proceedings.
    So I guess my question is whether there is a way to deal 
very specifically in a focused and targeted way with these 
violations of basic fairness that you outline in your 
testimony, a targeted way through the Servicemembers Civil 
Relief Act or through some other mechanisms, to make sure that 
we are protecting our men and women in uniform.
    Ms. Teske. Thank you for that question. There is. I mean, 
certainly there is precedent for that. In the Military Lending 
Act, there is a provision that for a narrow set of contracts 
you cannot have forced arbitration clauses. We could do the 
same through amendment of the Servicemembers Civil Relief Act 
to make clear that they cannot be forced into arbitration and 
that they do have the right to bring class actions in a court 
of law. And I think that would be a great step forward, at 
least for the servicemembers.
    But one thing that I do want to point out in addition to 
that is that our servicemembers are also consumers, and they 
have a whole host of rights under scores of consumer protection 
statutes. By amending the Servicemembers Civil Relief Act, 
although that is a major step forward, we are still leaving 
them open to forced arbitration for all the other consumer 
protection violations that they are victims of.
    So I would applaud any effort to provide protections, 
further protections for servicemembers under the Servicemembers 
Civil Relief Act, but I think we also cannot forget that the 2 
million men and women that serve in our military are also 
consumers, and their families are consumers, and employees.
    Senator Blumenthal. I accept and I applaud that comment, 
and I agree completely with it that they ought to be viewed as 
consumers in those other contexts as well. But I am thinking 
about what is achievable strictly in raw political terms, 
because I have not been here as long as Senator Franken or 
Senator Whitehouse, but I do know that often we are frustrated 
in trying to achieve these kinds of reforms.
    Mr. Parasharami, I wonder if I could ask you whether you 
would have the same objections that you have outlined in your 
testimony to that kind of focused and targeted bar on 
arbitration for our servicemen and servicewomen who may 
literally, physically, not have the ability to make use of 
these arbitration clauses?
    Mr. Parasharami. I suppose I do not think that it is a good 
idea, and, you know, I should say absolutely I respect our 
servicemembers. You know, what they do is so important, and I 
would not want to take anything away from them.
    If the question is how can they realistically achieve 
resolution of most of the claims that they have, most people 
have consumer disputes that are small and individualized. Class 
actions just necessarily cannot help them because if a claim is 
individualized, it cannot be brought on a class basis.
    And so then the question is: Well, which is better: going 
to court or going to arbitration? And it turns out that 
arbitration is cheaper in many instances because companies pay 
all of the costs of arbitration, and it is more flexible. You 
do not have to take a day off work, and when you are 
servicemember, a day off work is impossible. You can do it 
remotely. You can do it by telephone. You can do it by mail. 
And in many cases now, e-mail is the preferred form of 
communication with arbitration organizations. So I think it is 
actually more realistic to resolve claims on an individual 
basis through arbitration than through court.
    Senator Blumenthal. What would you say to that, Ms. Teske?
    Ms. Teske. Thank you. I have been listening and just kind 
of shaking my head. It is not reality. It is just not reality 
to say that servicemembers are going to have a better chance 
going into arbitrating their claims. We have seen time and 
again that a very, very small number of consumers and probably 
a much smaller number of servicemembers are going to go and 
take their claims to arbitration. What is happening really here 
is claim suppression. The majority of servicemembers, (A) are 
not going to know their rights under the Servicemembers Civil 
Relief Act, and (B) they are not going to have the time or put 
forth the effort or the energy to be able to bring these 
individually.
    So, yes, in some cases it is appropriate for an individual 
court action, and if they want to voluntarily take it to 
arbitration, I think that is great. But it has to be voluntary.
    But in many cases, the corporation that is breaking the 
law, the Servicemembers Civil Relief Act, is doing it on a 
widespread basis. It is a corporate practice. Or they have not 
put into place procedures to comply with the SCRA protections. 
And so in those situations, a class action is the best vehicle 
to go forward, and we have seen that in cases already.
    So to say that, no, we should not have the ability to bring 
class actions for our servicemembers and that they should be 
forced into arbitration because that is a better route for them 
I think is disingenuous.
    Senator Blumenthal. Thank you. My time has expired. I 
welcome and appreciate all of your testimony. It has been very, 
very helpful and important, and thank you for being here today.
    Thank you, Mr. Chairman.
    Senator Franken. Thank you, Senator Blumenthal.
    I have some more questions I would like to ask the panel, 
and so we will have a second round.
    Professor Gilles, in his written testimony Professor 
Rutledge argues that we have not seen an explosion of 
arbitration clauses and class action waivers in franchise 
agreements. Then on page 11 of his written testimony, Professor 
Rutledge says, ``last week's CFPB report of preliminary results 
told a similar story in several sectors of the consumer 
financial services industry.''
    My reading of the CFPB report was nearly the opposite, and 
I think this gets to the apples and oranges, because he was 
talking about 17 percent of, you know, I guess the companies 
that do this using these contracts. But an enormous percentage 
of the contracts have the clauses in actuality.
    So can you speak to--I mean, what is your take on this? My 
reading was that the report indicates that arbitration 
agreements and class action bans are extremely prevalent among 
outstanding credit card loans, insured deposits, and pre-paid 
cards. When someone is saying we have got to compare apples to 
apples, isn't it incumbent upon you to do that? And just what 
is your take on this?
    Ms. Gilles. I read the report the way you do. And I say 
that not just because you are chairing this hearing. I read the 
report, the CFPB report--and it really is the best empirical 
study we have out there. I read it as saying that basically 9 
out of 10 companies are using these forced arbitration clauses, 
that we are seeing almost 100 percent penetration of class 
action waivers--class action bans inserted in arbitration 
clauses, and I do not think that Professor Rutledge is--I do 
not think his testimony is accurate on that point.
    Now, he did try to clarify in his answer to--or in his 
opening statement that he does agree that we are seeing many 
more class action bans, so maybe we are all on the same page on 
that, and that saves this testimony.
    Look, I think it would be crazy for a company not to insert 
a class ban in its arbitration clauses. I am sure Mr. 
Parasharami tells every client to do so, because to do so is to 
ensure, unlike what Mr. Parasharami has testified to, that they 
will actually not have to be held accountable for any 
violations of law because very few consumers, employees, small 
businesses will ever bring an arbitration. And certainly there 
will never be any arbitrations near the numbers and near the 
significance of a class action. And, furthermore, the thing 
about arbitration, let us just be clear about what we are 
talking about. Arbitrations are private, they are sequestered, 
they are individual. You can only bring a claim for yourself. 
So maybe you do bring a claim, maybe Alan does decide to bring 
a claim, so he gets some money back from Amex. But, you know, 
Alan will have no power to actually change Amex's policy vis-a-
vis every other card acceptance contract. That is what class 
actions do.
    Senator Franken. Let us talk about just how this affects 
people's daily lives. Here we have a restaurant, a guy who went 
to culinary school, moves out west, opens a restaurant, has a 
few in Oakland. If I get out to Oakland, I am going to Italian 
Colors.
    [Laughter.]
    Senator Franken. Because it has been successful a long 
time, I know the food is good there.
    Okay. That is how he is affected by this. He cannot pass on 
savings to his customers. He is not allowed to tell them, ``I 
will give you a little bit off if you use this card as opposed 
to this kind of American Express card. You can still use an 
American Express card. Just do not use this one that they make 
us do 5 or 6 percent on.''
    But let us just talk about everyday people. You, in your 
testimony, talked about a cable company--I think it was Time 
Warner--that added a modem--or did not add a modem, the modem 
was there. And suddenly, boom, $4, $3.95 is charged to every 
customer without any--they just added it. It is like a hidden 
fee. So that is what--you know, a hidden fee. We are talking 
about how this is going to save money.
    Ms. Gilles. The thing that saves money for corporations is 
liability avoidance, which is what these clauses really result 
in, complete and utter avoidance of liability. So, yes, Time 
Warner, Comcast, Cox Cable, they can put in all sorts of hidden 
fees, and the consumer cannot do anything about it because the 
amount that they are being overcharged is just so small that it 
is hardly worth, you know, staying on hold with customer 
service for half an hour, much less going into an individual 
arbitration to prove a claim that actually would be expensive 
to prove. So the only way these sorts of cases would ever get 
brought is in a class forum.
    But to be honest, what I think your bill would do is it 
would actually return us to the status quo where corporations 
do not feel that they can engage in these widely dispersed, 
small-dollar harms because the class action threat, the 
deterrent threat is out there. I think that is what your bill 
would do.
    Senator Franken. And let us say there is actually a lot at 
stake in something. In 2011, I held a hearing on mandatory pre-
dispute arbitration, and that is what we are talking about 
here. We are not talking about getting rid of arbitration. And 
I heard testimony from a doctor in a gender discrimination 
claim against her employer, a hospital, and the doctor showed--
the doctor was forced into arbitration, and she testified how 
she showed up at the arbitrator's office for the proceedings 
and saw shelves upon shelves of binders--she was the 
plaintiff--with the defendant's name on it, clearly indicating 
that her arbitrator and the hospital had an ongoing business 
relationship. She lost the arbitration, and she left the 
proceeding feeling like she was not even really heard. She 
believed that the arbitrator was biased and did not give her a 
fair shake. This whole thing really undermined her trust in the 
system of justice.
    Now, Professor Rutledge, in 2004, before you started 
working for the Chamber of Commerce, you actually wrote a 
fairly compelling argument about this sort of thing. You wrote, 
``Just as competition in the marketplace may provide some 
arbitrators independence, it may provide other arbitrators 
incentives to be beholden to particular parties or industries 
likely to nominate them.'' You went on to say that arbitrators 
may ``develop reputations with particular types of parties. For 
an example, an arbitrator may be perceived as industry 
friendly.'' And you continued, ``Through these activities 
designed to enhance their reputations, arbitrators generate 
business in the form of fees and hopefully future 
appointments.''
    So I am curious. What would you say to that woman whose 
gender discrimination case was forced into arbitration and she 
came out believing that the fix was in?
    Mr. Rutledge. Senator, thank you for your question. Let me 
first begin by saying I do not know the details of the case 
that you are describing, so I am going to give the best answer 
that I can based on your description.
    Senator Franken. Sure. What would you say to her? I have 
related to you her testimony.
    Mr. Rutledge. I understand.
    Senator Franken. What would you say to her? That is the 
question.
    Mr. Rutledge. I understand.
    Senator Franken. What would you say to her?
    Mr. Rutledge. Senator, I think what I would say is that if 
you believed you were wronged and we can generate the evidence 
to demonstrate that you were wronged, we are going to find a 
way to get you relief. There are various ways in which that 
relief can be attained. It can be attained through litigation--
--
    Senator Franken. No, well, if you have a mandatory pre-
dispute arbitration clause in it, no, they cannot. In fact, 
that is what this whole hearing is about. You just summed up 
the entire hearing. She cannot go to court.
    Mr. Rutledge. I understand, Senator.
    Senator Franken. So why did you say she could go to court? 
Isn't that what this is all about? I mean, isn't that what we 
are talking about? Isn't that what we have been doing for the 
last 2\1/2\ hours?
    Mr. Rutledge. Senator----
    Senator Franken. She cannot go to court.
    Mr. Rutledge. May I answer the question?
    Senator Franken. What would you say to the woman?
    Mr. Rutledge. We may go to litigation, that there are ways 
under current law whereby that arbitration clause can be 
challenged, and we will attempt to see whether that clause can 
be challenged. If it cannot be challenged, then we will go to 
arbitration, and there are upsides to arbitration, some of 
which Mr. Parasharami has referred to. And so, therefore, what 
I am trying to say, Senator, and what I tried to say to Senator 
Lee as well, is that, back to the point that you have made--and 
I agree with you--the apples-to-apples comparison is to try to 
discern which of these two systems is going to yield the better 
result for the aggrieved individual.
    Can I make one other point just to----
    Senator Franken. Well, after I respond a little bit.
    Mr. Rutledge. Sure. I understand.
    Senator Franken. I asked you what to say to a woman who 
brought a gender discrimination suit to an arbitrator. She went 
in. The arbitrator had the name of the hospital--she was a 
doctor. No woman had been promoted in that practice, and she 
felt there was gender discrimination. She goes in; the guy in 
his office has folder after folder with the name of the 
hospital. She felt that the guy did not hear her. I asked you 
what you would say to her. The first thing you would say to 
her, ``Well, I would go to court. You can go to court.'' Well, 
no, you cannot go to court. Then the next thing you said, 
``Well, then we go to arbitration if we cannot go to court.'' I 
told you she went to arbitration, and she felt that this guy--
that the fix was in. And you yourself said--you yourself said 
in 2004--that arbitrators do this to get business. They develop 
reputations as friendly to industry. You said it. This is you. 
I read you back your own quote.
    What would you tell her? ``The fix is in, lady, ma'am. The 
fix is in.'' And that is not our system of justice. Go ahead.
    Mr. Rutledge. Sure. Senator, there are two points that I am 
trying to make. One pertains to your question and one pertains 
to the apples-to-apples point from a moment ago.
    What I am trying to say, as to this individual--and I 
apologize, Senator, if I misunderstood your question before. I 
had understood your question to be what I would say to her at 
the front end of the dispute, and I take it your question now 
concerns----
    Senator Franken. I asked you what would you say to this 
woman who testified here.
    Mr. Rutledge. I understand.
    Senator Franken. That is what I asked you.
    Mr. Rutledge. I understand, Senator. And I can understand 
that from her perspective that that result would be 
disappointing. And what I am saying, Senator, is that there are 
instances in which the civil litigation leaves people 
disappointed, too.
    The second point that I just wish to make, Senator, because 
I am very much with you on the apples-to-apples comparison 
point, and I do not know if you have a copy of the CFPB report 
with you or can see it. To be very clear, Senator, if I could 
direct your attention to page 21 of the CFPB report?
    Senator Franken. I am there.
    Mr. Rutledge. This is the pie chart that you see. And what 
you see here in the sentence immediately below the pie chart, 
``Of the 393 credit card issuers, 67 issuers, or 17 percent, 
included arbitration clauses in their credit card contracts 
while 326 issuers, or 83 percent, did not.''
    That was the point that I was making about the low 
incidence of the use of arbitration clauses, and----
    Senator Franken. And my question about apples to apples and 
oranges to oranges was: What percent do those 17 percent have 
of the market?
    Mr. Rutledge. Absolutely, and to that, Senator, they have a 
large portion of the market. That is----
    Senator Franken. What percent would you say?
    Mr. Rutledge. Senator----
    Senator Franken. Do you think that is relevant?
    Mr. Rutledge. I understand----
    Senator Franken. Ms. Gilles, Professor Gilles, what percent 
of the market do they have?
    Mr. Rutledge. Senator, the answer is approximately 94 to 98 
percent.
    Senator Franken. 94 to 98 percent.
    Mr. Rutledge. That is in a 2011 article that I published--
--
    Senator Franken. Okay. And you made the point----
    Mr. Rutledge [continuing]. And that is cited in my 
testimony.
    Senator Franken. Yes. So you made the point in your 
testimony that we need to compare apples to apples and oranges 
to oranges. And then you say that the CFPB report proves the 
point you have been trying to make today and uses your evidence 
that only 17 percent of credit card companies use these 
mandatory arbitration agreements without having the honesty, 
really, to say that, apples to apples, oranges to oranges, 94 
to 98 percent of the market is that way.
    Now, some credit union credit card company is not going to, 
you know, have any power over Mr. Carlson. That is the whole 
point of this. And when you talk about empirical evidence--and 
sound empirical evidence has to be done by objective people. 
That is what is sound empirical evidence.
    By the way, you write in your testimony you cannot--I think 
I have said my piece on this. I just think that it is apples--I 
want to give Mr. Carlson the last word on this. You felt it was 
important enough to come here today across the country. This is 
a big deal. Why is this issue so important to you?
    Mr. Carlson. I think that is a terrific question. I was not 
doing this for money. I am trying to do it just to level the 
playing field for all small business consumers so that they can 
make a fair living. You know, I got into this business not--I 
did not get into the restaurant business to get rich. That is 
not the industry I think you throw yourself into to say, ``Oh, 
wow, I am going to work my ass off and make a fortune.'' You do 
put in a lot of long hours, but for me the love and the passion 
comes from each guest that is satisfied, that you put a smile 
on their face. That is why I do it, and that is why I came 
here. I am just fighting for everybody else to have the same 
opportunity that I have been blessed with--that I have my own 
place. And it is not easy to do to try to find money to start a 
business and to grow. As a human, you know, you want to 
challenge yourself, and it is nice when people give you a 
handout and help a little bit, and that is all I am trying to 
achieve here. Thank you very much.
    Senator Franken. Thank you. I would like to thank you, and 
I would really like to thank all the witnesses for their 
testimony.
    I would also like to submit letters and statements for the 
record from more than a dozen professors, advocates, and 
interested organizations. I was especially pleased to receive 
written testimony from Mike Rothman, Minnesota's Commerce 
Commissioner, who is working hard to enforce the law in my 
State, and I would like to thank him for his service to 
Minnesota.
    [The letters and statements referred to appear as 
submissions for the record.]
    Senator Franken. I think that the case for the Arbitration 
Fairness Act is pretty clear. I think we saw that when you come 
down to what this is. You cannot go to court. With Concepcion 
and Italian Colors on the books, the Federal Arbitration Act 
has become a tool that the big corporations can use to avoid 
their obligations under the law. As Mr. Carlson put it, we are 
basically at a point where big corporations can write their own 
rules. We have heard today this has had a profound impact on 
consumers, workers, and small businesses, and simply put, it is 
not fair. It is not fair that powerful corporations can cheat 
consumers out of their hard-earned money or that they can 
withhold wages or turn a blind eye to workplace discrimination 
and that they can overcharge small businesses, that they can 
falsify affidavits and foreclose on active-duty servicemembers 
who are overseas, that they can do all of this knowing all 
along that there is little, if anything, that the consumer, 
worker, small business, or soldier can do to make it right for 
those who have been harmed.
    When I went to Walter Reed the first time and they ask 
you--I do a lot of USO tours, and they ask you to go to Walter 
Reed, and you think, ``How am I going to cheer up somebody who 
has lost legs?'' The first guy I met was from Anaconda. He lost 
two legs from a mortar. The Arbitration Fairness Act will 
restore access to justice for millions of Americans. I would 
urge my colleagues to join me in that effort.
    We will hold the record open for 1 week for submission of 
questions for the witnesses and other materials.
    The hearing is adjourned.
    [Whereupon, at 4:45 p.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]
                            A P P E N D I X

              Additional Material Submitted for the Record

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               Prepared Statement of Hon. Chuck Grassley

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               Prepared Statement of Hon. Orrin G. Hatch

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                Prepared Statement of Hon. Patrick Leahy

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                Prepared Statement of Sheldon Whitehouse

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                Prepared Statement of Leslie C. Overton

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                 Prepared Statement of Alan S. Carlson

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                  Prepared Statement of Myriam Gilles

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                 Prepared Statement of Vildan A. Teske

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              Prepared Statement of Archis A. Parasharami

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                Prepared Statement of Peter B. Rutledge

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        Questions submitted by Senator Franken for Myriam Gilles

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        Questions submitted by Senator Franken for Vildan Teske

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     Questions submitted by Senator Franken for Archis Parasharami

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     Questions submitted by Senator Grassley for Archis Parasharami

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       Questions submitted by Senator Grassley for Peter Rutledge

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         Questions submitted by Senator Hatch for Myriam Gilles

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        Questions submitted by Senator Hatch for Peter Rutledge

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 Responses of Myriam Gilles to questions submitted by Senators Franken 
                               and Hatch

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  Responses of Vildan Teske to questions submitted by Senator Franken

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  Responses of Archis Parasharami to questions submitted by Senators 
                          Franken and Grassley

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Responses of Peter Rutledge to questions submitted by Senators Grassley 
                               and Hatch

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                Miscellaneous Submissions for the Record

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