[Congressional Record Volume 144, Number 114 (Wednesday, September 2, 1998)]
[Senate]
[Pages S9881-S9883]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GRASSLEY (for himself and Mr. Feingold):
  S. 2434. A bill to amend chapter 1 of title 9, United States Code, to 
provide for greater fairness in the arbitration process relating to a 
motor vehicle franchise contracts; to the Committee on the Judiciary.


   motor vehicle franchise contract arbitration fairness act of 1998

  Mr. GRASSLEY. Mr. President, today, I am joined by my colleague from 
Wisconsin, Senator Feingold, in introducing the Motor Vehicle Franchise 
Contract Arbitration Fairness Act of 1998.
  As the Senate's leading advocate of ADR or alternative dispute 
resolution, I have attempted to facilitate the use of ADR in a number 
of ways. In the last Congress, we enacted my legislation to make 
permanent the use of ADR with and among our federal agencies. This 
year, we are attempting to enact legislation authorizing federal court-
annexed ADR.
  A small percentage of ADR cases involves the use of binding 
arbitration. In dealing with arbitration, I have tried to emphasize the 
use of voluntary, rather than mandatory arbitration. Both parties must 
agree to voluntary arbitration, whereas mandatory arbitration can be 
forced upon a party, as in the case of some contractual arrangements. 
The authorization and use of mandatory arbitration has to be carefully 
considered since the right to trial may be limited or even forfeited.
  One such arrangement can be found in some contracts between 
automobile or truck dealers and manufacturers. In these contracts, 
dealers are given a ``take it or leave it'' clause that forces them to 
agree to binding arbitration. There is no real bargaining. If the 
dealer wants the contract, he or she has to agree to the mandatory 
arbitration clause.

[[Page S9882]]

  A number of states have enacted laws to prevent these types of unfair 
contracts. But, even though these clauses may violate a number of state 
laws, the Fourth Circuit overturned a lower court and ruled that these 
state laws conflict with the Federal Arbitration Act of 1925, and are 
therefore preempted by the Supremacy Clause of the U.S. Constitution. 
So much for states' rights.
  Historically, Congress has questioned whether arbitration agreements 
should allow a stronger party to a contract to force a weaker party to 
forfeit rights to a court as a condition of entering a contract. But, 
it's been unclear as to what exactly the federal law allows. I believe 
it's now time to do more than just question these unfair 
``agreements''.
  The legislation Senator Feingold and I are introducing today would 
help remedy this current unfortunate situation by allowing only 
voluntary arbitration clauses between dealers and manufacturers. The 
bill would continue to recognize arbitration as a valuable alternative 
to litigation as long as both parties voluntarily agree to it. We want 
to preserve arbitration as an effective alternative to litigation, but 
we want to ensure that it's a fair alternative.
  I urge my colleagues to join Senator Feingold and myself in trying to 
address these unfair franchise contracts.
  Mr. FEINGOLD. Mr. President, I rise today to introduce, with my 
distinguished colleague from Iowa, Senator Grassley, the Motor Vehicle 
Franchise Contract Arbitration Fairness Act of 1998.
  While alternative dispute resolution such as arbitration can serve a 
useful purpose in resolving disputes between parties, I am extremely 
concerned with the increasing trend of stronger parties to a contract 
forcing weaker parties to waive their rights and to arbitrate disputes. 
Earlier this Congress, I introduced S. 63, the Civil Rights Procedures 
Act, to amend certain civil rights statutes to prevent the involuntary 
application of arbitration to claims that arise from unlawful 
employment discrimination and sexual harassment.
  It has come to my attention that the automobile and truck 
manufacturers, which present dealers with ``take it or leave it'' 
contracts, are increasingly including mandatory, binding arbitration 
clauses as a condition of entering into or keeping an auto or truck 
franchise. This practice forces dealers to submit their disputes with 
manufacturers to involuntary arbitration. As a result, dealers are 
required to waive access to judicial or administrative forums, 
substantive contract rights, and statutorily provided protection. In 
short, this practice clearly violates the dealers fundamental due 
process rights and runs directly counter to basic principles of 
fairness.
  Historically and currently, franchise agreements for auto and truck 
dealerships are nonnegotiable with the manufacturer; the dealer accepts 
the terms offered by the manufacturer or they lose the dealership; 
plain and simple. Dealers, therefore, have been forced to rely on the 
states to pass laws designed to minimize the manufacturers' greater 
bargaining power and to safeguard their rights. The first such state 
automobile statute was enacted in my home state of Wisconsin in 1937. 
Since then all states, except Alaska, have enacted substantive law to 
balance the enormous bargaining power enjoyed by manufacturers over 
dealers and to safeguard small business dealers from unfair automobile 
and truck manufacturer practices.
  In addition, the majority of states have created their own 
alternative dispute resolution mechanisms and forums which specialize 
in auto and truck industry disputes. These administrative forums are 
inexpensive, efficient, and unbiased. For example, in Wisconsin 
mandatory mediation is required before the start of an administrative 
hearing or court action. Arbitration is also optional if both parties 
agree. These state dispute resolution forums, with years of experience 
and precedent, are greatly responsible for the small number of 
manufacturer/dealer lawsuits.
  Unfortunately, when mandatory binding arbitration is included in 
dealer agreements, state laws and forums established to resolve auto 
dealer and manufacturer disputes are essentially null and void. Under 
the Federal Arbitration Act (FAA) arbitrators are not required to apply 
federal or state law. The stronger party--in this case the auto or 
truck manufacturer--can, therefore, use mandatory arbitration to 
circumvent the state laws which were specifically enacted to regulate 
the dealer/manufacturer relationship. Not only is the circumvention of 
these laws inequitable, it also eliminates the deterrent to prohibited 
acts that these state laws provide.
  Besides losing the protection of state law and the ability to use 
state forums, there are other numerous reasons why a dealer may not 
want to agree to binding arbitration. Arbitration lacks some of the 
important safeguards and due process offered by administrative 
procedures and the judicial system. For example: (1) arbitration lacks 
the formal court supervised discovery process oftentimes necessary to 
learn facts and gain documents; (2) an arbitrator need not follow the 
rules of evidence; (3) arbitrators generally have no obligation to 
provide factual or legal discussion of their decision in a written 
opinion; and (4) arbitration often does not allow for judicial review.
  The most troubling problem with this sort of mandatory, binding 
arbitration may be the absence of judicial review. Take for instance a 
dispute over a dealership termination. To that dealer--that small 
business person--this decision is of paramount importance. Even under 
this scenario, the dealer would not have recourse to substantive 
judicial review of the arbitrators' ruling. Let me be very clear on 
this point; in most circumstances a dealer cannot appeal an arbitration 
award even if the arbitration panel disregarded state law which likely 
would have produced a different result.
  This problem is growing. The use of mandatory binding arbitration is 
increasing in many industries, but nowhere is it growing more steadily 
than the auto/truck industry. Currently 11 auto and truck manufacturers 
require some form of such arbitration in their dealer franchise 
contracts.
  In recognition of this problem, many states enacted laws to prohibit 
the inclusion of mandatory, binding arbitration clauses in certain 
agreements. The Supreme Court, however, held in Southland Corp. v. 
Keating, 104 S. Ct. 852 (1984), that the FAA by implication preempts 
these state laws. The Southland Corp. decision has, in effect, 
nullified many state arbitration laws that were designed to protect 
weaker parties in unequal bargaining positions from involuntarily 
acquiescing--often without other meaningful options--to these 
mandatory, binding arbitration clauses.
  The legislative history indicates that Congress never intended that 
the FAA be a tool that the stronger party to a contract could use to 
force the weaker party into binding arbitration. Congress certainly did 
not intend the FAA to be a weapon used to coerce parties into 
relinquishing important protections and rights that would have been 
afforded them by the judicial system. Unfortunately, this is precisely 
the current situation.
  Although contract law is generally the province of the states, the 
Supreme Court's decision in Southland Corp. has in effect made any 
state action on this issue moot. I, therefore, along with Senator 
Grassley, am introducing this bill today to ensure that auto and truck 
dealers are not coerced into waiving their rights. Our bill, the Motor 
Vehicle Franchise Contract Arbitration Fairness Act of 1998 would 
simply allow each party to an auto or truck franchise contract to 
voluntarily agree to arbitration; mandatory, binding arbitration would 
be prohibited. The bill would not proscribe arbitration, however. On 
the contrary, our measure would encourage arbitration by making it a 
fair choice that both parties to such a franchise contract willing and 
knowingly select. In short, this bill would ensure that the decision to 
arbitrate is voluntary and that the rights and remedies provided for by 
our judicial system are not mandatorily waived.
  Today if a small business person wants to obtain or keep her or his 
auto or truck franchise, she or he may only be able to do so by 
relinquishing her or his statutory rights and foreclosing the 
opportunity to use the courts or administrative forums. Mr. President, 
I cannot not say this more strongly--this is unacceptable; this is 
wrong. I,

[[Page S9883]]

therefore, urge my colleagues to join with Senator Grassley and me to 
put an end to the invidious practice.
                                 ______