[Congressional Record Volume 145, Number 68 (Wednesday, May 12, 1999)]
[Senate]
[Pages S5157-S5159]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GRASSLEY (for himself and Mr. Feingold):
  S. 1020. A bill to amend chapter 1 of title 9, United States Code, to 
provide for greater fairness in the arbitration process relating to 
motor vehicle franchise contracts.


       Motor Vehicle Franchise Contract Arbitration fairness Act

 Mr. GRASSLEY. Mr. President, today, along with my colleague 
from Wisconsin, Senator Feingold, I am introducing the Motor Vehicle 
Franchise Contract Arbitration Fairness Act.
  Over the years, I have been in the forefront of promoting alternative 
dispute resolution (ADR) mechanisms to encourage alternatives to 
litigation when disputes arise. Such legislation includes the permanent 
use of ADR by federal agencies. Last year we also passed legislation to 
authorize federal court-annexed arbitration. These statutes are based, 
in part, on the premise that arbitration should be voluntary rather 
than mandatory.
  While arbitration often serves an important function as an efficient 
alternative to court some trade offs must be considered by both 
parties, such as limited judicial review and less formal procedures 
regarding discovery and rules of evidence. When mandatory binding 
arbitration is forced upon a party, for example when it is placed in a 
boiler-plate agreement, it deprives the weaker party the opportunity to 
elect any other forum. As a proponent of arbitration I believe it is 
critical to ensure that the selection of arbitration is voluntary and 
fair.
  Unequal bargaining power exists in contracts between automobile and 
truck dealers and their manufacturers. The manufacturer drafts the 
contract and presents it to dealers with no opportunity to negotiate. 
Increasingly these manufacturers are including compulsory binding 
arbitration in their agreements, and dealers are finding themselves 
with no choice but to accept it. If they refuse to sign the contract 
they have no franchise. This clause then binds the dealer to 
arbitration as the exclusive procedure for resolving any dispute. The 
purpose of arbitration is to reduce costly, time-consuming litigation, 
not to force a party to an adhesion contract to waive access to 
judicial or administrative forums for the pursuit of rights under state 
law.
  I am extremely concerned with this industry practice that conditions 
the granting or keeping of motor vehicle franchises on the acceptance 
of mandatory and binding arbitration. While several states have enacted 
statutes to protect weaker parties in ``take it or leave it'' contracts 
and attempted to prevent this type of inequitable practice, these state 
laws have been held to conflict with the Federal Arbitration Act (FAA).
  In 1925, when the FAA was enacted to make arbitration agreements 
enforceable in federal courts, it did not expressly provide for 
preemption of state law. Nor is there any legislative history to 
indicate Congress intended to occupy the entire field of arbitration. 
However, in 1984 the Supreme Court interpreted the FAA to preempt state 
law in Southland Corporation versus Keating. Thus, state laws that 
protect weaker parties from being forced to accept arbitration and to 
waive state rights (such as Iowa's law prohibiting manufacturers from 
requiring dealers to submit to mandatory binding arbitration) are 
preempted by the FAA.
  With mandatory binding arbitration agreements becoming increasingly 
common in motor vehicle franchise agreements, now is the time to 
eliminate the ambiguity in the FAA statute. The purpose of the 
legislation Senator Feingold and I are introducing is to ensure that in 
disputes between manufacturers and dealers, both parties must 
voluntarily elect binding arbitration. This approach would continue to 
recognize arbitration as a valuable alternative to court--but would 
provide an option to pursue other forums such as administrative bodies 
that have been established in a majority of states, including Iowa, to 
handle dealer/manufacturer disputes.
  This legislation will go a long way toward ensuring that parties will 
not be forced into binding arbitration and thereby lose important 
statutory rights. I am confident that given its many advantages 
arbitration will often be elected. But it is essential for public 
policy reasons and basic fairness that both parties to this type of 
contract have the freedom to make their own decisions based on the 
circumstances of the case.
  I urge my colleagues to join Senator Feingold and myself in 
supporting this legislation to address this unfair franchise 
practice.
   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 1999.''
  While alternative methods of dispute resolution such as arbitration 
can serve a useful purpose in resolving disputes between parties, I am 
extremely concerned by the increasing trend of stronger parties to a 
contract forcing weaker parties to waive their rights and agree to 
arbitrate any future disputes that may arise. Earlier this Congress, I 
introduced S. 121, the Civil Rights Procedures Protection Act, to amend 
certain civil rights statutes to prevent the involuntary imposition 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 often present dealers with ``take it or leave it'' 
contracts, are increasingly including mandatory and binding arbitration 
clauses as a condition of entering into or maintaining an auto or truck 
franchise. This practice forces dealers to submit their disputes with 
manufacturers to 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

[[Page S5159]]

and runs directly counter to basic principles of fairness.
  Franchise agreements for auto and truck dealerships are typically not 
negotiable between the manufacturer and the dealer. The dealer accepts 
the terms offered by the manufacturer, or it loses the dealership. 
Plain and simple. Dealers, therefore, have been forced to rely on the 
states to pass laws designed to balance the manufacturers' far greater 
bargaining power and to safeguard the rights of dealers. The first 
state automobile statute was enacted in my home state of Wisconsin in 
1937 to protect citizens from injury caused when a manufacturer or 
distributor induced a Wisconsin citizen to invest considerable sums of 
money in dealership facilities, and then canceled the dealership 
without cause. 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.
  A little known fact is that under the Federal Arbitration Act (FAA), 
arbitrators are not required to apply the particular federal or state 
law that would be applied by a court. That enables the stronger party--
in this case the auto or truck manufacturer--to use arbitration to 
circumvent laws 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 
state law provides.
  The majority of states have created their own alternative dispute 
resolution mechanisms and forums with access to auto industry expertise 
that provide inexpensive, efficient, and non-judicial resolution of 
disputes. For example, in Wisconsin mandatory mediation is required 
before the start of an administrative hearing or court action. 
Arbitration is also an option if both parties agree. These state 
dispute resolution forums, with years of experience and precedent, are 
greatly responsible for the small number of manufacture-dealer 
lawsuits. When mandatory binding arbitration is included in dealer 
agreements, these specific state laws and forums established to resolve 
auto dealer and manufacturer disputes are effectively rendered null and 
void with respect to dealer agreements.
  Besides losing the protection of federal and state law and the 
ability to use state forums, there are 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: (1) arbitration lacks the formal 
court supervised discovery process often 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 the 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 is 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 commercial life or death 
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 an arbitration 
award cannot be vacated, even if the arbitration panel disregarded 
state law that likely would have produced a different result.
  The use of mandatory binding arbitration is increasing in many 
industries, but nowhere is it growing more steadily than the auto/truck 
industry. Currently, at least 11 auto and truck manufacturers require 
some form of such arbitration in their dealer contracts.
  In recognition of this problem, many states have 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. This has the effect of nullifying many state 
arbitration laws that were designed to protect weaker parties in 
unequal bargaining positions from involuntarily signing away their 
rights.
  The legislative history of the FAA indicates that Congress never 
intended to have the Act used by a stronger party to force a weaker 
party into binding arbitration. Congress certainly did not intend the 
FAA to be used as a tool to coerce parties to relinquish 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. Therefore, along with Senator 
Grassley, I am introducing this bill today to ensure that dealers are 
not coerced into waiving their rights. Our bill, the Motor Vehicle 
Franchise Contract Arbitration Fairness Act of 1999 would simply 
provide that each party to an auto or truck franchise contract would 
have the choice to select arbitration. The bill would not prohibit 
arbitration. On the contrary, the bill would encourage arbitration by 
making it a fair choice that both parties to a franchise contract may 
willingly and knowingly select. In short, this bill would ensure that 
the decision to arbitrate is truly voluntary and that the rights and 
remedies provided for by our judicial system are not waived under 
coercion.
  In effect, if small business owners today want to obtain or keep 
their auto or truck franchise, they may be able to do so only by 
relinquishing their statutory rights and foreclosing the opportunity to 
use the courts or administrative forums. Mr. President, I cannot say 
this more strongly--this is unacceptable; this is wrong. It is at great 
odds with our tradition of fair play. I therefore urge my colleagues to 
join in this bipartisan effort to put an end to this invidious 
practice.
                                 ______