[Congressional Record Volume 147, Number 93 (Friday, June 29, 2001)]
[Senate]
[Pages S7195-S7197]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HATCH (for himself, Mr. Feingold, Mr. Grassley, Mr. Leahy, 
        Mr. Warner, Mr. Breaux, Mr. Burns, Mr. Reid, Mr. Craig, Mr. 
        Torricelli, Mr. Bennett, Ms. Snowe, Mr. DeWine, Mr. Thomas, and 
        Mr. Hutchinson):
  S. 1140. 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; to the Committee on the Judiciary.
  Mr. HATCH. Mr. President, I rise today to introduce S. 1140, ``The 
Motor Vehicle Franchise Contract Arbitration Fairness Act of 2001.'' I 
am pleased to be joined in cosponsorship of this legislation by 
Senators Feingold, Grassley, Leahy, Warner, Breaux, Burns, Reid, Craig, 
Torricelli, Bennett, Snowe, DeWine, Thomas, and Hutchinson. Our bill is 
intended to allow automobile dealers their day in court when they have 
disputes with the manufacturers.
  As automobile dealers throughout Utah have pointed out to me, the 
motor vehicle dealer contract often includes mandatory arbitration 
clauses, and they also point out their unequal bargaining power. This 
is usually the result of various factors, including the manufacturers' 
discretion to allocate vehicle inventory and control on the timing of 
delivery. Manufacturers can, thus, determine the dealer's financial 
future with the allocation of the best-selling models. Manufacturers 
can also exercise leverage over the flow of revenue to dealers, such as 
warranty payments. Manufacturers can limit dealers' rights to transfer 
ownership or control of the business, even to family members. And 
manufacturers have tried, arbitrarily, to take businesses away from 
dealers without cause.
  I recognize the efficiencies of mandatory arbitration clauses in 
general, but the specific circumstances in the manufacturer-dealer 
relationship justifies this widely-supported bipartisan proposal. It is 
worthy to note that Congress in 1956 enacted the Automobile Dealer Day 
in Court Act, which provided a small business dealer in limited 
circumstances the right to proceed in Federal court when faced with 
abuses by manufacturers. And State legislatures have enacted 
significant protections for auto dealers.
  S. 1140 amends Title 9 of the U.S. Code and make arbitration of 
disputes in motor vehicle franchise contracts optional. This would 
allow dealers to opt voluntarily for arbitration or use procedures and 
remedies available under State law, such as state-established 
administrative boards specifically established to resolve dealer/
manufacturer disputes.
  I must note that this legislation is extremely narrow and affects 
only the unique relationship between small business auto dealers and 
motor vehicle manufacturers, which is strictly governed by State law. 
This legislation is necessary to protect the States' interest in 
regulating the motor vehicle dealer/manufacturer relationship.
  All States, except for Alaska, have enacted laws specifically 
designed to regulate the economic relationship between motor vehicle 
dealers and manufacturers to prevent unfair manufacturer contract terms 
and practices. In most States, including my home State of Utah, 
effective State administrative forums already exist to handle dealer/
manufacturer disputes outside of the court system. Indeed, in the 
majority of States, a special State agency or forum is charged with 
administering and enforcing motor vehicle franchise law. These State 
forums provide an inexpensive, speedy, and non-judicial resolution of 
disputes.
  I urge my colleagues to support this worthwhile legislation.
  I ask unanimous consent that the text of the bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 1140

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

[[Page S7196]]

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Motor Vehicle Franchise 
     Contract Arbitration Fairness Act of 2001''.

     SEC. 2. ELECTION OF ARBITRATION.

       (a) Motor Vehicle Franchise Contracts.--Chapter 1 of title 
     9, United States Code, is amended by adding at the end the 
     following:

     ``Sec. 17. Motor vehicle franchise contracts

       ``(a) For purposes of this section, the term--
       ``(1) `motor vehicle' has the meaning given such term under 
     section 30102(6) of title 49; and
       ``(2) `motor vehicle franchise contract' means a contract 
     under which a motor vehicle manufacturer, importer, or 
     distributor sells motor vehicles to any other person for 
     resale to an ultimate purchaser and authorizes such other 
     person to repair and service the manufacturer's motor 
     vehicles.
       ``(b) Whenever a motor vehicle franchise contract provides 
     for the use of arbitration to resolve a controversy arising 
     out of or relating to the contract, arbitration may be used 
     to settle such controversy only if after such controversy 
     arises both parties consent in writing to use arbitration to 
     settle such controversy.
       ``(c) Whenever arbitration is elected to settle a dispute 
     under a motor vehicle franchise contract, the arbitrator 
     shall provide the parties to the contract with a written 
     explanation of the factual and legal basis for the award.''.
       (b) Technical and Conforming Amendment.--The table of 
     sections for chapter 1 of title 9, United States Code, is 
     amended by adding at the end the following:

``17. Motor vehicle franchise contracts.''.

     SEC. 3. EFFECTIVE DATE.

       The amendments made by section 2 shall apply to contracts 
     entered into, amended, altered, modified, renewed, or 
     extended after the date of the enactment of this Act.

  Mr. GRASSLEY. Mr. President, 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 Congress, 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 a 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 opportunist 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 hits 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 v. Keating. This, 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 we 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 me in supporting this legislation to 
address this unfair franchise practice.
  Mr. FEINGOLD. Mr. President, I rise today to introduce, with my 
distinguished colleague from Utah, Senator Hatch, the Motor Vehicle 
Franchise Contract Arbitration Fairness Act of 2001. I want to 
recognize the efforts of the Senator from Iowa, Senator Grassley, in 
advancing this legislation in the last Congress, and note how pleased I 
am that the distinguished ranking member and former chairman of the 
Judiciary Committee has decided to take the lead on this bill this 
year. By the time the 106th Congress concluded, we had the support of 
56 Senators for this bill. So I believe we have an excellent 
opportunity to pass this bill this year, and I look forward to working 
with the Senator from Utah to make that happen.
  While alternative methods of dispute resolution such as arbitration 
can serve a useful purpose in resolving disputes between parties, I am 
extremely concerned about 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. In every Congress since 
1994, I have introduced the Civil Rights Procedures Protection Act, 
which amends certain civil rights statutes to prevent the involuntary 
imposition of arbitration to claims that arise from unlawful employment 
discrimination and sexual harassment.
  A few years ago, it came 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 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.

[[Page S7197]]

  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 Hatch, 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 2001, would simply provide that 
each party to an auto or truck franchise contract has the option of 
selecting arbitration, but cannot be forced to do so.
  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 legal rights and foregoing the opportunity to use 
the courts or administrative forums. I cannot say this more strongly, 
this is unacceptable; this is wrong. It is at great odds with our 
tradition of fair play and elementary notions of justice. I therefore 
urge my colleagues to join in this bipartisan effort to put an end to 
this invidious practice.
                                 ______