[Congressional Record Volume 153, Number 61 (Tuesday, April 17, 2007)]
[Senate]
[Pages S4614-S4616]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SESSIONS:
  S. 1135. A bill to amend chapter 1 of title 9, United States Code, to 
establish fair procedures for arbitration clauses in contracts; to the 
Committee on the Judiciary.
  Mr. SESSIONS. Mr. President, I rise and send to the desk a bill 
entitled the ``Fair Arbitration Act of 2007.'' This bill continues the 
legislative process that I started several years ago with the 
introduction of the ``Consumer and Employee Arbitration Bill of 
Rights'' and the ``Arbitration Fairness Act of 2002.'' The purpose of 
the Fair Arbitration Act of 2007, like my earlier proposals, is to 
improve the Federal Arbitration Act so that it will remain a cost-
effective means of resolving disputes, but will do so in a fair way. 
The Fair Arbitration Act will provide procedural protections to 
everyone who enters into a contract with an arbitration clause. This 
bill ensures that consumers, employees, and small businesses that enter 
into contracts covered by the Federal Arbitration Act will have their 
disputes resolved in accordance with fundamental principles of due 
process, and in a speedy and cost-effective manner.
  Congress originally enacted the Federal Arbitration Act in 1925. It 
has served us well for over three-quarters of a century. Under the Act, 
if the parties agree to a contract affecting interstate commerce that 
contains a clause requiring arbitration, the clause will be enforceable 
in court. In short, the Federal Arbitration Act allows parties to a 
contract to agree not to take their disputes to court, but to resolve 
any dispute arising from that contract before a neutral decision-maker, 
generally selected by a nonprofit arbitration organization, such as the 
American Arbitration Association or the National Arbitration Forum. The 
parties can generally present evidence and be represented by counsel. 
And the decision-makers will apply the relevant State law in resolving 
the dispute. Arbitration is generally quicker and less expensive than 
going to court.
  In recent years, there have been some cases where the arbitration 
process has not worked well, but thousands of disputes have been fairly 
and effectively settled by arbitrators. Such a system is even more 
important because of skyrocketing legal costs where attorneys require 
large contingency fees. Accordingly, I have opposed piecemeal 
legislative changes to the act. Instead, I believe that the Senate 
should approach the Federal Arbitration Act in a comprehensive manner.
  The approach of reforming arbitration rather than abandoning the 
arbitration process provides a better solution in several respects. 
Arbitration is one of the most cost-effective means of resolving 
disputes. Unlike businesses, consumers and employees generally cannot 
afford a team of lawyers to represent them. And their claims are often 
not big enough so that a lawyer would take the case on a 25 percent or 
even a 50 percent contingent fee. In a 1998 article in the Columbia 
Human Rights Law Review, Lewis Maltby, then the Director of the 
National Task Force on Civil Liberties in the Workplace of the American 
Civil Liberties Union and a Director of the American Arbitration 
Association, explained how court litigation is often just too expensive 
for most employees:

       Even if the client has clearly been wronged and is 
     virtually certain to prevail in court, the attorney will be 
     forced to turn down the case unless there are substantial 
     damages. A survey of plaintiff employment lawyers found that 
     a prospective plaintiff needed to have a minimum of $60,000 
     in provable damages not including pain and suffering or other 
     intangible damages before an attorney would take the case.
       Even this, however, does not exhaust the financial 
     obstacles an employee must overcome to secure representation. 
     In light of their risk of losing such cases, many plaintiffs' 
     attorneys require a prospective client to pay a retainer, 
     typically about $3,000. Others require clients to pay out-of-
     pocket expenses of the case as they are incurred. Expenses in 
     employment discrimination cases can be substantial. Donohue 
     and Siegelman found that expenses in Title VII cases are at 
     least $10,000 and can reach as high as $25,000. Finally, some 
     plaintiffs' attorneys now require a consultation fee, 
     generally $200-$300, just to discuss their situation with a 
     potential client.
       The result of these formidable hurdles is that most people 
     with claims against their employer are unable to obtain 
     counsel, and thus never receive justice. Paul Tobias, founder 
     of the National Employment Lawyers' Association, has 
     testified that ninety-five percent of those who seek help 
     from the private bar with an employment matter do not obtain 
     counsel. Howard's survey of plaintiffs' lawyers produced the 
     same result. A Detroit firm reported that only one of eighty-
     seven employees who came to them seeking representation was 
     accepted as a client.

  Without arbitration, consumers and employees are faced with having to 
pay a lawyer's hourly rate, which may amount to several thousand 
dollars to litigate a claim in court. If that is what consumers and 
employees are left with, many will have no choice but to drop their 
claim. That is not right. It is not fair. Thus, Professor Stephen Ware 
of the Cumberland Law School stated in a paper published by the CATO 
Institute that ``current [arbitration] law is better for all consumers 
[than an exemption from the Federal Arbitration Act] except those few 
who are especially likely to have large liability claims. . . .''
  Thus, while some have argued that the Congress should enact 
exemptions from the Federal Arbitration Act for different classes of 
contracts from automobile franchise contracts to employment contracts 
to chicken farmers, such exemptions would not help the overwhelming 
majority of the people who could not afford a lawyer to litigate in 
court. This is where arbitration can give consumers and employees a 
cost-effective forum to assert their claims. Thus, before we make 
exceptions to the Federal Arbitration Act for special interests with 
friends in Washington, I think it is our duty to consider how we can 
improve the system for everyone.
  We can improve the arbitration system, but we must take a balanced 
approach. In such an approach, we must protect the sanctity of legal 
contracts explicitly protected under Article I, Section 10 of the U.S. 
Constitution. In any contract, the parties must agree to all the terms 
and clauses included in the contract document. This includes the 
arbitration clause. This is basic contract law, and the basic premise 
of the Federal Arbitration Act for over 75 years.
  Unfortunately, however, in certain situations consumers, employees, 
and small businesses have not been treated fairly. That is what the 
Fair Arbitration Act is designed to correct.
  The bill will maintain the cost savings of binding arbitration, but 
will grant several specific ``due process'' rights to all parties to an 
arbitration proceeding. The bill is modeled after consumer and employee 
due process protocols of the American Arbitration Association, which 
have broad support. The bill provides the following rights:
  1. Notice. Under the bill, to be enforceable, an arbitration clause 
would have to have a heading in large, bold print, would have to state 
whether arbitration is binding or optional, identify a source that the 
parties may contact for more information, and state that a consumer 
could opt out to small claims court.
  This will ensure, for example, that consumers who receive credit card 
notices in the mail will not miss an arbitration clause because it is 
lost in the ``fine print.'' Further, it would give all parties a means 
to obtain more information on how to resolve any disputes. Finally, the 
clause would explain that if a party's claims could otherwise be 
brought in small claims court, the party would be free to do so. Small 
claims court, unlike regular trial court, provides another inexpensive 
and quick means of dispute resolution.
  2. Independent selection of arbitrators. The bill grants all parties 
the right to have potential arbitrators disclose relevant information 
concerning their business ties and employment. All parties to the 
arbitration will have an equal voice in selecting a neutral arbitrator. 
This ensures that the large company who sold a consumer a product will 
not select the arbitrator itself, because the consumer with a grievance 
will have the right to nominate potential arbitrators, too. As a 
result, the

[[Page S4615]]

final arbitrator selected will have to have the explicit approval of 
both parties to the dispute. This helps ensure that the arbitrator will 
be a neutral party with no allegiance to either party.
  3. Choice of law. The bill grants the non-drafting party, usually the 
consumer or the employee, the right to have the arbitrator governed by 
the substantive law that would apply under conflicts of laws principles 
applicable in the forum in which the non-drafting party resided at the 
time the contract was entered into. This means that the substantive 
contract law that would apply in a court where the consumer, employee, 
or business resides at the time of making the contract will apply in 
the arbitration. Thus, in a dispute arising from the purchase of a 
product by an Alabama consumer from an Illinois company, a court would 
have to determine whether Alabama or Illinois law applied by looking to 
the language of the contract and to the place where the contract was 
entered into. The bill ensures that an arbitrator would use the same 
conflict of laws principles that a court would in determining whether 
Alabama or Illinois law would govern the arbitration proceedings.

  4. Representation. The bill grants all parties the right to be 
represented by counsel at their own expense. Thus, if the claim 
involves complicated legal issues, consumers, employees, or small 
businesses would be free to have their lawyer represent him in the 
arbitration. Such representation should be substantially less expensive 
than a trial in court because of the more abbreviated and expedited 
process of arbitration.
  5. Hearing. The bill grants all parties the right to a fair hearing 
in a forum that is reasonably convenient to the consumer or employee. 
This would prevent a large company from requiring consumers, employees, 
or small business owners to travel across the country to arbitrate 
their claim and to expend more in travel costs than their claim is 
potentially worth.
  6. Evidence. The bill grants all parties the right to conduct 
discovery and to present evidence. This ensures that the arbitrator can 
have all the facts before making a decision.
  7. Cross examination. The bill grants all parties the right to cross 
examine witnesses presented by the other party at the hearing. This 
allows a party to test the statements of the other party's witnesses 
and be sure that the evidence before the arbitrator is correct.
  8. Record. The bill grants all parties the right to hire a 
stenographer or tape record the hearing to produce a record. This right 
is key to proving later whether the arbitration proceeding was fair.
  9. Timely resolution. The bill grants all parties the right to have 
an arbitration proceeding completed promptly so that they do not have 
to wait for a year or more to have their claim resolved. Under the 
bill, a defendant must file an answer not more than 30 days of the 
filing of the complaint. The arbitrator has 90 days after the answer to 
hold a hearing. The arbitrator must render a final decision within 30 
days after the hearing. Extensions are available in extraordinary 
circumstances.
  10. Written decision. The bill grants all parties the right to a 
written decision by the arbitrator explaining the resolution of the 
case and his reasons therefor. If the consumer or employee takes a 
claim to arbitration, he deserves to have an explanation of why he won 
or lost.
  11. Expenses. The bill grants all parties the right to have an 
arbitrator provide for reimbursement of arbitration fees in the 
interests of justice and the reduction, deferral, or waiver of 
arbitration fees in cases of extreme hardship. It does little good to 
take a claim to arbitration if the consumer or employee cannot even 
afford the arbitration fee. This provision ensures that the arbitrator 
can waive or reduce the fee or make the company reimburse the consumer 
or employee for a fee if the interests of justice so require.
  12. Small claims opt-out. The bill grants all parties the right to 
opt out of arbitration into small claims court if that court has 
jurisdiction over the claim and the claim does not exceed $50,000.
  The bill also provides an effective mechanism for parties to enforce 
these rights. At any time, if a consumer or employee believes that 
another party violated his or her rights, the consumer or employee can 
request and the arbitrator may award a penalty up to the amount of the 
claim plus attorneys fees. For example, if a defendant party failed to 
provide discovery to a plaintiff party, the plaintiff could move for an 
award of fees. The amount of the fee award is limited, as it is in 
court, to the amount of cost incurred by the employee in trying to 
obtain the information from the company. This principle is taken from 
Rule 37 of the Federal Rules of Civil Procedure. After the decision, if 
the losing party believes that the rights granted to him by the Act 
have been violated, it may file a petition with the Federal district 
court. If the court finds by clear and convincing evidence that the 
losing party's rights were violated, it may order a new arbitrator 
appointed. Thus, if a consumer, employee, or small business has an 
arbitrator that is unfair and this causes him to lose the case, the 
plaintiff can obtain another arbitrator.
  This bill is an important step to continuing a constructive dialog on 
arbitration. This bill will ensure that those who can least afford to 
go to court can go to a less expensive arbitrator and be treated 
fairly. It will ensure that every arbitration carried out under the 
Federal Arbitration Act is completed fairly, promptly, and 
economically. I look forward to working with my colleagues in the 
Senate to ensure that consumers, employees, and small businesses who 
agree in a contract to arbitrate their claims will be treated fairly 
under the Federal Arbitration Act.
  I ask unanimous consent that the text of the bill be printed in the 
Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                S. 1135

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

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Fair Arbitration Act of 
     2007''.

     SEC. 2. ELECTION OF ARBITRATION.

       (a) In General.--Chapter 1 of title 9, United States Code, 
     is amended by adding at the end the following:

     ``Sec. 17. Election of arbitration

       ``(a) Fair Disclosure.--In order to be binding on the 
     parties, a contract containing an arbitration clause shall--
       ``(1) have a printed heading in bold, capital letters 
     entitled `ARBITRATION CLAUSE', which heading shall be printed 
     in letters not smaller than \1/2\ inch in height;
       ``(2) explicitly state whether participation within the 
     arbitration program is mandatory or optional;
       ``(3) identify a source that a consumer or employee can 
     contact for additional information regarding--
       ``(A) costs and fees of the arbitration program; and
       ``(B) all forms and procedures necessary for effective 
     participation in the arbitration program; and
       ``(4) provide notice that all parties retain the right to 
     resolve a dispute in a small claims court, as provided in 
     subsection (b)(12).
       ``(b) Procedural Rights.--
       ``(1) In general.--If a contract provides for the use of 
     arbitration to resolve a dispute arising out of or relating 
     to the contract, each party to the contract shall be afforded 
     the rights described in this subsection, in addition to any 
     rights provided by the contract.
       ``(2) Competence and neutrality of arbitrator and 
     administrative process.--
       ``(A) In general.--Each party to the dispute (referred to 
     in this section as a `party') shall be entitled to a 
     competent, neutral arbitrator and an independent, neutral 
     administration of the dispute.
       ``(B) Arbitrator.--Each party shall have an vote in the 
     selection of the arbitrator, who--
       ``(i) unless otherwise agreed by the parties, shall be a 
     member in good standing of the bar of the highest court of 
     the State in which the hearing is to be held;
       ``(ii) shall comply with the Code of Ethics for Arbitrators 
     in Commercial Disputes of the American Bar Association and 
     the American Arbitration Association and any applicable code 
     of ethics of any bar of which the arbitrator is a member;
       ``(iii) shall have no--

       ``(I) personal or financial interest in the results of the 
     proceedings in which the arbitrator is appointed; or
       ``(II) relation to the underlying dispute or to the parties 
     or their counsel that may create an appearance of bias; and

       ``(iv) prior to accepting appointment, shall disclose all 
     information that might be relevant to neutrality (including 
     service as an arbitrator or mediator in any past or pending 
     case involving any of the parties or their representatives) 
     or that may prevent a prompt hearing.
       ``(C) Administration.--The arbitration shall be 
     administered by an independent,

[[Page S4616]]

     neutral alternative dispute resolution organization to ensure 
     fairness and neutrality and prevent ex parte communication 
     between parties and the arbitrator. The arbitrator shall have 
     reasonable discretion to conduct the proceeding in 
     consideration of the specific type of industry involved.
       ``(3) Applicable law.--In resolving a dispute, the 
     arbitrator--
       ``(A) shall be governed by the same substantive law that 
     would apply under conflict of laws principles applicable in a 
     court of the State in which the party that is not drafter of 
     the contract resided at the time the contract was entered 
     into; and
       ``(B) shall be empowered to grant whatever relief would be 
     available in court under law or equity.
       ``(4) Representation.--Each party shall have the right to 
     be represented by an attorney, or other representative as 
     permitted by State law, at their own expense.
       ``(5) Hearing.--
       ``(A) In general.--Each party shall be entitled to a fair 
     arbitration hearing (referred to in this section as a 
     `hearing') with adequate notice and an opportunity to be 
     heard.
       ``(B) Electronic or telephonic means.--Subject to 
     subparagraph (C), in order to reduce cost, the arbitrator may 
     hold a hearing by electronic or telephonic means or by a 
     submission of documents.
       ``(C) Face-to-face meeting.--Each party shall have the 
     right to require a face-to-face hearing, which hearing shall 
     be held at a location that is reasonably convenient for the 
     party who did not draft the contract unless in the interest 
     of fairness the arbitrator determines otherwise, in which 
     case the arbitrator shall use the process described in 
     section 1391 of title 28, to determine the venue for the 
     hearing.
       ``(6) Evidence.--With respect to any hearing--
       ``(A) each party shall have the right to present evidence 
     at the hearing and, for this purpose, each party shall grant 
     access to all information reasonably relevant to the dispute 
     to the other parties, subject to any applicable privilege or 
     other limitation on discovery under applicable State law;
       ``(B) consistent with the expedited nature of arbitration, 
     relevant and necessary prehearing depositions shall be 
     available to each party at the direction of the arbitrator; 
     and
       ``(C) the arbitrator shall--
       ``(i) make reasonable efforts to maintain the privacy of 
     the hearing to the extent permitted by applicable State law; 
     and
       ``(ii) consider appropriate claims of privilege and 
     confidentiality in addressing evidentiary issues.
       ``(7) Cross examination.--Each party shall have the right 
     to cross examine witnesses presented by the other parties at 
     a hearing.
       ``(8) Record of proceeding.--Any party seeking a 
     stenographic record of a hearing shall make arrangements 
     directly with a stenographer and shall notify the other 
     parties of these arrangements not less than 3 days before the 
     date of the hearing. The requesting party shall pay the costs 
     of obtaining the record. If the transcript is agreed by the 
     parties, or determined by the arbitrator to be the official 
     record of the proceeding, it shall be provided to the 
     arbitrator and made available to the other parties for 
     inspection, at a date, time, and place determined by the 
     arbitrator.
       ``(9) Timely resolution.--
       ``(A) In general.--Upon submission of a complaint by the 
     claimant, the respondent shall have not more than 30 days to 
     file an answer.
       ``(B) Evidence.--After the answer is filed by the 
     respondent, the arbitrator shall direct each party to file 
     documents and to provide evidence in a timely manner so that 
     the hearing may be held not later than 90 days after the date 
     of the filing of the answer.
       ``(C) Extensions.--In extraordinary circumstances 
     (including multiparty, multidistrict, or complex litigation) 
     the arbitrator may grant a limited extension of the time 
     limits under this paragraph, or the parties may agree to such 
     an extension.
       ``(D) Decision.--The arbitrator shall notify each party of 
     its decision not later than 30 days after the hearing.
       ``(10) Written decision.--The arbitrator shall provide each 
     party with a written explanation of the factual and legal 
     basis for the decision. This written decision shall describe 
     the application of an identified contract term, statute, or 
     legal precedent. The decision of the arbitrator shall be 
     subject to review only as provided in subsection (c)(2) of 
     this section and sections 10, 11, and 16 of this title.
       ``(11) Expenses.--The arbitrator or independent arbitration 
     administration organization, as applicable, shall have the 
     authority to--
       ``(A) provide for reimbursement of arbitration fees to the 
     claimant, in whole or in part, as part of the remedy in 
     accordance with applicable law or in the interests of 
     justice; and
       ``(B) waive, defer, or reduce any fee or charge due from 
     the claimant in the event of extreme hardship.
       ``(12) Small claims opt out.--
       ``(A) In general.--Each party shall have the right to opt 
     out of binding arbitration and to proceed in any small claims 
     court with jurisdiction over the claim. For purposes of this 
     paragraph, no court with jurisdiction to hear claims in 
     excess of $50,000 shall be considered a small claims court.
       ``(B) Exception.--If a complaint in small claims court is 
     amended to exceed the lesser of the jurisdictional amount of 
     that court or a claim for $50,000 in total damages, the small 
     claims court exemption of this paragraph shall not apply and 
     the parties shall proceed by arbitration.
       ``(c) Denial of Rights.--
       ``(1) Denial of rights by party misconduct.--
       ``(A) In general.--At any time during an arbitration 
     proceeding, any party may file a motion with the arbitrator 
     asserting that another party has deprived the movant of a 
     right granted by this section and seeking relief.
       ``(B) Award by arbitrator.--If the arbitrator determines 
     that the movant has been deprived of a right granted by this 
     section by another party, the arbitrator shall award the 
     movant a monetary amount, which shall not exceed the 
     reasonable expenses incurred by the movant in filing the 
     motion, including attorneys' fees, unless the arbitrator 
     finds that--
       ``(i) the motion was filed without the movant first making 
     a good faith effort to obtain discovery or the realization of 
     another right granted by this section;
       ``(ii) the opposing party's nondisclosure, failure to 
     respond, response, or objection was substantially justified; 
     or
       ``(iii) the circumstances otherwise make an award of 
     expenses unjust.
       ``(2) Denial of rights by arbitrator.--
       ``(A) In general.--A losing party in an arbitration 
     proceeding may file a petition in the United States district 
     court in the State in which the party that did not draft the 
     contract resided at the time the contract was entered into to 
     assert that the arbitrator violated a right granted to the 
     party by this section and to seek relief.
       ``(B) Review.--A United States district court may grant a 
     petition filed under subparagraph (A) if the court finds 
     clear and convincing evidence that an action or omission of 
     the arbitrator resulted in a deprivation of a right of the 
     petitioner under this section that was not harmless. If such 
     a finding is made, the court shall order a rehearing before a 
     new arbitrator selected in the same manner as the original 
     arbitrator as the exclusive judicial remedy provided by this 
     section.
       ``(d) Limitation on Claims.--Except as otherwise expressly 
     provided in this section, nothing in this section may be 
     construed to be the basis for any claim in law or equity.
       ``(e) Definitions.--In this section--
       ``(1) the term `contract' means a contract evidencing a 
     transaction involving commerce; and
       ``(2) the term `State' includes the District of Columbia, 
     the Commonwealth of Puerto Rico, Guam, the Commonwealth of 
     the Northern Mariana Islands, and the Virgin Islands.''.
       (b) Technical and Conforming Amendment.--The table of 
     sections at the beginning of chapter 1 of title 9, United 
     States Code, is amended by adding at the end the following:

``17. Election of arbitration.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to any contract (as that term is defined in 
     section 17 of title 9, United States Code, as added by this 
     Act) entered into after the date that is 6 months after the 
     date of enactment of this Act.
                                 ______