[Senate Report 107-266]
[From the U.S. Government Publishing Office]

                                                       Calendar No. 210
107th Congress                                                   Report
 2d Session                                                     107-266




               September 10, 2002.--Ordered to be printed


Mr. Leahy, from the Committee on the Judiciary, submitted the following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                         [To accompany S. 1140]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on the Judiciary, to which was referred the 
bill (S. 1140) 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, having 
considered the same, reports favorably thereon, without 
amendment, and recommends that the bill do pass.



  I. Purpose of legislation...........................................2
 II. Legislative history..............................................2
III. Vote of the Committee............................................2
 IV. Background.......................................................2
  V. Need for legislation.............................................5
 VI. Section-by-section analysis......................................9
VII. Cost estimate....................................................9
VIII.Regulatory impact statement.....................................10

 IX. Minority views of Senator Sessions..............................11
  X. Changes in existing law.........................................16

                       I. Purpose of Legislation

    The Motor Vehicle Franchise Contract Arbitration Fairness 
Act, S. 1140, is a targeted amendment to the Federal 
Arbitration Act which requires that 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 the controversy 
only if both parties consent in writing after such controversy 
arises. This legislation would allow motor vehicle dealers the 
option of either going to arbitration or utilizing procedures 
and remedies available under State law such as those involving 
State-established administrative boards specifically created 
and uniquely equipped to resolve disputes between motor vehicle 
dealers and manufacturers. This legislation is intended to 
ensure that motor vehicle dealers are not required to forfeit 
important rights and remedies afforded by State law as a 
condition of obtaining or renewing a motor vehicle franchise 

                        II. Legislative History

    In the 106th Congress, legislation similar to S. 1140 was 
introduced by Senators Grassley and Feingold as S. 1020, the 
Motor Vehicle Franchise Contract Arbitration Fairness Act of 
1999. The legislation was referred to the Committee on the 
Judiciary and given a hearing on March 1, 2000, in the 
Subcommittee on Administrative Oversight and the Courts. It was 
subsequently placed on the markup calendar on October 5, 2000, 
but no Committee action was taken. A similar measure, H.R. 534, 
was reported favorably by the House Committee on the Judiciary 
on September 13, 2000, by voice vote, and approved by the House 
of Representatives on October 3, 2000, by voice vote.
    On June 29, 2001, Senator Orrin G. Hatch introduced S. 
1140, the Motor Vehicle Franchise Contract Arbitration Fairness 
Act of 2001, along with Senators Feingold, Grassley, Leahy, 
Warner, Breaux, Burns, Reid, Craig, Torricelli, Bennett, Snowe, 
DeWine, Thomas, and Hutchinson as original cosponsors.\1\ On 
March 29, 2001, a similar measure, H.R. 1296, was introduced in 
the House of Representatives with over 30 original 
    \1\ Since its introduction, S. 1140 has received exceptionally 
strong bipartisan support and is currently cosponsored by more than 60 
Members of the Senate.
    \2\ H.R. 1296 is currently cosponsored by more than 200 Members of 
the House of Representatives.

                       III. Vote of the Committee

    The Committee on the Judiciary, with a quorum present, met 
on Thursday, October 18, 2001, at 10 a.m., to consider S. 1140. 
The Committee ordered the Motor Vehicle Franchise Contract 
Arbitration Fairness Act to be reported favorably to the full 
Senate by voice vote, with one dissenting vote by Senator 
Sessions, with a recommendation that the bill do pass.

                             IV. Background

    Dealers of new motor vehicles are virtual economic captives 
of automobile manufacturers. Unlike some other franchisees, who 
may have a broad choice of franchisers with which to contract, 
new motor vehicle dealers may only obtain the right to 
merchandise and sell their product from an extremely limited 
group of manufacturers. As a result of the imbalance in 
bargaining power inherent in this relationship, manufacturers 
possess unparalleled leverage over dealers and potential 
franchisees. Motor vehicle manufacturers have historically, and 
do currently, require dealers to execute standard contracts of 
adhesion defining the manufacturer-dealer contract on a ``take 
it or leave it'' basis. Additionally, manufacturers have broad 
discretion to allocate vehicle inventory and to control the 
timing for delivery of dealer stock. Manufacturers also 
exercise considerable control over the flow of revenue to 
dealers, such as warranty payments.
    In recognition of the disparity in bargaining power between 
motor vehicle dealers and manufacturers, all States have 
enacted laws specifically designed to level the playing field 
between manufacturers and dealers and prevent unfair contract 
terms and practices. In fact, State laws govern nearly every 
aspect of the franchise contract (except for the inclusion of 
arbitration clauses as discussed below). Motor vehicle 
franchise contracts and resulting disputes greatly affect the 
competitive distribution of vehicles which directly affects 
consumers as well as individual States' economies generally. In 
fact, the U.S. Supreme Court has held that State legislatures 
are constitutionally empowered to regulate the motor vehicle 
contractual relationship as a valid exercise of their police 
powers. New Motor Vehicle Board v. Orrin W. Fox Co., 99 S. Ct. 
403 (1978). As a result, dealers have clear and enforceable 
rights under State franchise laws. Generally, these State 
rights and procedures are nonwaivable, and contract terms that 
conflict with State law are routinely rendered unenforceable, 
irrespective of contract terms.
    In 1987, many automobile and truck manufacturers began to 
include mandatory binding arbitration clauses in their dealer 
contracts. Mandatory binding arbitration clauses require that 
all disputes between the dealer and manufacturer be resolved by 
binding arbitration under the Federal Arbitration Act 
(``FAA''). These provisions ultimately require dealers to 
relinquish forums otherwise available under State law, 
including many of the State-established boards designed to 
regulate the relationship between dealers and manufacturers. 
Since dealers are unable to modify boiler-plate franchise 
contracts and delete the mandatory binding arbitration 
provisions, they have no choice but to accept such provisions 
as part of the standardized franchise contract or risk losing a 
business or prospective business.
    Today, almost every major motor vehicle manufacturer uses 
mandatory binding arbitration either in the dealer franchise 
contract or in side contracts with certain dealers.\3\ 
Manufacturers increasingly are inserting mandatory binding 
arbitration clauses in non-negotiated side contracts with 
dealers, such as those governing dealer finance disputes and 
incentive disputes. Many States, frustrated by the fact that 
mandatory binding arbitration provisions nullify their State 
statutes and procedures, have repeatedly attempted to enact 
laws to prohibit the inclusion of mandatory binding arbitration 
clauses in certain contracts. These State laws, however, have 
been universally preempted by the FAA.
    \3\ These manufacturers utilizing mandatory binding arbitration in 
their dealer franchise contracts include: Bering Truck, DaimlerChrysler 
(which provided limited opt-out of arbitration by addendum), 
Freightliner Truck/DaimlerChrysler, Sterling Truck/DaimlerChrysler, 
Ferrari, Ford Dealer Development--principally with dealer development 
programs, General Motors Dealer Development--principally with dealer 
development programs, Saturn/GM, Hino Diesel--Toyota majority stock 
holder, Kenworth Truck, Nissan Diesel, Peterbilt Trucks, Suzuki, and 
Western Star.
    The Supreme Court articulated the preemptive effect of the 
FAA in Southland Corporation v. Keating, 104 S. Ct. 852 (1984). 
Chief Justice Burger, writing for the Court, stated that ``[i]n 
creating a substantive rule applicable in state as well as 
federal courts, Congress intended to foreclose state 
legislative attempts to undercut the enforceability of 
arbitration agreements.'' Id. at 854.
    In 1985, the Supreme Court further held that the FAA 
provided no basis for implying a presumption against 
arbitration of statutory claims or for departing from the 
Federal policy favoring arbitration in situations where a party 
bound by an arbitration agreement raises claims founded on 
statutory rights. In the case of Mitsubishi Motors Corporation 
v. Soler Chrysler-Plymouth, 105 S. Ct. 3346 (1985), a motor 
vehicle dealer attempted to avoid the enforcement of a 
mandatory arbitration provision in its distribution agreement 
on the grounds that the enforcement of the arbitration clause 
would deprive the dealer of the ability to invoke its statutory 
right to bring an antitrust action under the Sherman Act. The 
Supreme Court was not persuaded by the argument that only 
contractual disputes, not statutory rights, should be 
determined through mandatory binding arbitration even when the 
claims presented are complex and carry as many public policy 
implications as a claim under the Sherman Act. Writing for the 
Court, Justice Blackmun stated that, ``[b]y agreeing to 
arbitrate a statutory claim, a party does not forego the 
substantive rights afforded by the statute; it only submits to 
their resolution in an arbitral rather than a judicial forum.'' 
Id. at 3354. Thus, the Court implied that statutory rights are 
not infringed when adjudicated in an arbitral rather than a 
judicial forum.
    Following this line of cases, the Federal preemption 
principle was specifically interpreted by the Fourth Circuit 
Court of Appeals to apply to contracts between motor vehicle 
dealers and manufacturers in ``Saturn Distribution Corp. v. 
Williams, 905 F.2d 719 (4th Cir. 1990). In 1989, Saturn filed 
suit against the Virginia Commissioner of Motor Vehicles when 
the Commissioner refused to approve Saturn's franchise 
contract. The Saturn Contract was rejected because it contained 
a mandatory binding arbitration clause in violation of the 
Virginia Motor Vehicle Licensing Act. Va. Code Ann. 
Sec. Sec. 56.1-515 et seq. That law specifically precludes any 
provision that denies access to the procedures, forums and 
remedies provided for under State law. The Commissioner had 
indicated to Saturn that he would approve the contract if it 
gave the dealer the option to delete the exclusive arbitration 
clause, but that Saturn could not make the inclusion of that 
clause a prerequisite to becoming a dealer. Saturn declined to 
make these modifications. Saturn Distribution Corp v. Williams, 
717 F. Supp. 1147, 1149 (E.D. Va. 1989).
    At trial, the district court ruled in favor of the 
Commissioner. Id. at 1153. However, the fourth circuit, holding 
that the Virginia Motor Vehicle Licensing Act conflicts with 
the FAA and is preempted under the Supremacy Clause of the 
United States Constitution. The court relied on two Supreme 
Court decisions, Southland, 104 S. Ct. 852 (1984), and Perry v. 
Thomas, 107 S. Ct. 2520 (1987). The Supreme Court denied 
certiorari and let stand the mandatory binding arbitration 
provision in Saturn's dealer franchise contract.

                      V. The Need for Legislation

    In the majority of States, an agency is charged with 
administering and enforcing motor vehicle franchise law.\4\ 
These State forums, boards, and commissions serve as efficient 
and cost-effective alternative dispute resolution systems for 
motor vehicle franchise disputes because State agencies have 
both expertise and experience in these matters. State motor 
vehicle administrative forums were specifically established for 
the public policy purpose of providing alternative dispute 
resolution mechanisms, but with the added features of important 
legal safeguards, particularly that of a right to appeal.
    \4\ Arizona, Arkansas, California, Delaware, Florida, Georgia, 
Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, 
Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New 
Jersey, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, 
South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, 
Washington, and Wisconsin have such agencies.
    Additionally, most metropolitan motor vehicle dealer 
associations participate in nonbinding third-party dispute 
resolution programs designed to mediate disagreements between 
consumers and new car dealers and/or manufacturers.\5\ The 
Automotive Consumer Action Program (``AUTOCAP'') is one such 
program, voluntarily sponsored by franchised motor vehicle 
dealer associations and administered in accordance with 
national standards established by the National Automobile 
Dealers Association.\6\ AUTOCAP is available in many States and 
in the District of Columbia.\7\ Often, these programs are run 
in conjunction with the offices of State attorneys general.
    \5\ Mandatory binding arbitration clauses are not prevalent in most 
dealer-consumer new car contracts except in Alabama, and some State 
associations actively discourage the practice.
    \6\ States with AUTOCAP programs are Arizona, California (San 
Diego), District of Columbia (MD and VA area), Hawaii, Illinois, 
Kentucky, Montana, New Hampshire, New Mexico, New York, North Carolina, 
North Dakota, Ohio, Rhode Island, South Carolina, South Dakota, Texas, 
and Vermont.
    \7\ Manufacturers including BMW, Honda/Acura, Isuzu, Jaguar, 
Mitsubishi, Nissan/Infiniti, and Volvo use the AUTOCAP resolution 
    AUTOCAP dispute resolution begins with an effort at 
informal mediation. If informal mediation is unsuccessful, 
disputes are then mediated by a panel comprised of consumer 
representatives and motor vehicle dealers. The decision to 
accept or reject an AUTOCAP decision is at the sole discretion 
of the parties, and in all cases is nonbinding on the consumer. 
If dissatisfied with the outcome a consumer is free to pursue 
other types of legal recourse. The Council of Better Business 
Bureaus sponsors a similar program, Auto Line, in which 
manufacturers participate on a manufacturer-by-manufacturer 
    The use of mandatory binding arbitration can be 
distinguished from State-established administrative boards and 
programs such as AUTOCAP and Auto Line in that mandatory 
binding arbitration does not allow for further judicial review. 
A dealer seeking to overturn an arbitration decision often 
cannot appeal the decision even when it is clear that the law 
has been misapplied. Arbitration also lacks the formal court-
supervised discovery process often necessary to learn facts and 
obtain documents. Arbitrators generally have no obligation to 
provide a factual or legal basis for the decision in a written 
opinion, and the impartiality of arbitration providers may be 
affected by the knowledge that the manufacturer may be likely 
to bring them repeat business but the dealer is not. In 
addition, the fees required to initiate an arbitration 
proceeding can be prohibitive to a small business owner, 
particularly in contrast to State forums that may be otherwise 
    The inclusion of mandatory binding arbitration clauses in 
contracts between dealers and manufacturers also provides 
automobile manufacturers with an advantage in disputes with 
dealers because these clauses create an easy means by which to 
avoid State-established forums. For example, a dealer in 
Virginia, who believed he met all of Virginia's franchise 
requirements to remain a Sterling Truck dealer, had his 
franchise terminated by the manufacturer because of his refusal 
to comply with a unilateral contract modification that mandated 
8-hour shifts in the dealership's parts and service department 
on Sundays and required the creation of a separate facility to 
house a new line of trucks. When the dealer sought a hearing 
before the Virginia Division of Motor Vehicles, the 
administrative body designated to hear these disputes, the 
request was denied because the dealer had been forced in his 
franchise contract to waive his rights under State law and 
submit to mandatory binding arbitration.
    The dealer decided that due to the legal expense involved, 
fighting Sterling in arbitration was not economically feasible, 
and Sterling subsequently terminated his franchise despite his 
42-year tenure as a heavy-duty truck dealer. Had the dealer not 
been forced to accept mandatory binding arbitration, he could 
have proceeded to the Virginia Division of Motor Vehicles 
dispute resolution forum, where, had State law been applied, he 
believes he would likely have successfully retained the 
    \8\ See letter to Senator John Warner, dated March 14, 2000, from 
Charles M. Robertson, President of Magic City Motor Corp.
    Mr. William Shack, a California dealer and long-time member 
of the National Association of Minority Automobile Dealers, 
testified before the Senate Administrative Oversight and the 
Courts Subcommittee on March 1, 2000, about his adverse 
experience with mandatory binding arbitration with his 
automobile manufacturer, Saturn. After a substantial financial 
investment by Mr. Shack and his partner, Saturn unilaterally 
terminated their dealer contract and forced them into mandatory 
binding arbitration. Mr. Shack believed the arbitration panel's 
monetary award to be grossly inadequate considering his total 
acquisition-related expenses, all incurred to comply with 
Saturn's terms and conditions. As a result of the mandatory 
binding arbitration clause unilaterally inserted in the 
franchise contract by the manufacturer, Mr. Shack believes he 
never received a fair hearing on the merits. Mr. Shack's 
franchise was terminated, and he consequently suffered 
tremendous economic loss.
    Mr. Shack further testified that:

          The administration of Saturn's mandatory binding 
        arbitration process is fundamentally unfair. All of the 
        decision makers in the process have economic ties to 
        Saturn. Under the mandatory binding arbitration that I 
        was subjected to, I had no state remedies, no right to 
        a hearing on the record, no right to an unbiased 
        decision maker, and no real right to an appeal on this 
    \9\ See testimony of Mr. William Shack before the Senate Judiciary 
Committee, Subcommittee on Administrative Oversight and the Courts, 
March 1, 2000.

    It is clear that dealers are being required to forfeit 
important rights and remedies afforded by State law as a 
condition of obtaining or renewing their motor vehicle 
franchise contracts. Furthermore, since State laws prohibiting 
mandatory binding arbitration clauses have been held to be 
preempted by the FAA, targeted Federal legislation amending the 
FAA is necessary to remedy this problem.
    As discussed below, Congress has acknowledged that a motor 
vehicle dealer, after making a tremendous investment, depends 
completely upon the manufacturer to survive and prosper. For 
example, manufacturers can determine the dealer's stock with 
the allocation of hot selling models; manufacturers can 
accelerate or delay warranty payments with great discretion, or 
alter the rate paid for certain types of work that the dealer 
performs to honor the manufacturer's warranty; and 
manufacturers can limit dealers' rights to transfer ownership 
or control of the dealership--even to family members. According 
to a recent National Automobile Dealers Association (``NADA'') 
survey,\10\ half of the member dealerships are second or third 
generation family businesses, and many of the family-owned 
first generation dealerships plan to pass their small 
businesses on to their children.
    \10\ NADA survey conducted May, 2000, of the total 2,148 surveys 
returned: 1st generation dealerships: 1,029 (48 percent); 2d generation 
dealerships: 670 (31 percent); 3d generation dealerships: 398 (19 
percent); and 4th generation dealerships: 51 (2 percent).
    Noting the imbalances in bargaining power inherent in the 
manufacturer-dealer relationship, in 1956 Congress enacted the 
Automobile Dealers Day in Court Act, 15 U.S.C. 1221-1225, to 
provide small business dealers with recourse in Federal court 
against manufacturer abuses irrespective of contract terms. 
This Federal statute serves as precedent for Federal 
legislation to deal with problems in this area caused by 
disparities in bargaining power between manufacturers and 
dealers. However, the Automobile Dealers Day in Court Act has 
proved to be insufficient to level the playing field between 
dealers and manufacturers. The act does not provide for 
equitable relief and fails to address the ``one sidedness'' of 
the motor vehicle franchise contract itself.
    In addition, Congress has passed legislation to prevent the 
forced waiver of substantive rights in disputes between small 
business service station owners and multinational oil 
companies. The Petroleum Marketing Practices Act (``PMPA''), 15 
U.S.C. 2801-2806, which regulates the franchise relationship 
between oil refineries and gasoline retailers, was enacted to 
prevent oil companies from improperly exploiting their unequal 
bargaining power and to deter unfair conduct by prohibiting 
refineries from forcing gasoline retailers to accept mandatory 
binding arbitration and surrendering important statutory 
rights. Similarly, S. 1140 would ensure that motor vehicle 
dealers will not be compelled to surrender their statutory 
rights as a condition of obtaining or renewing their dealer 
    In 1925, Congress passed the Federal Arbitration Act 
(``FAA'') to address the judicial hostility to arbitration and 
make arbitration decisions enforceable in Federal courts. Since 
1947, when the FAA was reenacted and codified in title 9 of the 
United States Code, there have only been minor amendments. 
However, in two recent alternative dispute resolution (``ADR'') 
statutes discussed below, Congress specifically provided 
statutory language to ensure that arbitration is voluntary. In 
the same vein, S. 1140 does not void arbitration as a viable 
option for dispute resolution, it merely seeks to ensure that 
participation is voluntary by both parties.
    In 1988, Congress first passed the Judicial Improvements 
and Access to Justice Act, 28 U.S.C. 651-658 (1988), 
authorizing 20 Federal judicial districts to establish 
experimental court-annexed arbitration programs as an 
alternative to formal civil trials. From the outset the law was 
drafted to ensure the voluntary nature of arbitration. Then, in 
1998, Congress passed the Alternative Dispute Resolution Act 
(``ADR''), 28 U.S.C. 651-658 (1998 amendments), expanding the 
program to all Federal district courts to provide litigants in 
all civil cases with at least one alternative dispute 
resolution process such as mediation, mini trial or 
arbitration. In that measure, Congress specifically included 
protective provisions to ensure that arbitration is voluntary. 
Under the ADR statute a district court may only allow 
arbitration if the parties consent. The law further clearly 
creates safeguards to provide true consent by requiring 
procedures ensuring that ``consent to arbitration is freely and 
knowingly obtained, and no party or attorney is prejudiced for 
refusing to participate in arbitration.'' Therefore, a party 
retains the right to pursue a judicial determination of the 
matter if it so chooses.
    Similarly, the focus of S. 1140, to make binding 
arbitration voluntary rather than mandatory, is fully 
consistent with the prominent theme that arbitration must be 
voluntary in court-annexed proceedings. In addition, S. 1140 
will not discourage alternative dispute resolution. In fact, 
the proposed legislation attempts to protect the State ADR 
forums established to resolve dealer-manufacturer disputes. 
Similar to court-annexed arbitration, these forums reduce costs 
and delays and preserve judicial time and resources.
    Additional legislation enacted in 1990 and 1996, the 
Administrative Dispute Resolution Act, 5 U.S.C. 581-593 (1990 
and 1996 amendments), authorizes Federal agencies to use 
arbitration to resolve administrative disputes if the parties 
consent. The act goes to great length to emphasize that the 
decision to arbitrate must be voluntary for both parties. For 
example, section 585 states that ``an agency may not require 
any person to consent to arbitration as a condition of entering 
into a contract or obtaining any benefit.'' 5 U.S.C. 585 
(1990). As stated in the Senate Governmental Affairs Committee 
Report accompanying the bill:

        A new Section 585 authorizes the use of arbitration 
        whenever all parties consent in writing. It prohibits a 
        federal agency from requiring any person to consent to 
        arbitration as a condition of receiving a contractor 
        benefit. This prohibition is intended to help ensure 
        that the use of arbitration is truly voluntary on all 
    \11\ S. Rept. 101-543, p. 12.

    This provision in the 1990 statute was maintained in the 
1996 legislation.
    The Motor Vehicle Franchise Contract Arbitration Fairness 
Act, S. 1140, would simply guarantee that binding arbitration 
to resolve disputes involving a motor vehicle franchise 
contract is entered into only after voluntary agreement by both 
parties. Voluntary agreements would prohibit motor vehicle 
manufacturers from mandatorily depriving dealers of rights they 
are entitled to under Federal and State laws. Thus, S. 1140 
conforms with recent congressional efforts to streamline the 
Federal judicial system, which have recognized the importance 
of maintaining voluntary consent to binding arbitration.

                    VI. Section-by-Section Analysis

Section 1.--Short title
    Section 1 provides that the short title of the bill shall 
be the Motor Vehicle Franchise Contract Arbitration Fairness 
Section 2.--Election of arbitration
    Section 2 amends the Federal Arbitration Act to require 
that 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 
the controversy only if both parties consent in writing after 
such controversy arises. This section also requires the 
arbitrator to provide the parties with a written explanation of 
the factual and legal basis for the decision.
Section 3.--Effective date
    Section 3 provides that the amendments to the FAA made by 
this legislation shall apply only to contracts entered into, 
modified, renewed or extended after the date of enactment.

                           VII. Cost Estimate

    In compliance with paragraph 11(a) of rule XXVI, of the 
Standing Rules of the Senate, the Committee sets forth, with 
respect to the bill, S. 1140, the following estimate and 
comparison prepared by the Director of the Congressional Budget 
Office under section 403 of the Congressional Budget Act of 

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, November 2, 2001.
Hon. Patrick J. Leahy,
Chairman, Committee on the Judiciary,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
contemplated a cost estimate for S. 1140, the Motor Vehicle 
Franchise Contract Arbitration Fairness Act of 2001. The CBO 
staff contacts for this estimate are Lanette J. Walker (for 
federal costs), and Paige Piper/Bach (for the private sector 
                                            Dan L. Crippen,

               congressional budget office cost estimate

    CBO estimates that implementing S. 1140 would cost less 
than $500,000 annually, assuming the availability of 
appropriated funds. Enacting the bill would not affect direct 
spending or receipts, so pay-as-you-go procedures would not 
apply. S. 1140 contains no intergovernmental mandates as 
defined in the Unfunded Mandates Reform Act (UMRA) and would 
not affect state, local, or tribal governments. It would impose 
private-sector mandates as defined by UMRA, but CBO estimates 
the direct costs if those mandates would fall well below the 
threshold established by UMRA ($113 million in 2001, adjusted 
annually for inflation).
    S. 1140 would provide that contract disputes between motor 
vehicle manufacturers and motor vehicle dealers can be resolved 
by arbitration only after both parties agree to arbitration as 
a means of settling the dispute. Under current law, 
manufacturers can include clauses in contracts with dealers 
that provide for mandatory arbitration if a contract dispute 
would arise.
    CBO estimates that implementing the bill could increase 
costs to federal courts to the extent that such contract 
disputes are tried in federal court. Based on information from 
the Administrative Office of the United States Courts, CBO 
estimates that any increase in federal costs would be less than 
$500,000 a year because of the relatively small number of cases 
expected. Any additional costs would be subject to the 
availability of appropriated funds.
    S. 1140 would impose private-sector mandates on certain 
motor vehicle manufacturers and arbitrators involved in 
disputes arising out of or relating to a motor vehicle 
franchise contract by allowing arbitration only after both 
parties in a dispute agree in writing to arbitration, and by 
requiring an arbitrator elected to resolve such a dispute to 
provide the parties with a written explanation of the basis for 
the award. Based on information provided by the National 
Automobile Dealers Association, the Association of 
International Automobile Manufacturers, and the American 
Arbitration Association, CBO estimates that the direct cost of 
those mandates would fall well below the threshold established 
by UMRA.
    This estimate was approved by Peter H. Fontaine, Deputy 
Assistant Director for Budget Analysis.

                   VIII. Regulatory Impact Statement

    In compliance with paragraph (11)(b)(1), rule XXVI of the 
Standing Rules of the Senate, the Committee, after due 
consideration, concludes that S. 1140 will not have a 
significant regulatory impact.

    Senate bill 1140, the Motor Vehicle Franchise Contract 
Arbitration Fairness Act, takes a piecemeal exemption approach 
to arbitration reform. The bill takes one type of contract--
motor vehicle dealership franchise contracts--and exempts the 
parties to such contracts from the Federal Arbitration Act 
(FAA). The bill does not address issues with other types of 
arbitration and does not attempt to reform the FAA itself. 
Instead, the bill reverses a long-standing congressional policy 
favoring arbitration in a manner that undermines the sanctity 
of contract and has serious implications for other types of 
transactions to which the FAA currently applies.
    Arbitration is an informal process of resolving disputes in 
which a neutral third party arbitrator renders a decision after 
hearing both parties. As the Supreme Court has explained, 
``[b]y agreeing to arbitrate a * * * claim, a party does not 
forgo * * * substantive rights * * *; it only submits to their 
resolution in an arbitral, rather than a judicial, forum.'' \1\ 
Arbitration in intended to avoid the formalities, expense, and 
delay of formal dispute resolution before courts.
    \1\ Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 
U.S. 614, 628 (1985).
    In 1925, Congress passed the Federal Arbitration Act 
(``FAA'') to preempt judicial aversion to arbitration by making 
arbitration decisions enforceable in Federal courts. Under the 
FAA, now codified in title 9, United States Code, when two 
parties agree to a binding contract that affects interstate 
commerce, an arbitration clause waiving the right to trial in 
court and calling for the informal settlement of any dispute 
arising from the contract will be enforceable.\2\ If one party 
to the contract containing an arbitration clause attempts to 
avoid arbitration and file suit in court, the other party can 
move to stay or dismiss the action on the grounds that the FAA 
requires the arbitration clause of the contract to be 
    \2\ 9 U.S.C. 2 (1988).
    \3\ Id. at pars. 3 and 4.
    Since 1925, Congress has amended the FAA in only minor 
respects. Instead of repealing the FAA, Congress has expanded 
arbitration, in a nonbinding form, to contexts in which the 
parties have not agreed to binding arbitration prior to a 
dispute. For example, Congress has encouraged nonbinding 
arbitration in the Judicial Improvements and Access to Justice 
Act, 28 U.S.C. 651-658 (1988), the Administrative Dispute 
Resolution Act, 5 U.S.C. 581-593 (1990 and 1996 amendments), 
and the Alternative Dispute Resolution Act (ADR), 28 U.S.C. 
651-658 (1998 amendments).
    As the expense of court litigation has risen, the use of 
arbitration has expanded. Clauses requiring parties to submit 
disputes to arbitration are now found in a variety of 
contracts, including union contracts, employment contracts, 
consumer credit contracts, and securities contracts. In cases 
dealing with arbitration contracts, the Supreme Court has 
emphasized that the FAA establishes a Federal policy favoring 
arbitration.\4\ In an unbroken line of decisions starting in 
1985, the Supreme Court has consistently upheld the application 
of the FAA to claims arising under the Sherman Act,\5\ 
securities law claims,\6\ civil Racketeer Influenced and 
Corrupt Organizations Act (``RICO'') claims,\7\ and employment 
claims.\8\ Thus, when parties to various types of contracts 
agree to arbitrate disputes, the FAA applies and the courts 
will enforce the arbitration clause.
    \4\ See, e.g., Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 
460 U.S. 1, at 24 (1983).
    \5\ Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 
U.S. 614, 638-40 (1985).
    \6\ See Shearson/American Express Inc. v. McMahon, 482 U.S. 220 
(1987) (applying FAA to claims arising under the Securities Exchange 
Act of 1934); Rodriguez de Quijas v. Shearson/American Express, Inc., 
490 U.S. 477 (1989) (applying FAA to claims arising under the 
Securities Act of 1933).
    \7\ McMahon, supra note 3, at 239-42 (applying FAA to claims 
arising under RICO).
    \8\ See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) 
(applying FAA to claims arising under Age Discrimination in Employment 
Act); Circuit City Stores, Inc. v. Adams 532 U.S. 105 (2001) (applying 
FAA to State law employment discrimination claim).
    In passing the FAA, Congress stated that ``[a]rbitration 
agreements are purely matters of contract, and the effect of 
the [Federal Arbitration Act] is simply to make the contracting 
party live up to his agreement. He can no longer refuse to 
perform his contract when it becomes disadvantageous to him. An 
arbitration agreement is placed on the same footing as other 
contracts, where it belongs.'' \9\ The Supreme Court has ruled 
that arbitration clauses must not be put on a lesser footing 
than any other clause of a contract.\10\ Arbitration clauses 
are subject, however, to the same defenses available under 
State law to the contract itself, such as fraud duress, 
adhesion, or unconscionability.\11\
    \9\ House Report No. 96, To Validate Certain Agreements For 
Arbitration, 68th Cong., 1st sess. (Jan. 24, 1924).
    \10\ Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 687 
(1996) (``Courts may not, however, invalidate arbitration agreements 
under state laws applicable only to arbitration provisions.'').
    \11\ See id. at 686-87.
    Senate bill 1140 would reverse the intent of Congress as 
interpreted by the Supreme Court by singling out arbitration 
clauses in motor vehicle dealer franchise contracts for non-
enforcement. S. 1140 would do this even when the U.S. Chamber 
of Commerce reports that only a small fraction of motor vehicle 
franchise contracts contain arbitration clauses:

                               (MBAC) \1\
           [Source: U.S. Chamber of Commerce (Feb. 27, 2000)]
                               Approx. No.    Dealers
       Manufacturer \2\         of Dealers   with MBAC         Note
DaimlerChrysler..............        4,435  Appr. 1,336  Dealer option
                                                          at time of
                                                          except in
Ford.........................        4,958            5
General Motors...............        7,753            0
Saturn.......................          236          236
Honda and Acura..............        1,254            4
Suzuki.......................          285          285
BMW..........................          337            0
Ferrari......................           29           29
Hyundai......................          483            0
Isuzu........................          567            0
Kia..........................          441            0
Land Rover...................          118            0
Mazda........................          763            0
Mercedes-Benz................          316            0
Mitsubishi...................          495            0
Nissan/Infiniti..............        1,230            0
Porsche......................          194            0
Rolls-Royce..................           36            0
Subaru.......................          603            0
Toyota.......................        1,195            0
Lexus........................          174            0
Volkswagen...................          567            0
Audi.........................          258            0
Volvo........................          332            0
Saab.........................          215            0
\1\ Excludes agreements with public companies.
\2\ Manufacturers listed include members of the Alliance of Automobile
  Manufacturers and the Association of International Automobile
  Manufacturers, Inc.

    By singling out arbitration clauses for non-enforcement, S. 
1140 tends to undermine the sanctity of the contract and the 
stability of contract law.\12\ This in turn undermines the 
certainty of transactions upon which our commerce is depends.
    \12\ E. Allan Farnsworth, ``The Past of Promise: An Historical 
Introduction to Contract'', 69 Columbia Law Review 576 (1969); Charles 
Fried, ``Contract as Promise: A Theory of Contractual Obligation'', 57 
    Further, the piecemeal, exemption approach of S. 1140 could 
have broader implications in areas other than motor vehicle 
franchise contracts. In a letter to the Judiciary Committee, 
the Chamber of Commerce of the United States of America stated:

          While [S. 1140] purports simply to undo the 
        arbitration clauses in contracts between motor vehicle 
        manufacturers and dealers, its long-term effects would 
        cause serious damage to the use and availability of 
        alternative dispute resolution. * * * S. 1140 would 
        weaken clear congressional intent to encourage 
        alternative dispute resolution. Most importantly, the 
        legislation could also call into question the U.S. 
        Supreme Court's continual reaffirmation of arbitration 
        clauses including its decision earlier this year in 
        Circuit City Stores, Inc. v. Saint Clair Adams [532 
        U.S. 105 (2001)].\13\
    \13\ Letter from R. Bruce Joston, Vice President of Governmental 
Affairs, U.S. Chamber of Commerce (Sept. 13, 2001).

    Because predispute binding arbitration is often less 
expensive than litigation in court,\14\ arbitration provides 
the critical benefit of allowing access to dispute resolution 
to many with small claims who cannot afford the higher price of 
court litigation. Lewis Maltby, Director, National Task Force 
on Civil Liberties in the Workplace of the American Civil 
Liberties Union and a Director of the American Arbitration 
Association, has stated:
    \14\ Stephen J. Ware, ``Arbitration Under Assault'', Cato Policy 
Analysis No. 433, p. 3 (Apr. 18, 2002) (``[A]rbitration typically 
reduces costs. Arbitration gains speed and efficiency by streamlining 
discovery, pleadings, and motion practice. This streamlined process 
generally results in much lower legal fees and related process 

          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 Lawyer's 
        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.\15\
    \15\ Lewis L. Maltby, ``Private Justice: Employment Arbitration and 
Civil Rights'', 30 Col. Hum. R.L. Rev. 29, 57-58 (1998).

    Indeed, Prof. Stephen J. Ware of the Cumberland School of 
Law has concluded that ``[a]rbitration tends to reduce consumer 
prices, raise employee wages, and increase access to justice 
for meritorious claims. Those benefits would not be fully 
realized if binding arbitration agreements could be entered 
into only after a dispute arose.\16\ Thus, this piecemeal, 
exemption approach of S. 1140, if applied to other types of 
transactions, could have negative implications for consumers 
and employees.
    \16\ Ware, supra note 14, at p. 2.
    At least the automobile manufacturers and dealers that S. 
1140 would exempt from the FAA, unlike many consumers and 
employees, could generally afford to litigate franchise 
disputes in court. The ability of a relatively wealthy group of 
businesses to afford to litigate, however, does not compel 
Congress to completely exempt that group from the FAA. Further, 
the ability to afford in-court litigation does not justify an 
exemption from the FAA when such procedural protections, much 
like those available in court, could be incorporated into the 
FAA itself.
    Even with the savings in expense and delay, arbitration can 
result in unfairness in certain cases depending on the 
procedural protections for the parties embodied in the contract 
containing the arbitration clause or those protections that are 
incorporated by reference, such as the rules of the American 
Arbitration Association. Accordingly, instead of a piecemeal 
reform of the FAA via exemptions, a comprehensive review of 
procedural protections that can be used in arbitration for all 
parties is more appropriate at this time. For example, a 
comprehensive reform could include the right to notice and 
hearing, the right to be represented by an attorney, the right 
to discovery and the presentation of evidence, the right to a 
written decision by the arbitrator, the right to a timely 
resolution of the matter, and the right to a neutral 
arbitration selected by both parties.\17\
    \17\ See, e.g., Consumer and Employee Arbitration Bill of Rights, 
S. 3210, 106th Cong. (2000).
    Given the broad Federal policy in favor of arbitration, in 
multiple contexts, the cost and time savings available in 
arbitration, the limited applicability in practice of 
arbitration clauses to motor vehicle franchise contracts, and 
the availability of procedural protections that could be 
incorporated into the FAA, I cannot support S. 1140 in its 
current form.
                                     Jeff Sessions.

                       X. Changes in Existing Law

    In compliance with paragraph 12 of rule XXVI of the 
Standing Rules of the Senate, changes in existing law made by 
S. 1140, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in bold brackets, new matter 
is printed in italic, and existing law in which no change is 
proposed is shown in roman):

                          UNITED STATES CODE

           *       *       *       *       *       *       *

                          TITLE 9--ARBITRATION

    Chapter                                                Section

    1. General provisions                                        1

           *       *       *       *       *       *       *

                     CHAPTER 1--GENERAL PROVISIONS


    1. ``Maritime transactions'' and ``commerce'' defined; 
exceptions to operation of title.

           *       *       *       *       *       *       *

    16. Appeals.
    17. Motor vehicle franchise contracts.

           *       *       *       *       *       *       *

Sec. 1. ``Maritime transactions'' and ``commerce'' defined; exceptions 
                    to operation of title

    ``Maritime transactions'', as herein * * *

           *       *       *       *       *       *       *

Sec. 16. Appeals

    (a) An appeal may be taken from--
          (1) an order--
                  (A) refusing a stay of any action under 
                section 3 of this title,

           *       *       *       *       *       *       *

    (b) Except as otherwise provided in section 1292(b) of 
title 28, an appeal may not be taken from an interlocutory 
        (1) granting a stay of any action under section 3 of 
        this title;
        (2) directing arbitration to proceed under section 4 of 
        this title;
        (3) compelling arbitration under section 206 of this 
        title; or
        (4) refusing to enjoin an arbitration that is subject 
        to this title.

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.

           *       *       *       *       *       *       *