Note: I can go on and on about arbitration. I’m not only passionate about this topic because I realize how important it is, I’m also interested because it really is a fascinating topic. It’s like a microcosmic view of the American government, including how our courts work, and the balance of power between the legislative, executive, and judicial branches.
However, I realize this is a topic that’s probably of little interest to most of you. Some of you aren’t from the US, in which case this country’s arbitration policies aren’t of interest. For the US folks, I’m not sure if you think mandatory arbitration agreements will not impact you, you’re already sold on the need to eliminate them and have contacted your congressional representatives, or because it doesn’t involve free candy.
However, if the reason you’re not interested is because you don’t know much about arbitration, leave comments and I’ll do my best to answer (with consideration that I’m not a lawyer and any answers provided are based on interest not legal training), or perhaps address the question to people who can answer the question.
I’m really pleased to see the discussions raised about binding mandatory arbitration agreements because of the Public Citizen report, but a little concerned about the misinformation being disseminated, and, frankly, lack of understanding of arbitration.
The original Federal Arbitration Act was actually a maritime act, and was intended for use in federal court, not state courts. In 1984, as noted in the Public Citizen report, the Supreme Court made a flawed decision to extend the Federal Arbitration Act to state courts, as well as federal courts. The majority opinion stated, “In 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.”
Sandra Day O’Connor wrote in dissent that the decision, “utterly fails to recognize the clear congressional intent underlying the FAA. Congress intended to require federal, not state, courts to respect arbitration agreements…Today’s decision is unfaithful to congressional intent, unnecessary, and, in light of the FAA’s antecedents and the intervening contraction of federal power, unexplained.”
To the Supreme Court, from that point on, the mandate was clear: push as many civil cases as possible into arbitration. In 1987, the Supreme Court ruled that states are required to “rigorously enforce arbitration agreements”; in 1995, that states could not outlaw pre-dispute arbitration agreements in order to “overcome judicial hostility to arbitration”; then in 2006 came the decision that, to me, showed that the Supreme Court is grossly out of touch with the people in its obsession with arbitration.
In this instance, the State of Florida ruled that an arbitration agreement cannot be forced when the contract the arbitration agreement was in, was illegal. Really, makes a lot of sense to me. The Supreme Court overruled Florida, however, and gave the power to determine whether a contract is legal to arbitrators saying that the state could only rule on the legality of the arbitration agreement itself, not the contract.
This, to me, is when the Court really crossed the line–putting issues of determining legality into the hands of anyone who sets themselves up to be an arbitrator. I still, to this day, cannot understand how the Supreme Court could so abuse its power in this way. Since arbitrators do not have to be accountable to the courts or the people, can be private for-profit corporations, don’t have to be lawyers or legal professionals–to give them the power to determine whether a contract is illegal or not is grossly dangerous.
The Supremes have also not accounted for the differences in how arbitrations are held between the time the FAA was created in now. The original 1925 Federal Arbitration Act did not account for the concept of for-profit arbitration firms, where such firms would cater to large clients at the cost of the individuals who ended up facing this combined corporate might; nor did they consider the concept of corporations embedding hidden arbitration clauses in contracts for services such as a credit card, bank account, new car purchase, new computer purchase, cable service, phone service, health insurance, car insurance, car maintenance agreements, hospital procedures, and, especially, employment. The FAA was intended solely to facilitate dispute resolution related to commerce between companies of equal financial strength.
The Public Citizen report focused in California, because that’s the only state to mandate public reporting of arbitration cases–elsewhere, the arbitration companies keep such information secret. Most of the cases had to do with credit cards, many having to do with debt collectors. These do form the majority of arbitration cases now, especially those handled by National Arbitration Forum, which rather specializes in this. In fact, it was NAF that encouraged the introduction of arbitration clauses into credit cards in the first place.
However, what the report can’t show, though, is that many of these filings are in error, based on mistaken identity, non-existent debts, debts years past the applicable statute of limitations, or even based on invalid or possibly illegal contracts. Many of the filings are focused at low income people who can’t afford lawyers, and who don’t understand the arbitration process well enough to know that they need to respond. All too frequently, notices sent to the individuals are sent to incorrect addresses, and the person doesn’t even know the arbitration occurred, until they get served with a court notice that the company has filed to validate the arbitration.
Now, you might think that there’s enough checks and balances in the arbitration process to ensure people’s legal rights are upheld, but that’s not true.
When an arbitration claim is first filed, the FAA allows the respondent to reject the arbitration process because there is no valid arbitration agreement in place. At that point, the organization or individual initiating the arbitration process is supposed to take the issue to court, and get a ruling as to whether an arbitration agreement actually exists. The initiating organization then has the burden to prove that an agreement exists.
What happens, though, is that people don’t get notices of pending arbitration in order to respond by rejecting the arbitration process because of no valid arbitration agreement. Worse, though, is that NAF and the other arbitration corporations ignore such responses anyway and continue the arbitration proceedings. Yes, in effect: NAF violates the very law that undermines its existence.
Why this is serious is that when the companies then move to enforce the arbitration agreement in court, the burden of proof shifts to the individual. The individual must now prove that the arbitration award needs to be set aside based on very limited, strictly controlled circumstances. To summarize:
- Where the award was obtained through corruption or fraud
- Where the arbitrators were guilty of misconduct, or grossly exceeded their powers
- Where the arbitrator is not properly impartial
- When no valid arbitration agreement exists–this latter was added by the states, because the FAA stipulated that no arbitration process should even occur if no valid agreement exists.
They sound good, except for one thing: because of the push by the Supreme Court, most judges are extremely reluctant to vacate an arbitration award, and you’ll have to go to rather extraordinary means in order to get the award overturned.
Case in point is the law most states support that will vacate an award by the individual showing no arbitration agreement exists. In one case in this state (Missouri), when a car buyer moved to sue the company that sold him the car, the car dealer went to court demanding that the case be moved to arbitration because there was a pre-dispute binding mandatory arbitration agreement contained within the car contract. The car buyer denied such an agreement existed, and demanded to see the signed agreement or contract that contained the agreement. The company said they couldn’t find it. Instead, the car company testified that since this is something they require for all car sales, one must exist even if it couldn’t be shown.
This was enough for the Missouri court system, which ruled in favor of the car company. In fact, this is a trend in all states, based on the Supreme Court rulings to ensure that arbitration be given precedence: companies, especially larger ones, don’t have to show signed contracts or arbitration agreements if a company employee is willing to testify that these contracts and agreements ‘typically’ exist.
In addition, it becomes extremely difficult to prove misconduct or corruption of an arbitrator, or that the arbitrator followed substantive law, when the arbitration process is kept secret. Remember that in a court of law, court minutes and decisions have to be public; arbitration is secret. You have no way of knowing whether the arbitrator is impartial or not, because you don’t have access to the arbitration cases they reviewed, or their past employment or other relevant information to determine if they are impartial. You don’t even know if looked at any papers you submit.
It’s been a tragedy to see binding mandatory arbitration agreements added to credit cards, but it now gets worse: they’re being added to every kind of consumer agreement. Broadband Reports wrote on the Public Citizen report, with the discussion focused more on arbitration agreements now being added to phone and cable contracts. This post demonstrates that we’re seeing a major shift in the use of arbitration agreements. Previously, these were introduced into credit card and other purely financial agreements. Now they’re in phone, cable, and satellite agreements, new computer or car or home purchases, employment agreements, health insurance policies, doctor and hospital pre-releases and so on.
These agreements are added in order to protect the organization from lawsuit. Dell has been using arbitration agreements in its online sales for a few years now; I know of one Dell class action lawsuit forced into arbitration, and I’ve heard from two lawyers about two others they decided to drop because of the difficulties. In the one case that went to court, the suit alleged that Dell advertised certain functionality in the machines it sold, and then didn’t provide what was promised. This is not an uncommon class action lawsuit against manufacturers.
The problem with class suits and arbitration, though, is that most arbitration companies don’t support class action suits. In these cases, then, each individual has to file an arbitration claim individually. Each person must do his or her own arguments, filings, investigation, as well as paying hefty fees upfront. The benefit back is typically too small for the individual to make such effort worthwhile, especially because most lawyers won’t touch arbitration cases, as they’re too difficult to win — the arbitration company’s rules tend to be rather, um, flexible when it comes to a big client.
There’s been criticism of class action lawsuits because many are seen as frivolous. However, most safety features in the car you drive, the medicine you use, the hospitals you visit, the toys you give your kids, even the paint you use and the air you breath, came about because of class action lawsuits. The frivolous suits are not as common as the corporations would like you to think. It’s actually quite difficult to get class action status for a lawsuit.
It’s only been recently that the state courts have been fighting back at arbitration, specifically because class actions weren’t being respected. To the courts, if the arbitration agreement is unconscionable–beyond being reasonable, or grossly one-sided–then the agreement can be rejected, and the case referred to the courts system. In this case, not supporting a basic constitutionally given right to a class action met the determination for ‘unconscionability’.
The only problem is, though, what constitutes ‘unconscionable’ differs wildly between courts, and again, forces the burden of proof on the individual fighting the arbitration agreement. In other words, the burden of proof always ends up falling on the party least able to have the resources to provide such proof.
Returning the Broadband post, some of the commenters mentioned about opting out of the arbitration agreements in whatever contract you enter. Unfortunately, this is no longer viable. All credit cards now have arbitration agreements but one, and that one is provided through the AARP, because the AARP strongly disapproves of binding mandatory arbitration agreements.
Most health insurance policies now include binding mandatory arbitration agreements, and we all know that many times we don’t have the option of switching companies. Same with phone companies, computer manufacturers, and,well, you’ve heard the list from me before.
One thing I hope doesn’t get lost in the discussion about the Public Citizen report is the fact that the Arbitration Fairness Act of 2007 is focused only on eliminating binding mandatory arbitration agreements. This doesn’t impact on post-dispute arbitration agreements or proceedings. People can still choose to go to arbitration or mediation for dispute resolution rather than go to the civil courts. In addition, when feasible, civil courts will even help facilitate this process.
- ars technical discussion (thx Susan)
- Arbitration Gets a Bad Rap
- Legal Blog Watch
- The Consumerist has been out against mandatory arbitration agreements almost as long as I have.