Mandatory Arbitration qxd by jennyyingdi


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Fighting Mandatory Arbitration
By F. Paul Bland, Jr. and Michael J. Quirk*

         Part Two in a series.                  sumers, workers, and other victims of      shared perception among plaintiff
     n an alarming trend, corporations          corporate wrongdoing. Although             advocates and corporate representatives

I    are waging a sweeping campaign to
     privatize justice and rewrite con-
sumer protection laws in their own
                                                mandatory arbitration clauses are gen-
                                                erally legal and enforceable, there are
                                                nonetheless a number of arguments we
                                                have used in particular cases to pre-
                                                                                           alike that arbitrators are more likely
                                                                                           than judges or juries to bring pro-
                                                                                           defendant attitudes to their decision-
                                                                                           making. Many lawyers have told us of
favor. For example, in July 2001,
AT&T mailed a brochure to its long              serve the rights of individuals to go to   cases where they sought arbitration and
distance telephone customers telling            court. This article gives a brief          then received a list of potential arbitra-
them that they were forfeiting their            overview of some of the problems of        tors, all of whom were either employed
constitutional right to have their day in       mandatory arbitration and some of the      in the defendant’s field of business or
court. Those few customers who scruti-          leading arguments available to parties     were lawyers who regularly represented
nized the fine print learned that they          opposing it. For a comprehensive dis-      businesses in the defendant’s field.
would have to submit major legal claims         cussion of the arguments used to defeat    There is evidence that arbitrators tend
to private arbitration, that they would                                                               to favor “repeat players,” the
be prohibited from taking part in any                                                                 institutional parties most like-
class action against AT&T, that they                                                                  ly to appear in future arbitra-
would have to submit claims to arbitra-                                                               tions, over individual parties
tion within two years regardless of                                                                   such as consumers or workers
applicable statutes of limitations, and                                                               who are not likely to be back
that they would never be able to recover                                                              in arbitration again. This bias
consequential or punitive damages from          A federal magistrate judge found the arbitration is predictable where arbitra-
AT&T in these arbitration proceedings.          clause in AT&T’s customer service agreement           tors compete to be selected by
                                                illegal, unconscionable, and unenforceable.
    While a federal district court has                                                                corporations, work under
ruled in a case brought by Trial                arbitration, see our book, Consumer        short-term contracts, and will lose
Lawyers for Public Justice and The              Arbitration Agreements: Enforceability     future work if corporate parties per-
Sturdevant Law Firm after a trial on            and Other Topics (NCLC and The             ceive their decisions as too favorable or
behalf of a class of seven million Cali-        TLPJ Foundation, Second Edition,           generous to plaintiffs.
fornia consumers that this particular           2002), co-authored with Jon Sheldon            Arbitration proceedings can also
contract is unlawful, this type of com-         of the National Consumer Law Center. be exceedingly expensive for con-
pulsory arbitration clause is hardly            (The book can be ordered by calling        sumers, with filing fees of several
unique to AT&T. More and more                   TLPJ headquarters or visiting our web hundred dollars and arbitrators’ fees
companies in a growing number of                site at                     (typically $200 to $450 per hour) run-
business fields across the country are                                                     ning into the thousands of dollars.
adding mandatory arbitration clauses            Problems with Mandatory                    Arbitration is also typically enshroud-
to their standard form contracts to             Arbitration                                ed in secrecy, with many arbitration
shield themselves from liability to con-            Private arbitration generally benefits services adopting rules that bar parties
sumers and workers and to conceal               corporate defendants while working to from telling anyone about cases in
their wrongdoing from public scrutiny.          the disadvantage of consumers, work-       arbitration. If Bridgestone and Ford
    Mandatory arbitration too often             ers, and other individual claimants.       dealers had adopted arbitration provi-
works to the disadvantage of con-               Perhaps most significant, there is a                                   Continued on page 2.
Continued from page 1.                       contract provisions that are uncon-          joined the case to write the successful
sions five years ago, they might well        scionable. To establish that a contract      brief opposing certiorari on the ground
have succeeded in concealing their           provision is unconscionable, a party         that this application of ordinary rules
tire failures from the press and the         typically has to show that there is a sub-   of state contract law is expressly per-
public. The dangers posed by this            stantial imbalance in bargaining power       mitted under the FAA.
secrecy are compounded by the nearly         between the contracting parties or that          Individuals can also use the high
unbridled discretion that arbitrators        the provision was hidden or concealed        costs of arbitration to argue that a
have in deciding cases. Courts have          (so-called “procedural unconscionabili-      defendant’s arbitration clause is uncon-
repeatedly held that arbitration deci-       ty”) and that the provision’s terms are      scionable. Here again, the party chal-
sions are subject to the most limited        unfairly one-sided in favor of the           lenging arbitration must produce
judicial review, with the U.S. Sup-          stronger party (so-called “substantive       evidence to support his or her claim
reme Court recently finding in                                                                 that arbitration is too expensive. In
Major League Baseball Players Ass’n v.                                                         Sanderson Farms, Inc. v. Gatlin,
Garvey that “improvident, even silly                                                           TLPJ joined Larry Abernathy and
fact finding” was not grounds for                                                              Dudley Butler of Mississippi in
overturning an arbitrator’s ruling.                                                            representing an individual farmer
Finally, arbitration is often imposed                                                          opposing enforcement of a poultry

                                                                                          Photos by Herman Farrer
without the meaningful consent of                                                              company’s mandatory arbitration
individuals because businesses write                                                           clause on the ground that it impos-
their arbitration clauses in legalese                                                          es excessive costs. By its terms, the
tucked in the middle of fine-print in                                                          clause requires use of a three-arbi-
standard form contracts.                                                                       trator panel with arbitration to be
                                             F. Paul Bland, Jr.       Michael J. Quirk
                                                                                               conducted under the American
Fighting Mandatory                           unconscionability”). While arbitration       Arbitration Association’s (AAA’s) Com-
Arbitration                                  clauses are not per se unconscionable,       mercial Rules. When the farmer
    The Supreme Court has proclaimed         some companies cannot resist writing         attempted to arbitrate under these
that the Federal Arbitration Act, 9          them in such a one-sided manner that         rules, AAA billed him for more than
U.S.C. §§ 1 et seq., creates a liberal       they become unconscionable.                  $10,000 (mostly for the arbitrators’
federal policy favoring arbitration, but         TLPJ, along with Garve Ivey and          hourly fees) before there was even a
that does not mean that courts will          Barry Ragsdale of Alabama, recently          hearing on his underlying claims. Our
enforce unfair arbitration clauses. The      represented consumer plaintiffs in a         argument that these costs render the
FAA provides that arbitration agree-         case where we argued that the arbitra-       poultry company’s arbitration require-
ments shall be enforceable “save upon        tion clauses at issue were uncon-            ment unconscionable is now before the
such grounds as exist at law or in equi-     scionable because, among other things,       Mississippi Supreme Court.
ty for the revocation of any contract.”      consumers had no choice regarding                We also made this argument in
9 U.S.C. § 2. The Supreme Court has          arbitration. In American General             Ting v. AT&T, our suit seeking to
held that the FAA preempts state laws        Finance, Inc. v. Branch, the Alabama         enjoin enforcement of AT&T’s con-
that single out all arbitration clauses      Supreme Court found that the plain-          sumer arbitration clause as uncon-
for disfavored treatment, but also has       tiffs established procedural uncon-          scionable under California’s Consumer
recognized that courts may refuse to         scionability by building a factual           Legal Remedies Act. As evidence that
enforce specific arbitration clauses that    record showing that virtually every          AT&T consumers will face prohibitive
violate generally applicable rules of        local sub-prime lender required arbitra-     costs if the company’s arbitration
contract law. The key to making a suc-       tion so that borrowers were forced to        clause is enforced, we put into the
cessful challenge is to direct these argu-   surrender access to courts as a condi-       record the fee requirements of AAA’s
ments not at all arbitration generally,      tion for obtaining loans. The plaintiffs     Commercial Arbitration Rules (used by
but at the specific abuses of arbitration    argued substantive unconscionability         AT&T for certain consumer claims)
that are involved in particular cases.       based on one-sided contract terms            and a study showing that AAA arbitra-
    Many arbitration clauses are vulnera-    exempting the lender’s claims from           tors in California charge parties an
ble to challenge under the state law doc-    arbitration. When the borrower peti-         average of $1,899 per day for their
trine that courts will not enforce           tioned to the U.S. Supreme Court, we                                    Continued on page 4.

                            Charleston, West Virginia                                 June 22, 2002

Supreme Court Tosses Arbitration Clause
Home equity loan provision hurts borrowers, justices rule
By KEN WARD, JR.                              In November 1999, the Toppings                “The court rightly recognized that
GAZETTE STAFF WRITER                       obtained a home equity loan. Compa-          it would be outrageous to trust such a

          he state Supreme Court has       nies involved in the loan included           crucial decision to a system where the
          struck down a one-sided          Meritech Mortgage Services, Saxon            private judges have powerful built-in
          arbitration clause included in   Mortgage, Platinum Capital and               incentives to favor the finance compa-
some home equity loans.                    Chase Manhattan Bank.                        ny over the consumer.”
    Justices agreed with consumer             The Toppings were told that the               F. Paul Bland, of the Washington,
advocates who said the clause was          loan had a 6.9 percent interest rate. It     D.C., group Trial Lawyers for Public
“unconscionable because the lender         turned out to have a 10 percent inter-       Justice, also represented the Top-
chose arbitrators whose income                                                          pings.
depended on continued referrals from                                                        “Meritech has a profit motive for
the lender.”                                      “Meritech has a                       selecting the National Arbitration
    On Wednesday, the court unani-                                                      Forum to replace judges and juries for
mously ruled that Meritech Mortgage
Services violated the law by inserting
                                                profit motive for                       all disputes,” Bland said.
                                                                                            “The record shows that the forum
the mandatory arbitration clause into                                                   has repeatedly demonstrated
its form contract with customers.           selecting the National                      favoritism toward lenders over con-
    Generally, when legal disputes go                                                   sumers, and that the forum represent-
to arbitration, both sides approve the      Arbitration Forum to                        ed itself to lenders as a way for them
                                                                                        to shield themselves from legal
    In the case, Meritech required bor-                                                 accountability.”
rowers to resolve any disputes with            replace judges and                           In the Toppings’ case, the court
lenders through arbitration.                                                            cited a lengthy footnote in a case
    The lenders mandated that the dis-     juries for all disputes.”                    decided last week concerning a jewel-
putes be arbitrated by the National                                                     ry chain’s arbitration clause with its
Arbitration Forum.                                                                      customers.
    Consumer lawyer Dan Hedges             est rate, according to court records.            “Neutrality in the selection and
alleges that the forum, a private com-     To pay off indebtedness of $37,000,          composition of any forum or tribunal
pany, almost always favors lenders         the couple would have to pay                 is essential to the legal validity of con-
because its business is dependent on       $104,000, including a $36,600 bal-           tractual provisions providing for dis-
being chosen by lenders to arbitrate       loon payment.                                pute resolution mechanism,” the
loan cases.                                    As part of the deal, the Toppings        court said in the previous case.
    In the case decided Wednesday,         signed an “arbitration rider.” This              In the Toppings’ case, the high
Hedges represents Margaret and             required all disputes, claims or contro-     court issued a short, unsigned order
Roger Toppings of Lincoln County.          versies to be resolved through binding       rather than a full opinion. The order
    Margaret Toppings is 65 and has a      arbitration by an arbitrator designated      said that Justice Elliott Maynard
fifth-grade education. Roger Toppings      by the National Arbitration Forum.           would have issued a full opinion
has a seventh-grade education and              “Our clients stood to lose their         instead.
cannot read, according to court            home because of a predatory loan,”               The case now returns to Lincoln
records.                                   Hedges said Friday.                          County Circuit Court. ■

                                                                                FIGHTING MANDATORY ARBITRATION                 3
Continued from page 2.                          arbitration agreements, Congress is free    statute before conceding that claims
own compensation. When AAA                      to override this policy and to prohibit     arising under it are subject to arbitra-
offered an affidavit regarding its fee          arbitration of claims under any partic-     tion under the FAA.
reductions and deferrals, we deposed            ular federal statute. Consumers have
AAA officials and proved at trial that          had some success arguing that the           Conclusion
AAA rarely reduces its fees, but merely         Magnuson-Moss Warranty Act, 15                  The ability of corporations to opt
delays its collection of them. The fed-         U.S.C. §§ 2301-2312, prohibits bind-        out of the public civil justice system
eral district court held that the cost          ing arbitration of certain breach of        poses fundamental policy questions for
provisions of AT&T’s arbitration                warranty claims through its provisions      Congress and the courts. TLPJ will
clause are unconscionable because they          requiring that informal dispute resolu-     continue to use innovative strategies to
threaten consumers with costs in excess         tion systems be non-binding.                fight arbitration abuses and preserve
of $5,000 in a case and will therefore             We are making this argument,             Americans’ right to their day in court.
“deter many litigants from proceeding”          along with E. Powell Miller,                We encourage all who encounter this
with their claims.1                             Christopher Lovasz and Mark Romano          problem to contact us or visit our web
    In addition to unconscionability,           of Michigan, in Abela v. General Motors     site at ■
the entire range of contract law rules          Corp., an appeal from a trial court             *F. Paul Bland, Jr. is a Staff Attorney for
and requirements are available to par-          order denying GM’s motion to compel         TLPJ and the head of its Mandatory Arbitration
ties fighting arbitration. When TLPJ,           binding arbitration of breach of express    Abuse Prevention Project. Michael J. Quirk is a
along with John T. Ward of Baltimore            warranty claims asserted by consumers.      Staff Attorney at TLPJ.
and Michael Malakoff of Pittsburgh,             Parties should always examine the text          1) Ting v. AT&T, 182 F. Supp. 2d 902,
represented credit cardholders suing            and legislative history of a federal        (N.D. Cal. 2002)
Chevy Chase Bank for raising their
interest rates above 24% after promis-          OUR MISSION
ing never to do so, we opposed Chevy
Chase’s motion to force the case into                Trial Lawyers for Public Justice is the only national public interest
arbitration primarily by arguing that                law firm that marshals the skills and resources of trial lawyers to
Chevy Chase’s attempt to unilaterally                create a more just society.
amend pre-existing cardholder agree-                 Through creative litigation, public education, and innovative work
ments did not result in a valid contract             with the broader public interest community, we:
under applicable state law. Maryland’s
                                                     ■   protect people and the environment;
highest court ruled that the precise lan-
guage of Chevy Chase’s arbitration                   ■   hold accountable those who abuse power;
clause made arbitration voluntary                    ■   challenge governmental, corporate and individual wrongdoing;
rather than mandatory for consumers.
                                                     ■   increase access to the courts;
    Finally, parties may also be able to
beat arbitration in some settings by                 ■   combat threats to our justice system;
making arguments under federal law.                  ■   and inspire lawyers and others to serve the public interest. ■
While the FAA permits enforcement of

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