By Caroline E. Mayer
Washington Post Staff Writer
Sunday, July 14, 2002; Page H01
Five weeks after Dawn and Scott Richardson and their family moved into their new $300,000 house in Austin, they moved out. Dawn Richardson says the house had become so contaminated with toxic mold and volatile chemicals -- benzene and formaldehyde and more -- that she and her then-16-month-old daughter suffered bloody noses, rashes, dizziness, shortness of breath and neurological disorders.
In March, nine months after abandoning their home and its contents, the Richardsons sued the builder, David Weekley Homes, seeking millions of dollars for property damage, physical pain and mental anguish.
But they discovered they couldn't take their case to court. The six-page construction agreement they had signed contained a clause that said all disputes had to be resolved through binding arbitration.
"My husband and I are both college-educated, but we did not know that signing a construction contract meant that we forever gave up our constitutional rights to a trial by jury for any and all future disputes with our builder," Dawn Richardson said in a telephone interview.
Binding arbitration: It means that a designated third party will unilaterally settle a suit -- no judge, no jury, no compromise as with mediation, no right of appeal and often no public record. And the Richardsons' case illustrates how such arbitration has penetrated everyday life.
Until a decade ago, most arbitrations pitted two businesses against each other over a contract dispute. Then arbitration spread to disagreements between companies and their customers or employees, with contractual or discrimination issues on the table.
Now, as the Richardsons' case demonstrates, private, third-party adjudicators are being used to resolve many other types of claims, including personal injury.
"In the old days, arbitration would not have covered personal-injury claims," said India Johnson, senior vice president of the American Arbitration Association, the nation's largest arbitration provider. "These would have gone to court."
Earlier this year, for example, a Florida state judge ruled that the courts cannot be the judicial forum for a father seeking damages from a travel agency after his 11-year-old son was killed by hyenas while on an African safari. Why? Before the trip, the boy's mother signed a liability release that included a provision requiring that any future controversy or claim go to binding arbitration. The father is appealing the judge's decision.
Arbitration is now everywhere: in employee and customer agreements with banks, credit card providers, retailers, computer makers, exterminators and long-distance telephone firms. They and others want employees and customers to agree, in advance, to refer all future disputes to a third-party arbitration firm, usually one selected by the companies -- all in the name of avoiding protracted and costly court fights. In many cases, however, consumers may find they still have to pay to have a lawyer represent their interests.
Sign one of these agreements -- or continue to use a credit card, do business with a firm or work for it -- and consumers and employees find they have waived their rights to a court trial for any grievance that may arise.
Businesses say arbitration is a faster and more efficient way to resolve disputes. Weekley Homes' general counsel, John Burchfield, explained: "It often takes two to three years to get to trial -- all while the homeowner wants his home repaired." And as the disputes linger, the house "may be deteriorating into worse and worse condition," he added. Arbitration can solve a dispute within months and get any alleged problems fixed.
Opponents of mandatory arbitration argue that it also protects many firms from large jury verdicts, particularly from class-action lawsuits. And, they add, the process itself often stacks the deck against the individual.
Deriving from the same Latin root, "arbitrator" and "arbitrary" both do suggest a certain amount of independence: Arbitrators can limit an aggrieved individual's access to a company's documents, thus possibly reducing support for the complaint. Arbitrations are decided in private -- hearings can take place in a law office, a hotel room, the company's headquarters; they can even be limited to an arbitrator looking over written materials, with no personal appearances. Decisions are kept confidential, so consumers don't necessarily learn what the arbitrator based a decision on. And many consumer agreements call for the arbitration firm to be chosen by the company being complained about.
Arbitration has been around for years, of course, one of the most common usages being between unions and companies, with each side presumably boasting considerable bargaining power. But pit a company against an employee or a customer and the system is inherently biased in favor of the company, said Cliff Palefsky, a San Francisco lawyer who has been representing employees in their fights against mandatory-arbitration clauses for the past decade.
"It's a modern-day version of separate but equal," he said.
Palefsky cited an advertisement that the American Arbitration Association ran in a legal journal: It boasted that 500 companies, such as FedEx Corp., Texaco Inc. and General Electric Co., have turned to the firm "for innovative alternatives to costly, time-consuming litigation."
"It's one thing to put an ad in a newspaper announcing general availability," Palefsky said, but another to advertise in a way that's designed to appeal only to businesses.
Palefsky also said arbitration clearinghouses such as the American Arbitration Association and the National Arbitration Forum consistently side with companies in court disputes, filing briefs on their behalf. One such filing by the association prompted complaints from two of its own arbitrators, with one saying it destroyed the group's "hard-earned neutrality."
Arbitration supporters say such criticism is unfounded and simply a ploy by trial lawyers like Palefsky to get rid of arbitration. "When trial lawyers come into the arbitration process, their fees are diminished," said the association's president, William K. Slate. "This is a matter of real economic importance to them."
Slate said the association has a roster of about 12,000 arbitrators; each acts as an independent contractor. Two complaints in that context "is not excessive," he said.
As for the firm's advertising, companies "can write us in" their contracts as the arbitration provider "one day, and write us out tomorrow -- it's no skin off their nose."
Edward Anderson, head of the National Arbitration Forum, said his company markets its services "more to the courts than anybody else, making everyone know arbitration is a good way to get quick access to dispute resolution."
"We market to lawyers in general and we pitch to legal-aid offices. We're only too happy to have a case come from anywhere," he said.
Few state or federal laws govern arbitrators or firms such as the American Arbitration Association and the National Arbitration Forum, but as the use of arbitration grows, some states are moving to create some regulatory oversight. California is the furthest along, with the state legislature close to passing a handful of laws to foster more openness and competition in the arbitration process. The measures would regulate how arbitration firms may solicit business and would bar companies from designating an exclusive arbitration firm to handle all of its disputes. Hearings have also been held in the Texas legislature.
The issue also has reached Congress, but most bills on the subject seek to eliminate mandatory arbitration entirely and are deemed to have little chance of passage -- with the exception of a measure that would bar automakers from requiring their franchised dealers to take all disputes with the car companies to arbitration. (Dealers would still be permitted to require their customers to arbitrate disagreements.)
Arbitration officials say that no new laws or rules are needed because there is plenty of oversight from state and federal courts. "The courts get to take a bite of every arbitration twice -- before it happens a party can argue the process is unfair, and then they get another bite after the award," Anderson said. "An opinion is issued almost every day now; the oversight is intense."
But the opinions vary greatly, with some courts upholding mandatory-arbitration clauses, some not.
There are no firm numbers on how big the business of arbitration has become. The American Arbitration Association is the only arbitration firm whose finances are available to the public, because it's a nonprofit organization. Last year, it administered more than 218,000 cases, a 10 percent increase from 2000 and the seventh year that its caseload increased. Association officials say less than 2 percent of the cases were consumer- or employee-related; more than a third were no-fault auto insurance cases that the group has been designated to resolve in New York, New Jersey and Minnesota. Revenue last year was $83.1 million, up 3 percent from the year before.
"In the last 10 to 15 years, there's been a significant change in the business," said Rocco Scanza, executive director of the Alliance for Education in Dispute Resolution, a consortium of universities and professional organizations with an interest in employment mediation and arbitration. In the past, a lot of arbitration was done by volunteers, Scanza said. Today, it's become a profession.
"That means you've got more good choices of people, and cases run smoother and there's greater efficiency. But the flip side is that there are more potential risks. As an arbitrator, you're going to get work as long as parties choose to use you, and if this is your career or it makes up a good part of your practice, then if you render a decision that is unpopular" with parties that frequently use arbitration, they "may not choose to use you again."
This potential risk, which Scanza calls "the repeat-player syndrome," does not concern him as long as the decision to go to arbitration is voluntary and between two parties with similar bargaining power. But Scanza worries when consumers or employees have no choice but to arbitrate.
Arbitration firms say his fears are misplaced. The association "is an administrative agency," Slate said. "We don't decide the cases; the arbitrators do, and they are independent contractors."
Johnson, the association's senior vice president, adds that the organization helps make the arbitration process fair. "We play a critical role in being the buffer zone, setting up fairness rules, time limits. People would beat each other to death like they do in court," she said.
But arbitration critics say the rules set by the big arbitration groups, law firms and other providers can affect the process and the outcome. "They are essential to the process -- they create the rules, select a list of potential arbitrators and, in the absence of an agreement of the parties, can actually select an arbitrator. And they can rule for cause and dismiss an arbitrator or a decision," Palefsky said.
To help reduce the possibility of repeat-player syndrome, Scanza said arbitrators must fully disclose any possible ties to either party before an adjudication begins.
The major arbitration firms say they require such disclosure, and new voluntary guidelines drawn up for the industry also seek greater disclosure of possible conflicts of interest.
Most arbitration firms, including the American Arbitration Association, applaud the guidelines, though Slate said, "We can't say all aspects apply to us." The rules are relevant to the small firms that accept and decide cases, but in the association's case, he said, "we do not decide cases -- arbitrators do. We take ethics very seriously but should not be bound by a process we're not engaged in."
Similarly, the National Arbitration Forum's Anderson said that because it doesn't have any contracts with companies (companies merely write its name into consumer and employee contracts, often without the group's knowledge), it doesn't need to disclose how many other cases it has handled involving any of the arbitrating parties.
Slate said his association demands that its arbitrators disclose any potential conflict of interest. But how much disclosure is enough? That's the question now being debated in a Texas case that, like the Richardsons', involves a homeowner against a builder. The homeowner charges that the builder improperly prepared the foundation; the concrete slab broke in half and the entire house started sliding down a hill.
The builder made repairs, but the homeowner tried to sue for monetary and emotional damages. He was ordered to settle his complaint through the arbitration association. A list of 10 adjudicators was sent to the parties, and each was allowed to delete three names, narrowing the field to four. The final selection was Houston lawyer Stephen Paxson, who forwarded his r鳵m鍊 to both sides. The r鳵m頳aid Paxson was a member of the Greater Houston Builders Association and noted some law articles that he had written several years earlier.
The attorneys for the homeowner, James T. Evans and Victoria Fair Woo, said they didn't consider Paxson's membership in the builders association significant because many lawyers in the area belong, so they agreed to his selection. In the end, Paxson ruled for the builder.
Later the homeowner's attorneys discovered that Paxson was more than just a member of the builders association -- he had also served as its legal counsel for various proceedings. They also learned that while the case was pending, Paxson was hired to write a brief arguing for a change in the law the homeowner was using as the basis for his case against the builder. Although the brief was submitted after the decision was made, court papers indicate that Paxson made the same argument in testimony before the Texas legislature while the case he was arbitrating was pending.
Paxson said he did not try to hide his legal affiliation with the builders association; he said it was duly noted in one of the law articles listed in his r鳵m鮠Additionally, he said, "if they had read the article, they would have also found what my views were prior to the case. . . . I don't think disclosure requirements call for me to disclose all my legal positions that could be involved in an arbitration. . . . At what point do I disclose enough? Every brief I have written over the last five years?"
District Judge Caroline Baker in Harris County, Tex., vacated Paxson's decision, saying his relationship with the builders association and his preparation of legal briefs during the arbitration "are facts which to an objective observer might create a reasonable impression of Mr. Paxson's partiality."
Paxson and the home builder are appealing that decision. Meanwhile, the homeowner has now filed suit against Paxson and the arbitration association, seeking triple damages under the state's consumer-protection laws, for failing to provide a fair and impartial hearing as was promised under the contract.
The association's Johnson declined to talk about the suit but said generally that "we tell the arbitrator to make disclosures, but we can't get inside their heads and live with their thoughts." He added: "We encourage disclosure in training, and obviously we want to ramp up our disclosure efforts."
The Richardsons' case will also be heard by an association arbitrator, as called for under the Weekley Homes contract.
Weekley counsel Burchfield said company officials do not "believe we built a toxic home." Burchfield said Weekley's environmental tests showed no mold contamination, although they did show a "marginal level" of a common allergen.
Dawn Richardson said the common allergen that Weekley found was mold -- and that subsequent tests she paid for showed far higher doses of the mold than the home builder's tests showed.
Richardson is convinced she won't get a fair hearing. "We have not found a single example of a single homeowner who's ever won against a builder in binding arbitration," she said. "Why would an AAA [American Arbitration Association] arbitrator find in favor of the consumer when AAA is Weekley's exclusive arbitration firm? If the arbitrator finds against Weekley Homes, AAA will no longer be on the contract, and the arbitrator may be blackballed from future work."
Richardson had sought a court order barring arbitration, but the judge, former state Supreme Court justice Rose Spector, ruled against her. Spector said in court that she considered recusing herself because she herself is an association arbitrator.
But Spector left a loophole for Richardson: While she ruled that Richardson and her husband must go to arbitration, she said any claims brought on behalf of their daughter could be heard in court because the little girl didn't sign the contract.
? 2002 The Washington Post Company