Leveling the Arbitration Playing Field for Consumers
Consumers and state legislators are quite concerned about these practices, but there is an incorrect perception that states can do little about this because of the preemptive effect of the Federal Arbitration Act (FAA) and other federal law.  This model law – developed by the National Consumer Law Center – avoids such preemption and significantly limits abuses in this area.  The model demonstrates that states have broad authority to regulate such abuses, despite the preemptive effect of the FAA.

1)   Preservation of legal rights 

Would forbid any contract from waiving a party’s right to obtain punitive damages, join a class action, or receive attorney’s fees, among other things. Would also prevent any contract from requiring an arbitration agreement to be kept confidential.

This would benefit consumers in many ways.  The threat of punitive damages deters misconduct and the publication of court orders keeps consumers better informed.  Additionally, class actions and statutory attorney’s fees encourage private litigation to remedy violations of the law where law enforcement would otherwise be impractical.  

2)   Limitation of arbitration in insurance contracts. 
Would prevent insurance companies from requiring a policyholder to resolve a dispute through binding arbitration.

As insurance is an area that states have the authority to regulate, it is one of the few areas where states can ban arbitration.  Mandatory arbitration in insurance is particularly troublesome because punitive damages via a jury trial and the attendant publicity are the most effective deterrents to the widespread insurer practice of delaying and refusing to pay legitimate insurance claims.

3)   Disclosure of arbitration costs to consumers

Would require a contract that forces the consumer to resolve disputes through binding arbitration to disclose the costs of arbitration, including the filing fees, the average daily cost of an arbitrator, and the percent of the cost the consumer must pay if he wins or if he loses.

Consumers are generally not aware of the expenses associated with arbitration and agree to arbitration agreements in contracts without this crucial piece of information.  The disclosure will aid the consumer in deciding whether he should agree to the arbitration requirement in the first place. 

4)   Limitation on consumer arbitration agreements

Would make arbitration agreements unenforceable unless the Federal Arbitration Act provides for their enforceability in a particular instance. This would have immediate effect for transactions not in interstate commerce, and thus not subject to the FAA.

This would minimize the types of contracts that can contain mandatory arbitration clauses, giving consumers more reasonable options in pursuing other methods to resolve conflicts that arise in relation to the contract.

5)   Regulation of arbitration service providers

Would require arbitration providers to publicly disclose information about individual cases and their outcome, how frequently a business uses the same arbitration provider, how long arbitrations take, how much arbitrators are paid, and who pays them. Would also prevent arbitrations where a non-prevailing consumer must pay the other side’s arbitration costs or attorney fees.

This would give consumers very important information about the arbitration providers who may be handling their claims. It would allow consumers to decide for themselves whether providers have a bias toward certain businesses or towards businesses in general.

Contact:     Pamela J. Bolton
                   Director of Policy and Research

                   512-381-1111 
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