Business Fights for the Tilted Arbitration Field: Susan Antilla
At a hearing in Washington yesterday, consumer advocate Richard M. Alderman sat before a subcommittee of the Senate Judiciary committee and quoted from a grade school textbook: The legislative branch makes the laws, the executive branch carries them out, and the judicial branch explains what they mean.

Business Fights for the Tilted Arbitration Field: Susan Antilla
Commentary by Susan Antilla

Dec. 13 (Bloomberg) -- At a hearing in Washington yesterday, consumer advocate Richard M. Alderman sat before a subcommittee of the Senate Judiciary committee and quoted from a grade school textbook: The legislative branch makes the laws, the executive branch carries them out, and the judicial branch explains what they mean.

It's a great concept. Too bad that isn't the way the system works for an increasing number of employees, consumers and people who invest in the stock market.

Alderman testified in support of the Arbitration Fairness Act of 2007, a bill proposed July 12 by Senator Russell Feingold and Congressman Hank Johnson, both Democrats. The bill supports the radical position that when you get a job, open a brokerage account, or buy a refrigerator, you shouldn't have to first agree that you'll never sue the boss. Or the stockbroker. Or the refrigerator maker. In other words, you shouldn't have to give up your constitutional rights to public courts as a condition of entering into a transaction.

Sometimes bosses discriminate, or stockbrokers rip you off, or the fridge turns out to be a lemon. And when that happens, Feingold says, the public should have the chance to use the country's judicial system to make things right.

That isn't at all the way the system has been working the past 20 years, as business increasingly has required that consumers sign agreements to use private arbitration if a dispute comes up. Don't want to sign? Sorry, you don't get the job and you can't open the brokerage account.

Leading the Way

Wall Street led the way in showing corporate America how to stay out of court. In the late 1980s, more securities firms began to sneak in clauses in documents that required customers to use a private judicial system run by the industry before they could invest. In 1987, the Supreme Court gave its blessing to such contracts.

It turned out to be such a nifty idea that, before you knew it, agreements just like it were popping up everywhere you looked. Try to buy mobile-phone service today without agreeing that you'll use a private justice system if something goes wrong.

Business says that arbitration is terrific. It's fast, it's fair and it saves everybody money, the argument goes. The Securities Industry and Financial Markets Association (Sifma) said in written testimony in October that securities arbitration is 40 percent faster than court and is satisfying to broker and customer alike.

A 1999 study of NASD arbitrations concluded that 94 percent of those surveyed found the arbitration to be fair, and 54 percent of that group was made up of investors, Sifma says.

So Satisfied

Yet Sifma frets in the same testimony that the proposed legislation will spoil all that contentment: give investors a choice between arbitration and the courts after something has gone wrong, Sifma says, and ``the odds of an agreement to arbitrate being entered into after a dispute has arisen are very low.'' The unanswered question, of course, is why investors wouldn't embrace such a benign, fast, fair system if it works so well.

There is the related question of why companies themselves use arbitration selectively.

When Theodore Eisenberg of Cornell Law School and Geoffrey Miller of New York University School of Law studied the arbitration policies of 2,800 public companies during 2002, they found that companies were using arbitration for 37 percent of their employment contracts, but weren't so keen on arbitration when it came to business-against-business fights between ``sophisticated actors.'' In all, 11 percent used binding arbitration for some contracts.

Easy Choice

It was surprising that companies would assert that they liked arbitration's low cost and simplicity, they wrote, yet opt for the courts when they were in disputes with other businesses.

Feingold suggested a possible reason at yesterday's hearings, calling arbitration an ``unaccountable'' system where the law doesn't necessarily apply.

Eppenstein, the New York lawyer who argued the 1987 Supreme Court case on behalf of a couple who tried to undo their arbitration agreement with a brokerage firm, told a House Judiciary subcommittee on Oct. 25 that it was little wonder the securities industry valued a system where complaints were shielded from public exposure.

``Public scrutiny of all kinds of brokerage evils are hidden behind arbitration's closed doors,'' he said.

Consumer crusaders echoed Eppenstein's assertions at the Senate hearing. They are fighting powerful forces, though. The newly formed Coalition to Preserve Arbitration already has submitted testimony applauding the virtues of arbitration to both houses of Congress.

Mandatory arbitration doesn't deprive anyone's rights, the group said in testimony, reflecting the opinion of 19 coalition members including Sifma, the U.S. Chamber of Commerce, the American Health Care Association and T-Mobile USA.

When it's their turn to sue, though, you rarely find corporate heavyweights racing to arbitration. The grade schooler might ponder this question after learning about those branches of government: If arbitration works so well, why don't corporations use it when they have a complaint?

(Susan Antilla is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Susan Antilla in New York at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

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