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Arbitration Bill Gives New Hope for Consumer Protection
Wednesday, 20 January 2010

Forced arbitration clauses hide in consumer contracts, but bills in Congress would give consumers more choice: Sheryl Harris
Binding arbitration carries some distinct pitfalls for consumers. Because the company chooses the arbitration forum and rules, upfront costs for consumers can be prohibitively high. Decisions, even ones that run counter to law, often are protected from review by courts. And while parties in court cases can demand important behind-the-scenes records through discovery, those in arbitration don't have the same access.

Consumer Affairs
Forced arbitration clauses hide in consumer contracts, but bills in Congress would give consumers more choice: Sheryl Harris

By Sheryl Harris, The Plain Dealer
January 18, 2010

The Question: A few years ago, I was hired by a company that required me to sign an arbitration agreement as a condition of employment.

Last year, I bought a new car from a Cleveland dealership and found a similar arbitration agreement. The darn thing said I was not required to sign it, but they said I had to or they wouldn't sell me a car. 

I have not had a case with either the employer or the auto dealership, but if I did, I think this would have put me at a disadvantage. I am thinking of pursuing this issue with my state representatives if there are no existing laws covering it.
Greg Finn, Middleburg Heights


The Answer: The mandatory arbitration clauses you've spotted are tucked into all sorts of contracts, and they are drawing heavy fire from consumer groups and from Congress.

When employees and consumers sign contracts that require binding arbitration of disputes, they are surrendering their right to go to court to resolve even serious disagreements.

Binding arbitration carries some distinct pitfalls for consumers. Because the company chooses the arbitration forum and rules, upfront costs for consumers can be prohibitively high. Decisions, even ones that run counter to law, often are protected from review by courts. And while parties in court cases can demand important behind-the-scenes records through discovery, those in arbitration don't have the same access.

Consumer groups charge that arbitrators have an incentive -- namely, a desire for repeat business -- to side with the company rather than the consumer.

Three important events last year affected mandatory arbitration clauses, says Paul Bland, an attorney with Public Justice:


  • Minnesota Attorney General Lori Swanson outed the folks behind the National Arbitration Forum. Swanson sued the privately held firm and discovered that it shared ownership with several debt collection firms that forced their customers to have their disputes arbitrated by the National Arbitration Forum. In a quick settlement, NAF agreed it would no longer handle consumer arbitration cases. Not long after, the much larger American Arbitration Association said it would also take a pass on debt-collection disputes.



  • Banks, spooked by the Minnesota suit and congressional hearings chaired by Ohio's own Rep. Dennis Kucinich, began announcing they would drop mandatory arbitration clauses from credit-card and other consumer contracts. Among the heavy hitters dropping the clauses were JP Morgan Chase, PNC, CapitalOne and Bank of America.



  • A clause wedged into an appropriations bill in December bars defense contractors from forcing employees to arbitrate certain claims. The amendment passed with support from both parties after Jamie Leigh Jones testified that her employer, Halliburton/KBR, tried to force her to drop a lawsuit and instead arbitrate her claims that she had been drugged, gang raped and imprisoned by fellow workers at a job site in Iraq. The new rules prohibit defense contractors and subcontractors from requiring employees to arbitrate claims that involve sexual assault, false imprisonment or discrimination.


    Mandatory arbitration clauses, however, remain a staple in a variety of consumer contracts, like the car purchase agreement you signed.

    Bland says the disclaimer you spotted -- the one telling you that you didn't have to sign the arbitration agreement -- is one companies are tucking into contracts as mandatory arbitration comes under increasing fire.

    Companies incorporate it, he says, so they can claim later that a binding arbitration clause wasn't mandatory.

    If you had pressed, I'm sure the dealer would have agreed to sell you a car without your agreeing to this clause (mine did). And if it wouldn't sell to you, another dealer probably would have.

    As far as wanting to strike a blow against these clauses, your aim is off, but your timing couldn't be better.

    The Federal Arbitration Act pre-empts states from imposing their own rules, so the ring for this fight is in Washington.

    Congress is right now considering two pieces of arbitration legislation.

    The Fairness in Nursing Home Arbitration Act (S. 512, H.R. 1237) would invalidate mandatory arbitration clauses in contracts patients and their families must sign when someone enters a nursing home.

    One that may resonate more with you -- and make the nursing home bill moot -- is the Arbitration Fairness Act of 2009 (S. 931, H.R. 1020). It would bar companies from locking employees, customers and franchisees into binding arbitration agreements before a dispute arises.

    If the Arbitration Fairness Act were in force, a company and customer could still opt for binding arbitration over a trip to court -- they just couldn't do so blindly, before a disagreement even cropped up.

    That seismic tweak in the law would give consumers a meaningful choice, one they don't always have right now.

    Cora Ganzglass, legislative director for the National Association of Consumer Advocates, said that the House version has more than 100 sponsors but that constituent calls could do a lot to speed the bills through both chambers.

    To read these bills or share your views with your elected officials, visit house.gov and senate.gov.


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