More On

Arbitration Attack


Read about two studies that draw divergent conclusions on the fairness of arbitration here.


As the Arbitration Fairness Act of 2007 continues its slow journey through Congress, debate over the bill is escalating. Public Citizen and the U.S. Chamber of Commerce, major voices respectively for and against the bill, have released battling analyses of identical data that either validates or conflicts with the assertion that arbitration favors corporations, depending on which group is analyzing it. Editorials, statistics and anecdotes have popped up in news outlets and blogs, discussing either the stress on the civil litigation system that will heighten if the bill
passes or the harm to individuals that will continue if it does not.

Businesses that rely on mandatory and binding pre-dispute arbitration agreements in their contracts with consumers, employees or franchisees should take notice. The bill would amend the Federal Arbitration Act to do away with the widespread practice. Arbitration would continue to be an option for resolving disputes with those groups but could not be forced on them.

Introduced in July 2007 in the House, with an identical bill in the Senate, the bill has gained momentum and support in Congress--102 representatives have co-sponsored the House bill that Rep. Henry Johnson, D-Ga., introduced. The bill took another step toward enactment as the House Judiciary Subcommittee on Commercial and Administrative Law voted in July to send it on to the full committee for mark up. Opponents of the legislation insist it interferes with a system that has been working to the benefit of both sides since enactment of the Federal Arbitration Act in 1925.

"Arbitration did not simply pop out of a vacuum. It emerged because of defects in our civil litigation system,"
says Peter B. Rutledge, a professor at the University of Georgia School of Law. Rutledge has testified in opposition to the bill and released papers in defense of arbitration with support from the Chamber.


Opaque Process
While arbitration began as a cheaper and faster way to resolve disputes than taking a case to court, consumer and employee rights groups say forcing consumers and employees into the present-day arbitration process is unfair.

"[Consumers] are either unaware of binding mandatory arbitration being in the contracts, or, even if they're aware of it, they can't negotiate it anyway," says David Arkush, director of Public Citizen's Congress Watch division. "Because it's forced on them in this way, there's an inherent danger in how arbitration is conducted."

To begin with, there is the so-called "repeat player phenomenon," the theory that, because the company chooses the arbitration forum, it is in competing forums' interest to favor corporate clients.

Supporters of the Arbitration Fairness Act say there is plenty of room for injustice to hide within the opaque arbitration process, which is often conducted entirely in secret and does not allow for appeal of opinions that parties are often not even allowed to view. While opponents of the bill say arbitration provides financial benefits for individuals, supporters say the argument is questionable since losers in arbitration usually must pay their opponents' legal fees. In addition, the arbitration process has grown more complicated and time consuming, and thus more costly--more like litigation.

The Act does not tackle the asserted shortcomings of the arbitration system head on; rather, it simply gives consumers, employees and franchisees the chance to weigh the benefits of arbitration and make an informed choice, just as a company can do in deciding whether to arbitrate disputes with another business.

"The companies are saying, 'We need to force consumers into arbitration or they won't do it,'" Arkush says. "That's basically an admission that arbitration is unfair to consumers, because if it were fair, you wouldn't have to force them."


Help or Harm?
Rutledge counters that the criticism of arbitration has focused more on anecdotal horror stories of consumer victims of arbitration than empirical evidence of injustice, while analysis on the bill's potential economic impact also is absent. "Rather than assuming that by eliminating pre-dispute arbitration [consumers, employees and franchisees] will somehow magically get better treatment in the civil justice system, let's understand what the outcomes are in those different systems," he says.

Some say the bill, aimed at helping consumers, could actually hurt them.

For instance, a July letter from the Consumer Bankers Association to the House Subcommittee on Commercial and Administrative Law states the bill "will force the parties to pay higher legal fees and costs to resolve their disputes."

A May letter to Congress from the Chamber and numerous business groups drew similar conclusions: "[Without] the option of arbitration, consumers would be faced with two choices--to try to navigate the legal system on their own, or to abandon their claim."

That may be true, but lost in these arguments is that arbitration would still be on the table. The bill takes no action against the practice itself, only the pre-dispute agreements.

"The point that is getting across the least, and that there's the most misunderstanding about, is that people think this bill would actually outlaw arbitration," Arkush says. "That's not true at all. All the Arbitration Fairness Act would do is ensure that consumers actually have a choice about going to arbitration."


Choosing Arbitration
The Chamber's statistics seem to suggest that, if given a choice and knowledge of arbitration's supposed benefits, most people would choose to arbitrate rather than go into litigation. As cited in its May letter to Congress, a poll for the Chamber's Institute for Legal Reform found that 82 percent of the public prefers arbitration to litigation as a means to settle disputes.

"I think what you may end up seeing is an initial bump in litigation cases," says Ed Shapiro, chair of the litigation and dispute resolution practice at Much Shelist. "Then once everything quiets down, people may evaluate and decide that maybe arbitration is a better way."

Still, there is no question that the Act would force some companies to rethink their contracts with consumers, employees and franchisees. And its current retroactivity provision could put many past contracts in doubt, although House subcommittee members have expressed interest in doing away with it.

Assuming most companies turn to mandatory arbitration for cost savings, companies would have to budget for increased litigation, at least until they can see the full impact of the bill on their own dispute resolution strategies. Proponents of the bill say such pains are necessary to ensure fairness in a flawed system, and that the Arbitration Fairness Act is the only way to do this short of revamping the entire established arbitration system.

"No matter what procedural fixes we put in place, no matter what reforms, no matter what sort of heavy-handed regulation of the conduct of arbitration we might put in place, there are always going to be gaps and loopholes and problems with it," Arkush says.

Join the Conversation

Advertisement. Closing in 15 seconds.