Arbitration Fairness Act of 2007

July 21, 2007 | By | 7 Replies More

Businesses are increasingly inserting arbitration provisions into contracts to prohibit the employees and consumers from resolving important disputes in courts of law.  Such arbitration provisions compel the employees and consumers to present his or her case to an “private arbitrator,” who need not even be an attorney.  There is no jury trial.  There is no automatic right to engage in pre-trial discovery.  There is no public access.  There need not even be an in-person hearing (unless you pay extra). The arbitrator often has the right to decide the entire case by merely looking at paperwork and you might not even have a right to be there when it happens.

If the arbitrator fails to apply the law correctly or if the arbitrator refuses to consider important evidence, too bad.  There is no appeal.  There is no accountability.  Your claim against a big company will simply disappear.  And here’s another huge concern: the big corporations are repeat customers to the big arbitration companies, while you will be a one-time player.  Under these circumstances, who is the arbitrator likely to favor?

Wouldn’t it be terrible if arbitration clauses started showing up everywhere?  Well, they are.  Arbitration clauses are increasingly appearing in consumer and employment contracts. Too often, these clauses take the form of unreadable fine print boilerplate, slapped onto the back of the contract.  Almost no one reads such fine print, yet large corporations are increasingly killing off important legal claims in Court based on that unreadable fine print.

Powerful corporations increasingly filing “Motions to Compel Arbitration,” asking Courts to throw important cases out of court and into the hands of arbitrators.   The effect?  For too many people, it’s like putting a padlock on the doors to the courthouse.  If this trend keeps up, our courthouses will become empty museums, places where we used to allow citizens to present their grievances against the rich and powerful.

Senator Russ Feingold and Representative Hank Johnson have both filed bills in Congress to restrict the use of arbitration clauses in certain types of contracts. The proposed legislation is entitled the “Arbitration Fairness Act of 2007.” The new law would amend the Federal Arbitration Act. Senator Feingold’s website describes his bill as making sure that Americans are not forced into signing agreements that mandate arbitration:

to resolve employment, consumer, franchise or civil rights disputes. The bicameral Arbitration Fairness Act of 2007 amends the Federal Arbitration Act to make pre-dispute agreements to arbitrate employment, consumer, franchise, or civil rights disputes unenforceable.

The proposed legislation does not prohibit arbitration, but limits it to situations where it is “knowingly and voluntarily” entered by both parties. Limitations are focused on employment, consumer and franchise disputes, as well as “transactions between parties of unequal bargaining power. The proposed legislation would also restrict bans on consumer class actions. The bill seeks to ensure Americans are not forced into mandatory arbitration agreements in employment, consumer, franchise or civil rights disputes.

Groups supporting the Act include the American Association for Justice, Center for Responsible Lending, Consumer Federation of America, Homeowners Against Deficient Dwellings, Home Owners for Better Building, National Association of Consumer Advocates, National Consumer Law Center.

Binding mandatory arbitration is an issue that affects each citizen of each state. Whether you are an employee who is being asked to sign an arbitration agreement even to apply for your job, or if your are taking out a loan, or if your are a franchisee who is required to arbitrate disputes with the franchisor, binding mandatory arbitration is a real problem that can deprive you of your hard-earned money and your legal rights.

You can step up and do your part to stop binding mandatory arbitration. You can click here to send an email to your representatives and senators. Please take the time to help fight for our right to open, accessible, and accountable justice. For the full text of the House version of the proposed legislation, go here.

In my “other” life, I work as a consumer lawyer.  To learn more about other developments in consumer law, you are welcome to check this Consumer Law Blog (where I am one of several contributors) at my law firm’s website (the Simon Law Firm).


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Category: Civil Rights, Corruption, Law

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

Comments (7)

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  1. Nancy Seats says:

    I attended the press conference announcing the Arbitration Fairness Act of 2007 on behalf of Homeowners Against Deficient Dwellings, and am a member of the Give Me Back My Rights group.

    There was little understanding of the impact of binding arbitration clauses on homebuyers at the time I began working with the group.

    Now it is understood that while many of the foreclosures today are due to subprime, predatory, or faudulent lending, there are foreclosures due to substandard construction and binding arbitration clauses in builder contracts and/or the worthless third party warranties that builders "give" their home buyers. Homeowners who contact us consider arbitration to be a kangaroo court that always favors the homebuilder who is a repeat user of the arbitration service. I have yet to meet a homeowner that was awarded enough to pay attorney fees let alone do tens of thousands of dollars to repair defects.

    Jordan Fogal, a homeowner from Houston, TX testified before a subcommittee of the House Judiciary Committee about her experience with binding arbitration. They have been unable to collect the small award the arbitrator gave them, the home required $150,000 in repairs and ended up in foreclosure in spite of the fact that they had an affordable 30 year mortgage and perfect credit scores. The cost of repair was prohibitive and they couldn't sell the home for enough to pay off the mortgage due to legally required disclosures.

    I hope that everyone will support this legislation and other consumer protection legislation that is needed in every state to protect the largest purchase a family ever makes, their home.

  2. Cindy S says:

    I attribute my satisfactory settlement in a construction defect case with a builder and warranty company to getting OUT of arbitration. Though the builder's contracts didn't have an arbitration clause, he purchased a 10 year home warranty policy from a third party company, and we got the policy in the mail a few weeks after closing. We never saw or agreed to the arbitration clause in the warranty, yet these clauses are generally enforceable on homeowners. Lawyers said we had a valid construction defect case but it wasn't worth their time because of how hard it is to collect a judgment from a builder, AND they felt we had to arbitrate which is usually rigged in favor of the industry that demands arbitration.

    But, because I found out in time that home buyers with a government backed loan (FHA and VA) didn't have to arbitrate with a third party warranty company, I was able to escape the problems of private industry run arbitration that so many homeowners are forced into to their disadvantage. The federal regulation that I used was 24 CFR 203.204(g). This is Title 24, Housing, Code of Federal Regulations, section 203.204(g), which states that court has to be an option along with arbitration in a dispute with a warranty company. Because I had to figure out how to enforce this on my own, it didn't happen easily or overnight. But once the warranty company and bulder realized we could retain our right to sue, they eventually all settled with us. Prior to getting to that point, the warranty co was offering a fraction of our actual damages and the builder was offering nothing.

    We definitely came out better than the homeowners I've seen who had to arbitrate their disputes. We were essentially "made whole" while others often lose a great deal, even lose everything.

  3. Erich Vieth says:

    Some nursing homes are starting to require "new residents sign contracts agreeing to take any future disputes to arbitration, rather than to court."

  4. Erich Vieth says:

    Meet Sharon Kruse, a 63-year-old widow from Dundee, Michigan, and the US Chamber of Commerce's latest poster child. Last month, Kruse headlined a new video the chamber released at a press conference devoted to preserving big business' use of binding mandatory arbitration clauses in consumer and employment contracts. That's the small print that forces people to waive their right to sue in order to get a cell phone or medical care or even a job. Such clauses require any disputes to be heard by a private arbitrator, usually hired by the alleged wrongdoer. Consumer advocates and many congressional Democrats have blasted the clauses for forcing people to give up their constitutional rights in exchange for ordinary goods and services, a practice they find not just unfair but un-American. Kruse, though, believes otherwise.

    From Mother Jones, May 2008.

  5. Erich Vieth says:

    Russ Feingold recently wrote this comment on the problems with mandatory arbitration clauses in consumer contracts:

    There’s nothing fair about some of the arbitration proceedings that consumers are forced into. A major arbitration firm actually advertised its services by pointing out how arbitration favors its corporate clients because arbitrations are secret, and consumers or employees have very limited rights to discovery and might even have to pay the costs of the arbitration if they lose.

    Arbitration should be a choice, not a mandate. It is only an adequate alternative to the courts in cases when both sides are willing participants. That is why I introduced legislation to prevent Americans from being forced to agree to arbitrate employment, consumer, franchise, or civil rights disputes. This will ensure Americans who participate in arbitration of these kinds of disputes are doing so voluntarily.

    … The rule of law means little if the only forum available to those who believe they have been wronged is an alternative, unaccountable system. We must make sure that all Americans can still have their day in court.

  6. Erich Vieth says:

    The U.S. Supreme Court is about to weigh in on the issue of arbitration on the case of Rent-A-Center v. Jackson:

    "Although the Court’s decision in Rent-A-Center will ultimately reveal just how far companies may go to eliminate courts from their traditional role of ensuring that arbitration agreements meet basic elements of fairness, it appears, at least preliminarily, that based upon Rent-A-Center’s own concessions and the Court’s skepticism, the biggest fears of the consumer, employee, and civil rights communities – that the Court would fully insulate corporations and arbitration from any meaningful judicial review from the even the most abusive arbitration agreements – may perhaps be unfounded. How the Court will harmonize these sentiments with the structure, text, and logic of the FAA, or with the basic contract law governing claims of unconscionability remains to be seen, but this development should encourage those who believe that there must be some role for courts in policing the most abusive elements of the arbitration system."

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