House Judiciary Committee to Hold Hearing on Arbitration Fairness Act

October 19, 2007. The House Judiciary Committee (HJC) will hold a hearing on HR 3010 [LOC | WW], the "Arbitration Fairness Act of 2007", on Thursday, October 25, 2007.

This bill is a response to the growing use of arbitration clauses in a wide range of contracts between businesses and consumers, including many in the information and communications technology sectors.

Arbitration agreements have long been negotiated between businesses for resolution of commercial disputes. However, recent judicial interpretations of the Federal Arbitration Act (FAA), which is codified at 9 U.S.C. § 1, et seq., have increased the use of arbitration clauses in business's contracts with consumers and employees.

See especially, the Supreme Court's 2001 opinion in Circuit City Stores, Inc. v. Adams, 532 U.S. 105, in which the Supreme Court held that an arbitration clause in an employment application is enforceable when that employee subsequently brings an employment discrimination action against the employer.

This was a 5-4 opinion written by Justice Kennedy. Justices Souter, Breyer, Stevens, and Ginsburg dissented.

9 U.S.C. § 2 currently provides, in full, that "A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."

The bill would amend this section of the FAA to provide that "No predispute arbitration agreement shall be valid or enforceable if it requires arbitration of (1) an employment, consumer, or franchise dispute; or (2) a dispute arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power".

HR 3010 recites in its findings that the FAA "was intended to apply to disputes between commercial entities of generally similar sophistication and bargaining power", but that now "a large and rapidly growing number of corporations are requiring millions of consumers and employees to give up their right to have disputes resolved by a judge or jury, and instead submit their claims to binding arbitration".

It also finds that "Private arbitration companies are sometimes under great pressure to devise systems that favor the corporate repeat players who decide whether those companies will receive their lucrative business".

It also finds that "Mandatory arbitration undermines the development of public law for civil rights and consumer rights, because there is no meaningful judicial review of arbitrators' decisions. With the knowledge that their rulings will not be seriously examined by a court applying current law, arbitrators enjoy near complete freedom to ignore the law and even their own rules."

Finally, it finds that "Many corporations add to their arbitration clauses unfair provisions that deliberately tilt the systems against individuals, including provisions that strip individuals of substantive statutory rights, ban class actions, and force people to arbitrate their claims hundreds of miles from their homes."

The bill would impact the use of arbitration clauses in a wide range of employment, credit card, securities broker, car purchase, home construction, HMO, nursing home, franchise, and other contracts.

However, it would also affect the use of arbitration clauses in the information and communications technology sectors.

Wireless communications service providers incorporate arbitration clauses into consumer contracts. For example, Verizon Wireless includes in its Customer Agreement for individual wireless services the provision that "... ANY CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY PRIOR AGREEMENT FOR WIRELESS SERVICE WITH US OR ANY OF OUR AFFILIATES OR PREDECESSORS IN INTEREST, OR ANY PRODUCT OR SERVICE PROVIDED UNDER OR IN CONNECTION WITH THIS AGREEMENT OR SUCH A PRIOR AGREEMENT, OR ANY ADVERTISING FOR SUCH PRODUCTS OR SERVICES, WILL BE SETTLED BY ONE OR MORE NEUTRAL ARBITRATORS BEFORE THE AMERICAN ARBITRATION ASSOCIATION ..." This agreement also contains a waiver of class arbitration,

Comcast's web site contains a web page [PDF] that is a copy of its "Comcast Agreement for Residential Services".

It provides that "If you have a Dispute ... with Comcast that cannot be resolved through the informal dispute resolution process described in this Agreement, you or Comcast may elect to arbitrate that Dispute in accordance with the terms of this Arbitration Provision rather than litigate the Dispute in court. Arbitration means you will have a fair hearing before a neutral arbitrator instead of in a court by a judge or jury."

Although, the agreement also provides that consumers may opt out of the arbitration requirement by providing written notice within 30 days of receipt of the agreement.

It also provides that "Any state statutes pertaining to arbitration shall not be applicable", and that "arbitration may result in limited discovery".

The agreement also contains a one year limitation on the arbitration of disputes, a waiver of class representation, and a waiver of indirect, consequential, punitive, exemplary or multiple damages.

eBay's web site contains a web page titled "Your User Agreement". It provides, in part, that "For any claim (excluding claims for injunctive or other equitable relief) where the total amount of the award sought is less than $10,000, the party requesting relief may elect to resolve the dispute in a cost effective manner through binding non-appearance-based arbitration." (Parentheses in original.)

It also provides that "the parties must comply with the following rules: a) the arbitration shall be conducted by telephone, online and/or be solely based on written submissions, the specific manner shall be chosen by the party initiating the arbitration; b) the arbitration shall not involve any personal appearance by the parties or witnesses unless otherwise mutually agreed by the parties; and c) any judgment on the award rendered by the arbitrator may be entered in any court of competent jurisdiction."

Rep. Hank Johnson (D-GA) (at left) introduced HR 3010 on July 12, 2007. It was referred to the HJC, and its Subcommittee on Commercial and Administrative Law. Rep. Johnson is a member of the HJC. The bill had 29 cosponsors as of October 18, 2007 -- mostly Democrats.

Sen. Russ Feingold (D-WI) introduced the companion bill in the Senate, S 1782 [LOC | WW], also titled the "Arbitration Fairness Act of 2007", on July 12, 2007. It was referred to the Senate Judiciary Committee (SJC), of which Sen. Feingold is a member. That bill had three cosponsors as of October 18, 2007, Sen. Ted Kennedy (D-MA), Sen. Sheldon Whitehouse (D-RI), and Sen. Richard Durbin (D-IL).

Sen. Feingold stated in the Senate on July 12, 2007, that "I have been concerned for many years that mandatory arbitration clauses are slowly eroding the legal protections that should be available to all Americans. A large and growing number of corporations now require millions of consumers and employees to sign contracts that include mandatory arbitration clauses." See, Congressional Record, July 12, 2007, at Page S9144.

He continued that "Most of these individuals have little or no meaningful opportunity to negotiate the terms of their contracts and so find themselves having to choose either to accept a mandatory arbitration clause or to forgo securing employment or needed goods and services. Incredibly, mandatory arbitration clauses have been used to prevent individuals from trying to vindicate their civil rights under statutes specifically passed by Congress to protect them."

One problem, said Sen. Feingold, is that "the administrative fees, both to gain access to the arbitration forum and to pay for the ongoing services of the arbitrator or arbitrator, can be so high as to act as a de facto bar for many individuals who have a claim that requires resolution."

He also stated that "arbitration generally lacks discovery proceedings and other civil due process protections", and that "there is no meaningful judicial review of arbitrators' decisions."

Joan Claybrook, head of Public Citizen, stated in a July release that "Privatizing justice benefits big corporate interests like national banks and insurance companies but does not help ordinary people. Corporations have figured out that simply by inserting an arbitration clause in contracts for everyday consumer goods and services or employment, they can usually evade accountability for any harm they cause or laws they break -- laws meant to protect consumers and employees from the misuse and abuse of corporate power in the marketplace."

She added that "It took more than a century for the United States to develop consumer protections and other laws that hold corporations accountable when they harm individuals or otherwise abuse their power in the marketplace. It’s time to stop the erosion of our hard-won protections and our civil justice system."