Congress is mulling ‘Arbitration Fairness Act’
U.S. Chamber, business groups are incensed

By Alan Cooper

Congress has before it a law that could change consumer and employment law profoundly – the Arbitration Fairness Act of 2009.

The name itself – not to mention the “findings” in the bill that its proponents say justify the law – has incensed the U.S. Chamber of Commerce and other business interests.

Simply put, the law would eliminate pre-dispute arbitration clauses in consumer, employment and franchise agreements.

That’s bad enough for business interests, but the legislation also would change a basic tenet of arbitration law by specifying that the validity and enforceability of an arbitration agreement shall be determined by a court rather than by an arbitrator.

Many arbitration clauses give the arbitrator the authority to make those determinations, and opponents of the act say that’s especially important in international agreements in which foreign companies often want to avoid the vagaries of American juries at all costs.

The opponents also see possible harm to arbitration agreements carefully drafted by parties with equal bargaining power as an unintended consequence of what proponents see as an effort to level the playing field in disputes between consumers and businesses and employees and employers.

The findings in the bill start with the premise that the Federal Arbitration Act “was intended to apply to disputes between commercial entities of similar sophistication and bargaining power.”

However, the U.S. Supreme Court has interpreted the act to apply to disputes where the bargaining power is hardly equal. Consumers and employees “must often give up their rights as a condition of having a job, getting necessary medical care, buying a car, opening a bank account, getting a credit card, and the like,” the bill says.

Clauses “deliberately tilt the system against individuals, including provisions that strip individuals of substantive statutory rights, bar class actions and force people to arbitrate claims hundreds of miles from their homes,” according to the findings.

Moreover, the findings say, arbitrations typically are hidden from public view and get no meaningful judicial oversight.

Perhaps the strongest criticism by proponents of the bill is that arbitrators are not truly neutral because they typically depend on corporations for repeat business. The critics and some former arbitrators say “neutrals” who don’t rule against consumers as a matter of course are taken off the list of arbitrators.

The proponents believe they were vindicated last summer when Minnesota Attorney General Lori Swanson filed suit alleging that the National Arbitration Forum, by far the largest organization arbitrating consumer debt cases, was owned by the law firms that represented the creditors.

The NAF has folded, and Mann Bracken LLC, the Rockville, Md.-based law firm that Swanson alleged controlled the arbitration group, filed for bankruptcy in January.

As part of the fallout from the collapse of NAF and the law firm, most major credit card companies have said they will no longer rely on the arbitration clauses in their agreements with their customers.

Moreover, the American Arbitration Association has suspended its consumer debt programs, although it contends that its due process protocol that establishes ethical standards for arbitrators is a more reasoned and responsible solution to the problem of rogue arbitrators and debt collection attorneys than the AFA.

Those protocols are designed to ensure that arbitrators are truly neutral and that cost, location, time limits and access to information are reasonable to consumers.

Dale W. Pittman, a consumer law specialist in Petersburg, said the troubles of NAF and Mann Bracken “changed everybody’s sensitivity to what was happening here.”

Before Swanson’s allegations, “The arbitrations I had, it was just a charade,” Pittman said. “I haven’t had a single arbitration defense” since her lawsuit.

He said the lawsuit and the fallout from it will provide “a real impetus to pass this act.”

Leonard A. Bennett, a consumer law specialist in Newport News, said his experience with NAF arbitrators was that they set up obstacles when the consumer was the plaintiff and streamlined the process when the creditor was the plaintiffs.

Pointing to the for the collapse of NAF and the withdrawal of AAA and credit card companies from consumer arbitration he said, “There has to be something wrong with arbitration if the industry is conceding it shouldn’t be doing it.”

Pittman and Bennett emphasized that they have no problem with arbitrations conducted by such major firms in Virginia as JAMS and the McCammon Group, whom they view as ethical and truly neutral.

If at least one aspect of the concern about consumer arbitration appears to be fading away, interest by employers in including arbitration clauses in their employee manuals and contracts also seems to be diminishing, according David C. Burton of Virginia Beach and David E. Nagle, employment lawyers who represent management.

Burton said the advantages often cited for arbitration, lower cost and faster resolution, aren’t necessarily the case, especially in the “rocket docket” of federal court in the Eastern District of Virginia where he practices.

And outside the collective bargaining context – an area exempted from AFA – arbitration law isn’t so well developed in the employment arena that he always feels comfortable predicting the outcome of an arbitration, he said.

Nagle agreed that the pace of corporations adopting pre-dispute mandatory arbitration procedures has slackened, but he said companies still are adding them and “those who have them still find them to be effective.”

Peter C. Cohen, an attorney in Reston who represents employees, said adoption of AFA “would be a significant achievement for employees.”

“It would prevent employers from using the lure of a job to [get workers to] give up their Seventh Amendment right to a jury trial,” he said.

He said he believes the employee aspects of AFA are “gaining speed in Congress” and pointed to a recent amendment to a defense appropriations bill as evidence. Under the amendment, any company that gets a contract worth more than a million dollars cannot enter into mandatory arbitration agreements with employees or enforce existing provisions. Any subcontractor also must abide by those restrictions.

Mark A. de Bernardo, a partner in the Reston office of Nagle’s firm, Jackson Lewis, disagrees.

He testified before the Senate Judiciary Committee against the bill in October and believes the odds are against it.

De Bernardo said surveys of both employees and employers who have gone through an arbitration show that they viewed it as fair. Moreover, arbitration provides a forum for employees who might not have the resources or an attractive enough case to interest an attorney.

Employers prefer it, not because they are more likely to win, but because it is much more predictable and eliminates the possibility of a runaway jury award, De Bernardo said.

The AFA in the House of Representatives is HR 1020, with Rep. Henry C. Johnson, D-Ga., as the chief sponsor. It has 108 co-sponsors.

The bill’s Senate counterpart is S.931, with Sen. Russell D. Feingold, D-Wis., as chief sponsor. It has 11 co-sponsors.