Senate, and the Bar, Rethink Mandatory Arbitration

Democrats are in control of Congress and the trial bar has grabbed the opportunity to get back on offense, after having spent the last decade or so fending off Republican efforts to limit tort cases.

A Senate Judiciary hearing this morning took up a bill that would render any mandatory arbitration clause invalid for consumer, employee, and franchise disputes. Testimony at the hearing, broadcast on the Web, called to mind Mark Twain's observation that there are "lies, damn lies, and statistics."

In speaking against the proposal to open more disputes to litigation, Professor Peter B. Rutledge of Columbus School of Law at Catholic University told the committee that the "underlying data" is "inconsistent with calls to abolish" mandatory arbitration.

He added that passage of the bill to effectively ban mandatory arbitration of disputes between little guys and big companies -- the Arbitration Fairness Act of 2007 -- would cause a myriad of problems, making it more difficult for average citizens to find a lawyer and obtain relief.

"All of this would occur at a slower pace due to our overburdened court system," he said, winding up to the money quote: "The only people who with certainty are going to benefit from this bill are the lawyers!"

The bill would not outlaw arbitration of these disputes: Consumers and employees could choose arbitration rather than court once a dispute arises; it would only forbid companies to ask people to sign away their rights by inserting a clause in the fine print of a credit-card contract or employment agreement.

But Mark A. de Bernardo, a lawyer with Jackson Lewis, a law firm that specializes in defending management in employment cases, cited a study by the American Bar Association, which found that 86 percent of plaintiffs and defense lawyers would not recommend post-dispute arbitration to clients.

Banning pre-dispute arbitration agreements, he added, is likely to force more people into court. It "would impose a death sentence in terms of alternative dispute resolution in America," he said.

And therein lies the canard: If the little guy thinks arbitration is wonderful, why doesn't big business allow him to choose it?

Senator Russ Feingold, a Democrat from Wisconsin and chairman of the Judiciary subcommittee that held the hearing, remarked: "No rational employee would choose arbitration voluntarily."

Paul Bland Jr., a staff lawyer with Public Justice in Washington, D.C., didn't miss a beat: "It's a pretty grim idea that the only way you could have arbitration is to force people into it."

By far, the forced arbitration of investor disputes has the longest history, since a 1987 U.S. Supreme Court case gave the green light to the constitutionality of mandatory clauses in brokerage contracts.

Tanya Solov, a state securities regulator from Illinois, told the committee, "investors are not getting a fair shake in the system."

She added that the North American Securities Administrators Association had reviewed many years of awards and found that investors are now "getting a small percentage of their losses" from arbitration panels.

Perhaps not coincidentally, many of those panels are run by the securities industry and by regulation must include a member from the securities industry on the three-person panel.

"Our position is that investors must be given a choice," Solov said. Nowhere to be found was Securities and Exchange Commission Chairman Christopher Cox. In May, Feingold and another Democratic Senator, Patrick Leahy of Vermont, sent a letter to Cox, calling on the commission to drum up regulation to make arbitration voluntary. Cox sent a letter back in July.

The S.E.C. does not release the chairman's correspondence with the Hill, according to a spokesman. But Feingold put the response into the record this morning. "Your letter raises important questions," it begins. A 2002 study by a law professor found "arbitrations are fair and perceived that investors perceived them to be fair."

What does Cox recommend? A study, of course!

"I have asked the agency's professional staff ... to collect additional empirical information on this matter," he wrote.

Otherwise, Mr. Twain, did you enjoy the play? But seriously, does anyone out there have an arbitration war story to tell?

Karen Donovan