Editore"s Note
Tilting at Windmills

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November 28, 2007
By: Kevin Drum

ARBITRATION AND YOU....Over at Mother Jones, Stephanie Mencimer writes about the increasing number of businesses that won't do business with you unless you sign away your right to a trial in case of dispute. In fact, there are now entire industries that refuse to deal with anyone who won't agree in advance that all disputes be resolved by a private arbitration firm:

All of this is especially nefarious given that the vast majority of consumers who attempt to seek justice in mandatory arbitration lose. The nonprofit consumer group Public Citizen recently analyzed data the NAF provided to the state of California, one of the few states that actually requires arbitration firms to disclose information about their results. Public Citizen found that in 94 percent of 19,000 cases, NAF arbitrators ruled in favor of the businesses that hired them.

....One reason businesses often come out on top in arbitration is that arbitrators who rule for consumers have a tendency to find themselves out of work. Such was the case with Richard Neely, a former chief justice of West Virginia's Supreme Court, who worked briefly as an arbitrator for the NAF. In an article called "Arbitration and the Godless Bloodsuckers," Neely reported that he had refused to award a bank arbitration-related fees that he judged to be far in excess of what a court would have charged. He never got another case. Neely is not alone. A 2000 study of forced arbitration in HMO contracts found that on the rare occasion that an arbitrator made a significant award for a patient, the HMO never hired that person to arbitrate a case again.

Fun fact: when car manufacturers tried to insist on arbitration clauses in their contracts with car dealers, the dealers fought back furiously, saying that it would allow big corporations to "unilaterally deny small business automobile and truck dealers rights under state laws that are designed to bring equity to the relationship between manufacturers and dealers." The dealers lobbied Congress to prohibit this and Congress agreed.

But guess which industry is one of the worst abusers of arbitration clauses when it comes to selling their product to consumers? Yep. Auto dealers. Read the whole thing.

Kevin Drum 1:44 AM Permalink | Trackbacks | Comments (28)

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If arbitration will put Bush and Cheney in jail, I'm all for it.

Posted by: craigie on November 28, 2007 at 1:51 AM | PERMALINK

Yeah, privatization of "justice."

So who didn't see this coming?

Posted by: Clave on November 28, 2007 at 2:54 AM | PERMALINK

What craigie said. Look, fascism is all about trampling on the rights of human beings and giving corporations preferential legal status. This is one more symptom of the creeping fascism that is destroying this great country. It might be helpful to review the 14 points of fascism.

Posted by: The Conservative Deflator on November 28, 2007 at 6:32 AM | PERMALINK

Ah, Richard Neely, famous for saying the following when he was the Chief Justice of the West Virginia Supreme Court:

"As long as I am allowed to redistribute wealth from out-of-state companies to in-state plaintiffs, I shall continue to do so."

Fairness personified, don't you think?

You can read Neely's 'Godless Bloodsucker' article here. http://consumerist.com/consumer/notag/arbitration-firms-are-godless-bloodsuckers-306136.php

His example of an outrageous case is that of a credit card holder who doesn't pay her bills and ignores the legal papers she gets in the mail. She's not insolvent, doesn't seek legal advice, doesn't try to make payments - she just charges stuff and doesn't pay. The bank is a 'Godless bloodsucker' because it uses arbitration to recover the money it lent her.

Arbitration does favor banks and businesses. Neely is not the guy to quote in opposition to it.

Posted by: corplawyer on November 28, 2007 at 6:44 AM | PERMALINK

There is a simple answer to all of this--federal regulation of the arbitration business. If the federal regulations are so tight that it forces the arbitrators out of business, it will be win-win.

Posted by: reino on November 28, 2007 at 7:58 AM | PERMALINK

Uh, hello. The computer industry won't let you buy its product unless you waive all claims for product defects. When we let the auto industry do that, then I'll listen to complaints from a tech industry flack.

Posted by: y81 on November 28, 2007 at 8:37 AM | PERMALINK

Must be the John Edwards effect - The legal system sucks so find a away to avoid it.

Government internvention is the definition of insanity.

Posted by: orwell on November 28, 2007 at 8:50 AM | PERMALINK

Arbitration clauses are not popular with big business only because arbitrators tend to favor businesses. Having an arbitration clause often effectively eliminates the possibility of a class action suit, since there's no such thing as a class action arbitration.

Posted by: eastbound on November 28, 2007 at 9:19 AM | PERMALINK

"Government internvention is the definition of insanity."

Arguing your case in front of a judge hired by your adversary is the definition of insanity. Government intervention is only insane if you are a nuclear power using your government to invade a country without nuclear weapons to rid it of nuclear weapons.

Posted by: reino on November 28, 2007 at 9:20 AM | PERMALINK

Really makes you nostalgic for those old fossils, the Democratic wing of the Democratic Party.

Posted by: frankly0 on November 28, 2007 at 9:29 AM | PERMALINK

As an aside, auto dealers are immensely powerful, and the enjoy all sorts of anticompetitive benefits in the form of franchising laws. The notion that they represent small business is bunk. For example, I believe the Red McCombs dealership chain in Texas is worth north of a billion dollars.

Obviously, there are small dealership out there. But I don't think these are the guys bringing the manufacturers to heel.

Posted by: Adam on November 28, 2007 at 9:34 AM | PERMALINK

"Sue people like that, and they're liable to be having dinner with the judge trying the suit." - Lawrence Walsh (Joe Mantell) to Jake Gittes (Jack Nicholson), Chinatown (1974)

Posted by: Donald from Hawaii, but currently in Chicago on November 28, 2007 at 9:38 AM | PERMALINK

The market works!

Posted by: Gore/Edwards 08 on November 28, 2007 at 9:44 AM | PERMALINK

And the legal system that is geared to make mountains of molehills is better?

Posted by: Luther on November 28, 2007 at 11:01 AM | PERMALINK

I see the same problem with medical "experts" in litigation. Insurers use the same "experts" repeatedly but should one offer an opinion adverse to the insurer, that expert is dropped. As an "expert" witness you better say what you think they want to hear or your lose your livlihood.

Posted by: Clem on November 28, 2007 at 11:18 AM | PERMALINK

Something something market something something.

Posted by: The Glibertarians on November 28, 2007 at 11:23 AM | PERMALINK

So many nonlawyers, so many ignorant comments.

"There is a simple answer to all of this--federal regulation of the arbitration business."

Um, what do you think the Federal Arbitration Act is? Go to the nearest law library, ask the librarian to give you volume 9 of the U.S. Code, and start reading.

"Having an arbitration clause often effectively eliminates the possibility of a class action suit, since there's no such thing as a class action arbitration."

This is absolutely wrong. Post Green Tree in 2000, class actions are permitted in arbitration -- though there is some debate over what language is necessary in the arbitration clause to authorize them. In any event, the AAA (American Arbitration Associate) has a special division devoted directly to class arbitrations, and when I last looked (probably 2 years ago at this point), they had or were conducting approximately three dozen of them.

Look, I arbitrated reinsurance disputes for several years. The arbitrators (almost always reinsurance professionals) were much more knowledgeable, and came to much better decisions, than any judge. In this or any other specialized fields, I would much rather be in arbitration than litigation.

There is a problem with consumer arbitration agreements, especially where they let the nonconsumer pick and pay for the arbitrator. But the solution to this already exists -- Section 10(a)(2) of the FAA allows a court to overturn an arbitral award where the arbitrator demostrates evident partiality or bias. If there is only a sole arbitrator (as opposed to a party-appointed arbitrator -- who is expected to be biased -- on a panel, see Sphere Drake), a consumer would have a strong argument where he or she is an obvious patsy for the industry.

Posted by: Joe on November 28, 2007 at 11:30 AM | PERMALINK

What Joe says is mostly right, but the ability of a consumer to overcome a biased forum is extremely limited. You have to file an arbitration, pay a big filing fee, go through the whole process and get an adverse ruling, then go to court and hope you win the bias argument. Which at the end of the day, at best gets you a new arbitration before a different arbitrator.

There are fair arbitration systems out there. I defend arbitrations in the securities industry and it's a pretty good system, actually a bit biased in favor of the customer. But these ridiculous adhesion contracts that obligate you to arbitrate before some kangaroo court are a totally different thing, and no, I don't consider the FAA to be "federal regulation of arbitration." Federal regulation would mean that the federal government licenses arbitration agencies and ensures that their rulings aren't systematically biased and they employ an arbitrator selection process that's fair to both sides.

In the securities industry, by the way, the disincentive for arbitrators to hand out big awards works both ways. If you give some customer a massive punitive damages award, good luck getting to handle more arbitrations. But if you have a reputation for always denying customer claims, the customers' lawyers are going to use peremptory strikes against you as well. This is still inferior to a system where the arbitrator simply gets to make the fair call as he sees it, but at least the inequities flow in both directions.

Posted by: Steve on November 28, 2007 at 12:00 PM | PERMALINK

Some might think corporate gamed arbitration is a way to increase market capitalization, which they think "is the only feasible way to run a modern economy." But I would disagree.

Posted by: Brojo on November 28, 2007 at 12:30 PM | PERMALINK

Joe and Steve make excellent points, but I don't think the corporate turn to arbitration (and mediation) is just about cheating consumers. My ABA subcommittee has been exploring the larger issue of how those who can afford it seem to be abandoning the state courts, moving their disputes to federal court, specialized state courts, arbitration, mediation, and other forums for dispute resolution. As a result, state courts of general jurisdiction seem to have great difficulty in getting funding from legislatures for facilities, technology, and judicial salaries. No modern businesses and few government agencies operate with anything like the primitive technology of the average state court. You can see it with your own eyes: the magnificent palaces of justice built in the late 19th and early 20th century, when the country was far poorer, are now replaced by trailers (in rural California) and squalid, over-crowded buildings everywhere.

Posted by: Keith on November 28, 2007 at 1:31 PM | PERMALINK

I'm so glad that we have lawyers to explain everything to us.

Arbitration firms are not required to disclose information about their results to anybody in most states, yet a lawyer assures me that they are regulated, so therefore a nonlawyer like me should shut up and pay him $500 for his time. It's a good thing that God made lawyers perfect--otherwise, nonlawyers like me occasionally might be tempted to question some of the things they say and do.

Posted by: reino on November 28, 2007 at 2:43 PM | PERMALINK

That's an interesting point, Keith, although I'm not sure how it ties in with the arbitration issue. It sure is annoying to me that you're luck if the heat is turned on at the state courthouse (whereas the federal courthouse is built like the Temple of Zeus), but I doubt that's why my clients put arbitration clauses in their contracts.

Posted by: Steve on November 28, 2007 at 2:53 PM | PERMALINK

I have long put arbitration clauses in my clients' contracts because the AAA and the like usually resolve disputes faster, cheaper and better than do the courts. Sometimes, but not always, the privacy is valuable. My thought is that the courts are slow, inefficient, and unpleasant places which run up costs even when there is little discovery, and they do so largely because they lack the budgets to update their processes. When a roomful of $x00 per hour lawyers have to cool their heels waiting for hours in a queue for a judge, that's waste!

Posted by: Keith on November 28, 2007 at 3:37 PM | PERMALINK

Well, right, arbitration is a cost-saver. There's little question about that.

If you can ensure yourself a friendly arbitration forum where you're guaranteed a good result, that's a different sort of a cost saver! Corporations are always looking for cost-savers, it's what they do.

Posted by: Steve on November 28, 2007 at 3:58 PM | PERMALINK

Just wanted to say that the Neely's are, in West Virginia speak, "Good People." Glad to see the reference noted here.

Posted by: geml on November 28, 2007 at 6:32 PM | PERMALINK

Maybe these "you must use an arbitrator" contracts should simply be illegal. "You must use the arbitrator we pick" contracts should definitely be illegal.

If particular mechanism of arbitration is fair and cheaper/faster than the courts then consumers and their lawyers will tend to agree to it when it is suggested by the other party, if not they won't.

Reinsurance is, i think, not very analogous to arbitration between a consumer and a corporation. The expertise imbalance is almost certain to be far less.

Posted by: jefff on November 28, 2007 at 7:54 PM | PERMALINK

A local real estate agent was complaining about the misleading information provided by a car dealer when she bought her natural gas fueled car. Her astonishment was mainly that disclosure practices that would see real estate agents sued and fired are common practice for car dealers. I guess the car dealers have better lobbyists. Who woulda thunk it?

Posted by: Common Sense on November 29, 2007 at 4:39 AM | PERMALINK

I write about labor arbitration and other forms of arbitration and mediation for what I'd prefer to call an unnamed publishing company. Not all arbitration is the same. For instance, in labor arbitration, awards are often published, arbitrators are selected by both the employer and union, and generally the arbitrators are a lot more knowledgeable about labor law and give more just decisions than courts.
But I want to make a more general point. For at least the time I've been writing about labor arbitration (1994) and probably well before, there has been a trend toward private justice, taking cases outside the traditional legal system, through arbitration and mediation. Part of the reason for this is that society does not adequately fund the courts and administrative agencies so that it takes years to pursue a case.
There are probably good and bad things about this trend. But it is a major change from our justice system that goes back to medieval England and which says that we all get a trial of our peers. And almost noone is writing about it. One of the most interesting things about the Mother Jones article is its existence. I bet there are almost no articles about this trend is any consumer-oriented magazines. And I bet none of the presidential candidates have positions on issues involving arbitration or are ever asked questions about it.

Posted by: Ken on November 29, 2007 at 10:46 AM | PERMALINK



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