[House Hearing, 110 Congress] [From the U.S. Government Publishing Office] ARBITRATION FAIRNESS ACT OF 2007 ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW OF THE COMMITTEE ON THE JUDICIARY HOUSE OF REPRESENTATIVES ONE HUNDRED TENTH CONGRESS FIRST SESSION ON H.R. 3010 ---------- OCTOBER 25, 2007 ---------- Serial No. 110-163 ---------- Printed for the use of the Committee on the Judiciary Available via the World Wide Web: http://judiciary.house.gov ______ ARBITRATION FAIRNESS ACT OF 2007 ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW OF THE COMMITTEE ON THE JUDICIARY HOUSE OF REPRESENTATIVES ONE HUNDRED TENTH CONGRESS FIRST SESSION ON H.R. 3010 __________ OCTOBER 25, 2007 __________ Serial No. 110-163 __________ Printed for the use of the Committee on the Judiciary Available via the World Wide Web: http://judiciary.house.gov ----- U.S. GOVERNMENT PRINTING OFFICE 38-510 PDF WASHINGTON : 2009 --------------------------------------------------------------------------- For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 COMMITTEE ON THE JUDICIARY JOHN CONYERS, Jr., Michigan, Chairman HOWARD L. BERMAN, California LAMAR SMITH, Texas RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr., JERROLD NADLER, New York Wisconsin ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina MELVIN L. WATT, North Carolina ELTON GALLEGLY, California ZOE LOFGREN, California BOB GOODLATTE, Virginia SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio MAXINE WATERS, California DANIEL E. LUNGREN, California WILLIAM D. DELAHUNT, Massachusetts CHRIS CANNON, Utah ROBERT WEXLER, Florida RIC KELLER, Florida LINDA T. SANCHEZ, California DARRELL ISSA, California STEVE COHEN, Tennessee MIKE PENCE, Indiana HANK JOHNSON, Georgia J. RANDY FORBES, Virginia BETTY SUTTON, Ohio STEVE KING, Iowa LUIS V. GUTIERREZ, Illinois TOM FEENEY, Florida BRAD SHERMAN, California TRENT FRANKS, Arizona TAMMY BALDWIN, Wisconsin LOUIE GOHMERT, Texas ANTHONY D. WEINER, New York JIM JORDAN, Ohio ADAM B. SCHIFF, California ARTUR DAVIS, Alabama DEBBIE WASSERMAN SCHULTZ, Florida KEITH ELLISON, Minnesota Perry Apelbaum, Staff Director and Chief Counsel Joseph Gibson, Minority Chief Counsel ------ Subcommittee on Commercial and Administrative Law LINDA T. SANCHEZ, California, Chairwoman JOHN CONYERS, Jr., Michigan CHRIS CANNON, Utah HANK JOHNSON, Georgia JIM JORDAN, Ohio ZOE LOFGREN, California RIC KELLER, Florida WILLIAM D. DELAHUNT, Massachusetts TOM FEENEY, Florida MELVIN L. WATT, North Carolina TRENT FRANKS, Arizona STEVE COHEN, Tennessee Michone Johnson, Chief Counsel Daniel Flores, Minority Counsel C O N T E N T S ---------- OCTOBER 25, 2007 Page THE BILL H.R. 3810, the ``Arbitration Fairness Act of 2007''.............. 2 OPENING STATEMENTS The Honorable Linda T. Sanchez, a Representative in Congress from the State of California, and Chairwoman, Subcommittee on Commercial and Administrative Law.............................. 1 The Honorable Chris Cannon, a Representative in Congress from the State of Utah, and Ranking Member, Subcommittee on Commercial and Administrative Law......................................... 9 The Honorable Hank Johnson, a Representative in Congress from the State of Georgia, and Member, Subcommittee on Commercial and Administrative Law............................................. 11 WITNESSES Laura MacCleery, Esq., Director, Public Citizen's Congress Watch Division, Washington, DC Oral Testimony................................................. 14 Prepared Statement............................................. 17 Mr. Richard Naimark, Senior Vice President, American Arbitration Association, Washington, DC Oral Testimony................................................. 29 Prepared Statement............................................. 31 The Honorable Roy E. Barnes, The Barnes Law Group, LLC, Marietta, GA Oral Testimony................................................. 48 Kenneth L. Connor, Esq., Wilkes and McHugh, P.A., Washington, DC Oral Testimony................................................. 49 Prepared Statement............................................. 51 Ms. Deborah Williams, Annapolis, MD Oral Testimony................................................. 61 Prepared Statement............................................. 63 Cathy Ventrell-Monsees, Esq., Law Offices of Cathy Ventrell- Monsees, Chevy Chase, MD, on behalf of the National Employment Lawyers Association Oral Testimony................................................. 64 Prepared Statement............................................. 67 Peter B. Rutledge, Esq., The Catholic University of America, Columbus School of Law, Washington, DC Oral Testimony................................................. 93 Prepared Statement............................................. 95 Theodore G. Eppenstein, Esq., Eppenstein and Eppenstein, New York, NY Oral Testimony................................................. 113 Prepared Statement............................................. 115 LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING Prepared Statement of the Honorable Steve Cohen, a Representative in Congress from the State of Tennessee, and Member, Subcommittee on Commercial and Administrative Law.............. 12 APPENDIX Material Submitted for the Hearing Record Material submitted by the Honorable Chris Cannon, a Representative in Congress from the State of Utah, and Ranking Member, Subcommittee on Commercial and Administrative Law...... 211 Response to Post-Hearing Questions from Laura MacCleery, Esq., Director, Public Citizen's Congress Watch Division, Washington, DC............................................................. 296 Response to Post-Hearing Questions from Richard Naimark, Senior Vice President, American Arbitration Association, Washington, DC............................................................. 361 Post-Hearing Questions submitted to the Honorable Roy E. Barnes, The Barnes Law Group, LLC, Marietta, GA........................ 367 Response to Post-Hearing Questions from Ken Connor, Esq., Wilkes and McHugh, P.A., Washington, DC............................... 369 Response to Post-Hearing Questions from Deborah Williams, Annapolis, MD.................................................. 376 Response to Post-Hearing Questions from Cathy Ventrell-Monsees, Esq., Law Offices of Cathy Ventrell-Monsees, Chevy Chase, MD, on behalf of the National Employment Lawyers Association....... 379 Response to Post-Hearing Questions from Peter Rutledge, Esq., The Catholic University of America, Columbus School of Law, Washington, DC................................................. 385 Response to Post-Hearing Questions from Theodore G. Eppenstein, Esq., Eppenstein and Eppenstein, New York, NY.................. 392 ARBITRATION FAIRNESS ACT OF 2007 ---------- THURSDAY, OCTOBER 25, 2007 House of Representatives, Subcommittee on Commercial and Administrative Law, Committee on the Judiciary, Washington, DC. The Subcommittee met, pursuant to notice, at 2:41 p.m., in room 2141, Rayburn House Office Building, the Honorable Linda Sanchez (Chairwoman of the Subcommittee) presiding. Present: Representatives Sanchez, Johnson, Lofgren, Cohen, and Cannon. Staff present: Norberto Salinas, Majority Counsel; Daniel Flores, Minority Counsel; and Adam Russell, Professional Staff Member. Ms. Sanchez. This hearing of the Committee on the Judiciary, Subcommittee on Commercial and Administrative Law will now come to order. I will recognize myself for a short statement. Several months ago, this Subcommittee held an oversight hearing on the Federal Arbitration Act. At our hearing, we learned through testimony about the history of arbitration and the reasons that Congress felt it wise to promote it through the FAA. Congress wanted to free-up the courts from an increasingly heavy docket, to place arbitration agreements on the same footing as contracts, and to encourage arbitration between businesses possessing equal bargaining powers. We learned how the use of arbitration has evolved since 1925, and how its use has expanded today. We also learned from the testimony that although arbitration may offer some benefits for parties to a dispute, an increasing number of businesses and employers have begun to utilize arbitration to their advantage, and thus to the distinct disadvantage of consumers, employees and others. Now, several months later, we hold this legislative hearing on H.R. 3010, the ``Arbitration Fairness Act of 2007,'' which my esteemed colleague from Georgia, Representative Hank Johnson, introduced shortly after our June hearing. H.R. 3010 seeks to amend the Federal Arbitration Act to require that agreements to arbitrate employment, consumer, franchise or civil rights disputes may be valid and enforceable only if they were made voluntarily and after the dispute had arisen. [The bill, H.R. 3010, follows:]Ms. Sanchez. Arbitration was never intended as a tool to advantage one side over the other in a dispute. To be a respected and reasonable alternative to the courts, arbitration must provide a level and fair playing field. But since our June hearing, several reports have been issued revealing how arbitration favors businesses, employers and securities firms. These reports do not paint a rosy picture for fairness in arbitration. However, we hope to elicit more testimony today on the accuracy of these reports to help us determine whether H.R. 3010 is needed legislation. Finally, during our June hearing on this issue, the Ranking Member on the Subcommittee, Mr. Cannon, stated that we should review proposals to restrict the freedom of contract cautiously. I concur with Mr. Cannon's statement, but also firmly believe that we should thoroughly review any process such as arbitration that may restrict constitutional and statutory rights and that may cement any unfair advantages at the expense of consumers, and particularly employees. Today, we gather to hear testimony from several individuals with knowledge of the arbitration process. I want to emphasize that today's testimony is very important for our understanding of the legislation. Accordingly, I look forward to hearing today's testimony and welcome a thorough discussion of the issues and legislation. I would now like to recognize my colleague, Mr. Cannon, the distinguished Ranking Member of the Subcommittee, for his opening remarks. Mr. Cannon. Thank you, Madam Chair. I would like to welcome our witnesses today. I got to shake some hands down there. I apologize, Ms. MacCleery, we didn't have a chance to shake hands. I will step down after the hearing. Arbitration is an important subject, and I am glad that we are having this hearing to help us sort out some of the serious issues and consequences of H.R. 3010. In June, we held a hearing on mandatory binding arbitration clauses in consumer contracts. These clauses have become more and more common over the years. What we found, as I recall the hearing, was this. It appears that those clauses are fair. Results for consumers in arbitration tend to be somewhat better than in court, costs tend to be lower, and consumers tend to be happier with the results. If an individual is told that arbitration is mandatory, the general reaction from most, including me, is one of concerned skepticism. But when one looks at the facts, one can see that arbitration on the whole is a good deal, and year by year becomes better and better as consumer-friendly procedures like due process clauses and opt-outs and off-ramps to small claims court and fee-shifting become more and more common in mandatory binding arbitration clauses. Arbitration is cheaper, simpler, faster and more effective than litigation, and makes sure the consumer's complaint is heard. Arbitration is a process that provides protection to consumers because there are few consumers who have the deep pockets of a large corporation if the dispute heads to litigation. All these facts came out at our hearing, and so when the hearing was concluded, I expected that we wouldn't be entertaining legislation to roll back mandatory binding arbitration clauses in consumer contracts. I was surprised to read the extent of H.R. 3010. Not only does it propose to prohibit mandatory binding arbitration clauses in consumer contracts, it reaches back and proposes to render null and void all such clauses in existing contracts, something that would undo bargains struck in probably millions of contracts over the years. It also proposes to prohibit mandatory binding arbitration in franchise and employment contracts. It even proposes to rule out and undo mandatory binding arbitration clauses in any setting in which the contracting parties had unequal bargaining power. I suspect that could even apply to disputes between groups or companies like Citibank and Chase Manhattan, as I am certain that one of them has more money than the other. Not one of these areas was considered in our hearing in June. The breadth of this bill is so great, the sectors affected so varied, and the potential solutions to any problems that do exist so many that we cannot possibly sort that out all today, even with two panels of witnesses. So my strong suspicion is that were we to get the real facts on the fairness of arbitration in all these settings, we would find the same thing we did with arbitration in consumer contracts--that arbitration is a good deal. That is why Congress and the courts have so strongly supported it for so long through so many acts and decisions. I appreciate the interest of my colleague from Georgia, Mr. Johnson, in arbitration, and I appreciate the interest reflected in the title of his bill, that arbitration be fair. As I said, our earlier hearing already showed arbitration, including mandatory binding arbitration, to be generally fair. I am not aware of any other proceeding of the Committee that has given us a reason to believe that mandatory binding arbitration isn't delivering similarly fair results in all of these sectors. I am left to wonder who really benefits from this proposed legislation. Would it be consumers and companies large and small that are vital to our economy? Would they really benefit if we took a widespread effective arbitration option off the table? We know from basic economics that when you artificially limit available services you can bank on driving up the cost and driving down the quality of the services that remain. So how will it benefit consumers--the little guy, the working man--to take an arbitration option off the table? Or would the only ones guaranteed to be helped be the ones who lost business to arbitration? Would the only ones guaranteed to benefit be the trial lawyers? I venture a yes. Common sense and the laws of economics suggest that if this bill were to pass, trial lawyers would be the largest beneficiaries. I expect that today's testimony will help us sort that out. I am interested in hearing from today's panel of witnesses. I am particularly interested in the testimony of Professor Rutledge, who has dedicated serious academic study to this issue. I am also interested in the testimony of Mr. Naimark of the American Arbitration Association. No one at the witness table can offer us anything near the association's hands-on familiarity with arbitration, all of its features, fine points and foibles, and with all of the efforts over the years to assure that it does indeed deliver fairness. Thank you, Madam Chair. I look forward to the testimony of the witnesses, and yield back the balance of my time. Ms. Sanchez. I want to thank the gentleman for his statement. I would also like to recognize Mr. Johnson, a distinguished Member of this Subcommittee and the author of the bill that we are examining today, for an opening statement. Mr. Johnson. Madam Chair, thank you. I appreciate your holding this hearing. This Subcommittee is holding its second hearing on the troubling trend toward binding arbitration clauses becoming ubiquitous in consumer, employment and franchise agreements. Most people would think twice before they signed away their right to free speech, their freedom to worship, or their right to vote. But every day, people are forced by stronger parties to give up their constitutional right to a jury trial, often unknowingly, and compelled to agree to pre-dispute mandatory binding arbitration. The result? Well, businesses will say that they are a good thing. Consumers fare well under these agreements. They enjoy a fast economical and efficient means to settle their disputes through a neutral third party arbitrator. But what do consumers have to say about that? The reality is quite different. As a witness in previous hearings stated, arbitration hearings are neither economical nor neutral. Rather, pre-dispute binding arbitration strips consumers of a number of rights and procedural protections designed to produce impartial and fair justice. Arbitration sessions are largely conducted in secret, with limits on discovery and the appealability of decisions rendered, which limits the ability of consumers to sometimes bring class action suits and often saddles consumers with high administrative fees. Historically, the Federal Arbitration Act was enacted as an alternative dispute resolution process for resolving disputes voluntarily between businesses on equal footing. It was not enacted to force parties of unequal bargaining power into arbitration, but to enforce voluntary arbitration agreements between parties of equal bargaining strength. During floor debate on the Federal Arbitration Act in 1924, Representative George Graham, who chaired the House Judiciary Committee, clearly stated, ``This bill provides for one thing, and that is to give an opportunity to enforce an agreement in a commercial contract, when voluntarily placed in the document by the parties to it.'' Rather than upholding the spirit of that law, big businesses have turned that law on its head and have made alternative dispute resolution a trap for the unwary, locking consumers into a process that is neither consumer-friendly nor fair. The arbitration companies that are supposed to administer this type of justice are neither unbiased nor neutral. Arbitration is a lucrative business. Although advocates say arbitration is much more economical than court action, the truth is consumers are often saddled with fees that they would not be charged with if they went to court. For example, the National Arbitration Forum's fee schedule published in August of this year, if a consumer files a claim, the filing fee can range anywhere from $25 to $240, depending on the size of the claim. Administrative fees start at $200 and a participatory hearing session fee starts at $150. If you or I have a claim for under $2,500, we could face a $325 filing fee just to get the case into the arbitration process. To some, that doesn't seem like a lot, but in life there are always unexpected events. So if you need to expedite the hearing, that is an extra $500. You need an extension? $50; What about a discovery order? $250; a request to open or reconsider? $250 for the fee. As I said, arbitration is a lucrative business not only through fees generated by the cases, but also through repeat business. The danger to consumers is obvious--a system where the arbitrator has a financial interest to reach an outcome favorable to the commercial interest which his company receives its referrals from is no longer a fair process of resulting disputes. The current system is flawed as it grants stronger commercial interests the upper hand against consumers. That is why I, along with my colleague, Senator Feingold, introduced the Arbitration Fairness Act of 2007, which has of today enjoys bipartisan support of over 35 members. This bill does not eliminate arbitration agreements as a means to settle a dispute. It would simply return the Federal Arbitration Act to its original intent and render unenforceable pre-dispute mandatory binding arbitration clauses in consumer, medical and franchise agreements. I think all of us can agree, a fundamental feature of a fair justice system is that both sides to a dispute have a fair system of resolving the dispute. This legislation will ensure that citizens have a fair choice between arbitration and the civil court system to which they are entitled by the seventh amendment of the Constitution of the United States of America. I yield back. Ms. Sanchez. I thank the gentleman for his statement. We are joined also by the gentleman from Tennessee, Mr. Cohen, and without objection, other Members' opening statements will be included in the record. [The prepared statement of Mr. Cohen follows:] Prepared Statement of the Honorable Steve Cohen, a Representative in Congress from the State of Tennessee, and Member, Subcommittee on Commercial and Administrative Law I am of the firm belief that consumer protection must be among the foremost considerations for Congress when it considers legislation affecting commerce. That is why I am a cosponsor of H.R. 3010, the Arbitration Fairness Act of 2007. I do not oppose arbitration in principle. Anecdotal evidence, however, suggests that companies' use of mandatory pre-dispute arbitration clauses in consumer, employment, and other contracts may be unfairly stacking the arbitration system against the interests of consumers, employees, and others with relatively less bargaining power. While parties are certainly free to agree to arbitrate a dispute, consumers and employees are unable to negotiate away the mandatory arbitration clauses that I referred to because of the unequal bargaining power between them and the corporations with which they are conducting the transaction. The result, I fear, is that people are giving up their right to have their disputes heard in court without any meaningful choice in the matter. H.R. 3010 is one way to address this imbalance. Ms. Sanchez. Without objection, the Chair will be authorized to declare a recess of the hearing at any point. I am now pleased to introduce the witnesses on our first panel for today's hearing. Our first witness is Ms. Laura MacCleery. Ms. MacCleery is director of Public Citizen's Congress Watch Division. She works to promote public access to civil justice and a more ethical and sound government with public financing of elections. Prior to joining Congress Watch, Ms. MacCleery was deputy director of Public Citizen's Auto Safety Program. She has worked for the general counsel of the Federal Trade Commission, the Office of the Federal Public Defender in San Francisco, California, and at the Legal Aid Society Federal Defender Division in New York City. Our second witness of our first panel is Richard Naimark. Mr. Naimark is the senior vice president of American Arbitration Association at the International Center for Dispute Resolution. He is the founder and former executive director of the Global Center for Dispute Resolution Research, which conducted research on arbitration and ADR for business disputes in cross-border transactions. Mr. Naimark is an experienced mediator and facilitator, having served in a wide variety of business and organizational settings. Since joining the association in 1975, Mr. Naimark has conducted hundreds of seminars and training programs on dispute resolution and published several articles on alternative dispute resolution. We welcome you. Our third witness is Governor Roy Barnes. I would like to hand the honor of introducing him over to my distinguished colleague from Georgia, Mr. Johnson. Mr. Johnson. Thank you, Madam Chair. Roy Barnes won a seat in the state of Georgia Senate and became one of the youngest legislators in the State. As the chair of the State Senate Judiciary Committee, he used his legal talents to rewrite the Georgia constitution. He served in the Senate for a number of years before running for governor unsuccessfully. Thereupon, he returned to the House of Representatives of the Georgia legislature, where he again was assigned to the House Judiciary Committee, and distinguished himself. He later ran for governor and won, but while serving as a legislator, he, as an attorney, scored a number of tremendous legal victories on behalf of consumers, most notably a victory against Fleet Finance, which had been involved in predatory lending activities in Georgia. He held them accountable and forced them to exit that business. When Governor Barnes became Governor of Georgia, among his many accomplishments was a tough, probably the toughest, anti- predatory lending ordinance or statute in the country that was passed. It was later watered down, but if that legislation had been in effect over the last 4 years, Georgia would not be facing the extent of the foreclosure crisis that it now faces. One of the things that Governor Barnes will always be remembered for in Georgia is his courageous act in removing the Confederate battle flag from the state of Georgia flag. For that, he won the Profiles in Courage Award from the JFK Library Foundation. After leaving office as governor, Governor Barnes lended his legal talents to the Atlanta Legal Aid, where he practiced for free, representing indigent men and women in need of legal services. He did that for 6 months before going back into private practice at his hometown in Marietta, Georgia, where he practices law with his daughter and son-in-law. So Governor Barnes, we are pleased to have you here with us today. Ms. Sanchez. Thank you for joining us. Our final witness of the first panel is Mr. Ken Connor. Mr. Connor co-founded the Center for a Just Society in 2005, and serves as the organization's chairman and one of its principal spokesmen. Affiliated with the law firm of Wilkes and McHugh, Mr. Connor recently served as counsel to Governor Jeb Bush in Bush v. Schiavo, the matter involving Terri Schiavo, and the court order to remove her feeding tube. Mr. Connor is also an advocate on behalf of nursing home residents, and was appointed to Florida's Task Force on the Availability and Affordability of Long-Term Care. He has served as chairman of the state of Florida Commission on Ethics, and as a member of the state Constitution Revision Commission. I want to thank you all for your willingness to participate in today's hearing. Without objection, your written statements will be placed into the record in their entirety, and we are going to ask that you limit your oral testimony to 5 minutes. We have a lighting system that will turn green when you are recognized. After 4 minutes, it turns yellow as a warning that you have 1 minute left, and then it will turn red at 5 minutes. If your light turns red, please quickly try to summarize your last and final thought so that we can move on to all of the witnesses. After each witness has presented his or her testimony, Subcommittee Members will be permitted to ask questions subject to the 5-minute limit. Now that we have all the rules out of the way, I am going to invite Ms. MacCleery to please proceed with her testimony. TESTIMONY OF LAURA MacCLEERY, ESQ., DIRECTOR, PUBLIC CITIZEN'S CONGRESS WATCH DIVISION, WASHINGTON, DC Ms. MacCleery. Madam Chairwoman, Congressman Cannon, Representative Johnson, who is the sponsor of the Arbitration Fairness Act, and honorable Members of the Committee, good afternoon. Thank you very much for the opportunity to provide this testimony. My name is Laura MacCleery. I am the director of Public Citizen's Congress Watch Division. We oppose the use of pre-dispute binding mandatory arbitration for three main reasons. First, it is imposed on consumers and is mandatory, rather than voluntary. Second, proceedings and decisions are shrouded in secrecy. And third, it utterly lacks due process and impartiality. For example, there are only very limited grounds for appeal of a decision. Under current case law, decisions which are, in the words of the courts, ``silly,'' ``wacky,'' or ``contrary to law,'' are routinely allowed to stand. Moreover, binding mandatory arbitration is poisoned by the fact that arbitrators and their firms have a direct financial stake in business- friendly outcomes. The framers of our Constitution sought to create the public courts and to enshrine due process in our laws because they understood that secrecy is anathema to democracy and that unfettered power of any kind will become abuse. Binding mandatory arbitration, or BMA, in contrast, disregards fundamental notions of fairness. It is wrong by design. BMA is imposed on consumers in millions of take-or-leave-it contracts of adhesion for routine matters, often without signers' full or even partial understanding of the consequences. It lacks basic mechanisms for transparency and accountability and threatens hundreds of hard-won State and Federal consumer protection statutes with legal irrelevance. We recently concluded an 8-month investigation of 34,000 cases in binding mandatory arbitration used by credit card companies and other firms that buy credit card debts. Only one State in the country, California, requires any public disclosure whatsoever of these decisions. We used the data from reports made public under California's law by the National Arbitration Forum, NAF. In the approximately 19,000 cases in which an arbitrator was appointed, we found that consumers lost a shocking 94 percent of the time and prevailed only 4 percent. Ninety percent of the cases were handled by a small cadre of 28 arbitrators, and the busiest arbitrators processed as many as 68 cases in a single day, or one case every 7 minutes. Other findings are in our report, a copy of which is submitted for the record. We also found arbitrators decided more than 83 percent of the cases based entirely on documents supplied by companies making the claims, without a hearing or any consumer involvement. In this large subset of cases, arbitrators ruled for business a stunning 99 percent of the time, and for consumers only twice out of 16,000 cases. Our research shows that consumers often either do not receive notice of arbitration or do not understand the notice when they do receive them. Ronald Kahn, an NAF California arbitrator, who has decided 820 cases, recently discussed his work. Mr. Kahn's comments confirm that NAF arbitrators routinely rubber-stamp company requests in violation of its own procedural rules. ``Because they are defaults,'' Kahn said, ``the power of an arbitrator is such that you have no choice as long as the parties have been informed. There is no one there to argue due process.'' Kahn's decisions show his lopsided record. He decided 96 percent of cases in favor of business, and 1.7 percent of the time for consumers. Yet, NAF's own procedural rule 36(b) provides that if a party does not respond to a claim, the arbitrator will review the merits. And NAF's rule 36(E) provides that no award or order shall be issued against a party solely because of a failure to respond, appear or defend. So a consumer's failure to respond should not mean that NAF arbitrators would award a bank or other claimant every penny of the amount requested without further review of the merits. But several consumers interviewed for our reports told us that arbitrators confirmed awards where there was no evidence that an account even existed beyond the credit card company's bald assertions. And one victim, Troy Cornock, in fact told us that even after he repeatedly protested that he had never signed up for that account, he was still pursued for the debt. Of the nearly 34,000 consumer arbitrations that NAF identified in California, 99 percent were collections cases, and more than half involved the cardholders of MBNA. If arbitration firms are acting as part of a debt collections mill, they are in effect circumventing Federal regulations that protect consumers under the Fair Debt Collection Practices Act and other statutes. While default rates for collection cases in small claims court may be high, in any court there are far more assurances of due process, including notice to consumers through service of process, than in binding mandatory arbitration. Indeed, it is an open question whether arbitrators are making awards on the basis of records far too spotty or poorly maintained to support the same claim in court. BMA may be an elaborate shell game set up to hide the fact that companies are seeking to collect on debts that have long since run past their expiration date, or are otherwise uncollectible under prevailing law. Congress should investigate whether arbitrators are being used as a scrim to conceal these legally dubious practices. Ms. Sanchez. Ms. MacCleery, your time has expired. Could you just finish your final thought? Ms. MacCleery. Absolutely. The fundamental thought is that arbitration runs contrary to constitutional rights that are core notions of fairness, and that Congress should enact the Arbitration Fairness Act. Thank you very much. [The prepared statement of Ms. MacCleery follows:] Prepared Statement of Laura MacCleery
Ms. Sanchez. Thank you very much for your testimony. I would invite Mr. Naimark to begin his testimony. TESTIMONY OF RICHARD NAIMARK, SENIOR VICE PRESIDENT, AMERICAN ARBITRATION ASSOCIATION, WASHINGTON, DC Mr. Naimark. Thank you. Good afternoon, Madam Chair, Congressman Cannon, Congressman Johnson. Thank you for the invitation, spending your time and attention with us this morning. I would like to say at the outset the AAA is a not-for- profit service organization with an 81-year history in the administration of justice. AAA does not represent the ADR industry or other arbitral institutions. We feel as a result of our unique position, we have something valuable to add to the proceedings today. I want to say at the outset that the public policy in the United States on consumer and employment arbitration is something that could use some fixing, could use some balancing. We would like to discuss briefly with you here about how Congress might accomplish that. About a decade ago, before there was any turmoil and controversy about consumer cases, AAA recognized that when you looked at the horizon, that these issues would begin to arise. So we assembled a group which is in Annex A of our submission if you get a chance to look at it, a very broad coalition of people from all different diverse interest groups to work on what we call the due process protocol for mediation and arbitration of consumer disputes. These protocols provide for rules of fair play in the arbitration process and were the best consensus thinking at that time and currently for what provides for fair play in the arbitration process that applies to consumer disputes. To date, the AAA and a few other organizations have implemented this protocol, but others have not. By the way, in the employment arena, we have a similar task force which developed due process protocols for employment cases and as a result there has been fairly broad recognition by the courts of these protocols as the standard of fair play all the way up to Supreme Court justices citing them, at least in oral commentary, as the standard of fair play for employment disputes. A couple of highlights in the due process protocols. They do common sense things. They, for instance, provide that consumers and employees always have a right to representation; that the costs of the process must be reasonable; that the location of the proceedings should be reasonably accessible; that no party should have a unilateral choice of arbitrator; that there shall be full disclosure by arbitrators of any potential conflict or appearance of conflict or previous contact between the arbitrator and the parties. The arbitrator shall have no personal or financial interest in the matter. Perhaps most important, I would like to highlight there shall be no limitation of remedy that would be otherwise available in court of administrative hearing. There are other features as well to the protocols, but I think that gives you a bit of a flavor. I was told a few years ago by a very prominent plaintiffs' employment attorney that at least 95 percent of the meritorious claims that come into his office will never get legal representation because no one can afford to pay for it. The lawyer can't afford to bankroll all these cases and the individual often cannot afford to pay for it. So for those that do get to court, only 2 percent ever get to trial before a judge or a jury. So the idea of ``my day in court'' is in reality a myth for more mere mortals. Most Americans can't afford the court process. This is a problem. Lack of access to justice is a drag on our democracy and our social system. But, and I say ``BUT'' in capital letters, arbitration needs to be done right--no sloping of the playing field, no structural advantages for either side, the need to be these procedural safeguards built into the process. That essentially is my message for the Committee. Congress can address these problems in the use of arbitration in consumer and employment disputes by codifying the standards and protections that were built by the National Consumer Disputes Advisory Committee and the Task Force on Alternative Dispute Resolution in Employment. In that way, fairness in consumer and employment arbitration will no longer be voluntary. Thank you. [The prepared statement of Mr. Naimark follows:] Prepared Statement of Richard Naimark
Ms. Sanchez. Thank you, Mr. Naimark, and you came in under 5 minutes. I would now at this time invite Governor Barnes to please give his oral testimony. TESTIMONY OF THE HONORABLE ROY BARNES, THE BARNES LAW GROUP, LLC, MARIETTA, GA Mr. Barnes. Madam Chair, Mr. Cannon, Mr. Johnson and others, I want to talk about just one category of cases. I began to see these when I was down at Legal Aid, and they have become the result of a decision of the Supreme Court of the United States. I came up and listened to the argument. Paul Bland made the argument over there that you previously heard from. That is contracts that are illegal. You would think that an illegal contract, that is a contract for a crime, that you wouldn't have to worry too much about arbitration. For example, the chief justice asked the counsel for the bank, if Murder Incorporated were still in existence and it had an arbitration provision, would we have to go to arbitration on a dispute over whether the fee had ever been paid on Murder Incorporated? Well, the answer under the law as it exists today is yes, you would have to go to arbitration about it. You would have to go to arbitration and argue before arbitration on a ridiculous, or as Ms. MacCleery says, as the courts have said, ``crazy'' decisions that are made. Now, the case that arose in Cardegna v. Buckeye, which is the case that came up from Florida, is that in most States the making of payday loans is a crime. It is in Georgia. It was a felony in Florida. With all due respect, Mr. Cannon, I will tell you I never found anybody at Legal Aid that thought it was fair and efficient after they had been taken advantage of, that they were told they had to go to arbitration to prove that they were a victim of a crime. The other point I want to make, these claims are so small. If you ever file an arbitration, they may pay the claim. But it doesn't stop the conduct, even though it is illegal. Let me tell you something, there are more payday lenders in the United States than there are McDonald's stores, more payday lenders than there are McDonald's'. They charge anywhere from 250 percent to 1,000 percent interest. It is a practice that has been universally condemned over the years. Let me give you some examples of cases that we have been involved in that I can tell you about. Ina Claire Evans, one of Mr. Johnson's constituents over there--make sure I don't run over my time here--she was charged 829.55 percent interest on a $500 loan. Ms. Shamburger, also from over in DeKalb, was charged $701. That case was filed on August 6, 2004. We have been to the court of appeals twice on the arbitration. And then you say, well, you tried to go to court. Why didn't you just go to arbitration? We did go to arbitration. We took two of them and put them in arbitration, and I want to say and benefit Mr. Naimark over here, it wasn't AAA now. But we went to arbitration on two of them. Do you know how long those cases have been pending? They have been pending 3 years. And do you know why? Because the arbitrator ruled in our favor in one of the cases. It said, well, if it is a crime under the Georgia law, then of course the arbitration provision, all the restrictions of not being able to group the cases together and stop this practice, of course it is illegal. And then on motion to reconsider after a letter was sent up and objection was made about the decision, upon reconsideration the arbitrator said, ``Well, no, I can't decide that.'' And so you can only litigate one case, and we have to let the criminal activity continue. One of the cases, a lady came to me. She worked for the State. I would see her when I would go down to the World Congress Center. She was a secretary down there, a young African American woman. She came up to me after I left the governor's office, and she said, ``I am so embarrassed.'' I said, ``Well, what is wrong?'' She said, ``I have a child, and I have been raising the child by myself. Christmas came, and I wanted some money to buy Christmas for my child, so I went down and I borrowed $300 from a payday lender. I have been paying every month"--this was July--"and I paid $900 and I still owe the $300.'' And I said, ``Don't pay another penny,'' and they took the money out of her account before I could stop the automatic withdrawal. I filed suit for her. We have been litigating that case 3 years over the arbitration provision. So I will tell you, at least if you do nothing else, take arbitration provisions out of criminal acts. At least say if it is a criminal act, you don't have to go to arbitration, and take it away from the Supreme Court of the United States. The Supreme Court of the United States says, well--and this is my last word I am going to take--the Supreme Court said, and I heard it from the justice myself, because they ruled that the arbitration provision was valid in the Supreme Court, Cardegna v. Buckeye. They said, ``Well, if Congress didn't want us to do this, they would stop us.'' Well, here it is and it is up to you all to see if it is going to be stopped. Thank you. Ms. Sanchez. We appreciate your testimony, Governor. It is very compelling. Thank you. At this time, I would invite Mr. Connor to give his oral remarks. TESTIMONY OF KENNETH L. CONNOR, ESQ., WILKES AND McHUGH, P.A., WASHINGTON, DC Mr. Connor. Thank you very much, Madam Chair, Congressman Cannon, and Members of the Committee. I appreciate the chance to come and share some experiences with you about arbitration in the context of nursing home cases. I think it is important for you to understand the background of these cases so that you can understand the implications of the waiver of the rights that frequently come up in these cases. For over 25 years I have represented victims of abuse and neglect in nursing home cases around the country, from Florida to California. I have reviewed hundreds of charts, represented hundreds of clients. I can tell you without hesitation, but with great sadness, that the way in which we treat many of our frail, elderly families and adults in this country is really America's shame and dirty secret. Daily, I encounter nursing home residents who suffer from avoidable pressure ulcers, some literally as big as pie plates, infected to the bone, infected because they were left languishing in their urine and feces for so long that their wounds became contaminated and their skin became increasingly excoriated. They often suffer from avoidable malnutrition and dehydration. They have gaunt bodies and hallow eyes and parched tongues that are a testimony of the lack of time that harried and often overworked nursing home employees have to devote to their care and attention in the nursing homes. They frequently suffer from multiple falls and avoidable fractures because again, given the short staffing in nursing homes which is a product of nursing home operators' decisions to consciously seek to maximize profits by minimizing their labor costs. These residents are allowed to fall and suffer horrific fractures. We frequently find that nursing home employees have to use shaving cream and other substances to try to soften the feces that have dried so hard on their bodies. Their bed linens have become covered with brown rings, a testament to the length of time the urine has been there and been left to dry. But the point I make, very simply, is it is these kinds of circumstances that give rise to the claims that nursing home residents have against their caregivers, against the institutions that typically are being paid money by Medicare and Medicaid to take care of these residents. I guarantee you, if the results of these kinds of outcomes were occurring at Abu Ghraib or Guantanamo, there would be no end to the congressional hearings into the matter. There would be no end to the outrage that the media would be expressing about the consequences of those actions. But these facts are often suppressed by nursing home operators by shredding the records or falsifying the records. I routinely come in contact with records that have been so poorly falsified, they are documenting care as having been given before residents are admitted to the facility, long after they are dead or buried, while they are in the hospital. I look at their time cards and find they are giving care on days when the employee isn't even at work. But it is in this context in which issues relating to nursing home arbitration arise. I can assure you that there is no more stressful emotional difficult experience than families who are now admitting for the first time their inability to care for their loved one at home and are putting them into the care of a nursing home, who in soothing tones is assuring them of their ability to care for their loved one. Typically, these families and often the residents who suffer from dementia or who are medicated or who are blind or deaf or both or otherwise lacking in some mental capacity to appreciate the significance of what they are signing, they are presented with 50 or 60 pages in an admission packet. They are told that they need to sign these documents so that grandmother can be admitted to the nursing home, and if they don't, she won't be. That is not acceptable because usually these folks have a monopoly in many communities, and the family would have to travel miles to see them otherwise. Typically, these documents are signed by someone who merely makes their mark, because they are so illiterate they can't understand. They can't read or write, and frequently, as I mentioned, their sight or hearing is compromised, and they are unable to appreciate the significance of what they are signing. Yet because they were afforded an opportunity to sign, the courts often enforce these agreements notwithstanding the unconscionable circumstances in which they are entered into. As a result, typically you find a waiver of all kinds of rights, not just the right to a jury trial, but the right to discovery, limitations on witnesses, limitations on the ability to present your case, limitations on the ability to interview witnesses. And yet typically, all of this information is available to the nursing homes. When they are finally arbitrated, Congressman Cannon, I would submit to you, you will find that the costs in these settings are typically higher than they are in cases involving litigation, and the rewards are lower. As a result, the costs as a percentage of the awards are much higher than they would be in the case of a jury verdict. Ms. Sanchez. Mr. Connor, your time has expired. I will allow you to summarize your final thought and we will get a chance to visit more testimony through our questions. Mr. Connor. Thank you, Madam Chairman. I would simply say that in the nursing home context, the mandatory binding arbitration regime is a playing field that is tilted substantially in favor of the nursing home and against our most frail and vulnerable members of society, who are most desperately in need of the protection of the rights that they are accorded under the law. Thank you. [The prepared statement of Mr. Connor follows:] Prepared Statement of Kenneth L. Connor Mr. Chairman and Members of the Subcmmittee: Thank you for the opportunity to share some thoughts with you about the use of binding mandatory arbitration in the context of nursing home cases. In order to fully appreciate the implications of what is at stake for nursing home residents and their families, some background is in order. For almost twenty five years I have represented nursing home residents who have suffered abuse and neglect at the hands of their caregivers in long term care institutions. I have been involved in cases from Florida to California and have been exposed to the charts of hundreds of patients in facilities all over the country. I am saddened to tell you that the care and treatment that many of our elders receive in long term care facilities is nothing short of scandalous and is America's shameful and dirty secret. This problem is pervasive and extends to every part of the country. Daily, I encounter frail elderly adults in nursing homes who have suffered from avoidable pressure ulcers (bed sores) which penetrate all the way to the bone. Some of these wounds are as big as pie plates. Often they are infected and so foul smelling that when you approach their room from down the hall, you can smell the resident before you can see them. The wounds often become infected because residents are left to languish in urine and feces for so long that the feces becomes hardened and stuck to their bodies and the urine dries in tell-tale brown rings on their bed clothes. Residents often suffer from avoidable malnutrition and dehydration and their gaunt bodies, hollow eyes and parched tongues are testimony to the lack of time and attention that overworked and harried staff are able to afford them. Many times these residents suffer from multiple falls and associated fractures resulting from a lack of supervision--that lack resulting from nursing home operators consciously understaffing their facilities seeking to maximize profits by minimizing labor costs. All too often my clients are the victims of rape or sexual assault--sometimes by their caregivers, and sometimes by fellow residents who, because of their diminished capacity and lack of supervision, are allowed to prey on weaker residents. The results of this abuse and neglect are so horrific that if it were happening to detainees at Guantanamo or Abu Ghraib, there would be no end to the Congressional hearings investigating the problem or to the hue and cry of America's media howling in outrage. Yet, year after year, these problems persist and they are multiplying. These facts are often suppressed by unscrupulous nursing home operators who falsify records or shred them in an attempt to conceal them from regulators, residents' family members, and their lawyers. These attempts at falsification are often so poorly executed that in my practice I regularly review records that reflect care as having been given on non-existent days (February 30 or 31), on days when the resident was in the hospital rather than in the nursing home, and before the resident was even admitted. Sometimes I find care charted on days that occur long after the resident has been dead and buried. Often, when I compare the care givers' time cards with their charting, I find that the care givers are not even at work when the care was purportedly administered. In an interview with the Washington Post published February 4, 2000, John T. Bentivoglio, special counsel for health-care fraud at the Department of Justice, said in an interview, ``A number of highflying nursing home chains appear to have incorporated defrauding Medicare as part of their business strategy.'' In my experience, those words are just as true today as they were when they were uttered seven hears ago. It is into this milieu that families bring their precious, elderly loved ones to be cared for by the nursing home industry. Most people seeking care for their loved ones don't have a clue about the scope of problems that exist in the nursing home industry (and, of course, the problems I have outlined above, while pervasive are not universal). They just know that they no longer can provide the care needed by their aging parent or grandparent and their local nursing home has assured them that it can do so. Comforted though they are by those assurances, the admission process is, nevertheless, stressful to say the least. Few decisions are as difficult or as painful as the decision to surrender one's loved one to be cared for by strangers. Families are often wracked with remorse and guilt at the time of the nursing home admission. The elderly person is often filled with apprehension and fear and worries about being abandoned to the care of strangers. Emotions typically run high. An admissions packet of 50-60 pages is often presented for review by the patient or their family. The briefest of explanations is offered and the patient or their representative is asked to sign on multiple pages. The agreement for binding mandatory arbitration is commonly sandwiched toward the end of the documents and is explained, if at all, in the briefest of terms and in the most soothing of tones. Prospective new residents frequently suffer from dementia or are on medication or are otherwise mentally compromised. Often they suffer from poor vision or illiteracy. Rarely do they have the capacity to understand the significant and complex documentation with which they are presented. Sometimes, the nursing home representative will acknowledge, after the fact, that they, themselves, didn't really understand the significance of the arbitration agreement they were asking the resident or their family member to sign. The goal, however, is to get patient's or family member's signature or mark on the document. If the family balks, they are told that admission will be denied. That is not acceptable to most family members since the next nearest available nursing home is often miles away and it will be extremely difficult to visit their loved one on a regular basis. Equality of bargaining position between the nursing home and the resident or their family does not exist. The terms of the binding mandatory arbitration agreement are often as unconscionable as the circumstances under which the agreement is executed. There is no mutuality. The residents and their families typically aren't afforded an opportunity to negotiate the terms. As to the proposed agreement, they must ``take or leave it.'' The nursing home often retains the right to modify the contract, but that same right is not afforded to the resident or her family. The nursing home reserves the right to pursue a collection action in the courts against the resident or their family, but the resident is usually left with only the right to pursue any claims against the facility through arbitration. Discovery pursuant the agreement is emasculated. The agreement typically imposes draconian limits on (1) the number of witnesses who can be deposed or called at the arbitration, (2) the number of experts who can be called, (3) the number of interrogatories, requests for admission and requests for production that can be filed, and (4) the length of time to be allotted for the arbitration hearing. The arbitrator or arbitral forum is typically selected by the nursing home and often the home (or the chain of which it is a part) provides repeat business for the decision maker. This is a process which hardly leads to a fair and just result for the resident who is a victim of abuse and neglect in a nursing home. Not surprisingly, therefore, arbitration awards are usually substantially lower than court awarded jury verdicts. The current system of binding mandatory arbitration employed by nursing homes creates a playing field that is tilted in favor of nursing homes and against frail, vulnerable residents who suffer terribly at the hands of their caregivers. Sadly these residents are, all too often, the victims of abuse by their caregivers. They should not be further abused by an arbitration system that dispenses anything but justice. Ms. Sanchez. Thank you. I appreciate your testimony, Mr. Connor. We will now begin the first round of questioning, and I will begin by recognizing myself for 5 minutes. Ms. MacCleery, I want to start with you. Consumer advocates argue that some businesses forbid class action lawsuits with the use of arbitration clauses. I am curious to know what effect do you believe that this has on consumers who are arbitrating their claims? Ms. MacCleery. I think it means that a lot of claims that might be brought won't be, because there are abuses by corporations, particularly ones that have financial impact in small aggregate amounts--credit cards, cell phones--where the company has unrightful gains. They have obtained ill-gotten gains through some kind of accounting practice. There was a credit card company out in California that was sitting on people's payments until they were late, and then dinging them with late fees--that sort of abusive behavior, but any individual consumer would not suffer a huge loss. So that if it was not able to be aggregated into a class action, you would not in fact be able to ever correct that abuse or bring it to light. Also, one other thing about this which is that there was a move by some of the arbitration providers, the firms, to allow class actions, including AAA, and yet when their members revolted and essentially threatened to pull their business out of that arbitration provider, that pressure was enough to get them to cave on that decision. That is documented in our report. Ms. Sanchez. So in other words, if I have this correct, if you are a consumer who has been harmed, if there are thousands of consumers who have been harmed let's say $50 or under, for an individual it may not be worthwhile to try to recoup that $50 because you might have to pay $250 in fees to get back that $50. But if you could aggregate it, you might be able to punish companies who are doing bad business practices, or perhaps even illegal business practices and force them to compensate the whole class of people that have been affected. Ms. MacCleery. The issue is the deterrent effect that a case like that has against similar abuses. Ms. Sanchez. And if I am understanding you correctly, Governor Barnes, even with illegal actions, each individual plaintiff, if you will, has to arbitrate each claim and in the aggregate they can't say this is a wrong business practice and you have to stop this immediately. Is that correct? Mr. Barnes. That is correct, to answer your question directly. Even where there is a crime, well, why doesn't the solicitor prosecute them? Well, we have tried that a time or two, and we have had a few that have been prosecuted. But you go to most solicitors, and they said, ``Listen, I have mayhem and murder in the streets. The courts have to take care of this.'' This is more in a civil nature. Even though the general assembly said, ``Listen, you ought not to be in this business.'' The only way you can ever litigate these cases is to aggregate them some way. The courts, you all have put the Class Action Fairness Act, you have put all these requirements. Most of the States have. You have an interim appeal from it. Whether I agree with them or disagree with them, they have been controls on the abuses of class actions, but let me tell you something. In consumer cases, if a business, particularly an illegal one, knows they can get by with it because everybody is too busy, and they know they don't have any responsibility or accountability because they can't be brought, they are going to do it. That is just the way it is, and they are going to make the money. Ms. Sanchez. Because it is profitable. Mr. Barnes. And then when you sue them and when you go to arbitration with them, you have every white-shoe law firm from New York to Atlanta because this business is so profitable. Ms. Sanchez. Correct. Mr. Connor, I was very touched by some of the problems that you have outlined in care facilities. Now, you are a Republican, is that correct? Mr. Connor. I am. I am a conservative Republican trial lawyer. Ms. Sanchez. Okay. Mr. Cannon. Thank heaven for a few. [Laughter.] Mr. Connor. An oxymoron, some less charitably call me. Ms. Sanchez. I would never call it an oxymoron or any other kind of moron, I dare say. [Laughter.] I appreciate your testimony. I am interested in hearing from you and Mr. Naimark, and it is sort of a joint question. In your opinion, is this is partisan issue, the pre-arbitration mandatory arbitration clauses? Do you think that that is a partisan issue? Mr. Connor. I don't. I think that this bill gets at frankly some bedrock fundamental conservative principles that Republicans ought to be affirming. Accountability and responsibility run hand in hand. If you don't hold wrongdoers fully accountable for the consequences of their wrongdoing, that wrongdoing is going to multiply. Republican conservatives have typically said we believe decisions made at the local level by people with their feet on the ground are the best decisions. That is what the jury system is all about. What the arbitration system does, certainly in the nursing home context, is just exactly what Mr. Naimark was critical of. It slopes the playing field in favor of one side against the other. It doesn't result in full accountability for wrongdoing. Wrongdoers calculate the cost of doing business. They can calculate the profit as easily as you and I can. Their wrongdoing multiplies and the profiteering increases, and it is at the expense of our frailest and most vulnerable residents for whom Republicans maintain they have high esteem for the sanctity of their lives, but are actually in many respects I think undermining the protection of those lives. Ms. Sanchez. I appreciate that. I have one last question I would beg everybody's indulgence to go over my time by 1 additional minute to just ask Mr. Naimark. Is there any objection? Okay. The AAA does not support pre-dispute binding arbitration in the health care context such as disputes involving medical malpractice or health insurance coverage. I am interested to know why does AAA take this stand, and yet support arbitration involving civil rights employment cases or consumer protection cases or in other contexts? Why is there that carve-out, and how can you justify that? Mr. Naimark. In a word, the health care cases are qualitatively different. I mean, they can literally be matters of life and death and very similar to the situation Mr. Connor described, where people under great duress may be signing documents and not knowing what they are signing. So it was the considered opinion of the advisory committee that they are qualitatively different, different stakes. Ms. Sanchez. I can understand and appreciate that, but to me the idea that that somehow deserves exception and people signing away their civil or statutory rights is somehow not as important, to me is a distinction that I couldn't place the line there. Mr. Naimark. Well, let me say a couple of things. First of all, this is a public policy issue, whether mandatory clauses in the consumer and employment context are acceptable or not. The courts in fact are very split on this. It is a very contentious issue. You asked about the class actions, is that contentious? This is also. They are both contentious issues. So it really is not an issue that AAA necessarily supports or defends. It is an issue that we have to deal with. So if the cases come in, what we try to do is make sure that you have the protections with the due process protocols so that people are not giving away their civil rights or any rights. That was one of the issues that I pointed to about all remedies should be available that they would otherwise get in court or in an administrative hearing. It is merely a change in forum, and we try to make sure that that is followed through all the way so people aren't losing. Ms. Sanchez. Okay. I appreciate that. My time has expired. I would now recognize Mr. Cannon for 5 minutes of questions. Mr. Cannon. Thank you, Madam Chair. I appreciate the testimony received from this panel. Let me just say, this is to a large degree not a partisan issue. This is a question of how we do things that make some sense, and both Mr. Connor and Governor Barnes have made cases for particular classes of people. I don't think these things are so simplistic. For instance, after we passed the bill that disallowed payday loans, Utah has a disproportionate number of people in Iraq and Afghanistan, and we have a bunch of wives who can go in and for a $25 fee get a loan until the next pay day. That can be a horrible thing when those fees pile up, and in those cases you often have criminality. But it is a huge burden on families when they can't make it to the next pay day because we have a problem with payday loans. So it is something where we need some balance. Governor Barnes, you were talking about a case in particular, and you ended by saying that it had to wait until the criminality was over. Was there a criminal charge in that case? Mr. Barnes. It is a crime, but there was not a criminal charge in that case. I don't know which one, of course, sometimes---- Mr. Cannon. Yes, there were both. But what you are saying essentially is the criminality continues then because there is no civil solution---- Mr. Barnes. Oh, I see what you are talking about. Yes, because I mean it is just an enforcement problem. In other words, it is a crime. It is a crime in Georgia and has been, to do payday lending, but you go down there and solicitors just don't have the time to do it. And if they are shielded from civil responsibility, there is no impediment at all. Mr. Cannon. Right. But in that particular issue, it did not have some criminal activity going on. Thank you. Mr. Barnes. Well now, there was criminal activity. Mr. Cannon. Right, but no criminal prosecution. I am sorry. That is exactly what I meant. Ms. MacCleery, your study as I understand it was limited to the National Arbitration Forum, and you did not study things like the AAA? Ms. MacCleery. Well, here is the problem. The NAF is actually, and I hate to say this really, better than AAA in terms of their disclosures on the California reports in the sense that they have created a consistent dataset that allowed us to build a mechanism to dump it into a sortable database. So NAF still---- Mr. Cannon. So it was an easier thing for you to do to study them. Ms. MacCleery. Well, it is still 34,000 records. Mr. Cannon. There are some limitations on that study. Those are mostly credit card debt studies or collection cases, right? So you have---- Ms. MacCleery. It was all of the NAF cases in their data, all 34,000. Mr. Cannon. What kind of cases did they deal with? Ms. MacCleery. It was mainly debt collection cases. Now, AAA doesn't even complete its records in the California disclosures. So we have been trying to build---- Mr. Cannon. It is hard to get conclusions, is what you are saying. Ms. MacCleery. Well, they don't complete the records. I mean, you cannot---- Mr. Cannon. I understand that. What we are trying to figure out here is what kind of weight to put on your study. There is a huge difference between a consumer who says, ``my widget broke,'' and goes to an arbitration process, and a person who says, ``I paid that bill,'' when maybe they did or maybe they didn't. Certainly, there will be outlandish cases where bills were paid and were not credited. You mentioned the case where a payment is held and then a late charge is added. Those kind of things happen. We recognize that. Those are terrible things and should not happen. But generally speaking, credit cases are overwhelmingly going to go against the person who failed to pay the bill. Ms. MacCleery. There is a high level of what you would call default in credit card cases. There was another database of 20,000 cases in an Alabama court case that came to light that showed similar decision rates against consumers about 99 percent that were NAF data records. We would love to analyze the AAA data. Mr. Cannon. Were those also---- Ms. MacCleery. Those were also collections. Mr. Cannon. So in the collection cases, you had 94 percent of the cases that were decided by NAF in favor of the company and against the creditor. Ms. MacCleery. That is right. Mr. Cannon. Would that have been different, for instance-- did you take a look at whether or not that would have been different if those people had been in the court system and been litigating in the court system? Ms. MacCleery. The only two studies we found on default judgments in the court systems are dated. They pre-date a lot of identity theft problems. There is one from 1990 and one study in the late 1960's. Both of them have default rates for consumers that are lower than the default rates in our study. But there is very little data on a comparison basis to look at whether small claims court data are similar to the arbitration outcomes. But I think the argument is really fundamental. It is about fairness in the structural problems that we highlighted. Mr. Cannon. With your data, you are dealing with a very narrow slice, and I just think we need as a Committee to be thoughtful about how narrow that slice of data you looked at is as you look at it. We have particular problems that Governor Barnes raised, particular problems that Mr. Connor raised, but what your data shows is what it is in a very narrow slice of the issue of arbitration clauses. I think I understand what the position is. I think the record is fairly clear that this is a very narrow study in a very narrow environment with the best data available, but not data that particular is illuminating in other areas. Ms. MacCleery. Well, I would disagree that it is narrow. It was all the cases. We didn't exclude any cases by subject matter. Mr. Cannon. Well, it is narrow by nature of the question-- -- Ms. MacCleery. Well, it is 19,000 cases. Mr. Cannon. That is a lot of cases, but it is a very narrow category of cases. Ms. MacCleery. We would love to look at AAA's data if they would only complete their records in California. We would love to expand the power of the study, but this is the only empirical data that is currently available. Mr. Cannon. But I think we understand each other that you are not disagreeing that the nature of the study is very, very narrow. That is, it is related to cases that are consumer credit cases, debt cases where you have collections. There is no way even to compare that data--and I apologize, I am going over my time, but I would like to just clarify the point. Ms. Sanchez. Yes, finish. Yes. Mr. Cannon. Which is that there is no way even to compare that narrow kind of data with what would happen in courts. You are not purporting that your study compares with courts, and so it is a data point that we can look at, but it is hard to associate with the larger issue. Ms. MacCleery. I think there are a lot of stories in our report that go outside the credit card context and look at the same kind of patterns of problems in decision-making in arbitration that point to the structural deficiencies. So I would agree that it deals with a certain type of case, but I would disagree that its implications are narrow. Ms. Sanchez. The time of the gentleman has expired. Mr. Cannon. Thank you. I yield back. Ms. Sanchez. Thank you. At this time, I will recognize Mr. Johnson, the gentleman from Georgia, for his questions. Mr. Johnson. Thank you. Mr. Naimark, would you say that AAA would be the largest arbitration firm in the Nation? Mr. Naimark. Yes, but with a qualifier. Our annual consumer caseload is approximately 1,500 cases, of which 60 percent settle before they ever get to an arbitrator, so we are talking about a relative few hundred a year that actually get to an arbitrator. In employment cases, it is roughly 2,000 per year. So we do lots and lots of arbitration of all types with unions, companies and international. These caseloads for us are fairly small. Mr. Johnson. Do you advertise your services in the yellow pages or newspapers? Mr. Naimark. I don't know if we have listings anymore in the yellow pages. We have run a number of ads over the years in a variety of publications. Mr. Johnson. Typically what type? Mr. Naimark. What type? Mr. Johnson. Yes. Mr. Naimark. For the international business disputes, we will run them in the international business journals. Mr. Johnson. You typically run them in business journals, in publications that are directed toward businesses. Is that correct? Mr. Naimark. For business-to-business dispute resolution, yes. Mr. Johnson. Because it is rare that a consumer would ever choose AAA to arbitrate a dispute. Mr. Naimark. I don't know that that is so. Mr. Johnson. Let me rephrase the question. How does AAA get the bulk of its business? Mr. Naimark. How do we get the bulk of it? Mr. Johnson. Isn't it through referrals from businesses that either are instituting arbitration proceedings against a consumer, or a consumer that is limited in the choice of the arbitration panel that he or she can employ to pursue a dispute against a commercial interest? Mr. Naimark. In the consumer caseload--I assume that is what we are addressing--we get both. A significant number--I can't tell you the exact percentage--are filed by consumers. Our stats show they win basically half of those cases, and the businesses file the rest. Mr. Johnson. I guess the point I am trying to make is you get most of your referrals from business interests. Isn't that correct? Most of your arbitrations are done as a result of referrals from business interests, commercial interests? Mr. Naimark. Unions and businesses primarily, yes. Mr. Johnson. Who typically pays the fee for the arbitration process? Mr. Naimark. If we are talking about the consumer process, we have two levels of fees for consumers. Claims up to $10,000, they pay a maximum of $125. For claims up to $75,000, they pay a maximum of $375. Business will pay the rest. Mr. Johnson. Most of your claims are instituted by commercial interests against consumers, however. Isn't that correct? Mr. Naimark. No, that is not correct. Mr. Johnson. Well, let me ask you this question. What class of disputes do you get where consumers tend to file more than the commercial interests? Mr. Naimark. I don't know that they file more, but in our consumer caseload--those 1,500 cases I mentioned--a significant number are filed by consumers because they are seeking redress against the business. Let me try to explain it this way, if a company---- Mr. Johnson. Okay. I am running out of time. I want to switch to a different tack now. The arbitrators who you employ, approximately how many do you employ? Mr. Naimark. Well, if you look at the entire panel for every category, roughly 9,000 I would say. Mr. Johnson. Are they judges? Mr. Naimark. Most of them are not judges, no. Mr. Johnson. Are they lawyers? Mr. Naimark. Most of them are lawyers, yes. Mr. Johnson. Yes. And most of them are selected by AAA based on, I guess, their connections to businesses that employ them? Mr. Naimark. Absolutely not. We have committee that reviews. We look especially for diversity and try to get as much balance between, especially plaintiff and defense as possible. What you try to do is get senior respected people in the community. Mr. Johnson. Let me ask you this question. Is there a court reporter that takes down the typical proceeding? Mr. Naimark. For a consumer case, typically no. Mr. Johnson. So there is no record upon which to appeal on? Mr. Naimark. No. I have to say typically under U.S. law, even if you had one, it would be tough to appeal. Mr. Johnson. There is basically no effective right to appeal the arbitrator's decision, correct? Mr. Naimark. That is correct. Mr. Johnson. And there is no right to discovery of documents or witnesses? Mr. Naimark. No, the protocols provide that there is right to discovery. Mr. Johnson. And those are the protocols that AAA follows, but not necessarily all of the others? Mr. Naimark. Yes. The discovery may be limited. It is controlled by the arbitrator, but this is an especially important issue in the employment cases where typically the employee needs records that the employer has, so you have to make provision that they can at least get some of the documentation. Mr. Johnson. Well, if the arbitrator rules unfairly against the consumer and in favor of the employer, there is no right to appeal is there? Mr. Naimark. No. Mr. Johnson. So it pretty much means that whatever the arbitrator says goes. Mr. Naimark. Yes. Mr. Johnson. And there is no requirement that the arbitrator be an attorney. Mr. Naimark. No. In the employment area, the parties pick their arbitrators. Mr. Johnson. And you do have some arbitrators who are not even lawyers. Mr. Naimark. In the consumer area, virtually none. Ms. Sanchez. The time of the gentleman---- Mr. Johnson. Virtually none are lawyers? Mr. Naimark. No, they are virtually all lawyers. Mr. Johnson. All right. Ms. Sanchez. The time of the gentleman has expired. I am going to thank the first panel for their testimony. I am going to excuse you, and we will invite the second panel to please come up and be seated. I am now pleased to introduce the witnesses for our second panel for today's hearing. Our first witness is Ms. Deborah Williams. Ms. Williams is a Coffee Beanery franchise owner, along with her partner Richard Welshans, and was a victim of a binding mandatory arbitration clause. She resides in Annapolis, Maryland. We appreciate your being here today. Our second witness is Ms. Cathy Ventrell-Monsees. Ms. Ventrell-Monsees has been practicing in employment discrimination law since 1983. She litigated several ADEA class actions and has written more than 50 amicus briefs in the U.S. Supreme Court and circuit courts. Ms. Ventrell-Monsees has a part-time law practice and teaches employment discrimination law at the Washington College of Law at American University. From 1985 to 1998, she worked in and directed an age discrimination litigation project at AARP and, with Steve Platt, she is coauthor of ``Age Discrimination Litigation.'' Ms. Ventrell-Monsees has appeared in numerous national and local media as a commentator on employment issues. We welcome you to today's hearing. Our third witness is Professor Peter Rutledge. Professor Rutledge is an associate professor of law at The Catholic University of America, where his teaching and research interests include international dispute resolution and criminal law. A former law clerk at the United States Supreme Court and the United States Court of Appeals for the Fourth Circuit, Professor Rutledge regularly advises parties and lawyers on matters before the U.S. Supreme Court. Before entering the academy, Professor Rutledge practiced at Wilmer, Cutler and Pickering, where his practice included Supreme Court work, and at Freshfields Bruckhouse Derringer, where his practice concentrated on international arbitration. We welcome you to our second panel. Our final witness is Theodore Eppenstein. Mr. Eppenstein is a member of Eppenstein and Eppenstein, a law firm with an international practice. He has testified previously before Congress on matters of compulsory arbitration and arbitration reform. Mr. Eppenstein was appointed to be one of three public members of the Securities Industry Conference on Arbitration, an advisory committee to the U.S. Securities and Exchange Commission on arbitration. He is a member of the American Arbitration Association's Security Advisory Committee and has coauthored many articles on securities arbitration and litigation. I want to thank you all for your willingness to participate in today's hearing. You understand the rules about the lights from the previous panel. So with that, I will invite Ms. Williams to please begin her oral testimony. TESTIMONY OF DEBORAH WILLIAMS, ANNAPOLIS, MD Ms. Williams. I want to thank Chairwoman Sanchez and the Members of the Subcommittee for giving me the opportunity to share my story. My name is Deborah Williams. I am 54 years old, and I am bankrupt and on the verge of being homeless, all because of a binding mandatory arbitration clause. In February 2004, my partner and I opened a Coffee Beanery franchise in Annapolis, MD. Included in our franchise contract hid a binding mandatory arbitration agreement. Within 3 months, our dream of owning our own small business was becoming a nightmare. The franchise rapidly fell apart through no fault of our own. The Coffee Beanery had sold us a failed business concept that generated massive losses. We were required to purchase expensive, faulty equipment, such as a discontinued lighting system that cost $14,000, and a defective display case that cost $8,000, a $2,000 markup from what it normally sells for. We were forced into illegal third-party contracts which required ongoing fees and additional equipment such as a gift card program, a required DMX music and security system, and a Pepsi contract. The DMX music and security system was listed in our contract as already paid for, but the Coffee Beanery forced us to pay an additional $8,000 for the system. The gift card program and Pepsi contract were not disclosed in our initial contract as required by law, but we had invested so much money that we had no choice but to accept the exorbitant additional fees. We would have never bought the franchise if these contracts had been disclosed. We conducted more research and discovered over 73 other failed Coffee Beanery franchises, and that the Coffee Beanery was being investigated in other States. We also learned that a Coffee Beanery cafe had an average life span of 3 years. That is pretty unbelievable considering that the investment is over $375,000 for the average cafe. We immediately alerted the Maryland attorney general of our situation. The attorney general's office conducted an investigation and, based on Maryland franchise law and the Federal Trade Commission franchise rule, they concluded that the franchisor committed fraud in the sale of our small business. When someone commits fraud they should be held accountable. In December 2005, we filed our civil case in Maryland district court, but despite the Maryland attorney general's finding and the protection of Maryland franchise law, we were forced to resolve our dispute through binding mandatory arbitration. The arbitration company that the Coffee Beanery used in our case is called the American Arbitration Association, the AAA. The AAA arbitrator was selected without our input and without our consent at a fee of $200 an hour. We had no information about her history as an arbitrator, or if she had been hired by the Coffee Beanery before to arbitrate, and how often she ruled in their favor. We also discovered that our arbitrator shared an accounting firm with the Coffee Beanery, an obvious conflict of interest. We tried to have her replaced, but were unsuccessful. If a judge had a similar connection to the defense in a court case, it would have been thrown out immediately, but not in the kangaroo court known as arbitration. We also found later that the Coffee Beanery's attorney also doubled as an arbitrator for the AAA. Because discovery is very limited in arbitration, we had difficulty obtaining copies of the Coffee Beanery's illegal third-party contracts to use as evidence in our case. The Coffee Beanery did not respond to our discovery requests, dragging out the process for 7 months, knowing that we couldn't afford the exorbitant costs that accompany a long arbitration process. We later obtained some of these contracts from another franchisee, and not the Coffee Beanery. The arbitration took place in Michigan, 500 miles from our home. We flew back and forth with our attorney four times for a total of 11 days of proceedings. We felt that we had a great chance of prevailing since the attorney general had already found the franchisor had committed fraud. Our cost of the arbitration proceedings totaled over $100,000, hardly a cheaper alternative to litigating locally in Maryland. In the end, the arbitrator ruled that, contrary to the findings of the Maryland attorney general's office, we were at fault. In addition to our costs, we were required to pay the Coffee Beanery $150,000, plus their attorneys' costs and fees. That is a total of over $250,000. We are trying to appeal our decision, but we have been told by several attorneys that it is a lost cause. It is virtually impossible to overturn a decision of an arbitrator on appeal. It has been 4 years since we have opened our franchise. We haven't made a profit. We haven't paid ourselves wages. We are in enormous debt. We have invested over $1.5 million in this failed business, and every year we owe the Coffee Beanery more money in royalties. Since we signed a 15-year franchise agreement with the Coffee Beanery, our only options have been to sell this business to another unsuspecting person which we refuse to do, or to file for bankruptcy. Recently, our landlord terminated our lease due to our inability to pay rent and the doors to our Coffee Beanery cafe will be locked as of next Wednesday, October 31. We are borrowing money from our family so that we can file for bankruptcy. However, we still owe the Coffee Beanery royalties for the remaining 11 years on our franchise even if our cafe is no longer open. Losing our right to a trial by jury has crippled us, but we are not alone. Binding mandatory arbitration has harmed the livelihoods of thousands of others. The Arbitration Fairness Act of 2007 would ensure that all Americans have access to the courts and trials by juries to resolve disputes. It would still permit arbitration in cases like ours, but only if both parties voluntarily agree to it. Please do not force more consumers into a privatized system that has no oversight and almost no opportunity to appeal. That kind of power is dangerous and too easily abused. We never knew how precious our constitutional rights were until they were stolen from us by a binding mandatory arbitration clause. It is the American dream to own your own business. Our dream has been trampled upon by binding mandatory arbitration. I hope hearing our story will make a difference and you will protect hard-working Americans across the country by eliminating these abusive clauses. Thank you. [The prepared statement of Ms. Williams follows:] Prepared Statement of Deborah Williams I want to thank Chairwoman Sanchez and the members of the subcommittee for giving me the opportunity to share my story. My name is Deborah Williams. I am 54, bankrupt and on the verge of being homeless, all because of a binding mandatory arbitration clause. In February 2004, my partner and I opened a Coffee Beanery franchise in Annapolis, Maryland. In the small print of our franchise contract hid a binding mandatory arbitration agreement. Within three months, our dream of owning our own small business was becoming a nightmare. The franchise rapidly fell apart through no fault of our own. The Coffee Beanery had sold us a failed business concept that generated massive losses. We were required to buy expensive, faulty equipment, such as a discontinued lighting system that cost $14,000, and a defective display case that cost $8000, a $2000 mark-up from what it normally sells for. We were forced into illegal third-party contracts which required ongoing fees and additional equipment such as a Gift Card program, a required DMX music and security system, and a Pepsi contract. The DMX music and security system was listed in our contract as already paid for, but the Coffee Beanery forced us to pay an additional $8000 for the system. The gift card program and Pepsi contract were not disclosed in our initial contract as required by law, but we had invested so much money that we had no choice but to accept the exorbitant additional fees. We would have never bought the franchise if these contracts had been disclosed. We conducted more research and discovered over 73 other failed Coffee Beanery franchises, and that the Coffee Beanery was being investigated in other states. We also learned that a Coffee Beanery cafe had an average life span of three years--hat's pretty unbelievable considering the average cost to open one of these cafes is over $375,000. We immediately alerted the Maryland Attorney General of our situation. The Attorney General's office conducted an investigation and, based on Maryland franchise law and the Federal Trade Commission franchise rule, they concluded that the franchisor committed fraud in the sale of our small business. When someone commits fraud then they should be held accountable. In December 2005, we filed our civil case in Maryland district court, but despite Maryland Attorney General's finding, we were forced to resolve our dispute through binding mandatory arbitration. The arbitration company that the Coffee Beanery used in our case is called the American Arbitration Association (AAA). The AAA arbitrator was selected without our input and without our consent at a fee of $200 an hour. We had no information about her history as an arbitrator--f she had been hired by the Coffee Beanery before for arbitration or how often she had ruled in their favor. We also discovered that our arbitrator shared an accounting firm with The Coffee Beanery, an obvious conflict of interest. We tried to get her replaced but were unsuccessful. If a judge had a similar connection to the defense in a court case it would have been thrown out immediately, but not in the kangaroo court known as arbitration. We also found out later that the Coffee Beanery's attorney also doubled as an arbitrator for the AAA. Because discovery is very limited in arbitration, we had difficulty obtaining copies of the Coffee Beanery's illegal third-party contracts to use as evidence in our case. The Coffee Beanery did not respond to our discovery requests dragging out the process for seven months, knowing that we couldn't afford the exorbitant costs that accompany a long arbitration process. We later obtained some of these contracts from another franchisee, and not the Coffee Beanery. The arbitration took place in Michigan, 500 miles from our home. We flew back and forth with our attorney three times for a total of 11 days of proceedings. We felt that we had a great chance of prevailing since the Attorney General had already found the franchisor had committed fraud. Our cost of the arbitration proceedings totaled over $100,000-- ardly a cheaper alternative to litigating locally in Maryland. In the end, the arbitrator ruled that contrary to the findings of the Maryland Attorney General's office, we were at fault. In addition to our costs, we were required to pay the Coffee Beanery $150,000, plus their attorneys' costs and fees. That's a total of over $250,000. We are trying to appeal our decision, but we have been told by several attorneys that it is a lost cause. It's virtually impossible to overturn a decision of an arbitrator on appeal. It's been four years since we have opened our franchise. We haven't made a profit. We haven't paid ourselves wages. We are in enormous debt. We've invested over $1.5 million in this failed business and every year, we owe the Coffee Beanery more money in royalties. Since we signed a 15 year franchise agreement with the Coffee Beanery, our only options have been to sell this business to another unsuspecting person which we refuse to do, or to file for bankruptcy. Recently, our landlord terminated our lease due to our inability to pay rent and the doors to our Coffee Beanery cafe will be locked as of next Wednesday, October 31. We are borrowing money from our family so that we can file for bankruptcy; however, we may still owe the Coffee Beanery royalties for the remaining 11 years on our franchise even if our cafe is no longer open. Losing our right to a trial by a jury has crippled us, but we are not alone. Binding mandatory arbitration has harmed the livelihoods of thousands of others. The Arbitration Fairness Act of 2007 would ensure that all Americans have access to the courts and trials by juries to resolve disputes. It would still permit arbitration in cases like ours, but only if both parties voluntarily agree to it. Please do not force more consumers into a privatized system that has no oversight and almost no opportunity to appeal. That kind of power is dangerous and too easily abused. We never knew how precious our constitutional rights were until they were stolen from us by a binding mandatory arbitration clause. It is the American dream to own your own business. Our dream was trampled upon by binding mandatory arbitration. I hope hearing our story will make a difference and you will protect hardworking Americans across the country by eliminating these abusive clauses. Ms. Sanchez. Thank you, Ms. Williams. We appreciate your testimony. At this time, I would invite Ms. Ventrell-Monsees to give her testimony. TESTIMONY OF CATHY VENTRELL-MONSEES, ESQ., LAW OFFICES OF CATHY VENTRELL-MONSEES, CHEVY CHASE, MD, ON BEHALF OF THE NATIONAL EMPLOYMENT LAWYERS ASSOCIATION Ms. Ventrell-Monsees. Thank you, Madam Chair, Congressman Cannon and Members of the Subcommittee. My name is Cathy Ventrell-Monsees. I am an executive boardmember of the National Employment Lawyers Association, known as NELA. NELA advances employee rights and serves lawyers who advocate for equality and justice in the American workplace. NELA's concern, and why we are here today, is the widespread use of pre-dispute mandatory arbitration to resolve employment cases, and the deterrent effect that system has on the ability of employees to enforce their employment and civil rights. Every day, NELA members see how companies stack the deck in their favor in their disputes with employees, and the use of mandatory arbitration has grown exponentially over the past 15 years. In 1991, a mere 3.6 percent of private employers used arbitration systems. Today, approximately 15 percent to 25 percent of private employers from Circuit City to Hooters to Halliburton, use mandatory arbitration to keep the potential claims of more than 30 million employees out of court. Companies put mandatory arbitration provisions into employment applications, employment handbooks and employee benefit plans. Employees must sign those documents if they want to get the job or keep the jobs they already have, despite whatever theoretical due process protocols may bar imposing mandatory arbitration as a condition of employment. The workers we represent face many different kinds of employment and discrimination problems, such as being fired while on family or medical leave; our military and reserve personnel who return from Iraq and Afghanistan only to find their jobs gone, blue- and white-collar workers who are forced to work off the clock so their employers don't have to pay them overtime; and retaliation against whistleblowers who risk their careers to report dishonest or risky corporate or government behavior. But the courts have held that all of these claims are subject to mandatory pre-dispute arbitration. So what is wrong with that? What is wrong is that mandatory arbitration creates a modern-day version of separate and unequal justice for employees, and here is how. Under mandatory pre-dispute arbitration, employees lose their day in court before an impartial judge. They lose their right to a trial of their peers and their right to appeal. They lose the protection of our laws because arbitrators do not have to follow the law. They do not even have to know the law. Employees lose important remedies because mandatory arbitration programs and arbitrators can and do limit the damages an employee can get in court by Federal or State law. An employer who forces its employees into this separate system can pick its favorite arbitrator and use that same arbitrator over and over again to rule in its favor in other cases brought by other employees of the company. The effect of this repeat player phenomenon is dramatic as shown by two recent examples taken from public reports of the American Arbitration Association. From January 1, 2003 to March 31, 2007, the AAA held 62 arbitrations for Pfizer in employment cases, of which 29 went to decision. Of the 29, an arbitrator found for the employee just once, and for the employer 28 times. That is a rate of 97 percent for the employer. Halliburton in its cases won 32 out of 39 cases that went to a decision, a telling 82 percent win rate in arbitration. The result? Companies that routinely discriminate against their employees are never held accountable to the public because of this private separate system. Pre-dispute mandatory arbitration provides no deterrent effect to prevent employers from discriminating again and again. Rather, pre-dispute binding mandatory arbitration deters employees from pursuing their employment rights. That is a significant cost that employees in our society bear under the current separate and unequal system. Arbitration is often touted as inexpensive. Not true in employment cases. Employees often have to pay exorbitant fees just to get a hearing. Arbitrators typically charge $250 to $450 an hour and arbitrations can last more than 100 hours. A worker who has been fired from her job simply cannot afford this cost. Ms. Sanchez. I am sorry, Ms. Ventrell-Monsees. Your time has expired. I want you to summarize your final thoughts. Ms. Ventrell-Monsees. Yes. NELA urges Congress to act without delay to pass the Arbitration Fairness Act. Congress should no longer allow this separate and very unequal system to continue. Thank you. [The prepared statement of Ms. Ventrell-Monsees follows:] Prepared Statement of Cathy Ventrell-Monsees
Ms. Sanchez. Thank you very much for your testimony. At this time, I would invite Professor Rutledge to give his testimony. TESTIMONY OF PETER B. RUTLEDGE, ESQ., THE CATHOLIC UNIVERSITY OF AMERICA, COLUMBUS SCHOOL OF LAW, WASHINGTON, DC Mr. Rutledge. Thank you, Chairwoman Sanchez, Ranking Member Cannon, Representative Johnson and Members of the Subcommittee. I am an associate professor of law at the Columbus School of Law, coauthor of the book ``International Civil Litigation in the United States,'' and author of several articles in the field of arbitration. I appreciate the opportunity to participate in the hearing today, and would like to take you up on your invitation, Madam Chair, to elicit testimony to assess the accuracy of reports on exactly what is the state of the empirical data in arbitration to assist the Subcommittee in deciding whether legislation is necessary. I hope that both my written testimony and my oral testimony will assist you in that process. Allow me to briefly summarize my points. First, the available data on arbitration is growing and in important respects is either inconsistent with or flatly contradicts some of the arguments that have been driving this debate so far. It is important to fill the gaps in the empirical record before knowing whether and to what extent legislation is necessary. Second, several of the findings upon which H.R. 3010 rests either conflict with the available empirical evidence or rest on criticism not unique to arbitration. Third, to the extent there are problems with arbitration, and let me speak personally here and stress I agree that there are some, several mechanisms already exist to regulate them. The question is not whether arbitration is perfect. Surely it is not. The question is whether the imperfections in the system justify jettisoning it altogether. That leads me to my fourth point. Eliminating arbitration agreements may have significant negative economic effects. I am the first to admit that this is an area where we need more empirical research, but several bits of anecdotal evidence which are summarized in my written testimony indicate that arbitration has enabled companies to lower their dispute resolution costs and that those savings have been passed on to individuals in the form of higher wages, lower prices, and better share prices. My own research, which I stress is a work in progress, indicates that eliminating the employment arbitration docket of a single organization, the AAA, would increase the cost of resolving those disputes by $88 million. If eliminating a single organization's docket increases costs that much, imagine what the increase in costs would be if arbitration were eliminated altogether. Basic economics teaches us that those increased costs have to be borne by someone, and they are going to be borne by the individuals, the same people whom H.R. 3010 is trying to protect. And fifth and finally, the notion that post-dispute arbitration can somehow replace pre-dispute arbitration is something that is not a viable alternative. Madam Chair, at bottom let me urge Congress to respond to the empirical proof here. The risk of legislating otherwise is that it would make worse-off the very individuals who Congress is trying to protect. In my remaining time, allow me to elaborate briefly on two examples. One, arbitration is often criticized on the ground that it leaves the party with the weaker bargaining position, whether the employee, the consumer or otherwise, worse off. You have heard a few examples today of particular companies or instances where that is the case. But the aggregate measures indicate that by most measures, the party with the inferior bargaining position achieves superior or comparable results compared to what is the case is in litigation. One thing that I would encourage the Subcommittee to do is to consider exactly where are these people going to end up if arbitration is not available? Two, arbitration is often criticized on the grounds--and it has been so criticized today--that it surrenders the employee's or the consumer's right to a jury trial. It is certainly true that arbitration does not involve a jury, but eliminating arbitration is not going to magically cause a jury to appear for all these cases. The available evidence indicates that if Congress eliminated arbitration, many of these individuals who it is trying to protect will not be able to find an attorney. If they can, few of their cases will reach a jury, and if they do, justice will come far later than it does for them in arbitration. To paraphrase the words of one respected scholar in this field, in a world without arbitration, we would essentially have a Cadillac system of justice for the few, and a rickshaw system of justice for the many. Arbitration replaces that with a system of justice of Saturns for all. In other words, it enables citizens as a whole to have greater access to justice, even if a few individuals and their lawyers experience a marginal reduction in recoveries. Madam Chairman, I have tried to keep underneath my time. Thank you for the opportunity to present my testimony. I would be happy to answer your questions. [The prepared statement of Mr. Rutledge follows:] Prepared Statement of Peter B. Rutledge
Ms. Sanchez. I appreciate your testimony. Thank you. I would now invite Mr. Eppenstein to present his oral testimony. TESTIMONY OF THEODORE G. EPPENSTEIN, ESQ., EPPENSTEIN AND EPPENSTEIN, NEW YORK, NY Mr. Eppenstein. Thank you, Madam Chairwoman, and thank you, Mr. Johnson, for proposing this bill to the House. I am going to talk to you today a little bit about securities arbitration. I have had various opportunities to view securities arbitration, first as an advocate for the investing public in the landmark securities case before the U.S. Supreme Court in 1987, Shearson v. McMahon. Secondly, after that I testified in Congress twice, attempting to retroactively reverse the decision in that case, which in effect required mandatory arbitration, since it permitted the broker-dealers to require mandatory arbitration in their customer agreements. Also, I have been a public member of the Securities Industry Conference on Arbitration, and we are a group that meets regularly involving not just the three public members, but a member from the industry, SIFMA today, and members from each of the securities regulatory organizations, the self- regulatory organizations like the NASD and the New York Stock Exchange. The SEC sits in regularly at our meetings. I have been a public member since 1998. I can tell you through my experience from what I have observed, securities arbitration does not work for the investor. I request that you specifically include securities disputes and other investment malpractice disputes in your bill. My concern is that if it is not specifically laid out in your bill, we are going to be coming into court and finding out whether or not what is said here in the legislative process covers securities arbitration. Now, let me tell you why I think you should do this. First of all, the Supreme Court in 1987, in a very close 5 to 4 decision, ruled that based on the SEC's position, which was presented in an amicus brief in support of the industry's view, and against the public, that pre-dispute arbitration clauses would be okay with them. This they did despite the fact that there was an SEC rule in place at the time--SEC rule 15(c)2-2, which prohibited the use by broker-dealers of arbitration clauses with regard to Federal statutory claims of fraud. The SEC argued to the Court that they should permit mandatory arbitration, deem these contracts to be enforceable because they had oversight over the arbitration process. Well, they have oversight over the arbitration process, but it hasn't worked for the investor's protection. Let me tell you why. SRO arbitration, and that is self-regulatory organizations, and I am covering now all of the self-regulatory organizations, have arbitration panels of three people for claims over a minimal amount. One person must come from the securities industry--must. There is no way the investor can get this person off. There are no investor advocates on the arbitration panels. Yes, there are people selected from a public pool of arbitrators. However, these people sometimes have conflicts of interest and are problematic to the investor. Aside from that, the public pool is impure. They are very concerned about their own image and they want to work another day. So they are not prone to come out with a large award because they think they are going to be stricken the next time their name comes up. Let me tell you about a few other things, and I am not going to go into a description of war stories. There certainly are plenty. I am going to talk about statistics because that has been specifically challenged. In our area, it is clear--and I will lay it out to you in very summary fashion--that the investor has taken it on the chin ever since the McMahon decision came out. The GAO did a study in 1992 taking a look at decisions that came out of arbitrations at the SROs from 1989 and 1990. They found the customer won about 60 percent of the time. They found that the customer got about 61 percent of what they claimed. After that, the Securities Arbitration Commentator, a private commentator looking at all SRO arbitration awards, took a look at the first 10,000 awards after the McMahon decision and found there was a downward trend in the results. After that, you can see through the NASD's own statistics on how customers fare on their website the wins and the losses from 2000 to 2006. You can go there right now and you will see, back in 2002 the customer--just on a win-loss basis--was winning 53 percent of the time. I would like to correct my written statement at page 10. It had 50 percent. It was 53 percent in 2002. Every year after 2002, it went down. Today, 2006 are the final figures that we have, it is down to a 42 percent win rate for customers. That means that 58 percent of the time, a customer goes home not only empty- handed, but they are going to have to pay their lawyers. They are going to have to pay the costs for the privilege of going to arbitration, and they have no faith in the system that the public believes is a stacked deck against them. There has been a very recent study that has just come out, and this will be the last thing I will quote, and that is a 2007 study that came out looking at 14,000 arbitration awards from 1995 through 2004. That study is mentioned in my written materials. That study found not only the declining trend in arbitration of win rates, but they look at something called an ``expected recovery rate,'' and that is not just the win-loss, but they took the probability of winning and they took the amount of recovery and they meshed it together, and they found that today--2004 was the last year that they covered--in 2004, the investor would get back approximately 22 percent in an arbitration. I ask that you do three things. One, include us in your bill. Two, there is a place in some instances for arbitration, but it is not going to work at the industry-run forum, FINRA, which is where everything is now required to be held. We need an independently run arbitration system for those people who want to go to arbitration as opposed to court. If they have a $10,000 claim, they would rather go to arbitration. Give them that opportunity. Have the industry cosponsor it. Have them fund it. The NASD paid their members each $35,000 in order to--some commentators have said--vote in favor of a consolidation of the arbitration forums and regulatory division at the NASD and the New York Stock Exchange. That equates to $175 million due to the costs that the companies are going to save because after consolidation the arbitrations will be heard at one forum. But where is the benefit to the investor? [The prepared statement of Mr. Eppenstein follows:] Prepared Statement of Theodore G. Eppenstein
Ms. Sanchez. Mr. Eppenstein, I apologize, but we are way over time and we do have questions we need to get to and we are expecting votes on the floor shortly. So I am going to have to cut your testimony off. Perhaps we can elicit some more information through the round of questions. I am going to begin by recognizing myself for 5 minutes of questions. I will start with Ms. Ventrell-Monsees. One of the attachments to Mr. Naimark's testimony is the employment due process protocols. The president of your association, the National Employment Lawyers Association, at the time signed the protocols. Can you please explain the disconnect between the president of NELA approving the protocols, and your contrary testimony representing the NELA today? Ms. Ventrell-Monsees. Yes, I can. The president of NELA did not sign the document, the employment due process protocol, as the president of NELA. The first paragraph of the employment due process protocol specifically states that the signatories were designated by their organizations, but the protocol reflects their personal views and should not be construed as representing the policy of the designating organizations. I happened to be at the time working at AARP when the employment due process protocol and the consumer due process protocol were being developed. I was also a member of the American Bar Association's Labor and Employment Council at that time. You will see the other signatories on the due process protocol for employment were members of the American Bar Association's Labor and Employment Council, of which I was also. All of those people acted in their individual capacities, bringing their knowledge and expertise to that process. The greatest flaw in the employment due process protocol is that, one, it did not bar pre-dispute mandatory arbitration. That is NELA's concern and it remains our position today. Ms. Sanchez. I appreciate that answer. Ms. Williams, I am sorry for your experience, because it sounds like it has been an absolutely terrible one. I am going to ask you some very simple questions, and then I am going to ask you a little bit tougher question. Do you feel like you got ripped off? Just real briefly, yes or no? Ms. Williams. Absolutely. I feel like what was done to me was against the law. Ms. Sanchez. Do you think that the option of going to court would have been more fair to you and perhaps less costly to you? Ms. Williams. According to our franchise agreement, Maryland law would supersede the entire agreement, so that I should never have been in arbitration. We filed a civil suit. I was not to be in arbitration. I was forced in there. Ms. Sanchez. How do you feel when you hear things like something that Professor Rutledge said, that, well, you know, most people can't hire attorneys to take their cases to court, so by virtue of the fact that they have mandatory arbitration, and you know, we are sorry that a few people are going to have bad experiences there, but you know, that is kind of the cost of doing business. Ms. Williams. It is kind of incredible to me that the gentleman who spoke for the AAA and this gentleman here talk about, yes, there are flaws and yes, there are things that need to be done. What are you going to do for me? That flaw cost me everything I have ever had. What is going to happen for me? Ms. Sanchez. I am sure it is not just you, but I am sure that there are many others who find themselves in similar situations. Ms. Williams. True. Ms. Sanchez. Ms. Ventrell-Monsees, Professor Rutledge points out in his written testimony that a founder of NELA testified a few years ago that employment attorneys turned away at least 95 percent of employees who sought representation, and he suggested arbitration would allow those who have been turned away to have their disputes heard. I am interested in knowing what your response is to his observation and conclusions? Ms. Ventrell-Monsees. Post-dispute voluntary arbitration or mediation would provide a forum for employees. That is absolutely clear. Attorneys also turn away many, many cases that would be forced into mandatory pre-dispute binding arbitration because the deck is stacked against the employees. Ms. Sanchez. So in other words, a lot of employees who would normally consult with an attorney about bringing a case get turned away because of the very reason that there is a mandatory arbitration clause and they feel like it is not a worthwhile case to take because they have so many obstacles. Ms. Ventrell-Monsees. The arbitrator doesn't have to follow the law. At least if you go to court, you are assured that the judge has a law guiding him or her and a right to appeal; that the jury should follow the law based on the instructions given by the judge; that you will get full discovery, not the limited discovery that you would be left with in arbitration; you will get full remedies stated by the Federal and State law, not the limited remedies that arbitrations take away from employees. Ms. Sanchez. Thank you. Professor Rutledge, if arbitration is more favorable to consumers and employees, according to the empirical studies that you cited in your written testimony, what rational business or employer would choose to arbitrate if it is in fact this wonderful system for employees and consumers who feel like they have been wronged? Mr. Rutledge. Thank you, Chairwoman Sanchez. That is an excellent question. The best way that I can answer it to you is by referring you to a 1997 study by the GAO entitled ``Alternative Dispute Resolution: Employers' Experiences.'' I would just briefly highlight, recognizing that you are at the end of your time and you have votes going, two anecdotes that would explain why. Ms. Sanchez. That study is more than 10 years old now. Correct? Mr. Rutledge. Absolutely, but I believe what it does, Madam Chairman--excuse me, Madam Chairwoman. Ms. Sanchez. I have been called a lot worse, so ``chairman'' is not such a bad thing. [Laughter.] Mr. Rutledge. Me, too. [Laughter.] Very briefly, the reason why I believe this study is relevant is because I believe it helps establish for you and the other Members of the Committee the context in which we came into a world where arbitration is much more prevalent. Ms. Ventrell-Monsees cited for you studies which I agree with indicating that if you look back, there was a relatively lower frequency of arbitration, and that has grown. Two anecdotes very quickly. The GAO study cites an instance in which the Rockwell Corporation spent over $1 million in attorneys fees winning a legal case. So I think the reason why a company might well choose to opt into an arbitration even if in the aggregate the individuals against whom they are arbitrating prevail more often is because it is lowering their attorneys fees. Second example, the Brown and Root Company spent over $400,000 in legal fees defending an employment discrimination suit which it won. Following that experience, it put an ADR system in place which included an arbitration clause. According to GAO, the overall costs of dealing with employment conflicts were less than half of what the company used to spend, and legal fees were down 90 percent for the first 3 years following Brown and Root's adoption of the program. That is GAO's findings, not mine. I am not a business person. I can't speak for the community. But responding to your initial invitation, Madam Chairman, I believe that the information such as what is contained in the GAO report will help you assess the empirical record to determine whether this legislation is necessary. Ms. Sanchez. I thank you for your answer. I would only note that Mr. Eppenstein did say that statistically not only are consumers and employees going to mandatory binding arbitration--not only is their win-rate falling, but their recovery is also falling as well. And that may be one reason why businesses choose to go through the arbitration system as well. My time has expired. I will recognize Mr. Cannon for 5 minutes for questions. Mr. Cannon. It seems to me, before you run my time, that Mr. Rutledge wanted to respond to your last statement-question. Mr. Rutledge. Thank you very much. Ms. Sanchez. I will grant him the opportunity if he so chooses. Mr. Rutledge. If I may, Madam Chairman. Thank you for the opportunity, and to Ranking Member Cannon. I would just make two points. I would not put words in Mr. Eppenstein's mouth, but I believe that his testimony was concerned with the declining win rates in the securities industry. Ms. Sanchez. I stand corrected. You are correct. That was in one specific area. My apologies. Mr. Rutledge. The other point that I would make, Congressman Cannon, is this. There are a variety of studies in the securities industry, the 2007 one that Mr. Eppenstein cited being only one. Footnote--excuse me, congressman--a footnote in my written testimony cites several others, including the Tidwell study and the Perino study. Very briefly, as to the 2007 study that Mr. Eppenstein kindly brought to our attention, there is one point that I would make, picking up on what Mr. Eppenstein said. Mr. Eppenstein indicated that--well, two points that I would make. One, Mr. Eppenstein indicated that win rates in securities arbitration were approximately 98 percent. Let us compare that for a moment with what William Howard found in 1995 in looking at employment and consumer arbitrations. In employment and consumer arbitrations, Mr. Howard found that in employment and consumer litigation only 8 percent of those claims went to trial, and when they went to trial, the employer's win rate was 72 percent. So if we are going to engage in a comparison of raw win rates, let's be clear that there are instances where the win rates at trial are more favorable to the business than the win rates in arbitration. The other point that I would make---- Ms. Sanchez. Mr. Rutledge, I am going to just interrupt you to point out, though, the paradox that I think we have already stated with Ms. Ventrell-Monsees, which is many possibly meritorious employment claims never go to court by virtue of the fact that there is a mandatory binding arbitration clause in the employment context. Mr. Rutledge. Absolutely true, Chairwoman Sanchez. The other point that I would make is that many potentially meritorious employment claims would never go to trial because there would not be lawyers willing to take them. I cite in my written testimony a statistic indicating that if you don't have a meritorious claim of at least $60,000, that an employment lawyers is not going to be willing to take your case. Ms. Sanchez. I hate to keep contradicting you, but if legal services were more available to people who needed access to them, I don't disagree that perhaps they would be able to bring their claims. But it seems to me that that is a whole other issue that we need to look at as Members of Congress, because there is a way that we can impact that as well. Mr. Rutledge. I agree with you, Madam Chairwoman, and that is precisely why I say I think it is so important to respond to your initial invitation, which is to ask: Does the empirical record justify the remedy that is being proposed here? There may be other remedies that are appropriate, but the question is whether jettisoning arbitration on balance is going to yield net benefit to the individuals whom Congress is trying to protect. The point that I am trying to make is based on my assessment of the empirical evidence, and I am not convinced that is the case. Ms. Sanchez. I appreciate that. Mr. Cannon? Mr. Eppenstein. Madam Chairperson, do I get to respond to inaccuracies about my testimony? Mr. Cannon. I don't think we have any objection here. Ms. Sanchez. Okay. If there is no objection, absolutely. Mr. Eppenstein. Thank you. First of all, Professor Rutledge, the customer never won 98 percent of the time. In 2006, the customer is down to a 42 percent win rate; 58 percent of the time, the industry wins. The other thing you mentioned was settlements, and the impact of settlements. I can tell you that settlements are impacted by arbitration. That is because--and I am not the only one to know these statistics, the broker-dealers do also--they feel in a settlement situation that they don't have the big risk if they go to arbitration and get a decision by the arbitrators, because they know that they are not going to be hit for a big number, and they know 58 percent of the time they are going to win anyway. So they give low-ball offers to the investor. The investor is there with the investor's attorney and the investor says, ``Why are they so low?'' And the attorney has to tell the investor what the deal is in terms of the stacked deck and what we have been talking about, how you can't get a fair trial. That pushes down the settlement offers. It pushes down the deals. It has a negative impact. And you cannot compare a court decision to an arbitration decision because you don't have the same customer going to both forums at the same time. Ms. Sanchez. That is very valid point. Mr. Eppenstein. That comparison is out the window. Ms. Sanchez. I appreciate that. I am now going to allow Mr. Cannon to ask questions. Mr. Cannon. Thank you. There are distinctions between sectors, and Mr. Eppenstein, you mentioned I think in your testimony that there is no public faith in the system. Doesn't that have the effect of moving people and customers out of the system? Isn't there a profound problem for stockbrokers who cheat their clients and then have the benefit of an arbitration system that is counterproductive for the industry and then perhaps for themselves individually? Mr. Eppenstein. I don't quite understand your question, Mr. Cannon. I am sorry. Mr. Cannon. If stockbrokers cheat their customers, the customers won't come back. Mr. Eppenstein. They may not have any money to continue anyway. Mr. Cannon. Of course not--well, perhaps. The point is there are other factors that affect how these things proceed and it is not just what happens in arbitration. Once burned, twice not there, I guess. Let me shift to Ms. Ventrell-Monsees. We are looking actually at a bill here, and I wonder if you are familiar with it. There are basically three kinds of contracts, grossly speaking here. You have an at-will contract, you have a signed contract. You can't have an arbitration clause in an at-will contract. You can in a signed contract. And then you have union contracts. This bill excludes union contracts. Do you think that is appropriate? Are you familiar with that? Ms. Ventrell-Monsees. Yes, I am familiar with it, and I have been dealing with it for many years. We have no concern with arbitration in collective bargaining agreements. The unions are there to represent their workers. They often do a very good job, and so there is no reason for Congress to address that issue. The real problem that needs to be addressed is the contracts, and you can have mandatory arbitration in employment at-will. When you apply for the job, at the bottom of that application oftentimes there is a mandatory arbitration clause that people never see. Mr. Cannon. Then it is a contract that is not an at-will. There may be few protections for the person at that point. You pointed out that there are overtime problems. There are resolutions to overtime issues and those made a major story in Business Week last week. There clearly are other protections in the system. I had one other question for you, and that is that you cited two statistics, one I think was 85 percent win for the employer, and the other was 97 percent win for the employer. Did you look at the merits of those cases, or would it have been acceptable if it had been a 50-50 win? Ms. Ventrell-Monsees. It is not possible to look at the merits because they are the results of the AAA decisions in California, so it is just the result itself. Mr. Cannon. And that result you characterized as routinely discriminating against employees, as opposed to figuring out what the merits were. Let me just suggest that that is not very helpful to us because all kinds of things go into what is happening. From 1 year to the next, the employment world, whether we have a shortage of labor or a surplus, affects that sort of thing and companies have a fairly long-term interest in keeping their employees relatively happy. There are aberrations to that, but I don't think those statistics are very helpful in what we are looking at here. Ms. Williams, my understanding is that in your case, there was a point at which the attorney general from the State actually got a settlement for you, and perhaps others--I am not sure if it included others in your franchise situation. Was that the case? Ms. Williams. What do you mean by ``settlement''? Mr. Cannon. An offer to refund and take equipment back and things like that. Ms. Williams. There is an open pending investigation still. We can talk about arbitration today if you like. I would love to talk about that with you, and I hope I get the opportunity at another point in time. Mr. Cannon. I am just asking a question here. Did you have an opportunity to settle that was provided by the attorney general? Ms. Williams. Mr. Cannon, Congressman Cannon, I should never have been in arbitration regardless. Mr. Cannon. I understand that you don't like that. I am just wondering. Look, you ended up spending $1.5 million, and you told us that you didn't know at the time you made an investment which led to $1.5 million in expenditures that the average life of a coffee shop was 3 1/2 years. Ms. Williams. That is correct. That would be the fraud. Mr. Cannon. Was that fraud on the part of the company that sold you the equipment and the franchise, instead of telling you all the downsides? Ms. Williams. Exactly. The information was not disclosed. Mr. Cannon. You didn't have a reason to go look on the Internet--at the time, I am not sure that was available--to check out the kind of business you were getting in? In other words, you are a victim here, and I don't know this franchisor, but all the money you put out to vindicate your right to a trial, when you might have cut your losses and gone into some other kind of business, seems to me to be an unfair indictment of a franchisor. Ms. Williams. That is correct, and we were given a UFOC, and according to the FTC guidelines there are 21 requirements by law that a franchisor needs to disclose. We did our due diligence based on the information we were given. Your due diligence is only as good as the information that is being disclosed to you. Mr. Cannon. With all due respect, we live in a world full of information, more full these days than before. It seems to me that it can't all be the franchisor's fault. This is not a case for the franchisor, but a case for the responsibility of the investor. Thank you, Madam Chair. I yield back. Ms. Sanchez. The gentleman yields back his time. We have been called for votes, but we have just enough time, I think, to allow Mr. Johnson for his 5 minutes of questions, and then we will conclude our hearing. Mr. Johnson? Mr. Johnson. Well, I don't know if I will take 5 minutes. I will say that your testimony, Ms. Williams, has been very compelling. Ms. Williams. Thank you. Mr. Johnson. You purchased a franchise, and when you entered into that agreement, you really didn't have a choice as to whether or not to accept the pre-dispute binding mandatory arbitration clause that was in it. If you did not accept it, you simply would have been turned away from being able to purchase that franchise. Is that correct? Ms. Williams. In our situation, the UFOC and the franchise agreement are amended to adhere to Maryland franchise registration disclosure laws. Under those laws, if there is a dispute as to whether or not fraud has been committed, it does not arbitrate. It goes to court. Mr. Johnson. Well, my point is there was a mandatory binding arbitration clause in the franchise agreement that you signed. Correct? Ms. Williams. I am finding out now that the amendment to the contract to adhere to Maryland law was useless. That is correct. Mr. Johnson. And you didn't have a choice about whether or not to sign it or not. If you had not signed the agreement, then you would not have gotten a contract. I guess the point that I am trying to make is that when you go to purchase a cell phone, get cell phone service, a nursing home situation, you go to put your mother in a nursing home, you are confronted with a mandatory pre-dispute binding arbitration clause in the agreement. If you don't sign it, then you won't be able to get mom into the nursing home. You won't be able to get the cell phone service. You won't be able to purchase the home from the builder. Every builder in town has a mandatory arbitration clause, pre-dispute, in their agreement. So if you want to purchase a home in that market, you are going to have to sign that agreement with that clause in there. So it basically makes the consumer not have a choice as to whether or not to waive it or not. Of course, the consumer is not concerned about a dispute at that time. It is only when the dispute arises that you get caught up and you find that you have signed away, contracted away your right for a jury trial. A jury trial is important because it is in a public courtroom. The judge has either been elected or appointed. He or she has been subject to the will of the people and remains that way. Subject to judicial canons of ethics, he or she has to be fair and impartial, or else there is some recourse. But there is no recourse available to help a person agree to buy an arbitrator or an unfair arbitration proceeding. So it is because of this imbalance that continues to take hold throughout the commercial industry throughout America that results in people not having an ability to engage in the public justice system that gives rise to this legislation. So your testimony, Ms. Williams, is a clear example notwithstanding statistics and that kind of thing, but this is a clear example of why this kind of legislation is necessary, because of the nightmare that you have been through--no discovery, no choice of the arbitrator, exorbitant fees. You have spent $100,000 in costs, and did not have the ability to select the arbitrator. The arbitration process was held 500 miles away from your home. There are just so many costs involved. Do you find, Ms. Ventrell-Monsees, that this is typical as far as this kind of nightmare is concerned? Ms. Ventrell-Monsees. Yes. It is a very typical story in consumer cases and employment cases as well. Just as the consumer's life is devastated, so is the employee's. Mr. Johnson. All right. Mr. Eppenstein, you would agree that in terms of securities regulations and securities disputes that stockholders who have been burned by stockbrokers are subject to the same kind of nightmare? Mr. Eppenstein. Yes. And more than that, Mr. Johnson, the public isn't learning about the terrible frauds that are going on because the hearings are held behind closed doors. The decisions don't go into detail about what happened, and a lot of time the public never hears about it. Mr. Johnson. Thank you. Ms. Sanchez. The time of the gentleman has expired. I want to thank all of the witnesses. Mr. Cannon. Madam Chairman, may I just ask unanimous consent to submit a packet of documents for the record for the hearing? Ms. Sanchez. Without objection, so ordered. [The information referred to is available in the Appendix.] Ms. Sanchez. I want to thank all of the witnesses for their testimony today. We actually got in both panels before the vote. Without objection, Members will have 5 legislative days to submit any additional written questions, which we will forward to the witnesses and ask that you answer as promptly as you can so that they can be made a part of the record. Without objection, the record will remain open for 5 legislative days for the submission of any other additional materials. Again, I want to thank everybody for their time, patience and effort in coming today to help us get to the bottom of this issue. This hearing on the Subcommittee on Commercial and Administrative Law is adjourned. [Whereupon, at 4:40 p.m., the Subcommittee was adjourned.] A P P E N D I X ---------- Material Submitted for the Hearing Record Material submitted by the Honorable Chris Cannon, a Representative in Congress from the State of Utah, and Ranking Member, Subcommittee on Commercial and Administrative Law
Response to Post-Hearing Questions from Laura MacCleery, Esq., Director, Public Citizen's Congress Watch Division, Washington, DC
Attachment 1
Attachment 2
Response to Post-Hearing Questions from Richard Naimark, Senior Vice President, American Arbitration Association, Washington, DC
Post-Hearing Questions* submitted to the Honorable Roy E. Barnes, The Barnes Law Group, LLC, Marietta, GA
-------- *At the time of the printing of this hearing, the Subcommittee on Commercial and Administrative Law had not received a response to these questions from the witness.
Response to Post-Hearing Questions from Kenneth L. Connor, Esq., Wilkes and McHugh, P.A., Washington, DC
Response to Post-Hearing Questions from Deborah Williams, Annapolis, MD
Response to Post-Hearing Questions from Cathy Ventrell-Monsees, Esq., Law Offices of Cathy Ventrell-Monsees, Chevy Chase, MD, on behalf of the National Employment Lawyers Association
Response to Post-Hearing Questions from Peter B. Rutledge, Esq., The Catholic University of America, Columbus School of Law, Washington, DC
Response to Post-Hearing Questions from Theodore G. Eppenstein, Esq., Eppenstein and Eppenstein, New York, NY
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