Testimony of Representative Sean P. Flaherty regarding LD 1256: An Act To Prohibit Pre-dispute Mandatory Binding Arbitration Clauses in Consumer Contracts to the Joint Standing Committee on Judiciary

April 30, 2009

Senator Bliss, Representative Priest and members of the Joint Standing Committee on Judiciary, I am Sean Flaherty and I represent House District 127, which is part of Scarborough.  I am pleased to present to you today LD 1256 - An Act To Prohibit Predispute Mandatory Binding Arbitration Clauses in Consumer Contracts.

Buried in the fine print of most consumer contracts - such as credit cards, insurance plans and car deals - is a clause, which waives the buyer’s constitutional right to recourse through public process if some sort of dispute occurs.  These contracts mandate that consumers give up their rights before a dispute even occurs.

Arbitration was oringinally conceived as an informal, expedited process for resolving routine disputes between businesses. But when it is imposed on a weaker party, such as a consumer, arbitration can be used to defeat valid claims. Arbitration has several unique characteristics that stack the deck against consumers, making it harder for individuals to prevail in a dispute with a business and I’d like to run through them now:

First of all the costs are high: An injured party must pay steep filing fees just to initiate a case—seldom less than $750. These fees do not even cover the arbitrator’s hourly charges, which are generally in the range of $200 to $300 per hour, which are split between the parties.  All these fees must be deposited in advance, and almost always amount to thousands of dollars. Because the injured person has usually sustained a serious loss in the dispute with the business—foreclosure on a home, firing from a job, denial of medical care—most individuals covered by an arbitration clause cannot afford these costs and are forced to drop their cases.

Biased Arbitrators: Even though arbitrators are supposed to be impartial, they are often biased toward business, since only businesses will be repeat users of a particular arbitrator. If an arbitrator knows that a business may use them again and again, they are inclined to rule in their favor.

Limited discovery: Discovery is the process by which parties in a legal dispute obtain information and evidence in the possession of their opponent or third parties. In arbitration, discovery is a privilege, not a right, and many businesses draft arbitration clauses to severely restrict the consumer’s ability to obtain necessary evidence. Moreover, since arbitrators do not have the power to enforce subpoenas, claimants must sometimes file lawsuits to get compliance—defeating the purpose of arbitration.

Prohibition of class actions: Nearly every arbitration clause prohibits participation in class action lawsuits. Class actions are the only effective remedy for wide-scale scams that rip off individual consumers or farmers in small amounts. Individuals do not have the time or resources to recognize, investigate, or prove the existence of such fraudulent practices.

Inconvenient locations:  Arbitration clauses often require that hearings be held in a location inconvenient to the injured consumer or worker. Individuals may have to bear the cost of long-distance travel to have their case heard.  For example, the Internet auction site e-Bay requires its customers to travel to its home turf of San Jose, California, to arbitrate any dispute.

One-way requirements.   Most arbitration clauses require only the weaker party (the consumer, employee, or franchisee) to arbitrate his or her claims, while allowing the dominant party (the corporation) to sue in court on its claims.

No public record. While proceedings and records of the courts are open to the public, most arbitration clauses and provider organizations require that proceedings be kept confidential. As a result, only the businesses that impose arbitration can track past decisions and know which arbitrators have ruled for them. Public discussion of the fairness of an arbitration ruling is discouraged, even if the case raises policy issues of wide concern. Moreover, arbitration sets no legal precedents to guide companies’ future conduct.

Limited judicial review.    Parties are allowed only limited judicial review of an arbitration award. A decision may only be overturned when there is fraud or “manifest disregard of the law.” This is a very high hurdle to overcome because arbitrators are not required to issue written findings of fact or legal conclusions. Oddly enough, courts will refuse to hear appeals of arbitration decisions even when both sides have agreed to let a court do so!

And lastly, Limited remedies.   Courts can provide a range of remedies that are not available to a claimant in arbitration.  Injunctive relief—a court order compelling the offending party to do something, or prohibiting that party from taking some action—cannot be obtained through arbitration.

So how does the inclusion of Mandatory Binding Arbitration Clauses in contracts affect real people?  While most of us are already bound by several Mandatory Binding Arbitration Clauses, it is true that we probably will not end up having to try to resolve a dispute.  But that is also what so many other people thought when they got a new credit card, a cell phone, purchased a car, built a home, remodeled a bathroom, put their mother in a nursing home and much much more.

Certainly Jordan Fogal didn’t think that she’d be signing her life’s savings away when she bought a new home.  Jordan bought her dream retirement home in Houston, Texas.  Within months of moving, she discovered over $150,000 worth of damages–damages so severe that her doctor forced her to move out immediately, because of the harmful health effects.  Jordan pleaded with her builder to fix the damage on the home but instead he forced her in to arbitration because, as with many homebuyers’ contracts, her contract included a binding mandatory arbitration clause.  Jordan went through arbitration, spending thousands on experts and witnesses.  After successfully proving fraud against her builder she only received $26,000 for her $300,000 home, which is now uninhabitable.  Jordan now cannot appeal and has no recourse for action.  She is left homeless and stripped of her basic American right to get justice through the courts.

It wasn’t what Linda Stewart thought when she put her Grandmother Hattie Miller into a nursing home.  Hattie, age 92 was a resident of the Guadalupe Valley Nursing Center in Seguin, TX.  On March 4, 2004 Hattie was being transferred to a wheelchair when her leg became entangled.  She complained of leg pain following the incident, but the staff simply put her back in bed without submitting an incident report.  When her grandaughters came for a visit, Hattie told them about the severe leg pain.  They immediately took her to the hospital themselves and learned she had suffered an oblique fracture of the tibia, and a distal fracture of the fibula.  An oblique or “spiral” fracture occurs when the bone is twisted to the point of breaking.  Hattie had surgery on her leg the next day; however, the damage was so extensive, and the follow up care from the nursing home was so substandard that on 3/25/04 her leg had to be amputated.

Because negligence was so obvious, her granddaughters pursued litigation against the nursing home.  They were shocked to discover that the pile of paperwork they signed off on while admitting their grandmother to the facility contained an arbitration clause.

Hattie and Jordan are just two of the hundreds of victims that I have found out about.  I’ve included into my extended testimony just a sampling of the stories of many victims, most of whom I have spoken with, some of whom I’ve helped to prepare for Congressional Testimony.

Since mandatory arbitration clauses are presented on a take-it-or-leave-it basis, often called a contract of adhesion, an individual has no choice but to sign these contracts in order to obtain a necessary product, service, or job.  Unfortunately, these clauses are achieving their intended purpose— completely undermining consumer protections, civil rights, and other laws intended to protect consumers and employees.

This bill, with the amendment that I have proposed, would allow voluntary arbitration while preserving the right to trial by jury.  The bill would help prevent a corporation from forcing a consumer or employee into a rigged mandatory arbitration system where the corporation hand-picked the arbitrator and all of the rules of the process before a dispute even occurred.  Specifically, the bill as amended, would limits the enforceability of such clauses and will preserve certain legal rights of those who are forced to enter into a binding arbitration agreement.

I have gone on long enough about this issue, but I want to leave you with one final example of how dangerous arbitration agreements can be.

“Jamie Leigh Jones, now 22, says that after she was raped by multiple men at a KBR camp in the Green Zone (of Iraq), the company put her under guard in a shipping container with a bed and warned her that if she left Iraq for medical treatment, she’d be out of a job.

Since no criminal charges have been filed, the only other option, according to Hutson, is the civil system, which is the approach that Jones is trying now.

But Jones’ former employer doesn’t want this case to see the inside of a civil courtroom.

KBR has moved for Jones’ claim to be heard in private arbitration, instead of a public courtroom. It says her employment contract requires it.

In arbitration, there is no public record nor transcript of the proceedings, meaning that Jones’ claims would not be heard before a judge and jury. Rather, a private arbitrator would decide Jones’ case. In recent testimony before Congress, employment lawyer Cathy Ventrell-Monsees said that Halliburton won more than 80 percent of arbitration proceedings brought against it.” -ABC News, 20/20

Although it is too late to fix this particular injustice, you have a chance to prevent thousands of more Mainers from being victimized by the fine print.

Thank you and I would be more than happy to answer any and all questions you may have.