Arbitration Pendulum 
Mandatory Arbitration Agreements, Once an Easy Pass, Come Under More Scrutiny

By TERRY CARTER
ABA Journal
May 2003

The pendulum is swinging away from compulsory arbitration toward consumer rights.

Alabama got a reputation in the 1990s as one of those "jackpot justice" states so generous to plaintiffs lawyers and their clients. Probably most notorious was the case of the doctor whose new BMW arrived with touch-up paint over scratches. He got a jury award of $4 million in punitive damages. 

Never mind that the state supreme court cut it in half, and the U.S. Supreme Court ruled that even the $2 million remainder was so "grossly excessive" it violated due process. BMW of North America v. Gore, No. 94-896 (1996).

Still, Alabama businesses learned their lesson. The pendulum swung, and the state now leads the country in what critics call limited justice. Mandatory arbitration clauses are tucked into more consumer agreements concerning sales and services in Alabama than anywhere else, says Gene Marsh, a professor at the University of Alabama School of Law. 

"It saturates everything," Marsh says. "You can't breathe, you almost can't buy a lamp in a store without agreeing to mandatory arbitration, whether you know you did or not. ... In the early 1990s we had all those extremely high jury verdicts and now this. In typical Alabama fashion, we've gone from zero to 100 miles an hour in no time." 

And that has led to a backlash against the backlash. Not just in Alabama, but around the country, the pendulum is swinging again. Mandatory arbitration agreements are getting scrutiny from courts that had gotten used to finding them enforceable. And consumer groups are getting state legislatures to chip away at discrete areas of the otherwise preemptive Federal Arbitration Act.

"There has been real abuse by some companies using arbitration agreements, and courts are well aware of it," says Sarah Randolph Cole, chair of the ABA Dispute Resolution Section's Arbitration Committee, and a professor at Ohio State University's Moritz College of Law. "Right now, the courts are engaged in what I'd call a backlash against consumer arbitration agreements."

Recently the supreme court agreed to hear a pivotal case for the future of mandatory arbitration. The question before the court is whether consumers can bring a class action in arbitration where the contract does not expressly prohibit one. Green Tree Financial Corp. v. Bazzle, No. 02-634. 

Arbitration is supposed to make things easier. It's supposed to be cheaper and fairer in matters of equity, where common sense is better than cold, detached law. But it was created for handling commercial matters. As it has moved into employment law, health care matters and consumer agreements over the past 15 years, mandatory arbitration has come under attack as a deck stacked against the little guy. 

These are take-it-or-leave-it contracts of adhesion. You want the product or service, you're stuck with mandatory arbitration. And often the clause is in tiny print, tucked in stacks of paperwork. Sometimes it's added later to change the terms of an ongoing agreement. A notice may be included with your monthly statement, announcing that your checking account now mandates arbitration for any dispute. 

Some say mandatory arbitration favors businesses. Arbitrators know where their bread is buttered and hope to get called back for more cases, say critics including F. Paul Bland Jr., a staff lawyer with Trial Lawyers for Public Justice. The secrecy of the proceedings makes it easier to hide the ball.

Arbitration groups deny that. They say their procedures have evolved to ensure a level playing field for the public. "Nobody was paying attention to consumer cases or seemed to care until the past year or so," says Richard Naimark, a senior vice president with the American Arbitration Association. Since the mid-1990s, AAA has adopted protocols to ensure neutrality and shift the burden of costs away from purchasers.

"We were ahead of the curve," Naimark says.

Liking What It Sees

The U.S. Supreme Court has favored mandatory arbitration agreements over the past 20 years. The court knocked down an Alabama case in 1995, using the interstate commerce clause to hold a termite-service contract enforceable. The Alabama Supreme Court had relied on the state's statute prohibiting any pre-dispute agreements, but the high court found the Federal Arbitration Act pre-empted it.

But Bazzle could change things. A state court granted class certification for customers challenging the lender, and sent the case to arbitration as the consumer agreement stipulated. The arbitrator awarded $ 27 million to customers.

"Bazzle will determine the future of arbitration in consumer agreements," says Alan S. Kaplinsky, co-chair of the ABA Business Law Section's Ad Hoc Committee on Consumer Arbitration. He also is counsel in the effort to overturn Bazzle.

If the court upholds Bazzle, Kaplinsky predicts that companies will avoid arbitration because of the risks of class actions and limited right of appeal.

If the court overturns Bazzle and says class actions must be expressly authorized by the agreements, it would follow that clauses barring class-wide arbitration are legal, says Kaplinsky. That would call into question several cases around the country that have found such prohibitions to be unconscionable. 

More and more companies have added such prohibitions in recent years, and critics say they amount to insulation from class actions in any forum.

Courts have ruled against these prohibitions, typically, because the individual claims are so small they're not worth arbitrating. In one such case, the 9th U.S. Circuit Court of Appeals decided it was impractical for a single consumer to take on AT&T in a legal battle over an arbitration agreement for a few hundred dollars. Ting v. AT&T, No. 02-15416 (Feb. 11).

"That's the catch-22," says Jean R. Sternlight, a critic of mandatory arbitration who teaches at the University of Missouri-Columbia School of Law. "You've got to spend thousands of dollars to build a factual case to prove that the arbitration clause is denying you access to justice. It's a miracle there have been as many successful challenges as there have."

Plaintiffs lawyers have found it expensive going, she says, and some have spent a lot of money and failed. "I expect fewer challenges. You'd have to be rich or crazy."

Or plucky, like Birmingham, Ala., lawyer Thomas Campbell, who keeps spending his own money in arbitration cases to build a record to challenge others. He was behind a man-bites-dog case recently before the Alabama Supreme Court. The court ruled in favor of a consumer who, along with his renewal payment to a termite company, slipped in a notice rescinding his earlier agreement to mandatory arbitration. The trick was ghostwritten by Campbell. Cook's Pest Control Inc. v. Rebar, No. 1010897 (Dec. 13, 2002).

Campbell got another arbitration win in the state supreme court last year, also against a termite company, which is a specialty of his. The other case was one where the court found a prohibition against class actions unconscionable. Leonard v. Terminix, No. 1010555 (Oct. 18, 2002).

Leonard "was interesting, but as a result people are now saying companies will rewrite agreements to make them even more one-sided than they are now," says Bland.

Not the smart ones, says Kaplinsky, who advises corporate clients to "bend over backwards to create an agreement that's even fairer to the consumers than it is to the company." With cases like Ting piling up, it's important to do what it takes to make the agreements enforceable, he says.

Bland acknowledges that agreements are improving. "There is pressure as cases are won and things become more public," he says. "There are increasing efforts from some of the better companies and arbitration providers to amend and fix their agreements."

The state supreme court has decided more than 100 mandatory arbitration cases since the mid-1990s, in part because it has reversed its own decisions a number of times. Some critics wonder jokingly if the court itself ought to go into arbitration: Private justice is said to offer greater consistency.

All Eyes on Alabama

"The Court has been such a political battleground that you could win an arbitration case one day and lose it the next," says Stephen J. Ware, a  proponent of arbitration who teaches at the University of Alabama School of Law. "Litigants on both sides would think they have a chance to come back and reverse or win."

During the November 2000 judicial elections, in which five of nine seats on the state supreme court were in play, bumper stickers and campaign signs around the state proclaimed: "Arbitration: A Right to Steal."

That backdrop points up the fact that mandatory arbitration is as much a political issue as a legal one. The court has been a focal point in the battles between tort reformers and plaintiffs lawyers, and its make-up has changed from mostly Democratic to mostly Republican in recent years.

State courts are bound by the Federal Arbitration Act, but California has enacted several pieces of legislation to address consumer concerns. 

The most dramatic calls for arbitration groups such as AAA, National Arbitration Forum and JAMS to put quarterly reports on their Web sites with detailed information about disputes, including the parties, fees and outcomes. That includes cross-referenced information to see if critics are correct in alleging that arbitrators who rule against businesses don't get called back.

"The goal was laudable," says AAA's Naimark, who last year began monitoring legislative action on arbitration. AAA at first said it would leave California because the reporting requirement was too burdensome, but recently the group got its computer systems up to the task.

Despite the lurches toward more fairness, the ubiquity and sometimes hidden nature of mandatory arbitration in consumer agreements bother critics.

One of the most vocal opponents in Alabama is plaintiffs lawyer Jere Locke Beasley, a former lieutenant governor. 

"Everybody ought to be bothered by the fact that we force criminals to listen and fully understand they're giving up the right to a jury trial before they can plead guilty, but on the consumer end you can slip arbitration agreements through on people," says Beasley.

"And even if they know, it's take it or leave it."