Originally published in the Denver Business Journal, July 31, 2009

By Todd A. Wells

American movies are full of scenes depicting the little guy standing up in his local courthouse, speaking his mind, having his day in court. Sometimes he wins, sometimes he loses. But there is usually that jury, a neutral judge and a long-cherished process we’re all familiar with.

The House of Representatives Subcommittee on Domestic Policy held a hearing on July 22 titled, “Arbitration or ‘Arbitrary’: The Misuse of Mandatory Arbitration to Collect Consumer Debts.” It focused on a simple question: Is it fair for businesses to force consumers to resolve disputes in arbitration instead of the courts?

The following day, the American Arbitration Association (AAA) stated it would decline to administer consumer-debt arbitrations until improved fairness standards were established.

The National Arbitration Forum — another large arbitration institute — recently agreed to cease the administration of consumer arbitration, as part of a settlement agreement.

The subcommittee hearing was timely as more attorneys, consumer advocate groups and law professors question the use of pre-dispute binding mandatory arbitration in consumer and employment contracts.

A large number of businesses include these arbitration provisions in contracts involving a wide variety of services, such as cellphone plans, Internet services and credit cards. Employers also have increasingly included arbitration provisions in employment contracts.

Many of us have agreed to resolve disputes in arbitration at some point in the past few years, as called for in the proverbial “fine print” part of agreements.
The key issue is that few consumers or employees understand they have signed away their right to the constitutionally guaranteed day in court, and agreed instead to resolve any disputes through a secretive process before a supposedly neutral third-party decision-maker.

Once an arbitration award is rendered, it’s subject to review only by a court for very limited reasons, which typically don’t include a review of the merits. The arbitration award is registered with local courts and enforced like any other court judgment.
The list of problems involving the use of these arbitration provisions strikes at the heart of what most attorneys would identify as fundamental constitutional rights.
For example: the lack of notice that an arbitration has begun, arbitrators who don’t appear to be “neutral” decision-makers, no right to a jury trial, no right to appeal, no right to join with other consumers in class actions, a secretive nonpublic process, hearings held far away in other states and other basic due-process concerns.
The essential problem is that arbitration originally was designed for use by businesses with attorneys who would ensure, at the minimum, a fair process. Arbitration is indeed a fantastic dispute-resolution process for businesses with attorneys who understand what they’re getting themselves into. Arbitration takes on even more significance in international commercial disputes.

However, when small domestic parties are pitted against those with massive resources and knowledge, the standard constitutional guarantees developed over hundreds of years in the public court system become crucial — especially for those who represent themselves.

The use of arbitration in consumer and employment disputes is relatively new.
In the 1980s, the Supreme Court issued decisions that opened up the use of arbitration for the resolution of civil rights-related disputes in employment, antitrust disputes and even securities disputes. Prior to that, judges in the United States and other commonwealth countries were long suspicious of arbitration as a form of dispute resolution and refused to enforce arbitration awards.

This began to change in the United States with the creation of the Federal Arbitration Act (FAA) in the 1920s. New York attorneys primarily involved in the maritime trade designed the act. It was developed for large, sophisticated parties to resolve their disputes quietly before third-party neutral experts.

Over time, the Supreme Court issued judgments that expanded the use of the FAA into areas that the drafters of the FAA never would have imagined. The Supreme Court justified this expansion of arbitration based on what the court has referred to as the strong policy of favoring the use of arbitration to resolve disputes.
It seems curious that the great protector of constitutional rights would find reason to believe that our country would favor the mass expulsion of fundamental constitutional rights.

Congress finally is catching up with this problem. In the past few years, legislators have promoted updated arbitration-related bills, such as the Arbitration Fairness Act, the Fairness in Nursing Home Arbitration Act and even a new Consumer Financial Protection Agency with the authority to regulate or ban consumer arbitrations.
The Arbitration Fairness Act essentially would amend the Federal Arbitration Act to prohibit the use of pre-dispute arbitration clauses in consumer, employment and franchise agreements. The act would prohibit only pre-dispute mandatory arbitration, not post-dispute. In other words, consumers and employees would be free to agree to resolve a dispute in arbitration after it occurs, but not before.

Pre-dispute mandatory arbitration in consumer and employment disputes is virtually unknown in the rest of the world. It either has been banned or likely is unenforceable under local legal practices.

The Supreme Court never should have expanded the Federal Arbitration Act into areas it was never intended to cover in the first place. Congress should amend the Arbitration Act to prohibit pre-dispute mandatory arbitration clauses in consumer and employment agreements.

Constitutional due process rights were created to defend the weak from the strong. It’s time we restore those rights.

Todd A. Wells, an attorney and adjunct professor of law at the University of Denver, can be reached at 303-842-0831 or todd.wells@gleasonwells.com.