Stuck in a Bind: Can the Arbitration Fairness Act Solve the Problems of Mandatory Binding Arbitration in the Consumer Context?

• Author: Joshua T. Mandelbaum
• Position: J.D. Candidate, The University of Iowa College of Law, 2009
• Pages: 03

J.D. Candidate, The University of Iowa College of Law, 2009; B.A., Brown University, 2001. I would like to thank Professor Edward Brunet for his comments and suggestions and the editors and writers of Volumes 93 and 94 of the Iowa Law Review for their efforts in guiding this work though the publication process. I would like to give a special thanks to Gretchen Lewis for her love, support, and patience throughout this endeavor.

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I Introduction

Hardly a day goes by without the average American consumer talking on a cell phone, or making a credit- or debit-card purchase. Ask a passerby on the street, and he is likely to tell you that he cannot imagine life without these everyday conveniences that were rare or unheard of a generation ago. However, along with these new conveniences, many consumers receive something they did not bargain for-mandatory binding arbitration.

Consumers are likely to encounter mandatory binding arbitration for products beyond credit cards and cell phones. In transactions for home loans, car loans, personal accounts, gym memberships, exterminator services, computers, goods on eBay, prizes in fast-food-restaurant contests, and a variety of other products, companies frequently require mandatory binding arbitration.¹ In all, over 1000 companies include mandatory binding arbitration in routine transactions.²

While mandatory binding arbitration is not unique to the consumer context,³ consumer arbitration has been particularly controversial.⁴ Critics of consumer arbitration point out its many problems for consumers and society. These problems include high fees, a lack of due-process safeguards, unequal bargaining power, arbitrator bias toward the business, the bar of class-action suits, potential private usurpation of the roles of the judicial and legislative branches, and society's inability to make good policy decisions going forward because of a lack of information.⁵ On the other hand, defenders of mandatory binding arbitration argue that it is a cheaper, quicker, and fairer way to resolve disputes,⁶ and that the cost savings it generates ultimately benefit consumers.⁷ Page 1078

A quick search of the popular press demonstrates that there is an abundance of anecdotal evidence documenting the horror stories of mandatory binding arbitration for consumers. For example, without even knowing that there was an arbitration hearing, Beth Plowman had an arbitration judgment of over $27,000 entered against her for credit-card charges that an identity thief accrued.⁸ Stories like this illustrate dramatically the problems of consumer arbitration-problems that consumer advocates and academics are trying to highlight with their work.

The plight of individuals entangled in mandatory binding arbitration and the resulting outcry of critics have caught the attention of legislators. Over the last decade, a variety of bills have been introduced in Congress to curb mandatory binding arbitration in various contexts.⁹ These bills have typically died with a whimper, killed in committee without so much as a hearing.¹⁰ However, the 2006 elections brought a shift in power to Washington and with it a renewed effort for legislative change on arbitration policy. Advocates and legislators have rallied around the Arbitration Fairness Act, a bill originally introduced in 2007 by Senator Russ Feingold (D-WI) and Congressman Hank Johnson (D-GA)¹¹ and reintroduced in nearly identical form by Congressman Johnson in 2009.¹²

This Note critically assesses the Arbitration Fairness Act to determine if it is the best way to achieve the consumer-arbitration reform that advocates and academics have championed. Part II of this Note highlights the convergence of factors behind the rise of mandatory binding arbitration. Page 1079 Part III explores the problems for consumers and society created by the widespread use of mandatory binding arbitration. Part IV describes the potential options for correcting the problems of mandatory binding arbitration and assesses their efficacy. Part V details and analyzes the likely congressional approach to addressing mandatory binding arbitration, as represented by the Arbitration Fairness Act. Part VI argues that the Arbitration Fairness Act approaches consumer protection through disclosure; it concludes, however, that the bill fails to require critical substantive disclosures that are necessary to protect consumers from the full range of problems associated with mandatory binding arbitration.

II The Rise of Consumer Arbitration

Arbitration is a well-known method of alternative dispute resolution. Mandatory binding arbitration in the consumer context refers to the contractual clause by which "a company requires a consumer to agree to submit any dispute that may arise to binding arbitration prior to completing a transaction with the company."¹³ The rise of mandatory binding arbitration in the consumer context is a relatively recent phenomenon. Congress first took action on arbitration in 1925, when it passed what is now known as the Federal Arbitration Act.¹⁴ However, it was not until significantly later in the century that a line of cases began to interpret the Act in a way that made mandatory binding arbitration enforceable.¹⁵ Even after the line of cases emerged, it took companies some time to figure out how to take advantage of the opportunities that those cases presented.¹⁶

A The Federal Arbitration Act

In 1925, Congress enacted what is now known as the Federal Arbitration Act ("FAA")¹⁷ in order to address the courts' reluctance to enforce Page 1080 arbitration agreements.¹⁸ Section 2 of the Act made arbitration provisions in a contract "valid, irrevocable, and enforceable."¹⁹ The Act gave courts the power to enforce arbitration agreements and stay pending litigation until the arbitration concluded.²⁰ Like most legislation, however, the FAA failed to address a number of eventualities. This left significant issues for the courts to decide, such as questions involving federal jurisdiction, scope and preemptive effect, grounds on which to refuse enforcement, public-policy exclusions, and the immutability of the Act's provisions.²¹

B The Supreme Court's Stamp of Approval

Since Congress enacted the FAA, the Supreme Court has played a critical role in interpreting its boundaries. The Court has construed the FAA's boundaries loosely, frequently citing Congress's preference for arbitration as a rationale for its decisions.²²

A clear line of decisions has emerged that broadly favors arbitration as national policy. The Court has held that the FAA preempts state laws that limit the enforceability of arbitration agreements.²³ The Court has further limited the states' ability to invalidate arbitration clauses through the states' power to regulate contracts.²⁴ The Arbitration Fairness Act succinctly describes the impact of these court cases when it notes in its findings that "[a] series of United States Supreme Court decisions have [sic] changed the meaning of the [FAA] so that it now extends to disputes between parties of Page 1081 greatly disparate economic power, such as consumer disputes and employment disputes."²⁵

C The Adoption of Consumer Arbitra tion by Businesses

Once the U.S. Supreme Court started to give mandatory binding arbitration its stamp of approval, many businesses began to look for new ways to use arbitration.²⁶ Consumer arbitration quickly rose to the fore because it could "be of great advantage to manufacturers, distributors and other businesses that face the potential for burdensome, costly litigation arising out of disputes with the consumers to whom they sell."²⁷

In theory, consumer arbitration benefits businesses, consumers, and society as a whole. An early arbitration scholar, Frances Kellor, commenting on arbitration in general, noted that "any instrumentality which reduces the burden of waste and cost of disputes to a nation is an activating power for the advancement of civilization."²⁸ Benefits of arbitration include speed, potentially low costs, finality, informality, low-stress environments, confidentiality, and party control over both the process and the choice of decisionmaker.²⁹

To the extent that speed and efficiency reduce legal costs, both sides benefit from arbitration. The finality of arbitration that results from the limited right of appeal is also beneficial to both sides if the arbitration Page 1082 proceedings result in outcomes that are fair (i.e., outcomes that benefit whichever side has the most favorable facts).

However, many of these benefits, as they accrue in mandatory consumer arbitration, tend to be one-sided.³⁰ Businesses are able to choose the decisionmaker and control the terms of the arbitration proceedings through arbitration clauses included in adhesion contracts. The private nature of arbitration as a dispute-resolution mechanism, while useful for a consumer trying to protect his or her...