Pre-dispute mandatory binding arbitration. “Suckers Wanted: How Car Dealers and Other Businesses

After much hassle, the dealership allowed us to bring home the sales paperwork so we could read it over without the salesman hovering over us. Everything seemed to be above board until we got to the end of the buyer's order and discovered that if we signed the contract, we would waive our rights to sue the dealership in court, before a jury, should any dispute arise after the sale. Instead, as a condition of buying the car, we had to agree to submit to mandatory pre-dispute binding arbitration, handled by the dealership's pre-selected company, the National Arbitration Forum (NAF).

* * * * * * * * * * * *

Arbitration seriously tilts the playing field in favor of businesses. Companies like the NAF, which our Volkswagen dealership used, market themselves to businesses as an alternative to the "million-dollar lawsuit." NAF rules eliminate many of the protections given to both sides of a dispute in court, things like meaningful discovery. The NAF also requires that losing parties pay the other side's legal fees, raising the stakes considerably for anyone trying to find relief from fraudulent and deceptive practices. And arbitration is extremely expensive. Consumers have to pay the arbitrators just to hear their claims, unlike the public courts, where the taxpayers pay the judges. Arbitrators often charge hundreds of dollars an hour for their services.

* * * * * * * * * * * *

Mandatory arbitration clauses are so insidious that car dealers actually furiously lobbied Congress to get them banned in their contracts with auto manufacturers. The National Automobile Dealers Association wrote members of Congress in 2000 that if they weren't outlawed for the dealerships, mandatory binding arbitration clauses would allow "multinational motor vehicle manufacturers…to be able to unilaterally deny small business automobile and truck dealers rights under state laws that are designed to bring equity to the relationship between manufacturers and dealers." Congress agreed and passed legislation protecting the dealers. Apparently, though, the car dealers didn't see a problem in using the same sort of underhanded contracts with their own customers. (Some of them may also be forced to use the clauses whether they like it or not. Several major auto manufacturers' credit divisions have told their dealers that they won't provide financing to any dealerships that don't have arbitration clauses in their sales contracts, says Paul Bland, a lawyer and expert on arbitration at the nonprofit law firm Public Justice.

* * * * * * * * * * * *

Meanwhile, Senator Russ Feingold (D-Wis.) and Rep. Hank Johnson (D-Ga.) have introduced legislation that would amend the Federal Arbitration Act to get rid of mandatory, pre-dispute arbitration clauses in all consumer and employment contracts. That bill has the business community mobilizing against it, in part because there is some hope it could pass. The arbitration issue is not strictly a partisan one. When the House held hearings on Johnson's bill, several of the witnesses who spoke in support of the legislation were longtime Republicans, including Deborah Williams, the former Coffee Beanery franchisee, and Ken Connor, a movement conservative who was Jeb Bush's lawyer in the Terry Schiavo case and a former head of the Family Research Council. Connor represents the victims of nursing home abuse, many of whom have been forced to sign mandatory arbitration clauses when getting admitted into a home.

SEC. 11028. MOTOR VEHICLE FRANCHISE CONTRACT DISPUTE RESOLUTION
PROCESS.

(a) ELECTION OF ARBITRATION.—
(1) DEFINITIONS.—For purposes of this subsection—
(A) the term ‘‘motor vehicle’’ has the meaning given
such term in section 30102(6) of title 49 of the United
States Code; and
(B) the term ‘‘motor vehicle franchise contract’’ means
a contract under which a motor vehicle manufacturer,
importer, or distributor sells motor vehicles to any other
person for resale to an ultimate purchaser and authorizes
such other person to repair and service the manufacturer’s
motor vehicles.
(2) CONSENT REQUIRED.—Notwithstanding any other provision
of law, whenever a motor vehicle franchise contract provides
for the use of arbitration to resolve a controversy arising
out of or relating to such contract, arbitration may be used
to settle such controversy only if after such controversy arises
all parties to such controversy consent in writing to use arbitration
to settle such controversy.
(3) EXPLANATION REQUIRED.—Notwithstanding any other
provision of law, whenever arbitration is elected to settle a
dispute under a motor vehicle franchise contract, the arbitrator
shall provide the parties to such contract with a written explanation
of the factual and legal basis for the award.
(b) APPLICATION.—Subsection (a) shall apply to contracts
entered into, amended, altered, modified, renewed, or extended
after the date of the enactment of this Act.