Millions
Losing Legal Rights as Supreme Court Forces Arbitration
Reynolds Holding / SF Chronicle 7oct01
Lost Rights
Mandatory arbitration clauses tucked into the fine print of bills, bank statements and other documents deprive people of their legal rights -- with the approval of the U.S. Supreme Court.Conflicts of Interest
Some arbitration firms have financial interests in their clients, creating the appearance of conflicts that would never be tolerated in court.Compromised Judges
The lure of potentially high-paying jobs as arbitrators prompts some judges to try to impress arbitration firms in ways that undermine confidence in the courts.
A private brand of civil justice, one without laws or juries or constitutional rights, has swept quietly across the nation's commercial landscape, shielding corporations from costly verdicts, compromising judges and stripping the public of its right to a day in court.
Tens of millions of Americans can no longer get medical treatment, a job, a home, a credit card or a host of goods and services without agreeing to resolve future disputes in confidential, unregulated proceedings riddled with conflicts of interest.
They cannot claim injury, fraud or discrimination without paying filing fees that may reach thousands of dollars. They cannot rely on legal guarantees of due process and fair treatment. They cannot appeal, except in rare circumstances.
And most of them don't even know it.
They have been forced into binding arbitration, a quasi-legal process that allows private individuals to pass final judgment on the disputes of the parties who hire them.
Voluntary arbitration has a long history in corporate commerce, organized labor and professional sports, where it has earned praise for efficiently resolving conflicts between adversaries of equal strength.
But over the past two decades, corporate America has imposed mandatory arbitration on the public as a condition of doing business - with the blessing of the U.S. Supreme Court.
Legal experts, including advocates of voluntary arbitration and several members of the court itself, have accused the justices of ignoring the intent of Congress and distorting the Federal Arbitration Act so that business interests can avoid the costs and risks of lawsuits and judges can lighten their workloads.
"The Supreme Court rewrote that statute as a service to corporations that don't like jury trials," says Professor Paul Carrington of Duke University School of Law.
The result, critics say, is a second-class justice system in which obscure clauses buried deep in bank statements, phone bills and job applications deprive millions of people of their legal rights:
-- Lost rights: In mandatory arbitration, high fees can discourage individuals from pursuing cases. The system lacks the procedural safeguards of court, and limited awards can make hiring a lawyer difficult. Arbitrators don't have to be lawyers and may not follow the law or justify their rulings. Their decisions are confidential and final.
-- Conflicts of interest: Some arbitration firms have invested in the companies whose disputes the firms' arbitrators hear, creating the appearance of conflicts that would never be tolerated in court. Studies show that arbitrators may favor large corporations and other frequent clients.
-- Compromised judges: Soaring demand and potentially high pay have lured an increasing number of sitting judges into arbitration - particularly in California - and pressured some to act in ways that may impress arbitration firms but weaken public confidence in the courts.
"Mandatory arbitration allows corporations to undermine the whole system by which we hold them accountable," says Montana Supreme Court Justice Terry Trieweiler. "Every day it becomes more pervasive, and more oppressive."
Taking a case through mandatory arbitration can be financially and emotionally devastating.
While a vice president at NationsBank Capital Markets, Renee Cecala says male bosses grabbed, cursed and pawed her. A stripper dressed as a pizza delivery boy disrobed as she stood on the trading floor. For Halloween, she received a small coffin containing a nude figure with a penis as long as its body.
In 1998, under securities-industry rules, her complaint was assigned to a panel of three arbitrators.
The panel's chairman was a retired music teacher. The second arbitrator had run a small stock-brokerage firm in Indiana and, Cecala says, "was immensely hard of hearing." The third, a small-town lawyer and diabetic, often slept during the proceedings as his insulin pump whistled in the background.
"I remember walking into the room, seeing these three and thinking, "Oh, my God,' " says Cecala.
Transcripts show the panel losing control of the attorneys, misstating the law and making bizarre rulings. The hearings lasted 18 days over more than two years and cost Cecala almost $25,000 in arbitrator and hearing fees alone. Then the panel ruled against her.
Cecala says she fell into deep depression, unable to sleep for days at a time.
"In terms of the massiveness of the mess, it's hard to top her case," says Cecala's current attorney, Mitchell Aberman, who is asking a federal judge to overturn the arbitrators' ruling.
In response to mounting criticism, several arbitration firms have adopted fairness standards. But the protocols are sometimes ignored and, in any event, cannot be enforced in court.
Reforms that would protect the public have been proposed in Congress and state legislatures. On Sept. 26, Gov. Gray Davis signed a bill calling for rules requiring arbitrators to disclose conflicts of interest. A bill now before the U.S. House of Representatives would prohibit employers from imposing arbitration on most workers.
But the prospects for further reform are uncertain. The California Chamber of Commerce, the American Insurance Association and other business interests from Silicon Valley to Wall Street have consistently fought to defeat proposed limits.
"What you're talking about here," says Rep. Dennis Kucinich, D-Ohio, a sponsor of the House bill, "is a classic struggle between the basic rights of workers and the desire of corporations to have absolute control of the workplace."
On Wednesday, the U.S. Supreme Court will hear arguments in a case that could extend the reach of mandatory arbitration even further. The court will decide whether the federal Equal Employment Opportunity Commission can sue an employer on behalf of Scotty Baker, a fired short-order cook who unwittingly signed away his right to a jury trial.
The case may show how far the court is willing to go in limiting not only the rights of individuals but the authority of the agencies created to protect them.
"Employers see a green light posted on the front steps of the Supreme Court,
emboldening them to make arguments that 20 years ago would have been deemed outrageous," says San Francisco attorney Michael Rubin, author of a brief supporting the EEOC's position. "This time, I hope the Supreme Court tells them that they have finally pushed too far."
For years, the nation's courts refused to enforce arbitration agreements, frustrating companies eager to conduct business without lawyers or courts.
Then, in 1923, Republican Rep. Ogden L. Mills of New York introduced a bill that would make arbitration contracts enforceable in federal court.
Critics of arbitration worried the legislation would undercut the rights of individuals. But the bill's authors and supporters said it would only apply to "merchants" in contract disputes.
The Federal Arbitration Act became law in 1925, and for decades the nation's courts honored the limits Congress intended to impose on the act.
But by the mid-1970s, the fear of an explosion in litigation gripped the federal judiciary. Business interests warned of skyrocketing lawsuits. Insurance company Crum & Forster ran a full page advertisement in Time magazine, condemning lawyers for filing more than 1 million product liability cases each year. Although the actual number never exceeded about 80,000, the point had been made.
In 1983, without explanation, the Supreme Court declared that the Federal Arbitration Act had created a "liberal federal policy favoring arbitration," meaning arbitration agreements should be upheld whenever possible.
The pronouncement marked a stark change in the high court's thinking, and the new policy soon drew criticism from its own members, including Justice Sandra Day O'Connor, who said the court "utterly fails to recognize the clear congressional intent underlying the Federal Arbitration Act."
But the court repeatedly invoked the new policy as it expanded mandatory arbitration throughout the nation's commercial life - even when civil rights were at stake.
The court had long maintained that arbitrators "may be wholly unqualified" to decide civil rights cases and similar legal matters, said Justice Hugo Black.
But in 1991, the justices ruled 7 to 2 that Robert Gilmer, a 62-year-old financial services manager replaced by his 28-year-old protege, must take his age discrimination case to arbitration.
The ruling cleared the way for companies in every industry to prohibit their employees from going to court with their grievances.
In its rulings, the Supreme Court has treated arbitration clauses as ordinary contracts between consenting parties.
But for individuals, the clauses are much more. They are waivers of the constitutional right to a jury trial. And in all contexts other than arbitration clauses, federal courts have consistently ruled that such waivers must be "knowing, voluntary and intentional," says Jean Sternlight, a law professor at the University of Missouri.
Yet thousands of medical patients, credit cardholders, homeowners and employees give up that right every day without even knowing they have done so.
Many mandatory arbitration clauses are tucked into shipping materials. Some lurk in the dense pages of bills and bank statements. Often the clauses appear in tiny type.
In 1992, the Bank of America started slipping mandatory arbitration clauses into bills sent to its credit card and account holders. Customers who continued to use their card or account, said the notices, would agree not to sue.
But a group of cardholders sued the bank, arguing that the so-called "bill stuffers" were unfair and deceptive. In 1998, the California Court of Appeal in San Francisco ruled in their favor, becoming one of the few courts in the nation to say that a business imposing arbitration on its customers "must clearly and unambiguously show" that they have agreed to waive their constitutional right to a jury trial.
For a while, the decision discouraged bill stuffing in the state. But in July, Berkeley resident Darcy Ting and other phone customers received "Dear AT&T Customer" letters. If they made one more long-distance call, the letters said, they would have to resolve all disputes of more than $5,000 in arbitration.
Ting was outraged. She led a class-action suit against AT&T in federal court in San Francisco.
"Why should I lose my rights?" asked Ting. "It is really unfair."
Filing a case in California Superior Court typically costs from $90 to $185.
If the complaint involves discrimination, a state agency such as the California Department of Fair Employment and Housing or the federal Equal Employment Opportunity Commission might take the case for free. In certain employment disputes, the state Labor Commission might take the case, also for free.
But mandatory arbitration can require thousands of dollars to file a case. As a result, some people must pay fees they cannot afford or drop their legal complaints.
Lorraine Aho had to make that choice earlier this year in her wrongful firing case against Maxager Technology in San Rafael.
The American Arbitration Association ordered her to pay a $3,000 filing fee,
plus any fees the arbitrator might charge. Her attorney, Mary Dryovage, says the fees could have topped $50,000.
"We told them to forget it," Dryovage says. "I wasn't going to let one of my clients get into a situation of having to declare bankruptcy to pursue her case."
Some arbitration firms charge less. Several courts, including the California Supreme Court, have ruled that employers must foot the bill in employment discrimination cases.
But American Arbitration Association, the nation's largest arbitration firm with more than 140,000 cases each year, charges up-front fees ranging from $500 for claims under $10,000 to more than $7,000 for claims above $1 million in commercial cases.
Mandatory arbitration agreements often prohibit class actions, lawsuits that combine many claims so awards are large enough to cover legal fees and other costs. Class actions help people of modest means afford litigation and, although subject to abuse, enforce consumer protection and civil rights laws.
The National Arbitration Forum has assured potential clients that its rules will shield them from class actions and improve "the bottom line."
FleetBoston Financial Corp., Citigroup Inc. and MBNA Corp. recently barred credit card customers from joining any class actions against the companies, including suits already filed but not yet "certified" by courts.
Although many arbitrators are former judges, they are rarely required to follow the law. Some arbitrators are not even lawyers.
In 1997, Carl Posey's defamation and wrongful firing case against PaineWebber Inc. was assigned to a panel of three arbitrators in Nashville, Tenn. Two of the arbitrators weren't lawyers. The third, the panel's chairman, showed up wearing a white T-shirt and a khaki vest adorned with fishing lures.
"I remember asking the case administrator, "Where did you get these guys - off a barstool?' " says Posey's attorney, Jeffrey Liddle.
After a full day of opening statements, the panel asked if the lawyers could go through the statements again. It soon became clear that the arbitrators would never grasp the case's nuances, says Liddle, so they agreed to quit.
A second panel was appointed. But when its chairman, a nonlawyer, leaped to his feet to stop Posey from getting documents he was legally entitled to, Liddle sensed more trouble. After a three-hour discussion, the second panel also quit.
Ultimately, the case was filed in federal court and settled.
"They just had a total misunderstanding of what we were about," says Posey, who had to pay the arbitrators $10,000 for the aborted hearings.
PaineWebber, now UBS PaineWebber, declined to comment.
Although supporters of arbitration praise the system's swift resolution of disputes, critics say speed and efficiency come at a price: the loss of rights guaranteed in court.
In 1999, San Francisco investment banker Nicholas Prassas sued Smith Barney Inc., claiming the bank fired him for not lying about campaign contributions that could have disqualified the firm from doing a bond deal with the state of Hawaii.
Smith Barney forced Prassas into arbitration, preventing the allegations from being aired in open court. During the case, his attorney says, the firm turned over few documents and gave superficial answers to his written questions. When the attorney tried to take deposition testimony from witnesses,
the arbitrators stopped him.
Left with scant information to make his case, Prassas settled without a hearing.
"It was awful," says Prassas. "There seemed to be no rationale behind the arbitrators' decisions."
Smith Barney, now Salomon Smith Barney, declined to comment.
In many cases, arbitration agreements limit the size of awards.
In July, for example, AT&T's customer notice said disputes with the company would go to arbitration rather than to court and that the company would only pay for faulty phone service or direct damages to property - not for indirect, punitive or other damages normally allowed by law.
Award limits can make finding an attorney difficult. In December, the California Research Bureau, the Legislature's research wing, reported that almost a third of the medical patients who go to arbitration don't have attorneys.
Cliff Palefsky, a San Francisco attorney who has led the legal opposition to mandatory arbitration, says he has advised many women - particularly securities industry professionals - not to pursue a discrimination case in arbitration.
"The high costs, the amount they could win and the chances of winning all militate against pursuing it, because of the damage it could do to their careers," he says. "It breaks my heart to have to give someone with a good case that kind of advice."
Three years ago, after Sherri Warner lost her discrimination and wrongful firing suit in mandatory arbitration, a San Francisco arbitrator not only charged her nearly $16,000 for his time, he ordered her to pay her opponent's legal fees of more than $207,000.
The fee award would probably not have been allowed in court, and it forced Warner into bankruptcy. But after her lawyer, Stephen Gorski, asked the arbitrator to explain his decision, the arbitrator refused when reminded no rules required him to do so.
Arbitrators rarely issue written opinions, making requests for review virtually impossible.
The National Association of Securities Dealers generally limits arbitration opinions to the names of the participants and their attorneys, the claims asserted and the outcome. In some cases, major clients of arbitration firms have prohibited arbitrators from even issuing opinions.
MCI Telecommunications Corp., for example, agreed in 1994 with Endispute, which later merged with Judicial Arbitration and Mediation Service now JAMS, that awards "shall not include any findings of fact or conclusions of law."
As a marketing company pointed out in its 1996 lawsuit against MCI, an arbitrator's finding that MCI had engaged in "willful misconduct" would have exposed the company to increased liability under federal regulations.
In recent years, mounting complaints about arbitration have prompted the nation's largest arbitration firms to adopt fairness standards.
Starting in 1995, for example, American Arbitration Association agreed to abide by "protocols" for running arbitrations in employment, consumer and health care cases. In health care, the association said it would accept only cases that people had voluntarily agreed to submit to arbitration after the dispute arose.
But the standards are not enforceable, and the association seems to ignore them.
In 1999, for example, Maureen Alexander filed a complaint against Blue Cross of California, claiming that a doctor removed her gown during a routine checkup and, for no apparent reason, poked her breasts and pelvic area with a pin, according to court papers.
Blue Cross forced her into arbitration, and American Arbitration took the case, even though Alexander said she didn't know she had signed an arbitration clause.
The arbitrator failed to apply the association's health care rules, including requirements for sharing documents and other information, and ruled against Alexander.
She sued Blue Cross to overturn the award, claiming the arbitrator was biased and ignored applicable laws, but she lost. She then sued the American Arbitration Association for breaching its own protocols, but a federal court dismissed her suit earlier this year.
Meanwhile, in a separate case last year, American Arbitration Senior Vice President Robert Meade submitted a sworn affidavit saying the organization "does not require compliance with the (health care) protocol for cases we administer."
In other cases, the association has also failed to require its arbitrators to follow the consumer or employment protocols.
American Arbitration spokeswoman Kersten Norlin says the association enforces the protocols unless a case "doesn't fall under one of the defined categories. You may have an employment arbitration clause involving a health care company, for example. So it's not always black or white."
Palefsky says that's nonsense.
"The protocols," he says, "are all just a marketing ploy."
On Wednesday, attorneys for the Equal Employment Opportunity Commission will appear before the U.S. Supreme Court on behalf of 27-year-old Scotty Baker.
In November 1992, Baker's white Corolla flipped off a rain-slickened highway near his home in South Carolina. He walked away with a bump on his head, but a week later started to have periodic seizures.
In 1994, he filled out an application for a job cooking at the Waffle House in Columbia. He got the job, but turned it down. A few weeks later, he applied for a similar job at the Waffle House in West Columbia.
The manager hired him on the spot, without asking Baker to complete an application. When Baker mentioned his seizures, the manager just said, "Show up for work at 7 a.m.," Baker says.
About two weeks into the job, Baker suffered a seizure, and the manager fired him. The manager said, "It's bad for business to have you spazzing out in front of the customers," says Baker.
Eight months later, he consulted a lawyer about suing Waffle House for discriminating against a disabled employee. That was when he learned about the arbitration clause at the bottom of the application he had filled out for the Waffle House in Columbia.
In barely readable type, a four-line paragraph said any dispute involving the company would go to binding arbitration.
Baker says he never saw the arbitration clause. Besides, the clause was on the application he had completed at the first Waffle House, not at the Waffle House in West Columbia where he worked.
But arbitration was his only recourse. And he would have to pay half the costs, including the arbitrator's fees. Out of work and seeking reinstatement to a job that paid $5.50 an hour, Baker couldn't afford it.
In 1996, the Equal Employment Opportunities Commission sued Waffle House in the U.S. District Court in Columbia, S.C., claiming the company had violated the Americans with Disabilities Act by firing Baker for his seizure. Waffle House, as expected, moved to force the case into arbitration.
Waffle House and its attorneys declined to comment on the case.
When a federal judge ruled that Baker wasn't bound by any arbitration agreement, Waffle House appealed. In October 1999, the appeals court reversed the ruling, deciding not only that Baker must go to arbitration, but that the "strong policy favoring arbitration" barred the EEOC from suing Waffle House for damages and, in effect, doing an end run around the agreement.
The court, though, also acknowledged the EEOC's congressionally mandated duty to protect the public's interests. The agency could, therefore, seek an order stopping Waffle House from illegally firing any disabled workers.
That is the issue now before the U.S. Supreme Court. Can a federal watchdog like the EEOC use every means provided by Congress, including suing for damages, to enforce the laws against employment discrimination and other civil rights violations?
"I can't imagine the court will stop the EEOC from enforcing the
law," says Carrington, "but who knows? And if workers have to protect
themselves from discrimination without the EEOC, to bargain for their own
rights, then that means they don't have any rights."
In a series of controversial rulings since 1983, the U.S. Supreme Court has encouraged companies to impose mandatory arbitration on the public. But critics say the rulings seriously misinterpret the Federal Arbitration Act. .
-- Federal Arbitration Act
For years courts allowed people to back out of arbitration agreements. In 1925, Congress passed a bill making arbitration agreements as enforceable as any other contract. During congressional debates, the bill's supporters assured critics that the new law would apply only to "merchants" who entered agreements voluntarily.
. .
1983 -- New policy favoring arbitration
In the mid-1970s, fears of a litigation explosion prompted judges and companies to push arbitration as an alternative to lawsuits. In 1983, without explanation, the high court concluded that the Federal Arbitration Act had created a "liberal federal policy favoring arbitration.". 1984 -- Trumping state laws
Citing that "federal policy," Chief Justice Warren Burger wrote for the court that arbitration clauses preempt state laws protecting the public's right to go to court. In dissent, Justice Sandra Day O'Connor said the decision Ð"utterly fails to recognize the clear congressional intent underlying the (Federal Arbitration Act)." .
1985 -- Fair and competent
In a case enforcing an arbitration agreement in an antitrust action, the high court called arbitration just as fair and competent as the legal system. Justice John Paul Stevens disagreed, calling arbitration "despotic decision making." .
1989 -- Ignoring consumer protections
Reversing an earlier ruling, Justice Anthony Kennedy wrote for the court that a securities firm could force a disgruntled customer into arbitration, even though arbitrators might not enforce the consumer protections of securities laws. Justice Stevens compared the decision to "an indefensible brand of judicial activism." .
1991 -- Lost civil rights
The high court ruled that an employee must take an age discrimination case to arbitration, breaking with its longstanding position that civil rights cases were too important and legally complex to handle in arbitration. .
1995 -- Undermining state protections
The Supreme Court held that states could not limit mandatory arbitration with, for example, laws ensuring that consumers, employees and others understand the rights they are giving up by agreeing to arbitration. .
2001 -- Covering employees
Earlier this year, the high court ruled for the first time that the Federal
Arbitration Act applied to all employees, except transportation workers.
Advocates of arbitration say the process is swift, efficient and inexpensive. But critics say arbitration can mean high filing fees, unqualified arbitrators,
lost legal rights, limited awards and no appeals. .
Court: Filing a case in state Superior Court costs from $90 to $185, depending on the amount claimed.
Arbitration: Filing fees for arbitration can cost thousands of dollars, depending on the case and the arbitration firm. Fees for hearing rooms and the arbitrator's time can run tens of thousands of dollars more and discourage individuals from pursuing a case. .
Court: Judges or other judicial officers hear cases.
Arbitration: Many arbitrators are former judges, but some are not even lawyers. Arbitrators are rarely required to follow the law and are regulated in only two states. .
Court: Judges are usually assigned according to a rotation or by a presiding judge.
Arbitration: Parties select arbitrators, usually from a list compiled by an arbitration firm. Firms offer parties various methods of striking names from the list and reducing them to one. If the parties cannot agree, the firm may designate an arbitrator. .
Court: The right to a fair process is protected by legal safeguards such as discovery, testimony and evidence rules.
Arbitration: Court rules do not apply, meaning the arbitrator - sometimes guided by an arbitration agreement or the rules of an arbitration firm - controls the process. .
Court: Judges and juries decide how much an injured party should receive.
Arbitration: Awards are generally lower than in court, and arbitration agreements sometimes limit the type of damages an individual can recover. .
Court: Judges' decisions are public record and subject to appeal.
Arbitration: Most decisions by arbitrators are confidential. They cannot be
appealed and are subject to judicial review only in narrow circumstances.
The stories of three people who discovered how hard it is to fight mandatory arbitration. .
-- No arbitration, no job
For three years, Donald Lagatree worked as a legal secretary at a Long Beach firm, receiving regular bonuses and pay raises. Then in June 1997, the firm asked him to agree "that any claims arising out of or relating to my employment . . . shall be resolved by final and binding arbitration."
When Lagatree refused, the firm fired him.
Several months later, he took another secretarial position, this one at a Los Angeles law office. On his first day, he was handed a letter to "confirm" the deal, including his agreement to take all disputes to arbitration.
Again Lagatree refused to agree to arbitration, and, once again, he was fired.
He sued both firms for wrongful termination and lost in the state courts. The federal Equal Employment Opportunity Commission is pursuing the case before the U.S. Court of Appeals in San Francisco.
The right to go to court "just seemed too important to give away," said Lagatree. .
-- Even egregious decision stands
Rosalind Smith says her co-worker ogled her breasts, licked his lips and gyrated against her from behind. He complimented her "onion-shaped butt," bragged of his sexual prowess and repeatedly asked for "a one-night stand."
When Smith, a secretary at a Pennsylvania social services agency, finally complained to her supervisor, she was fired. In 1999, she filed a claim against the agency and her co-worker, charging them with sexual harassment and retaliation.
At the formal hearing, her co-worker admitted asking her for a one-night stand and making vulgar comments about her body. But the arbitrator ruled against Smith.
So she went to federal court, seeking to overturn the arbitrator's decision.
The judge acknowledged that her case met all the requirements for proving sexual harassment. And when she argued that the arbitrator was simply wrong about the law, the judge agreed.
But courts are prohibited from overturning even the most egregious decision by an arbitrator, unless it makes virtually no sense at all.
In declining to reverse the ruling in Smith's case, the judge wrote that he could not "conscientiously conclude that the arbitrator's . . . decision exceeded all bounds of rationality." .
-- "Plaintiffs have themselves to blame'
Three years ago, when Gabriel Martinez lost his job with Scott Specialty Gases Inc. in Fremont, he and his wife sued the company in Alameda County Superior Court, claiming the firm had fired him illegally and ruined their lives. The company responded that Martinez was bound by the arbitration agreement he had signed when he started work.
Although Martinez insisted that he had repudiated the agreement when it was presented to him, the court ordered him to arbitration.
Martinez appealed, and late last year the state Court of Appeal in San Francisco ruled against him and his wife.
Then the court informed Martinez that by pursuing his case in court, he had waived his right to take the case to arbitration. Martinez was left with no recourse against his former employer, either in court or in arbitration.
"While perhaps genuinely regretting this now, . . . " the court
wrote, "plaintiffs have themselves to blame for their predicament."
Waffle House's policy requiring parties to settle disputes through arbitration - and give up their right to a jury trial - appears in small, barely readable type at the bottom of its employment application form. An excerpt: .
"The parties agree that any dispute or claim concerning Applicant's employment with Waffle House, Inc. . . . or the terms, conditions or benefits of such employment, including whether such dispute or claim is arbitrable, will be settled by binding arbitration."
Waffle House's employment application form (shown actual size at right)
Can
public count on fair arbitration?
Financial ties to corporations are conflict of interest, critics say
Reynolds Holding / SF Chronicle 8oct01
The notice that arrived in Darcy Ting's mailbox early last July was troubling enough.
AT&T, her long-distance phone company, was cutting off her right to sue. If Ting made one more long-distance call from her Berkeley home, the notice said, she would have to resolve claims of more than $5,000 against the company through the American Arbitration Association.
What the notice didn't disclose was that the association had invested $100, 000 in AT&T bonds the previous November.
"How can I possibly count on their being fair?" asks Ting, who has sued AT&T on behalf of California customers who received the notice.
In fact, the American Arbitration Association, the nation's largest arbitration firm, owns millions of dollars' worth of stocks and bonds in major corporations whose legal disputes its arbitrators have heard. Some of the corporations also buy "memberships" in the association, and their executives sit on the association's board of directors.
The association denies that any of these financial relationships affect its ability to provide fair and neutral arbitrators.
But critics say the arbitration industry is riddled with conflicts of interest that would never be tolerated in court.
"Virtually any lawyer who has had to use arbitration doubts the integrity of the system in a way we never doubted the integrity of the public courts," says Arne Werchick, a lawyer, arbitrator and former president of the California Trial Lawyers Association.
Over the past two decades, the U.S. Supreme Court has allowed corporate America to impose mandatory arbitration on the public so that companies can avoid lawsuits and judges can lighten their workloads. But the pressure to generate income and attract new clients has driven some arbitrators and their firms to engage in practices that cast doubt on the fundamental fairness of the process:
-- Financial investments. The American Arbitration Association and other arbitration firms own millions of dollars in stocks and bonds in some of the companies whose disputes the firms' arbitrators hear.
-- Undisclosed contracts. Large arbitration firms sell administrative and consulting services to many clients they provide arbitrators to, contracts that aren't revealed to people forced into arbitration.
-- Soliciting clients. Many arbitration firms court corporate clients by stressing the small awards and cursory procedures, sometimes asking ostensibly neutral arbitrators to help salesmen solicit new business.
-- Repeat players. Researchers have found that some arbitrators may succumb to the pressure of ruling for the clients who use their services repeatedly.
-- Captive operators. Some arbitration firms have such a close relationship with their clients that arbitrators may rule in the companies' favor to keep the business.
Last year, the American Arbitration Association's own arbitrators and mediators sharply criticized the firm for filing a legal brief that supported electronics company Circuit City's position before the U.S. Supreme Court. Circuit City wanted to enforce an arbitration clause against an employee, and American Arbitration didn't disclose that the clause named it to handle the dispute.
The association insists the brief merely explained how arbitration worked. But in a Sept. 15, 2000, letter to the association, American Arbitration mediator Elaine Leitner wrote that the brief "is not only unseemly, but destroys AAA's hard-earned neutrality."
Even arbitration's strongest supporters insist that an industry based on neutrality cannot tolerate the appearance of a conflict of interest.
"The only thing that keeps arbitrators in business is their integrity," says Arnold Zack, former president of the National Academy of Arbitrators.
AT&T is not the only corporate client in which American Arbitration has held a financial interest.
The association also has owned shares of Bank of America, Aetna, Cigna Corp. , General Electric and other corporations whose disputes its arbitrators have heard.
Several corporate officers of General Electric, Sprint and other companies that use the association's arbitrators have been directors of American Arbitration. And last year the association received more than $2.1 million in membership fees from Aetna, GE Industrial Systems and other corporations, institutions and individuals.
Kersten Norlin, spokeswoman for American Arbitration, said an outside investment firm manages all the nonprofit association's investments and the association's actual knowledge of the investments "is extremely limited." And whatever the affiliations of its directors or members, she explained, arbitrators are largely independent from the organization and usually selected from panels by the parties themselves.
"Our neutrals decide the outcome of cases. AAA doesn't," Norlin said.
But critics stress that the association has substantial control over the cases it resolves: American Arbitration Association sets the arbitration rules,
selects and trains the panels and chooses arbitrators when parties cannot.
"Do you honestly believe," says Alabama plaintiffs' attorney Charles Robinson Jr., "that a consumer has a fair chance when the company on the other side of the table pays yearly fees to AAA?"
Two years ago, several long-distance phone customers complained that MCI WorldCom Inc. had concealed a mandatory arbitration clause in documents filed with the Federal Communications Commission. The clause required customers to file all complaints with Irvine-based JAMS, formerly Judicial Arbitration and Mediation Service.
But JAMS, argued the customers, was financially beholden to MCI under side agreements that had never been made public.
One of the customers, a company owned by George Hopper of Lexington, Ky., said in legal papers supporting a complaint to the FCC that JAMS had earned more than $325,000 providing administrative and consulting services to MCI, had received free phone service from MCI, and, until 1999, was owned primarily by investment firm Warburg, Pincus & Co.
As a result, Hopper argued, the arbitration rules were "unjust, unreasonable, unlawful and unenforceable."
JAMS President Steve Price says MCI never paid for JAMS' long-distance service, the investment firm "never attempted to influence JAMS" and "any claim that this program was biased is just not true."
In 1998, a federal appeals court upheld the contract with MCI.
Another major arbitration firm, National Arbitration Forum in Minnesota, cited the MCI decision in a paper presented to the American Bar Association last year.
"Irrespective of allegations of bias," the company said, "the fact remains that the arbitration administrator -- and its employees -- cannot affect the outcome of an arbitration hearing any more than courthouse employees can affect the outcome of litigation."
But critics point to the overwhelming success of First USA N.A., one of the forum's biggest clients.
The bank has filed more than 50,000 collection cases with the forum and paid it several million dollars in fees, according to deposition testimony. And since 1998, First USA has won 99.6 percent of the cases, according to figures produced in a class-action lawsuit.
The forum's managing director, Edward Anderson, rejects the figures, saying the bank might have done as well in federal court.
"The forum is neutral, the arbitrators are neutral and the system has all sorts of protections against any claimant getting a leg up," Anderson says.
But on Sept. 30, 1999, a federal judge in Florida refused to enforce a mandatory arbitration agreement against a First USA credit cardholder because the card company had "failed to demonstrate . . . that the National Arbitration Forum is a neutral, inexpensive and efficient forum."
On June 1, the U.S. Court of Appeals reversed the decision, saying First USA was not required to demonstrate the forum's neutrality.
Formed in 1926, the American Arbitration Association had little competition for decades. But in the late 1980s and early 1990s, the Supreme Court dramatically expanded the role of mandatory arbitration, and the demand for arbitrators soared.
JAMS, National Arbitration Forum and other competitors commanded an increasing share of the market, and the association was forced to fight for business.
American Arbitration arbitrators began to accompany the firm's salesmen on calls to potential clients -- helping to solicit business from companies whose disputes the association hoped to resolve, say former association employees.
In a Jan. 14, 2000, memo, Regional Vice President Paul Van Loon in San Francisco asked arbitrators for introductions to corporations and to "indicate . . . if you would like to make the call with us."
Van Loon declined to comment, but association spokeswoman Norlin says he was referring to phone calls rather than personal calls, which, she says, arbitrators are barred from attending.
Although American Arbitration stresses that it does not tell potential clients they will prevail over employees, consumers and other individuals more often in arbitration than in the courts, that is the message the companies receive.
On the sales calls, often with arbitrators, "we would educate people on how arbitration was a less expensive, faster and confidential process," says one former salesman.
On a videotape played for workers at Red Lobster restaurants, American Arbitration arbitrator Bruce Chapin advised that a workplace dispute "is not a matter that would be best tried in front of a jury."
And the association's brochures have stressed "more rational outcomes than (in) the jury system."
Even reputable arbitrators are vulnerable to what has come to be known as the "repeat player" problem.
The problem arises because parties that frequently use arbitrators tend to have an advantage over individuals who go to arbitration once or twice. A repeat player who chooses an arbitrator and wins is more likely to select the same arbitrator in future cases. The prospect of more business gives the arbitrator a financial incentive to rule in the repeat player's favor.
In a 1997 study, Lisa Bingham, director of Indiana Conflict Resolution Institute, found that employees won just 16 percent of their cases against repeat players, defined as employers in arbitration at least twice a year. But the employees won 71 percent of their cases against nonrepeat players. Even when employees beat repeat players, the employees generally won no damages, the study found.
Last year, Bingham presented a revised study that accounted for new industry standards designed to make arbitrations fairer. Employees still won only 29 percent of the cases against repeat players compared with 51 percent against nonrepeat players.
Michael Young, co-chair of JAMS' Committee on Professional Standards and Public Policy, said in a recent article that "the risks of the repeat player advantage are real and can be disturbing," although he noted many arbitrators "take seriously their ethical obligations to be impartial."
By trying to reduce arbitration costs, the courts may have aggravated the repeat player problem.
In 1997, the U.S. Court of Appeals in Washington said an employee can't be forced into arbitration and then charged fees he wouldn't have incurred in court. The California Supreme Court reached a similar conclusion last year.
But making one party pay the fees skews the system, says Zack, who argues that parties should split the bill.
"I would like to think that if I did these cases, I would do what I think is fair regardless of where the chips fall," he says. "But I do have a gnawing feeling that if I hadn't had any cases for a while, and I saw the possibility of a lot of cases coming in from an employer, it might influence my decision."
Outside the major arbitration firms, thousands of arbitrators ranging from individual lawyers to company-controlled panels operate beyond scrutiny or industry guidelines.
And in some cases, the close relationship between these independent operators and their clients has cast doubt on the fairness of their proceedings.
"It's the unregulated, cowboy arbitrators," says Bingham, "and the private panels that employers set up below the radar that you really have to worry about."
In March, a federal judge in Indiana ruled that a chain of restaurants called Ryan's Family Steak Houses could not enforce an arbitration agreement imposed on two waitresses who accused their manager of sexual assault.
The agreement required employees to resolve disputes before Employment Dispute Services Inc., a private company the restaurant paid to provide arbitration whenever the need arose. Employees made no comparable payment, which the court found disturbing.
Employment Dispute Services "clearly has an incentive to maintain its contractual relationship with Ryan's," said the court. And since Employment Dispute Services also made the rules and picked the arbitrators, the court ruled there was "a strong potential for bias," and threw out the agreement.
It is rare, though, for a court to consider the fairness of an arbitration process before an award is issued. It is even rarer for a court to overturn an award -- even when the process is fraudulent.
In a lawsuit filed four years ago, for example, three Los Angeles landlords say they agreed to a commercial tenant's demand for an arbitration clause that named the Southern California Arbitration Association to resolve any disputes.
Unknown to the landlords, said the complaint, the tenant's officers were business associates of the arbitration firm's principals.
Within a few months, the tenant fabricated complaints that the association then resolved in their favor, costing the landlords hundreds of thousands of dollars in bogus awards, the complaint said.
Other victims of the association had failed to overturn similar awards because judges are essentially powerless to disturb arbitration decisions. But last year, a Los Angeles Superior Court judge slapped the now-defunct association and related businesses with a $5.1 million fraud and racketeering judgment.
Legal experts acknowledge that arbitration scams may be common -- but are very difficult to detect.
"The lack of oversight in this (arbitration) business creates a giant loophole," said Gregg Martin, an attorney for the landlords. "It's not going to take a rocket scientist to figure out how to do this again and again."
The financial pressure to get new business also can influence whether an arbitrator discloses information that might keep him off a lucrative case.
The U.S. Supreme Court acknowledged the problem as early as 1968. In a case involving an arbitrator who had failed to disclose $12,000 in income from one of the parties, Justice Hugo Black stressed that a judge or jury foreman in that position would have been kicked off the case.
"We should, if anything, be even more scrupulous to safeguard the impartiality of arbitrators than judges," Black wrote for the court, "since the former have completely free rein to decide the law as well as the facts and are not subject to appellate review."
In 1994, several instances of egregious conflicts of interest persuaded the California Legislature to require that arbitrators, like judges, disclose certain potential conflicts.
But judges and arbitrators face different financial considerations.
"In court, if a judge recuses himself, nothing happens," explains William Cahill, a mediator and arbitrator and former San Francisco Superior Court judge. "But if you recuse yourself in the arbitration world, it's more complicated, because you might have to refund money. Some people don't easily do that."
In June 2000, a commission sponsored by Georgetown University Law Center and the CPR Institute for Dispute Resolution drafted a code of ethics for arbitrators and arbitration firms.
The code calls on the firms to disclose "any interests or relationships" that "might reasonably create the appearance" of bias.
In a comment to that provision, the code's drafters say "it is essential to hold (the firms) . . . to the highest standards of quality and competence."
William Slate, president of American Arbitration Association, is a member of
the commission. But the firm has declined to say whether it will ever comply
with the code.
Yesterday: Lost Rights. Mandatory arbitration clauses tucked into the fine print of bills, bank statements and other documents deprive people of their legal rights -- with the approval of the U.S. Supreme Court.
Today: Conflicts of Interest. Some arbitration firms have financial interests in their clients, creating the appearance of conflicts that would never be tolerated in court.
Tuesday: Compromised Judges. The lure of potentially high-paying jobs as
arbitrators prompts some judges to try to impress arbitration firms in ways that
undermine confidence in the courts.
Some arbitration firms have undisclosed financial relationships with their corporate clients. Critics of mandatory arbitration say the relationships create conflicts of interest that raise questions about the fairness of the mandatory arbitration process.
As of Dec. 31, GE Senior Counsel Arthur E. Joyce was a member of the association's board of directors.
GE Industrial Systems, a GE business unit, is a "sponsoring member" of the association, meaning it has contributed $10,000 or more and receives services such as advice on handling disputes. .
A case study: GE and AAA
General Electric ..... American Arbitration Association
General Electric requires its employees to resolve any disputes with the company before arbitrators with the American Arbitration Association.
General Electric pays the arbitrators andÐAmerican Arbitration fees to conduct the hearings.
As of Dec. 31, American Arbitration owned $680,000 in bonds of GE Capital Corporation, a GE subsidiary that accounts for almost half of GE's sales.
To Kristy Shubin, it just didn't seem fair.
Her boss had greeted the news of her pregnancy by demoting her, Shubin claimed, so she sued him for sex discrimination.
But a clause in her employment contract said she couldn't sue. She could only take her complaint to mandatory arbitration, a private process of resolving disputes without judges, juries or the rule of law. The same clause, though, allowed her boss to sue her in certain circumstances, a double- standard that Shubin cited in persuading a trial court to strike down the clause as "unconscionable."
But Shubin's employer appealed, and on Nov. 14, Justice Daniel Hanlon and two colleagues at the state Court of Appeal in San Francisco ruled the clause, with slight modifications, should stand.
The ruling outraged Shubin. What she didn't know was that while her case was pending, Hanlon had accepted a job with JAMS, formerly Judicial Arbitration and Mediation Service - the very firm that Shubin's contract had named to hear her dispute. In fact, the day before Hanlon and his colleagues issued their decision, JAMS advertised in the San Francisco Daily Journal, a legal newspaper, that it had hired Hanlon.
"There was a clear conflict of interest," says Professor Erwin Chemerinsky, a constitutional law and ethics expert at the University of Southern California Law School. "The judge had something to gain financially by enforcing clauses that might send cases to JAMS."
Hanlon declined to comment. But JAMS President Steve Price said, "it's inconceivable to suggest that a pre-eminent jurist who has served on the bench for more than 20 years with an impeccable reputation for nonbias . . . would compromise his record in any way."
Price added that JAMS wouldn't have heard Shubin's case because the arbitration clause failed the firm's fairness standards.
For more than a decade, corporate America has forced the public into mandatory arbitration - with the blessing of the Supreme Court.
While the system has enabled companies to avoid the costs and risks of jury trials, the nation's judges have benefited, too: Mandatory arbitration not only eases their workload, it offers them potentially lucrative jobs as arbitrators after they leave the bench.
Nowhere have judges flocked to arbitration firms faster than in California, where private judging blossomed more than 20 years ago.
But today the business is "one of the single biggest problems facing the California judiciary," says Justice Anthony Kline of the state Court of Appeal in San Francisco.
Critics believe the allure of mandatory arbitration has caused sitting judges to act in ways that may compromise the integrity of the judicial system:
-- Impressing arbitration firms. Some judges have tried to make themselves more attractive to arbitration firms by requesting specific assignments and pushing for swift settlements in complex disputes. One Los Angeles arbitration consultant gives judges a list of 10 ways to impress a potential employer.
-- Financial conflict. By upholding disputed arbitration clauses shortly before joining arbitration firms, judges may have created at least the appearance of financial conflicts of interest.
-- Clearing caseloads. Judges eager to clear their dockets of difficult and time-consuming discrimination lawsuits have forced such cases into arbitration,
where important civil rights issues are resolved by arbitrators who are rarely required to know or follow the law.
-- Client conflicts. Former judges working as arbitrators who return to court on temporary assignments have been accused of conflicts of interest by hearing cases involving clients of their current employers.
-- Blocked decisions. In some cases, the state Supreme Court has blocked anti-arbitration decisions from being cited as legal precedent after being asked to do so by corporations, arbitrators and former judges.
Bills that would reform the arbitration industry are working their way through Congress and the state Legislature. But many businesses view mandatory arbitration as a shield against the risks and costs of lawsuits, and their financial and political clout may block efforts to restrain a system that even some judges believe is out of control.
"One might call mandatory arbitration the Œdo-it-yourself' approach to law reform," says Professor Jean Sternlight at the University of Missouri law school. "The company need not convince any legislature to pass revised laws, or persuade any judicial body to change court rules, but merely choose to eliminate pesky lawsuits on its own."
IMPRESSING ARBITRATION FIRMS
In recent years, the demand for private judges has soared.
Today, the American Arbitration Association, JAMS and several other arbitration providers compete to hire the biggest names on the bench.
Although arbitrators need not be judges, or even lawyers, most are. And former judges are preferred because "lawyers don't trust each other," says Lucie Barron, head of Action Dispute Resolution Services in Los Angeles.
The attractions for judges are obvious. A Superior Court judge earns $133, 055 a year, while top arbitrators can make $10,000 or more a day, in addition to retirement pay.
Judges who want to become arbitrators often beg off the criminal bench, where the number of cases is rising, and request assignments in civil court, where caseloads are down, so they can hone their settlement skills.
Barron, who advises judges wanting to become arbitrators, says it's a smart move.
"I have about 10 things that I work over with them while they are still on the bench," she explains. "I tell them to settle cases, develop an expertise, get on panels, do a lot of speaking, develop synopses of their cases, that sort of thing."
Eli Chernow, listed with Barron's firm, turned to arbitration and mediation because his salary as a Los Angeles Superior Court judge wasn't enough to support two kids in college. He prepared by getting assigned to the court's family law calendar, he says, "knowing it would be useful" in attracting business.
Chernow says the lure of private judging makes sitting judges "more polite and respectful. Otherwise, they're not going to get any business."
But other judges find the practice troubling.
"Understandably," says Justice Kline, "lawyers are increasingly worried about the objectivity of judges who seek assignments they think will enhance their chances of landing a job as a private arbitrator."
FINANCIAL CONFLICTS
No one has accused judges of issuing favorable rulings to impress arbitration
firms.
But critics say judges undermine the judiciary's credibility by joining the firms shortly after issuing opinions that uphold controversial arbitration clauses, particularly when those opinions are reversed on appeal.
"There's the appearance that the decisions are based on self-interest," says Professor Chemerinsky, "and that's very troubling."
On March 13, 1997, for example, U.S. District Judge Eugene Lynch ruled that securities broker Tonyja Duffield must go to arbitration with the sexual discrimination and harassment claim she had filed against her employer.
Duffield argued that she had not agreed to arbitration "knowingly," which the U.S. Court of Appeals had determined was a requirement for enforcing such agreements against employees. Lynch ruled against her anyway.
Less than four months later, JAMS announced that Lynch was joining its panel of arbitrators.
Ten months after he joined JAMS, the U.S. Court of Appeals in San Francisco overturned his ruling in the Duffield case.
Lynch declined to comment.
While stressing Lynch's "impeccable reputation," JAMS President Price explained that "at the end of the day, it doesn't matter to us how they (judges) rule in any individual case."
In a September 1999 decision, state Court of Appeal Justice William Masterson and two colleagues ruled that a law firm could fire legal secretary Donald Lagatree for refusing to sign a mandatory arbitration agreement more than three years after he was hired.
After discussing his options with Barron, Masterson retired to become a private judge in June 2000 - five months before a federal judge barred Lagatree's former law firm from imposing arbitration on its employees. The law firm has appealed the decision. Last August, Masterson joined JAMS.
He says there may be sitting judges who tailor their behavior to impress arbitration firms, but "I just don't see that happening."
Chemerinsky and others acknowledge that any appearance of conflict depends on how soon a judge becomes an arbitrator after upholding an arbitration clause.
In 1999, for example, Justice Christopher Cottle and two colleagues on the state Court of Appeal in San Jose ruled that San Diego's Technology Integration Group could force administrative assistant Amanda Lee to arbitrate her stalking and sexual discrimination suit - even though Lee didn't know she had waived her constitutional right to a jury trial.
The ruling reversed a trial court's decision and conflicted with the federal appeals court's ruling in the Duffield case.
The state Supreme Court agreed to review Lee's case, but then dismissed the appeal after the parties settled.
Earlier this year, Cottle retired from the bench and announced that he was discussing a job with JAMS. He has since decided to practice arbitration independently.
But Cottle says any conflict created by becoming an arbitrator after upholding an arbitration clause "was so remote that it never even came up as an issue in my mind."
Blocked decisions
In some cases, corporations, arbitration firms and former judges have lobbied against lower court rulings hostile to arbitration, and the state Supreme Court has "depublished" the decisions, in effect striking them from the books. Of about 850 published state Court of Appeal decisions last year, 22 were depublished.
In 1994, for example, the state Court of Appeal in San Francisco struck down an arbitration clause that a mortgage company had duped elderly borrowers into signing. The mortgage company had printed the clause in small, dense type,
effectively preventing the borrowers from realizing that they were waiving their right to a jury trial, the court said.
The decision troubled the American Arbitration Association, its client, Bank of America, and others. The association and state Attorney General Dan Lungren asked the high court to depublish the ruling so that it could not be cited as legal precedent.
A Bank of America spokesman said Lungren was asked to get involved by the bank, which had contributed to his re-election campaign and was facing a class- action lawsuit accusing it of sneaking mandatory arbitration into agreements with card and account holders. A Lungren spokesman said the attorney general acted on the issue's merits.
On July 28, 1994, the state Supreme Court voted 6 to 1 to grant the request.
Two years later, Justice Armand Arabian joined American Arbitration and Chief Justice Malcolm Lucas joined JAMS. Both voted to depublish the decision.
The following year, the state high court depublished another controversial decision involving private judges.
When Edgar Rushing sued his employer, Lancaster Radiology Medical Group, for race discrimination, Los Angeles Superior Court Judge Victor Chavez ordered procedural matters resolved before a private judge - at the parties' expense. Rushing said he couldn't afford the process, but the judge ignored his objections.
Rushing's share of the bill totaled more than $18,000, and when Chavez ordered Rushing's lawyer to pay it, she refused.
The case went before the state Court of Appeal, and in 1996 Justice Miriam Vogel struck down Chavez's order, saying it would "slam the courthouse doors in the face of the poor."
Once again, the decision prompted calls for depublication, including a letter from former high-court Justice David Eagleson and five other retired California jurists working as private judges.
On February 5, 1997, the Supreme Court acquiesced to the request of its former colleagues and struck Vogel's ruling from the books.
"It was a lamentable act of censorship," says Professor Stephen Barnett of Boalt Hall School of Law at the University of California at Berkeley. "It was made even worse in this case by the unfortunate fact that the future economic interests of the justices arguably were affected as well."
CLIENT CONFLICTS
Conflicts can also arise when former judges working as arbitrators return
temporarily to the bench.
In July 1999, for example, Escondido (San Diego County) restaurant owner Ruben Estrada sued Crusader Insurance Co. for denying his insurance claim. The case was assigned to a retired judge, Kenneth Ziebarth, who was filling a temporary vacancy on the San Diego Superior Court.
When Estrada's attorney, Jack Winters, discovered Ziebarth also worked at JAMS, he demanded that the judge step aside. Many insurance companies - including Crusader - use JAMS, and Crusader could "easily reward Judge Ziebarth for his handling of this case" by subsequently hiring the judge or one of his JAMS colleagues, argued Winters.
But Ziebarth refused to step down. Estrada appealed to the state Court of Appeal in San Diego, and last year the court ordered Ziebarth to explain why he should remain on the case. Instead, the judge stepped down.
"I didn't believe then, and I still don't believe there was any conflict," says Ziebarth. "I was in a no-win situation. If I ruled for the plaintiff, the defense would have thought I was bending over backward not to be biased. If I had favored the defendant, it would have solidified the plaintiff's belief."
Clearing caseloads
For decades, the U.S. Supreme Court insisted that civil rights cases be heard in federal court because arbitration's abbreviated procedures and minimal legal protections would give the cases short shrift.
But in 1991, the high court changed its mind - and federal judges took full advantage.
A study by the U.S. Court of Appeals in New York four years ago found that federal judges consider discrimination cases too difficult and time-consuming. So with the high court's blessing, the judges have forced such cases into mandatory arbitration at an increasing rate - and, say some legal experts, at a troubling cost.
"What the (Supreme) Court has not yet recognized," warns Professor David Schwartz of the University of Wisconsin Law School, "is that it has allowed corporations to avoid not only the courts, but the regulatory impact of the law."
Even some judges are critical.
Montana Supreme Court Justice Terry Trieweiler says rulings upholding mandatory arbitration illustrate "an all too frequent preoccupation on the part of federal judges with their own caseloads and a total lack of consideration for the rights of individuals."
Mandatory arbitration, he says, "subverts our system of justice as we have come to know it."
PROSPECTS FOR REFORM
In February, California Sen. Sheila Kuehl, D-Santa Monica, introduced a bill
that would allow employees bound by mandatory arbitration to file employment
disputes with the state's Department of Fair Employment and Housing.
In June, Reps. Dennis Kucinich, D-Ohio, Barney Frank, D-Mass., and other members of Congress introduced a bill that would overturn the recent Circuit City decision, in which the U.S. Supreme Court granted employers in almost every industry the power to impose arbitration on employees.
"Circuit City made it mandatory," says Kucinich, "that we address arbitration's destructive undermining of a wide range of civil rights protections."
But both bills are likely to face intense resistance from business interests, and politicians from Sacramento to Washington, D.C., are keenly aware of that opposition, as Kuehl recently discovered when she ran into Gov. Gray Davis at a party.
"He started shaking his head," says Kuehl, "and said, "That employment arbitration bill, I really don't want to see it on my desk.' "
Davis declined to comment.
Kuehl has postponed any action on the bill until next year.
REFORMS PROPOSED FOR FAIRER SYSTEM
Proposals to reform mandatory arbitration essentially fall into two categories:
Make it fairer or make it voluntary. Each raises difficult issues.
Several courts have required fairer procedures. The state Supreme Court, for example, ruled last year that arbitration imposed on employees must provide a neutral arbitrator, enough discovery to make a case, a written decision and limits on costs. Companies and arbitration firms also have adopted rules to protect individuals' rights.
Professor Samuel Estreicher at New York University law school says there has been "a lot of progress" toward making arbitration fair, and additional protections would "just jack up costs" in most cases.
But critics say the changes don't go far enough. And reforms such as granting employees rights to appeal or to obtain more information from an employer could make arbitration just as slow and expensive as court.
In any event, says Cliff Palefsky, a San Francisco attorney who leads the legal opposition to mandatory arbitration, "to work, a justice system must be perceived as fair. And mandatory arbitration will never be perceived as fair so long as someone is forced into it by a stronger party that sets the rules."
Palefsky and others advocate making arbitration voluntary. "If people really are better off in arbitration," he says, "they'll choose it."
And to arbitration advocates who say a voluntary system would produce too few cases to make arbitration practical, Palefsky says, "So what? Increasing the arbitration caseload is not the objective here."
Estreicher, though, says the objective is a better system of resolving disputes, and companies could not afford to create such a system unless enough consumers and employees committed to using it.
He also stresses that mandatory arbitration is as "voluntary" as any other contract term. "It's one of an array of things that an employer or company offers that you may or may not find acceptable," Estreicher says. "But you can't disfavor arbitration by saying you need special standards to apply."
APPEARANCE OF CONFLICT
Critics have accused judges of undermining their credibility by joining
arbitration firms after issuing opinions that uphold controversial arbitration
clauses. .
-- Former California Court of Appeal Justice Daniel Hanlon. On Nov. 14, he and two colleagues upheld a clause forcing a secretary to arbitrate her employment dispute through the Judicial Arbitration and Mediation Service, or JAMS. He accepted a job with JAMS before the opinion in the case was issued.
-- Former U.S. District Judge Eugene Lynch. On March 13, 1997, he ruled that a securities broker must arbitrate her sexual discrimination claim against her employer. Four months later, JAMS announced Lynch was joining the firm.
-- Former California Court of Appeal Justice William Masterson. In September 1999, he and two colleagues ruled that a law firm could fire a secretary for refusing to sign a mandatory arbitration agreement. Masterson retired to become a private judge in June 2000, and joined JAMS last August.
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