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MANDATORY BINDING ARBITRATION

AGREEMENTS: ARE THEY FAIR FOR CONSUMERS?

HEARING

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JUNE 12, 2007

Serial No. 110–69

Printed for the use of the Committee on the Judiciary

(

Available via the World Wide Web: http://judiciary.house.gov 

(II)

COMMITTEE ON THE JUDICIARY 

JOHN CONYERS, JR., Michigan, Chairman 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. (BOBBY) SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

LINDA T. SA ́ NCHEZ, California 

STEVE COHEN, Tennessee 

HANK JOHNSON, Georgia 

LUIS V. GUTIERREZ, Illinois 

BRAD SHERMAN, California 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

ARTUR DAVIS, Alabama 

DEBBIE WASSERMAN SCHULTZ, Florida 

KEITH ELLISON, Minnesota 

LAMAR SMITH, Texas 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

DANIEL E. LUNGREN, California 

CHRIS CANNON, Utah 

RIC KELLER, Florida 

DARRELL ISSA, California 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio

PERRY APELBAUM, Staff Director and Chief Counsel 

JOSEPH GIBSON, Minority Chief Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

LINDA T. SA ́ NCHEZ, California, Chairwoman 

JOHN CONYERS, JR., Michigan 

HANK JOHNSON, Georgia 

ZOE LOFGREN, California 

WILLIAM D. DELAHUNT, Massachusetts 

MELVIN L. WATT, North Carolina 

STEVE COHEN, Tennessee 

CHRIS CANNON, Utah 

JIM JORDAN, Ohio 

RIC KELLER, Florida 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona

MICHONE JOHNSON, Chief Counsel 

DANIEL FLORES, Minority Counsel 

(III)

C O N T E N T S 

JUNE 12, 2007

Page 

OPENING STATEMENTS 

The Honorable Linda T. Sa ́nchez, a Representative in Congress from the 

State of California, and Chairwoman, Subcommittee on Commercial and 

Administrative Law ............................................................................................. 1

The Honorable Chris Cannon, a Representative in Congress from the State 

of Utah, and Ranking Member, Subcommittee on Commercial and Administrative Law ........................................................................................................... 2

The Honorable Hank Johnson, a Representative in Congress from the State 

of Georgia, and Member, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 4

WITNESSES 

Mr. F. Paul Bland, Jr., Public Justice, Washington, DC 

Oral Testimony ..................................................................................................... 5

Prepared Statement ............................................................................................. 8

Mark J. Levin, Esquire, Ballard Spahr Andrews and Ingersoll, LLP, Philadelphia, PA 

Oral Testimony ..................................................................................................... 43

Prepared Statement ............................................................................................. 45

Ms. Jordan Fogal, Political Activist, Houston, TX 

Oral Testimony ..................................................................................................... 68

Prepared Statement ............................................................................................. 70

Mr. David S. Schwartz, University of Wisconsin Law School, Madison, WI 

Oral Testimony ..................................................................................................... 82

Prepared Statement ............................................................................................. 84

APPENDIX 

Material Submitted for the Hearing Record .......................................................... 125

OFFICIAL HEARING RECORD 

MATERIAL SUBMITTED FOR THE HEARING RECORD BUT NOT REPRINTED

Publication by the U.S. Chamber Institute for Legal Reform entitled Arbitration: 

Simpler, Cheaper, and Faster Than Litigation, April 2005. This report is available 

at the Subcommittee and can also be accessed at:

http://www.arb-forum.com/rcontrol/documents/ResearchStudiesAndStatistics/2005HarrisPoll.pdf

Study by Ernst & Young entitled Outcomes of Arbitration, An Empirical Study of 

Consumer Lending Cases

http://www.arb-forum.com/rcontrol/documents/ResearchStudiesAndStatistics/2005ErnstAndYoung.pdf

Publication by the U.S. Chamber Institute for Legal Reform entitled State Court 

Enforcement of Arbitration Agreements, by John M. Townsend, October 2006

http://www.instituteforlegalreform.com/issues/docload.cfm?docId=487

Document by the American Arbitration Association, Dispute Resolution Services 

Worldwide entitled Consumer Due Process Protocol, Statement of Principles of the 

National Consumer Disputes Advisory Committee

http://www.adr.org/sp.asp?id=22019

(1)

MANDATORY BINDING ARBITRATION AGREEMENTS: ARE THEY FAIR FOR CONSUMERS? 

TUESDAY, JUNE 12, 2007

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, COMMITTEE ON THE JUDICIARY, Washington, DC.

The Subcommittee met, pursuant to notice, at 10:37 a.m., in 

Room 2237, Rayburn House Office Building, the Honorable Linda 

Sa ́nchez (Chairwoman of the Subcommittee) presiding. 

Present: Representatives Sa ́nchez, Johnson, Delahunt, Cannon, 

and Jordan. 

Staff present: Norberto Salinas, Majority Counsel; and Daniel 

Flores, Minority Counsel. 

Ms. SA ́ NCHEZ. Good morning. I would bang my gavel, but I don’t 

have a gavel presently, but we are going to call this Subcommittee 

on Commercial and Administrative Law to order. 

I will recognize myself for a short statement. 

In 1925, Congress passed the Federal Arbitration Act to free up 

the courts from an increasingly heavy docket and to place arbitration agreements on the same footing as contracts. At the time, Congress found several benefits to arbitration, including lower costs 

than litigating in courts, a choice of neutral arbitrators with expertise in the disputed area of law, and a quicker resolution to the dispute. 

However, the use of arbitration has expanded from simply involving disputes between commercial parties, to issues between consumers and businesses, employees and employers, and shareholders and corporations. This once-rare alternative to litigation 

has become commonplace and arbitration clauses are now frequently included in legal contracts of every variety. 

As arbitration has increased in popularity, what was once a 

choice has become a mandatory part of many consumer contracts. 

In fact, according to a 2004 survey, one-third of all our major consumer transactions are covered by mandatory arbitration clauses. 

Despite all the benefits of arbitration, mandatory arbitration agreements may not always be in the best interests of consumers. 

Mandatory binding arbitration clauses in agreements may require consumers to pay fees to arbitrate a claim or travel several 

States away for complaint proceedings. Advocates also have shown 

that businesses often fare better than consumers in arbitration 

matters. In fact, in one instance, it was reported that a particular 

bank won an astonishing 99.6 percent of the almost 20,000 arbitraVerDate 0ct 09 2002 11:02 May 13, 2008 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6601 H:\WORK\COMM\061207\36018.000 HJUD1 PsN: DOUGA
2

tion cases in which it participated. Besides the advantage of regular customers in the arbitration game, there are real questions 

about due process and the non-public nature of arbitration decisions. 

Considering that the Federal Arbitration Act was created only to 

cover businesses in equal bargaining positions, we have to wonder 

how today’s current use of arbitration agreements comport with the 

legislative history and the spirit of the act. Congress must now 

carefully consider whether arbitration is fair for all of the parties 

to a dispute. 

Today’s oversight hearing will provide an opportunity to learn 

more about the effect of arbitration on consumers and whether 

mandatory binding arbitration clauses are an equitable use of the 

arbitration process. First, we must review the history of arbitration 

and the reason that Congress codified it. 

Second, we must understand how the use of arbitration has 

evolved since 1925 and how it came to be used in the consumer 

business context of today. Finally, we must decide how best to ensure that the benefits of arbitration are maintained, while addressing its negative aspects. It is also important to note that several 

bills regarding arbitration agreements have been introduced. 

To help us learn more about mandatory and binding arbitration 

agreements, we have four witnesses here with us this afternoon. 

We are pleased to have F. Paul Bland, Jr., an attorney at Trial 

Lawyers for Public Justice; Mark Levin, a partner at Ballard Spahr 

Andrews and Ingersoll; Jordan Fogal, an author and consumer advocate; and David Schwartz, a professor at the University of Wisconsin Law School. 

Accordingly, I look forward to today’s testimony, and I welcome 

all of our witnesses. 

At this point, I would now like to recognize my colleague, Mr. 

Cannon, the distinguished Ranking Member of the Subcommittee, 

for his opening remarks. 

Mr. CANNON. Thank you, Madam Chair. 

Mandatory binding arbitration clauses in consumer contracts 

have become more common in recent years. Some consumer advocates argue that this is unfair. The claim is that the practice excessively benefits companies over consumers and urge that use of 

mandatory binding arbitration clauses in consumer contracts be restricted. Proposals to restrict the freedom of contract should be 

viewed cautiously and proposals to restrict the freedom of contracting mandatory arbitration should be viewed with special caution. 

Arbitration is the classic means of alternative dispute resolution 

for those wishing not to bring their dispute before Federal or State 

courts. For many years, the law and the courts have strongly encouraged arbitration. It can efficiently afford justice and it eases 

the burden on our strained court system. 

Free access to efficient arbitration is particularly useful in the 

area of consumer contracts. Consumers benefit from a quicker, less 

cumbersome and less expensive way of resolving their often smallscale disputes, and companies benefit from these same advantages 

because consumer claims can be repetitive and large in number. 

3

The use of mandatory binding arbitration clauses has risen not 

because companies want to disadvantage consumers, but because 

companies increasingly believe they need to protect themselves 

from abusive class action suits. Actual or perceived abuses of class 

action tort cases and class action lending disclosure suits, along 

with the web of inconsistent substantive law and civil procedure in 

competing jurisdictions entertaining such lawsuits have prompted 

companies to resort more and more to mandatory binding arbitration. 

In this way, companies have sought to introduce a more orderly, 

less expensive and more consistent set of rules for the resolution 

of customer disputes. They are not seeking to create a problem for 

consumers. They are trying to solve the serious problem they confront themselves. 

Is this solution working for both sides? I expect that the evidence 

today will support the conclusion that it is, that consumers are 

being fairly treated. For example, aware of consumer protection 

concerns, companies have developed what are known as ‘‘fair’’ 

clauses in consumer contracts. These clauses protect against undue 

advantage to companies in arbitration. 

They include provisions that comply with consumer due process 

procedures of the major arbitrating services; allow either the consumer or the company to invoke arbitration; provide for fee-shifting, including for indigent consumers; and open off-ramps to small 

claims court for certain claims. 

In addition, consumer contracts increasingly include opt-out 

clauses. These clauses allow consumers during a specified time 

after entering into a contract to opt out of mandatory binding arbitration clauses. Consumers who opt out will still preserve the rest 

of the bargain embodied in their contract. The National Arbitration 

Forum recently published a synopsis of independent studies and 

surveys on the benefits of consumer arbitration. 

The results of these studies included the following. Consumers 

prevail 20 percent more often in arbitration than in court. Monetary relief for individuals is higher in arbitration than in lawsuits. 

Arbitration is about 36 percent faster than litigation, and 64 percent of American consumers would choose arbitration over a lawsuit for monetary damages, and 93 percent of consumers using arbitration find it to be fair. 

The evidence from empirical studies suggests that mandatory 

binding arbitration is fair to consumers. Institutional and market 

forces appear to be working to promote the use of fair arbitration 

clauses in procedures, and in turn, arbitration is delivering fair results to consumers. There does not appear to be an urgency for 

Congress to intervene in this area. 

Restricting the freedom of contract over how to enter into arbitration would reduce the options available to consumers and it 

would reduce competition in the legal services and dispute resolution markets. When the consumer confronts fewer services and less 

competitive markets, the consumer inevitably suffers. Trial lawyers 

and public advocacy groups—the lawyers who bring class actions—

might gain from restrictions, but consumers likely would not. 

I look forward to the testimony today, and I yield back. 

Ms. SA ́ NCHEZ. I thank the gentleman for his statement. 

4

I would now like to recognize the gentleman from Georgia, Mr. 

Johnson, for his opening statement. 

Mr. JOHNSON. I want to thank the Chairwoman for holding such 

an important oversight hearing today. 

The right to a jury trial is guaranteed by the Federal Constitution, yet this right is lost as more and more businesses impose arbitration agreements on their customers. Although today’s hearing 

focuses on consumers, this problem has also permeated the employment and healthcare industries. 

The Federal Arbitration Act was enacted as an alternative to resolve disputes between businesses on equal footing. But today businesses impose these so-called ‘‘agreements’’ through envelope stuffers or in small-print notices which are often overlooked by the average consumer. This take-it-or-leave-it position leaves consumers, 

employees, and small businesses at a disadvantage. Coupled with 

high administrative fees, lack of discovery and limited opportunity 

to appeal, it has swayed away from its original purpose as a voluntary expedited process to resolving disputes, and it has become 

a tool for businesses to divert disputes into a private legal system. 

A fundamental feature of a fair justice system is that both sides 

to a dispute have equal access to that system. Mandatory arbitration agreements give one side the upper hand. It is my hope, 

Madam Chair, that although we are looking only into the issue of 

consumer arbitration agreements today, we will have other hearings in other areas such as employment. 

Thank you very much. 

Ms. SA ́ NCHEZ. Thank you, Mr. Johnson. 

Without objection, other Members’ opening statements will be included in the record. 

Without objection, the Chair will be authorized to declare a recess of the hearing at any moment. 

I am now pleased to introduce our panel of distinguished witnesses for today’s hearing. 

Our first witness is Paul Bland, a staff attorney for Public Justice. Mr. Bland serves as a member and former co-chair of the 

board of directors of the National Association of Consumer Advocates. Mr. Bland is also the co-author of Consumer Arbitration 

Agreements, published by the TLPJ Foundation and the National 

Consumer Law Center. 

Our second witness is Mark Levin, a litigation partner at Ballard 

Spahr Andrews and Ingersoll. Mr. Levin concentrates his practice 

in complex commercial and class action litigation, with particular 

expertise in consumer financial services litigation and the structuring and enforcement of consumer arbitration clauses. Mr. Levin 

has co-published several consumer financial services and arbitration articles which have appeared in Arbitration of Consumer Financial Services Disputes, and The Business Lawyer. 

Our third witness is Jordan Fogal. Ms. Fogal, a political activist, 

has waged a public advocacy campaign in the Houston area for 

homeowners affected by questionable practices of developers. Ms. 

Fogal has also been active in calling attention to the lack of lending 

laws to protect homeowners who get tricked into buying defective 

homes. 

5

Our final witness is David Schwartz, associate professor at the 

University of Wisconsin Law School. Professor Schwartz’s research 

interests include federalism, workers’ rights and the law of the 

workplace. Prior to joining the University of Wisconsin Law School 

faculty, Professor Schwartz was senior staff attorney at the American Civil Liberties Union of Southern California in my home town 

of Los Angeles. 

I want to thank all of the witnesses for their willingness to participate in today’s hearing. 

Without objection, your written statements will be placed in their 

entirety into the record of these proceedings. We would ask that 

you limit your oral remarks to 5 minutes. 

You will note that we have a lighting system that starts with a 

green light. After 4 minutes, it will turn yellow to warn you have 

1 minute remaining. Then it will turn red when the 5 minutes 

have expired. At that time, if you still have not finished your testimony, I would ask you to just conclude your final thought so that 

we have an opportunity to hear from all of our witnesses. 

After each of you has presented your testimony, Subcommittee 

Members will be permitted to ask questions, subject to a 5-minute 

limit. Those are the ground rules. 

So at this point, we are ready to proceed with the testimony. I 

would ask Mr. Bland if he would pleased proceed. 

TESTIMONY OF F. PAUL BLAND, JR., PUBLIC JUSTICE, 

WASHINGTON, DC 

Mr. BLAND. Thank you very much, Chairwoman. 

Arbitration, the way it is practiced in consumer cases today in 

America, has essentially become a lawless system. It is a system 

without rules. The arbitrators have a huge incentive to tilt the 

playing field. There are a lot of companies who compete for work 

as private arbitration companies. They compete against each other. 

It is lucrative work. Private arbitrators frequently make $300, 

$400, even $500 an hour in this city and a lot of other cities, and 

they want this work. 

Now, the companies, the corporations are the ones who right 

standard-form contracts. I am sure that every Member of this Committee and everyone in this room has a cell phone and a credit 

card. None of you wrote the terms of the agreement that govern 

your cell phone or your credit card. They were written by the bank, 

the cell phone company, whoever. Those are the companies who are 

picking the arbitration providers. 

So if you are an arbitration provider and you want this lucrative 

work, what you have to do is you have to pitch your services toward the companies who are writing the contracts. That is how you 

get the work. That is how the market works. So as a result, it creates a dynamic which is a race to the bottom. It shows up in a 

bunch of different ways. I spelled out a huge number of illustrations of this in my testimony. 

For example, one problem is again and again every time a private arbitrator rules in favor of a consumer in a significant way, 

they get blackballed and they don’t hear any more cases. So if you 

want to work as an arbitrator, and you want to be able to charge 

$500 an hour, you better work for the company who is picking you. 

6

If you bite the hand that feeds you and you rule for the consumer, 

you may never work as an arbitrator again. This has happened a 

lot. That is a problem. 

A second problem is the arbitration companies, like the National 

Arbitration Forum referred to by the Ranking Member, send out 

advertisements to corporations, to banks, trying to get them to pick 

them. So they will send out an advertisement that says, we want 

a better system—the American Arbitration Association—because if 

you pick us, we can set up the following things that will make for 

rules favored on your side against the consumer. 

Now, when companies start advertising for business like that, 

that is a problem. You don’t get that in the court system. I never 

have gotten in my 20 years of practicing as a lawyer a letter from 

a judge saying, ‘‘Hey, file your case in this district of Texas and we 

are going to see you get a really big bang-up result.’’ If I did get 

that letter, I can guarantee you the judge would be disbarred and 

it would be on the editorial page of The Wall Street Journal. But 

the arbitration companies act like this all the time. That is another 

problem. 

Another example is they have loaded panels. Who is going to be 

the arbitrator? When the companies go to pick the arbitration panels, the people who they pick, who show up on the panels, are a 

problem. Let me give you an example. Someone recently approached us about a health insurance case in Michigan. It was a 

medical malpractice case. The woman has breast cancer. Her doctor 

proposes a certain course of treatment. The HMO won’t do it. They 

won’t cover it. 

As a result, she ends up not getting the treatment and metastasizes. She is dying. She considers this a medical malpractice case. 

She wants to go to court. They want to force her into arbitration. 

She gets a list from the American Arbitration Association of seven 

names. 

Okay, so instead of a jury of her peers, she has these seven 

names. This is the universe of people who can decide her case. 

Every single person on the list from the American Arbitration Association, notwithstanding the due process protocols and everything, is somebody who works for an insurance company or they 

work for a law firm where all the work they do is for an insurance 

company. 

So if it was your spouse or if it was you who had a medical malpractice claim or any other claim against a corporation who you felt 

had really done something wrong to you, do you want to have a 

jury or do you want to have a defense lawyer who works for that 

industry deciding the case? 

Now, why do I say it is lawless? I say it is lawless because courts 

do not meaningfully review arbitration decisions. In order to make 

it so quick and so streamlined, the court system has established a 

set of rules and they have interpreted the 1924 act to basically say 

that there is virtually no judicial review of arbitration decisions. 

There was a case last year from the Seventh Circuit Court of Appeals. Judge Posner wrote that even if an arbitrator’s decision was 

wacky—‘‘wacky,’’ think about that word—as a matter of law, and 

that was not grounds for overturning it. 

7

The year before, the Third Circuit Court of Appeals in Philadelphia found that even if an arbitrator’s decision had gross errors of 

law, that was not grounds for overturning a decision. In a case involving Steve Garvey, the U.S. Supreme Court, with Justice O’Connor writing for the court, said that even if an arbitrator’s fact-finding was silly—‘‘silly’’ fact-finding—that was not grounds for overturning the case. 

About once a week in my practice of law, because I wrote a book 

on this and I do a lot of cases in this area, about once a week some 

consumer or employee someplace in America contacts our firm and 

says, we had an arbitrator who issued a terrible decision, that ignored all the evidence; they just ruled for the company and they 

wouldn’t even listen to me; they fell asleep while I was talking; it 

was completely unfair. 

And I will say, gee, were the errors of law wacky? Yes. Was the 

fact-finding silly? Well, according to the courts, you have no remedy 

at all. We turn that case down every time because it is next to impossible to get these cases overturned. It is a problem when you 

have a private system of justice, where you have an incentive to 

suck up to one side, and then no one is looking over their shoulders. Even if they were the best people in the world, honest and 

intelligent people make mistakes. But when there is no appeal, 

that is a problem. 

[The prepared statement of Mr. Bland follows:]

8

PREPARED STATEMENT OF F. PAUL BLAND, JR.


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Ms. SA ́ NCHEZ. The time of the gentleman has expired. I thank 

you for your testimony. 

Mr. Levin, would you please proceed? 

TESTIMONY OF MARK J. LEVIN, ESQUIRE, BALLARD SPAHR 

ANDREWS AND INGERSOLL, LLP, PHILADELPHIA, PA 

Mr. LEVIN. Madam Chair, Ranking Member Cannon, I know and 

like and respect Mr. Bland, but I could not disagree more conceptually and intellectually with his positions. 

It is my position, as one who has practiced law for 30 years and 

been a practitioner in the consumer arbitration area for more than 

a decade, that arbitration agreements are fair to consumers because there is a dynamic presently in place that ensures fairness 

to consumers and to all other parties involved. 

That system has never worked better than it does today. It involves four components. First, the Federal Arbitration Act itself. 

The Supreme Court has noted that the FAA, was enacted with consumers, among others, in mind, and it has operated effectively for 

more than 80 years through ever-changing economic, social and political times, to ensure that arbitration agreements are as enforceable as other contracts and that arbitration agreements and arbitration proceedings are fair. 

Contrary to what Mr. Bland said, courts do scrutinize arbitration 

agreements that are alleged by consumers to be unfair, and they 

do that because the FAA makes them do that. The courts determine the validity of these contracts. The Supreme Court has called 

them the ‘‘gatekeepers,’’ and they do, from personal experience, a 

superb job of doing that. Courts also have some powers of review 

following an arbitration award to ensure that the proceeding was 

not biased and that the arbitrator did not manifestly disregard the 

law. 

The second component of the system is the companies with whom 

consumers deal. In my experience, companies do act in good faith 

to draft arbitration agreements that are fair to the consumer, even 

giving the consumer a right to reject the arbitration agreement at 

the outset of the transaction with no strings attached. Today, the 

vast majority of arbitration agreements require the arbitrator to 

apply substantive law and authorize the arbitrator to award the 

same remedies that a consumer could obtain if he or she were in 

court. 

This includes, very importantly, the ability of the consumer who 

prevails in arbitration to recover attorneys fees and costs if applicable law so provides. I note that in almost all Federal and State consumer protection statutes do require fee-shifting, so this right is 

preserved in arbitration. The U.S. Supreme Court has said time 

and time again that when you go to arbitration, you are not losing 

your substantive claims. You are merely changing the forum for resolving them. 

The third component, the arbitration administrators. Again, I 

hear Mr. Bland’s apocryphal stories, but I think the best testimony 

on behalf of organizations such as the AAA and the NAF is the 

consumer protocols, consumer procedural rules and the consumer 

fee schedules that are especially designed to ensure that consumers 

are treated fairly. 

44

I note that the AAA’s, the American Arbitration Association’s, 

consumer due process protocol was drafted with the intense involvement of all consumer groups that had an interest in working 

with that group and devising due process protocols. That is in my 

statement. There is a list of the participants at the end. 

The administrators will not deal with the agreements of companies that do not meet their fairness standards. The arbitration fees 

for small claims are actually far less than the fees for filing a lawsuit in court. Justice Ginsburg herself has called the fees charged 

by the AAA and the NAF, ‘‘models for fair costs in fee allocation.’’ 

Both organizations will even waive that small fee if the consumer 

can’t afford to pay it. 

And finally, the courts. Again, based on my experience, courts 

very rigorously scrutinize arbitration agreements to make sure that 

they are fair, and they are quite vigilant in refusing to enforce 

those relatively few agreements that they conclude do not pass 

muster under applicable State and Federal laws. They take their 

job as gatekeepers very seriously. 

To the extent there are comments made in the witness submissions that have been made or at today’s hearing about cases in 

which arbitration agreements were not fair, the courts invalidated 

them. I think that shows that the system is working as it was intended to do. It should not be viewed as an indictment for all consumer arbitration agreements, the vast majority of which are drafted in order to be fair and scrupulously complied with applicable 

laws. 

My final thought, in closing, is that I submitted a good bit of empirical evidence, which I believe rebuts the testimony about the unfairness of arbitration. That empirical evidence shows that arbitration is fair to consumers, and also arbitration does reduce the cost 

of providing goods and services to consumers, which is another element of fairness. 

Thank you. 

[The prepared statement of Mr. Levin follows:]

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PREPARED STATEMENT OF MARK J. LEVIN


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Ms. SA ́ NCHEZ. Thank you, Mr. Levin. 

Ms. Fogal, you are up next. 

TESTIMONY OF JORDAN FOGAL, POLITICAL ACTIVIST, 

HOUSTON, TX 

Ms. FOGAL. On April 15, we moved into what was going to be our 

last home. It had all the eye candy, even an elevator. The children 

told everybody at school that their grandmother had an elevator. 

We are senior citizens. We had a 30-year mortgage, 6 percent interest rate. We could afford our payments. We had an elevator in case 

our knees went. We had a medical center close by, and a funeral 

home three blocks away. 

The first night in our new home, my husband tried out new Jacuzzi tub on the third floor. When he pulled the plug, 100 gallons 

of water crashed through our dining room ceiling into the dining 

room. This was not one overlooked plumbing connection, as my 

husband and I so desperately wanted to believe. It was a preview 

of coming attractions. 

For 29 months, we begged our builder to fix our house. They 

would come in and seal up the windows inside so the water 

wouldn’t run in, and then they would seal up the crack on the outside in the stucco so the water couldn’t run out. So the house just 

filled up with water, and the mold grew. An accredited laboratory 

said they had never seen toxic readings that high in an inhabited 

dwelling. 

Our doctor told us to move out immediately. We sent the reports 

to the builder. He lied under oath, saying that he never received 

it, and the engineer received it that day, his engineer. We moved 

out. We had estimates for over $150,000 and our new home did not 

last 29 months. 

After we exhausted all other remedies, I began protesting my 

builder’s new property. I felt foolish standing on a street corner 

holding up a sign because it was the only option left to me. We did 

not file on our builder an arbitration. Our builder filed on us for 

taking advantage of the only thing we had left, our first amendment rights. 

He warned me that his attorneys would take care of me in arbitration. Two weeks after I stepped out on that corner, we received 

our arbitration papers. The builder filed a fast-track to dispose of 

us more expediently than regular arbitration. 

We couldn’t afford a lawyer anymore. We were paying for our 

new house, moving costs, deposits on the apartment, storage for 

our things. We had to keep the insurance and lights on in our new 

house, even if we couldn’t live there, because the builder said that 

we had caused the damage. We knew that he was not going to buy 

it back. He told us he only sold houses. He didn’t buy them. 

We also called the mortgage company and sent them the reports. 

After never being late with one payment, we allowed our home to 

go into foreclosure. We felt ashamed. At the same time, we also 

were paying for engineering, moisture, infrared, mold and air quality testing, and our builder knew that all of this was unnecessary. 

In arbitration, all the burden of proof is on the homeowner. The 

builder lets you do all the work and pay for it, and he sit there 

smugly knowing all the while that you will run out of money, shut 

69

up, go away, or he will win in arbitration. We did everything right. 

We had our house inspected. We hired a licensed realtor. We paid 

$3,400 a year for homeowners insurance, but substandard construction and builder defects are not covered by homeowners insurance. 

We were not in good hands with Allstate. 

We paid good money for an uninhabitable house and had no recourse. We were constantly tormented by the American Arbitration 

Association and billed a $6,000 counterclaim fee that got us out of 

fast-track and into regular arbitration. We were billed for case 

service fees, arbitration fees, even for the rent on the room. After 

receiving hardship, our case was dismissed due to failure of payment of fees by both parties. 

Now, we could finally file in court and charge the builder with 

fraud. We were dragged through 10 hearings before the judge ordered us to return to arbitration. Once again in arbitration, 2 years 

passed. We have not had a Christmas tree. We have not grilled out. 

We have not planted a flower. We have not had company. Our 

grandchildren have no place to stay with us. We live in a small 

third-story apartment, a temporary situation because surely justice 

was going to come soon. 

After successfully proving fraud, my net award, including my attorney fees, is $26,000. I had to pay $1,690 for a study after arbitration was over before the arbitrator would issue her award. They 

do not have to face you when they render their verdicts. I feel an 

overwhelming responsibility as I sit here before you today because 

I feel like I have to represent the hundreds of families I have 

talked to over the years and the hundreds of thousands that I have 

never met who have suffered so much more than I have. 

Please don’t tell us that our houses would cost more if they were 

built correctly, or tell us that arbitration works so well. If it worked 

so well, why does it have to be mandatory? By mandatory arbitration, we have lost our seventh amendment rights to a trial by jury, 

and maybe a fight to getting their first amendment rights due to 

the abuses and harassment from arbitrators and unethical corporations. 

In closing, I would like to quote our second president: ‘‘Representative government and a trial by jury are the heart and lungs 

of liberty. Without them, we have no other fortification against 

being ridden like horses, fleeced like sheep, worked like cattle, and 

fed and clothed like swine.’’ Mr. Adams must have had a premonition about the privatization of the justice system we now refer to 

as arbitration. 

Thank you. 

[The prepared statement of Ms. Fogal follows:]

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PREPARED STATEMENT OF JORDAN FOGAL


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Ms. SA ́ NCHEZ. Thank you, Ms. Fogal. 

Mr. Schwartz, please proceed with your testimony. 

TESTIMONY OF DAVID S. SCHWARTZ, UNIVERSITY OF 

WISCONSIN LAW SCHOOL, MADISON, WI 

Mr. SCHWARTZ. Chairman Sa ́nchez and Members of the Committee, thank you so much for inviting me to testify today at this 

hearing. 

I would like to emphasize four brief points. First, the most basic 

principle of fairness in any dispute resolution system is never let 

one part to a dispute make the rules. The second basic principle 

of fairness in any dispute resolution system is never let one party 

to a dispute choose the decision maker. 

Mandatory arbitration violates both of these fundamental principles. It gives the company writing the contract—the bank, the 

credit card company, the employer—the sole and exclusive say 

about whether its disputes against consumers or employees will go 

to arbitration or go to court. 

Second, a basic pre-dispute arbitration agreement—and that is 

what we are talking about here, agreements to arbitrate before the 

dispute has arisen—one that simply picks arbitration over a court 

is unfair enough for the reasons that you heard from the previous 

witnesses, Ms. Fogal and Mr. Bland. It deprives consumers of needed procedural rights like discovery, that is the right to get information from the other side and the right to appeal. 

Many large businesses push the envelope by trying to deprive 

consumers not only of their access to courts, but also a crucial remedy that the law affords them: compensatory and punitive damages, attorneys fees, and particularly class actions. The class action 

remedy is vital to consumer protection. 

I believe that the primary goal of many companies that use mandatory arbitration clauses is to gain immunity from class actions, 

which can become in effect immunity from liability for widespread, 

but small-dollar per capita, consumer frauds and wage and hour 

violations. 

Third, the surest way to tell that arbitration is unfair to consumers is to look at the behavior of the people involved. Who endorses mandatory arbitration?: The banking industry, the Chamber 

of Commerce, large employers, and their lawyers. Do any bona fide 

consumer groups endorse mandatory arbitration? No. 

Mandatory arbitration boosters argue that mandatory arbitration 

produces fair results indistinguishable from court, maybe even better than court, but that is false. There is not one reputable, impartial study showing that mandatory arbitration produces fair results 

for consumers. 

There are a handful of studies commissioned by pro-mandatory 

arbitration partisans—the banking industry, large employers and 

the attorneys who represent them—that claim that arbitration produces fair results, but those studies I am afraid to say are junk social science. They are based on very small samples and very biased 

samples of cases to study. They are not valid research. 

If arbitration is a good deal for both sides, if it really is faster, 

cheaper, but equally fair, then both sides would choose it after they 

have a dispute. The only reason for businesses to opt for mandaVerDate 0ct 09 2002 11:02 May 13, 2008 Jkt 000000 PO 00000 Frm 00086 Fmt 6633 Sfmt 6601 H:\WORK\COMM\061207\36018.000 HJUD1 PsN: DOUGA
83

tory pre-dispute arbitration is because they believe, with good reason, that they will get better results because they will reduce their 

overall liability. In effect, they view mandatory arbitration as doit-yourself tort reform. 

Fourth, the Federal Arbitration Act has been interpreted to displace State law. This is a seriously mistaken Supreme Court ruling 

that has thrown the lower courts across the country into wide confusion about how much State law is in fact preempted, essentially 

nullified by the Federal Arbitration Act. 

Business defenders today are increasingly arguing in court that 

the Federal Arbitration Act nullifies various State consumer protection laws. Since most consumer protection law is still State law 

in the United States, this doctrine of Federal Arbitration Act preemption poses a serious threat of creating a consumer protection 

gap that could only be filled by new Federal regulations. 

To conclude, the Federal Arbitration Act was not intended by 

Congress to apply to consumer or employment claims. It was not 

intended to preempt or nullify any State laws. We are in this mess 

because of a serious of legally incorrect and misguided court interpretations of the FAA. Unfortunately, the courts are not going to 

correct their own mistakes because they find that the caseload-reducing effect of arbitration, of mandatory arbitration, is an irresistible temptation. 

It is time for Congress to step in and clean up this mess. Thank 

you. 

[The prepared statement of Mr. Schwartz follows:]

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PREPARED STATEMENT OF DAVID S. SCHWARTZ


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Ms. SA ́ NCHEZ. Thank you, Mr. Schwartz, for your testimony. 

We will now begin a series of question rounds. I would like to 

recognize myself for 5 minutes for questions. I would like to start 

with Ms. Fogal. 

In your testimony, which is very compelling, I must say, for this 

hearing, you describe your experience in having gone through the 

arbitration process, and you indicate that you feel like you are representing other consumers who may have been in a similar situation. 

I am wondering, how many other people have you spoken with 

who had a similar experience with arbitration or a better or worse 

experience with arbitration? 

Ms. FOGAL. There are two consumer groups that track this information: HOBB, which is Homeowners for Better Building, and 

HADD, which is Homeowners Against Defective Dwellings. They 

did statistics every week and get phone calls. I talked to these people. I talked to people who would call me and ask me, what can 

we do? And all I can tell them is, I don’t know. 

Ms. SA ́ NCHEZ. I don’t mean to interrupt you. 

Ms. FOGAL. That is okay. 

Ms. SA ́ NCHEZ. Do you find that people’s experience with arbitration has been about as bad as yours has been, or better, or worse? 

Ms. FOGAL. What I found is that they are usually horrible, if 

they can talk about them, but when you come out of arbitration, 

a lot of people are under secrecy agreements. Like, I can go to their 

houses and see that their houses are still in horrible condition, but 

they can’t talk to me. 

Ms. SA ́ NCHEZ. Okay. One of the many arguments that have been 

used to advance arbitration is that it is less costly than litigating 

in a traditional court system. Have you personally found arbitration to be less costly than what you would expect to pay if you took 

your claim to court? 

Ms. FOGAL. What I really hate is when they say ‘‘arbitration 

costs,’’ because first you have arbitration costs paid to the arbitration company itself, and then you have costs of arbitration, which 

is like being on a trial. So you have the same trial costs of getting 

witnesses, testimony. You even have to pay to send out your own 

subpoenas for $50. You have all the costs of a trial and you better 

put on a good one, or it really didn’t matter. You have all the same 

costs. Sometimes it is worse. 

Ms. SA ́ NCHEZ. Okay. 

Mr. Schwartz, how did mandatory binding arbitration between 

equal commercial entities expand into the consumer business realm 

where the parties generally are not on equal footing? 

Mr. SCHWARTZ. Well, basically for 60 years, from 1925 until the 

mid-1980’s, the courts uniformly correctly interpreted the Federal 

Arbitration Act to apply only, as you said in your opening statement, in business-to-business kinds of disputes. And then suddenly 

in the 1980’s, the Supreme Court essentially surprised everybody 

with a series of decisions saying, oh, we have this new view of arbitration. It is much better than we previously realized. 

They don’t come out and say this in their court opinions, but that 

happened to correspond with the views of the chief justice then, 

Warren Burger, and subsequently the views of Chief Justice 

107

Rehnquist, that there are too many cases in Federal courts and too 

few judges. Whether that is true or not, it doesn’t seem that the 

way to reform the Federal caseload is to place the cost of it onto 

consumers and employees who have no say in whether they are 

going to arbitrate or not. 

Ms. SA ́ NCHEZ. Thank you. I have several questions for you. Are 

mandatory binding arbitration agreements really mandatory, because we have heard the argument that if a consumer is unhappy 

with an arbitration agreement, they can simply refuse the agreement and take their business to a competitor. What is your response to that? 

Mr. SCHWARTZ. There are two problems with that argument. The 

first is that for a lot of businesses, there are no competitors who 

give you a choice. Every cell phone company and every credit card 

company today—and those are perfect examples—has an arbitration agreement. So you cannot get a credit card or a cell phone 

without agreeing to that. It is becoming more and more true in the 

healthcare situation. 

Second of all, with a lot of situations, do people really have the 

freedom to go do something else? If somebody has looked for several months to find a job and they desperately need a job, and that 

employment agreements says, okay, here is a mandatory arbitration agreement if you want to come to work for us. Is a person 

going to refuse the job because of some possibility that they might 

down the road have a dispute with that person? 

Ms. SA ́ NCHEZ. Along that same vein, I was thinking of examples 

in my life where I have seen actual arbitration agreements that 

you have to sign. I am a sophisticated consumer here. I am an attorney and I am a Member of Congress, but I can remember, and 

probably never even realized that my credit card and cell phone 

had mandatory arbitration agreements. 

But I do remember one time I broke a tooth and went to the dentist. And before I got service from the dentist, I was asked to sign 

a binding arbitration agreement. It seemed to me that I was in so 

much pain that had I even really thought about it, because I will 

quite honestly tell you I was in so much pain that I signed it. I 

would have signed anything in order to get the services that I 

needed in order to not feel that pain. 

So I understand perfectly what you are saying and I appreciate 

your testimony. 

My time has expired, so at this time I would like to allow the 

Ranking Member, Mr. Cannon, 5 minutes for questions. 

Mr. CANNON. Thank you, Madam Chair. 

Ms. Fogal, I empathize with what you are saying. I decided after 

my last building experience that I would never, ever build anything 

again in the future because builders are very difficult. They control 

the facts of their world, and quality is iffy. 

I am wondering, as I listened to you, if there isn’t some other 

kind of way to deal with the problem. You had a very intense experience with a very big issue, a house, as opposed to, say, for instance, cell phones. Cell phones have arbitration clauses, but they 

tend to be small amounts of money. And cell phone companies tend 

to compete. 

108

On the other hand, in the same vein, if cell phones have arbitrary elements to their contracts, people would tend to move away 

from one company with their cell phone and go to a company that 

is better. So I am wondering if there isn’t a way that we could have 

a kind of quality assurance like you have on eBay so that people 

can understand who the good builders are and who aren’t. 

In other words, you had a terrible problem with a builder who 

was a jerk, apparently. I don’t know this guy so I am not maligning 

him. 

Ms. FOGAL. He was. 

Mr. CANNON. And you don’t necessarily need to go there. The 

short of it is he was in business and you weren’t. 

Ms. FOGAL. Right. 

Mr. CANNON. And you ended up with a house and all the burdens 

of a house and a mortgage, and he just had the relatively minor 

costs of opposing you. That is a very different environment, it occurs to me. But I don’t know if you built or if you just bought from 

a builder, but wouldn’t you have liked to have known something 

about his quality and all the other houses he built and all the other 

people who have lived in the houses that he built? 

Ms. FOGAL. Yes. That is why you go to the Better Business Bureau and he had a perfectly legitimate rating with the Better Business Bureau. Because he had operated under so many different 

names, when they would complain under one name, he would just 

change it. 

So after we went there, and he was the fourth-largest builder in 

Houston, and I did see other houses he had built. So I felt like, oh, 

very nice. But I also, after all this started happening, found out 

that he could build $1.3 million with $300,000 worth of foundation 

damage, or $120,000 that was uninhabitable. So you know, he was 

kind of an equal-opportunity crook. 

Mr. CANNON. Would your problem be somewhat lessened if there 

was a world in which you could identify your builder, having been 

able to identify your builder, and found out that other people had 

rated him and he was poorly rated. 

Ms. FOGAL. Yes, that might have helped, but I also thought that 

anybody that was going to build a house, why would they need an 

arbitration agreement? Why wouldn’t they build a house that they 

believed in enough that they didn’t have to have me sign that? In 

Texas, you can’t buy a new house without an arbitration agreement. It is a contract of adhesion. You either buy it or you don’t 

get one. 

Mr. CANNON. The nice thing is you can rent, but that is a different issue, I suppose. There are alternatives. 

Ms. FOGAL. Well, there goes your homeownership. 

Mr. CANNON. It is not really adhesion because you have lot of options in life. 

Mr. Schwartz, would you address the point of the difference between a cell phone company that has an arbitration clause in a 

highly competitive environment, and, say, the problem that Ms. 

Fogal had? 

Mr. SCHWARTZ. Yes, they are both bad for different reasons. With 

the cell phone company, their goal is to avoid class actions because 

they figure that most of the disputes they are going to have are 

109

going to be for small dollar amounts. They could rip off 50,000 customers for $50 each and no one is going to sue them individually 

because it is too costly to bring an individual case. What you need 

is a class action. 

So I think the goal of the cell phone company——

Mr. CANNON. The key probably is a better cell phone provider. 

In other words, I see the distinction of where you are headed, but 

the market needs to be a little robust. 

In fact, Mr. Bland, you have dealt with class actions. How many 

class action settlements are you aware of where individual plaintiffs recover even 20 percent of the economic damages they were 

seeking? 

Mr. BLAND. Actually, there is a study that was done a few years 

ago by the head of a periodical called Class Action Report. He was 

sort of a green eyeshade guy and he collected every class action settlement anywhere in the country that he could find. He found that 

across the board, collectively in the aggregate for consumer class 

actions that about 80 percent of the economic value went to the 

consumers. 

Now, there are some really bad abusive settlements. I personally 

have objected to bad settlements where most of the money goes toward——

Mr. CANNON. This guy died. When did he stop collecting data? 

Mr. BLAND. He died 2 years ago in an accident. 

Mr. CANNON. I have had like dozens of invitations to join class 

actions over the last 10 years. They are all frivolous. They are all 

flaky. 

Mr. BLAND. Sir, if I can give you an example. I just settled a case 

as a class action where a bank promised people that they would 

never charge them more than 24 percent interest, then it broke 

that promise and charged people 30 percent interest. The individual damages to people were $100 at the most. We settled that 

case for $16 million and we have sent out checks, or we are in the 

process of sending out checks to 280,000 people. Plus, we fixed 

everybody’s credit records. 

There are bad class action settlements, but that is not the majority of it. I feel very proud about the case that I just handled. 

Mr. CANNON. My time has expired, Madam Chair. Would the 

Chair indulge me to just ask what your fees on that case were? 

Mr. BLAND. The fees were 20 percent of the amount that was recovered. 

Mr. CANNON. So it was $4 million? 

Mr. BLAND. About $4 million. 

Ms. SA ́ NCHEZ. We may have time for a second and possibly even 

a third round of questions. I would like to give everybody an opportunity in this round, so I will recognize Mr. Johnson for 5 minutes 

of questions. 

Mr. JOHNSON. A 20 percent contingent fee is definitely a reasonable fee in a situation like that. I don’t know who could argue with 

the fact that attorneys serving a public purpose should not be fairly 

compensated for the work that they do. 

But let me ask you, Mr. Levin, do you agree generally with the 

principle that whoever is paying the piper calls the tune? 

Mr. LEVIN. No, I do not. 

110

Mr. JOHNSON. Do you disagree with that generally? 

Mr. LEVIN. Well, if by that you mean that if a company is paying 

the cost of arbitration, they are going to be favored. Is that your 

question? 

Mr. JOHNSON. My question is generally, just taking it away from 

legalities. Whoever is paying the piper generally is calling the tune, 

is telling the piper what tune to play. Is that not a general——

Mr. LEVIN. I disagree with that. I think the major arbitration organizations such as the American Arbitration Association and the 

National Arbitration Forum have put their rules and their procedures in writing. Their arbitrators are sworn to uphold those rules. 

The rules call for neutrality and fairness at every stage of the procedure. The rules give each side the right to strike arbitrators. I 

think there is a difference between saying——

Mr. JOHNSON. You are not really answering my question. 

Mr. LEVIN. I am sorry. Maybe I misunderstood your question. 

Mr. JOHNSON. I asked you this question. 

Mr. LEVIN. Okay. 

Mr. JOHNSON. In your statement, you have written that in the 

vast majority of cases the existing system works and works well. 

That is this arbitration. 

Mr. LEVIN. Yes. 

Mr. JOHNSON. Because companies and employers have gone to 

great lengths to make arbitration programs fair, to the point of giving the consumers unfettered and unconditional rights to reject arbitration when they enter into the transaction. Can you cite some 

specific instances of that statement? 

Mr. LEVIN. All of the arbitration agreements that I have had a 

hand in working on, drafting, providing legal comment on for the 

past several years have included a right to reject arbitration. 

Mr. JOHNSON. Now, I want you to hold up right there. 

Mr. LEVIN. Yes. 

Mr. JOHNSON. Mr. Bland, how would you respond to that assertion? 

Mr. BLAND. I have seen that type of clause in maybe eight banks’ 

contracts. I have never seen an opt-out right in a nursing home 

contract, a car sale, a cell phone, or employment or any other type 

of contract. But there are some banks that are doing it. The problem with it—if I can just quickly add—is that it is in the fine print 

of a contract, usually and literally like the seven-size font. I am 

physically incapable of reading these things. It is in legalese that 

is very hard to follow. 

The typical sentence in some of these contracts will be over 200 

words, and people just don’t even know it is there. No one opts out. 

They opt-out rate is like 1 percent or less. It is like .01 percent. 

Nobody reads the fine print of contracts. There is a word in America for people who read every word of the fine print of their contracts. It is ‘‘paranoid.’’

How many people in this room know whether their cell phone 

company chose the National Arbitration Forum or the American 

Arbitration Association? How many people know whether their cell 

phone contract requires them to do their case here or there? Nobody in this room knows those things. 

Mr. JOHNSON. All right. I understand. All right. 

111

Mr. Levin, you were champing at the bit wanting to get back in 

there. 

Mr. LEVIN. Yes, thank you, Congressman. 

Certainly with respect to the arbitration agreements that I am 

familiar with on behalf of consumer financial services companies, 

such as banks and credit card companies, we make sure that we 

do not——

Mr. JOHNSON. Mr. Bland said he has seen eight in his——

Mr. LEVIN. Well, but he also said that they were buried in small 

type, but certainly——

Mr. JOHNSON. I am just talking about the opportunity for people 

to actually reject arbitration when they enter into their various 

agreements. 

Mr. LEVIN. Yes. We make——

Mr. JOHNSON. Mr. Bland says he has seen it eight times in his 

20-year career. How many times have you seen it? 

Mr. LEVIN. A lot more than that. I can’t give you an exact number, but that represents agreements that may be in the hands of 

millions of people, because these credit card companies and banks 

have a lot of customers. The right to opt out of arbitration we always make sure is in boldface type, put right at the beginning, 

even before it describes our——

Mr. JOHNSON. By ‘‘we,’’ who are you referring to? 

Mr. LEVIN. As a lawyer, advising a client. 

Mr. JOHNSON. Your law firm? 

Mr. LEVIN. As a lawyer advising a client how to structure an arbitration agreement. We urge them to put the right to reject right 

up front, distinguished by either capital or boldface letters. 

Mr. JOHNSON. Okay. Well, let me ask you——

Ms. SA ́ NCHEZ. The time of the gentleman has expired. 

Mr. JOHNSON. All right. Thank you. 

Ms. SA ́ NCHEZ. I am sorry to say. It goes quickly. 

Mr. Jordan is recognized for 5 minutes of questions. 

Mr. JORDAN. Thank you, Madam Chair. 

Mr. Levin, you said in your work, your presentation, you thought 

the judicial review process was pretty good. So elaborate on that. 

Try to help me understand the sharp contrasts out there, and how 

the review process does in fact work. 

Mr. LEVIN. Well, I think what Mr. Bland is saying is that once 

you get outside the court system in to any alternative dispute resolution program, in a sense you are operating ‘‘technically outside 

the law,’’ because there is not a court involved. 

But in fact, the United States Supreme Court and the vast majority of courts in this country, both State and Federal, have recognized arbitration as a very valuable and significant way of making 

sure that everyone has access to justice and making sure that the 

courts do not get overburdened and that the costs of reducing costs 

for both consumers and companies are reduced by reducing litigation costs. 

The companies try to write their arbitration agreements in a 

very fair and equitable way. They try to write them so that they 

will be enforced by arbitration organizations which have adopted 

formal due process standards and protocols and standards of fairness for consumers. 

112

As I mentioned in my introductory remarks, the consumer protocols that were prepared by the American Arbitration Association 

were done so with the input and very active involvement of many, 

many consumer advocate groups to make sure that what came out 

was something that satisfied everyone involved in this process. 

The courts also provide an important check and balance by making sure that if someone claims that an arbitration agreement is 

unfair, that agreement is scrutinized and scrutinized very intensely. If a court rejects an arbitration agreement, that to me 

shows that due process is working because it has gone through 

court review. Again, there is court review going in and some 

amount of court review coming out. 

But I think it is all of these elements coming together and coalescing that produces a system which, in the vast, vast majority of 

cases, works and works very well. I am sympathetic to Ms. Fogal’s 

comments. I can’t comment on them. I have no personal knowledge 

of them. 

But I can say in the vast majority of cases, the system does work 

and arbitration does produce fair results, and it has been endorsed 

by not only the vast majority of courts, but by virtually every State. 

Virtually every State has its own Uniform Arbitration Act, which 

is another system of arbitration in addition to the Federal Arbitration Act. 

Mr. JORDAN. Mr. Bland, does your organization represent folks in 

arbitration cases situation or just in the courtroom? 

Mr. BLAND. We have done some cases in arbitration. 

Mr. JORDAN. As a public interest group, do you do a fair amount 

of educational work with consumers out there about the dangers of 

arbitration? Tell me about your——

Mr. BLAND. Mostly what we do is we provide training information to consumer lawyers and employment lawyers where they get 

an arbitration clause that in addition to sending you to arbitration, 

adds some other provision like it strips you of some of your rights 

under some statute or something like that, which is very common. 

We try and train lawyers in how to respond to those. 

A lot of consumers come to us because of what they googled on 

different issues relating to arbitration. They find us and come to 

us, so we spend a lot of time talking to individual consumers over 

the phone or who come into our office, but we don’t have a true 

educational program. 

Mr. JORDAN. Thank you, Madam Chair. 

Ms. SA ́ NCHEZ. Thank you. The gentleman yields back his time. 

Thank you. 

The gentleman from Massachusetts, Mr. Delahunt, is recognized. 

Mr. DELAHUNT. Thank you, Madam Chair. 

This is a very interesting discussion, but let me go back to a 

point I think that was raised by Mr. Bland. We can talk about the 

size of the font. We can talk about national arbitration groups, 

whether it is the American Arbitration Society, et cetera. But I 

think we have to deal in the real world. 

I think the point that you made, Mr. Bland, was how many people actually read the solicitation or the credit card agreement, 1 

percent? I dare say it would be far less than 1 percent. I mean, 

substantially less than 1 percent. 

113

So we can talk about due process. We can talk about the nuances 

and the rules of arbitration, the right to appeal, et cetera. But in 

the end, a credit card agreement is an adhesion contract between 

the parties. You either get a credit card or you don’t, particularly 

when all of the credit card issuers have these clauses within them. 

It really comes down to, I believe, a public policy issue which, 

you know, I think is really worthy of great debate, but to talk, I 

mean, is there a Member on this panel that has ever read—Mr. 

Jordan? Mr. Cannon? Mr. Johnson? Ms. Sa ́nchez?—have you ever 

read your credit card statement? 

Mr. CANNON. Absolutely not. [Laughter.] 

Mr. DELAHUNT. Is there anybody in the audience—please raise 

your hand? So, three. 

Mr. CANNON. Probably lawyers. 

Mr. DELAHUNT. I am a lawyer. I have never read that. 

Mr. CANNON. Paid to read it; paid to read it. 

Mr. DELAHUNT. Thank you. I will pay you. [Laughter.] 

I mean, the reality is that we are dealing with a subject that is 

esoteric at best; that simply creates a situation where, I don’t know 

what the precise definition of an adhesion contract is, but it fits my 

definition. 

Then I think it is an issue of what we do as a Committee, as a 

Congress, where it is documented, where if it can be documented 

by solid studies that implicate a scientific methodology, that there 

are abuses relative to consumers. 

And by the way, small businesses dealing, and I would even go 

so far as to say the business-to-business arbitration issue ought to 

be reviewed. I dare say there are a lot of small businesses that 

don’t have many options other than to accept a binding arbitration 

agreement from some single-source supplier. Is it fair to, you know, 

everyone in the business community? It really comes down to a 

question of fairness. 

I am sure, Mr. Levin, the documents that you draft are fair, are 

balanced, and the font is huge. It is right at the beginning, and it 

is probably in glaring red, but I have to tell you, nobody is reading 

it. That is the real world that we are dealing with. 

Mr. CANNON. Would the gentleman yield? 

Mr. DELAHUNT. I yield. 

Mr. CANNON. The question is really actually very interesting. 

This Committee certainly has jurisdiction over it. One of the problems is where we see a proliferation of standardized contracts. So 

for instance, have you ever bought software online and read the 

agreement that you have to say you read? 

Mr. DELAHUNT. Of course not. 

Mr. CANNON. Absolutely not. [Laughter.] 

And may I suggest that what I think Mr. Levin is saying and 

others is that there are procedures that help protect consumers in 

the process. 

Mr. DELAHUNT. I would ask the Chair for an additional 2 minutes. 

Ms. SA ́ NCHEZ. The Chair will be generous and grant the gentleman from Massachusetts 2 minutes 

Mr. DELAHUNT. I thank the Chair for her generosity. 

114

Ms. SA ́ NCHEZ. Although I might add, it seems that there is 

enough interest to do a second round of questions, so perhaps that 

might be a better way to tackle that. 

Mr. DELAHUNT. I will defer to whatever the Chair rules. 

Mr. CANNON. If the gentleman would continue to yield, one of the 

really interesting things to do here, and our role is to be part of 

that process for creating a system that can work. 

Mr. DELAHUNT. Reclaiming my time. 

Mr. Levin, would you object to, you know, the choice of the arbiter, I think, is significant. How would you feel about legislation 

dealing with credit cards that would allow the consumer to select 

the arbiter? How would you feel about that? 

Ms. SA ́ NCHEZ. The time of the gentleman has expired, but I will 

allow Mr. Levin to answer that before we move on to our second 

round of 5-minute questions. 

Mr. LEVIN. In fact, I believe that National Arbitration Forum 

rules permit the parties to select an arbitrator who is not with the 

National Arbitration Forum. 

Mr. DELAHUNT. No, no, I am saying how would you feel about 

legislation that would allow, that would mandate in binding arbitration agreements by the credit card industry that the arbitrator 

will be selected by the credit card holder, by the issuer, not by the 

credit card company? 

Mr. LEVIN. All the agreements that our firm participates in 

drafting give the consumer the right. Now, we do identify the major 

national organizations because they have promulgated standards of 

fairness that we have confidence in. But we give them the right to 

choose which organization they would like. We are not trying to 

force them to choose one or the other. 

That is true even if the company initiates arbitration, we give 

the consumer the right to choose which organization. Once you are 

within that organization, there are all sorts of internal procedures 

that are in the organization’s rules for choosing specific arbitrators, 

but we do try to give the consumer the right to do that. 

I think in terms of legislation, it would have to be drafted very 

carefully because it is a contract. You do want both sides, and this 

is something that both sides are supposed to agree upon. So the 

reason the company’s names the AAA or the NAF is because you 

can get a copy of their rules; you know what they are supposed to 

stand for; and you can understand what is going to happen to you 

in arbitration. 

But within that context, we always give the consumer the right 

to choose. 

Ms. SA ́ NCHEZ. Thank you, Mr. Levin. 

We are now going to move on to our second round of 5-minute 

questions. I get to start. I have a couple of questions I have been 

dying to ask. 

Mr. Bland, according to proponents of mandatory arbitration, the 

courts rigorously protect consumers from unfair arbitration agreements. Are they correct? Can we not just depend on the courts to 

protect consumers from unfair arbitration clauses? 

Mr. BLAND. If a company just has the arbitration clause that I 

talked about at the beginning, where they pick the arbitration firm 

who is going to give you basically a defense lawyer, I mean, that 

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industry, as your decision maker and there is no judicial review 

other than the incredibly limited review, that is always enforceable. 

Now, if a company gets greedy and they start tacking on other 

things, not only do you have to go to arbitration instead of court, 

but also we are going to repeal the consumer protection laws of 

your State—which, by the way, is shocking, and a shocking number 

of companies do. Then you can go to court and fight it. 

I mean, my career is basically finding cases where we have been 

able to get some courts to strike down companies that added on 

these unfair bells and whistles to the arbitration clauses. 

Some courts are striking them down. A lot of courts aren’t. There 

are some courts in this country where they think there is such a 

strong Federal policy in favor of arbitration that they would enforce 

an arbitration clause of anything short of a gun to the head of 

somebody. 

The Connecticut Supreme Court upheld an arbitration clause 

that required this guy to arbitrate a case against an accounting 

firm where the arbitrators were partners in the accounting firm. 

And they said, well you know, just because the arbitrator might 

rule for the guy, they would each only have to pay $1,200 themselves, so they would never be biased by that. Can you imagine when they start offering judges $1,200 to rule 

for me? And the Connecticut Supreme Court unanimously said, no 

problem with that. I thought that was like the unlosable case. So 

yes, we win some cases when companies really rig the system. It 

is not like my entire career is going around losing cases, but there 

are a lot of cases where courts will uphold things that are shocking. 

Ms. SA ́ NCHEZ. The point is well-taken. 

Mr. Levin, if I could ask you, you are counsel and you deal with 

arbitration clauses. Do you ever urge corporations to select arbitration companies which structure arbitration rules in a way that favors the corporate clients that you have? 

Mr. LEVIN. No. There are really only a few major national organizations, so those are the ones we tend to think of because they 

have the published protocols, rules and procedures. Certainly, in 

our own clients’ interests, we want to make sure that whatever 

rules we are suggesting are fair to both sides. So to the extent, do 

we look at whether it protects the company? Yes, but we also look 

to see whether it protects the consumer. It should be——

Ms. SA ́ NCHEZ. Do you believe that they are absolutely equally 

balanced? 

Mr. LEVIN. I do. 

Ms. SA ́ NCHEZ. Ms. Fogal, I wanted to give you an opportunity, 

and I wanted to recognize something—as some of my colleagues 

here have talked about—consumers educating themselves about 

services that they may be buying and going to other places. I want 

to touch on that, but I also want to recognize that you have made 

a concerted effort to try to inform other future consumers about the 

bad experiences that you had with somebody. 

I appreciate that because I think a lot of people here would have 

just felt so defeated that they would have just walked away and 

kept their mouth shut. So I really do want to recognize the work 

that you are doing in terms of trying to help other people avoid 

that pitfall. 

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Ms. FOGAL. Thank you. 

Ms. SA ́ NCHEZ. Let’s talk about the Houston housing market. I 

think you made a statement that all homebuilders in Houston have 

the arbitration agreements, so if you want to buy a home——

Ms. FOGAL. A new home. 

Ms. SA ́ NCHEZ.—a new home, you don’t really have a choice of declining one because he has a mandatory arbitration agreement, and 

selecting some other new homebuilder. Am I correct in that statement? 

Ms. FOGAL. Yes. Now, if you buy a home from someone else that 

is not a builder, or an older home, you can sue them. You can sue 

each other. You just can’t sue a builder. 

Ms. SA ́ NCHEZ. Right. 

Ms. FOGAL. That is how it is equal. 

Ms. SA ́ NCHEZ. So in that particular market, there really isn’t another option. If you want to purchase a new home——

Ms. FOGAL. No. We had a representative from our State try to 

buy one and she couldn’t find one. 

Ms. SA ́ NCHEZ. I am assuming, and I heard in your testimony—

and I don’t want to add facts that are not in evidence——

Ms. FOGAL. That is okay. 

Ms. SA ́ NCHEZ. You talked about being senior citizens and wanting a home with an elevator and sort of looking ahead prospectively 

to the future. I have to imagine that probably one of the considerations that you put into buying a home was that you wanted a 

newer home that perhaps would not have the maintenance costs of 

an older home. 

Ms. FOGAL. Exactly. No repairs. 

Ms. SA ́ NCHEZ. Unfortunately, you ended up in the exact worstcase scenario of that. 

I think I have finished my questioning, so I will now turn to Mr. 

Cannon for 5 minutes of questions. 

Mr. CANNON. Thank you, Madam Chair. 

Just following up on our discussion with Mr. Delahunt, let me 

just point out that one of the possibilities that we ought to consider 

as a Committee is standardized language that we put in statute, 

and then require people to explain the variations from that standardized language. Now, you might end up with lots and lots of explanations, but it is something we may want to consider as a Committee. 

I just wanted to follow up. The question about your attorney fees, 

I don’t ask that to question the value of your services or the fees, 

but only to put into contrast the fact that there are huge attorneys’ 

fees here. How much was the average benefit to each of the members of the class? 

Mr. BLAND. The cash that the individual class members, because 

there were so many claims, the average is going to be a little over 

$25. Some people are going to get over $1,000, depending on what 

their damages were, but for most people it is going to be like $25. 

Now, the injunctive relief by cleaning everybody’s credit reports 

and getting false information off, that is going to lower people’s interest rate, so people are going to actually make a lot more money 

in terms of savings. But the cash is relatively low per person compared to the attorney fees, no doubt about it. 

117

Mr. CANNON. And that really is the core of the issue of what we 

are dealing with here. Is it better and, granted, for attorneys that 

are bringing these lawsuits, there is a loss, but is the system better 

off if people get robust and we have a market where people can understand what they are getting into and decide which bank or 

which cell phone company they want to use, or which builder. 

I had a builder that I actually thought I had blackballed because 

I reported his failures. And 3 years later, I saw him driving around 

in a truck with a new name. So we have to have some identifiers, 

especially on the high-end activity. 

But it just seems to me that the cost of the lawyering in these 

cases, the cost of the defense to companies, is great, but obviously 

in the particular case you mention, you got what sounds like a 

clear violation—24 percent promised, 30 percent charged—and people are getting money. I suspect that the effect of those costs in 

some of those cases where people had their credit smashed because 

they started bouncing checks because they didn’t expect the higher 

interest rate. 

I have a very young son who just experienced his first cascading 

effect of overdrawing his account, $350 in fees later and a problem 

with his credit report, which I think we solved. He realized that a 

little mistake redounds to huge benefits to banks. 

This is not a defense of banks. It is not even a criticism of lawyers or the way you do business. As a society, are we better off 

with devices and methods and processes to protect us from the big 

fraud artists who build houses that are hundreds of thousands of 

dollars on the one hand, and protect us from companies who might 

cheat us by $50 here or there? 

But again, with those companies that cheat on cell phones, if you 

have a robust market, how much is it worth to a bank to cheat 

somebody out of $25 with a little higher interest rate? When people 

find out that they were being charged 30 percent, they tell all their 

friends that that bank is creepy, or that my cell phone was bumped 

up because of something I don’t agree with and therefore—and we 

have all had I think some experiences for instance with texting and 

how the texting system works. 

At least I have had experience with my kids over texting. And 

you go with the $5 plan it doesn’t cost you anything, but you don’t 

do the $5 plan, you are at $400 or something like that. 

So we have all these pickups in the market, but what happens 

when you starting saying, I don’t like this cell phone company, because they hurt me by charging this horrendous amount. Well, that 

hurts the company more than I think the $25 they gained in your 

case, or the $50 that you mentioned, Mr. Schwartz, in the case of 

cell phone companies. 

Our question is: How do we actually solve this problem in a way 

that doesn’t enrich a class of lawyers, for instance, and a much 

higher cost to society by litigation which is expensive, which may 

have merit, but which for any individual who has only $25, as I 

said earlier, I have had dozens of—maybe not dozens, but it seems 

like dozens—of requests to join a class where there might be something like, you know, I look at it a and say how much could I have 

possibly lost, if I really lost something here, $25, $10, $2? 

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So it seems to me that what we are dealing with here transcends 

the narrow parochial interests in how we structure ourselves so 

that we actually make this all work, because I don’t think anybody 

on the panel is going to disagree that these costs get passed back 

onto consumers. 

Mr. Bland, is this not going to be a matter of disagreement? 

Mr. BLAND. Actually, I do disagree because I think that what a 

lot of class actions do is a company will promise one thing and then 

charge something that is quite a bit higher. If you bring a successful class action, it forces them to keep to their promise to actually 

lower their prices back to what they originally promised. 

I think that Public Citizen, an organization, did a report last 

year around the successful tort reform bill to federalize all class actions, where they went through a series of industries and found 

that class actions actually lowered the prices of a lot of goods, because what was happening is you had bait-and-switch types of 

things where a company would promise one price, then charge 

something higher, and they already had the consumer on the hook. 

The class action caused them to go back to their honest price. 

Ms. SA ́ NCHEZ. The time of the gentleman has expired. I am sorry. 

Mr. CANNON. I yield back. 

Ms. SA ́ NCHEZ. The gentleman from Georgia, Mr. Johnson, is recognized for 5 minutes. 

Mr. JOHNSON. Thank you. 

Mr. Levin, I hate to pick on you, but you provide me with some 

interesting material here, particularly the fact that your paper 

seems to be weighted down with information about empirical studies that have been conducted which would tend to support arbitration as being consumer-friendly and basically something that is 

pretty benign and fair. 

Yet, it appears that the firms that called for the studies to be 

done were actually from the business community that uses the arbitration clauses, and then the results seem to substantiate the 

version that you would expect that they would want to hear, and 

that is arbitration is a good thing. 

How could you respond to the assertion I believe, and I am not 

sure if it was Mr. Schwartz or Mr. Bland made about the selective 

samples that were used, the definitions that perhaps people use 

when they say ‘‘winning,’’ that kind of thing? How can you justify 

who paid for the studies and whether or not those studies were actually done in a way that would pass muster as far as a statistician 

is concerned? 

Mr. LEVIN. I think that the fact that a study might have been 

commissioned by a business does not mean that the outcome of 

that study was in any way influenced by the fact that it was commissioned. Businesses are frankly used to hearing the kinds of 

comments that Mr. Bland and Professor Schwartz have made, and 

are interested in trying to gather factual information. 

Mr. JOHNSON. You don’t think that it would perhaps be biased? 

Mr. LEVIN. I would hope not. I think they are undertaken in good 

faith. 

Mr. JOHNSON. And you also don’t think that who pays the arbitrators, who selects them and gives them their business, would 

probably be favored by the arbitrators themselves? 

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Mr. LEVIN. No, I don’t, because there is a difference between an 

arbitration organization and an individual arbitrator deciding a 

case. 

Mr. JOHNSON. Where does the arbitrator get their assignment 

from? Don’t they get their assignment from the arbitration company? 

Mr. LEVIN. There are usually panels of arbitrators’ names and 

the parties through a process of give-and-take settle upon one. 

Mr. JOHNSON. And the arbitration company pretty much is free 

to decide who the individual arbitrators might be? 

Mr. LEVIN. They have their own ways of doing that. 

Mr. JOHNSON. And if the arbitration company is owned by, say, 

the brother-in-law of the company that writes the contract imposing the arbitration agreement, don’t you think that that brother-inlaw is going to make sure that all of the arbitrators are friendly 

toward those who are paying the bills? 

Mr. LEVIN. I certainly don’t know that to be the case, but there 

are safeguards built into the selection process for an arbitrator 

where disclosures have to be made. Most of these arbitrators, a lot 

of them are retired judges. A lot of them are very experienced lawyers on both sides of the fence. 

Mr. JOHNSON. Let me ask Mr. Schwartz to respond to that. 

Mr. SCHWARTZ. I would just repeat the statement that Mr. Bland 

made. I think he is absolutely correct, that there is going to be a 

preponderance of industry lawyers as panels of arbitrators. Yes, 

the American Arbitration Association and these other companies 

have their system of choosing the seven arbitrators that you can 

pick from, and one is going to be worst than the next. 

The thing that I don’t understand is that we hear from folks like 

Mr. Levin that arbitration is fair, it is fast, it is cheap, it is efficient, it is the greatest thing since sliced bread. What I have never 

understood to this day, in the more than a decade that I have been 

studying these, if arbitration is so great, then why do the companies have to say it is so great for you, Mr. Consumer, that we are 

going to force you whether you like it or not to accept it. 

Mr. JOHNSON. Now, let me stop you at that point and ask Ms. 

Fogal. Ma’am, when you first saw this home plan and thought it 

was so beautiful, you were so happy. 

Ms. FOGAL. Right. 

Mr. JOHNSON. And then you went and signed the contract. Do 

you feel like you had a choice at that time of rejecting arbitration? 

Ms. FOGAL. It was in my earnest money contract, and I could 

have not purchased the house. I could have not purchased a new 

home in Houston. My builder was on the Harris County Housing 

Authority, so I assumed he knew what he was doing. 

Mr. JOHNSON. Could you have purchased a house through any 

other builder in Houston? 

Ms. FOGAL. Not without signing an arbitration clause. 

Mr. JOHNSON. Because all of the builders in Houston insist on arbitration clauses——

Ms. FOGAL. Arbitration clauses. 

Mr. JOHNSON.—and are mandatory in their agreements? 

Ms. FOGAL. That is correct, sir. 

Mr. JOHNSON. Thank you. 

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Ms. FOGAL. You are welcome. 

Mr. DELAHUNT. [Presiding.] I am not Congresswoman Sa ́nchez, 

but let me take the gavel and recognize the gentleman from Illinois, Mr. Jordan, for his time. 

Mr. JORDAN. I am from the Midwest, but Ohio. [Laughter.] 

Mr. DELAHUNT. Anything west of Boston is west. [Laughter.] 

Mr. JORDAN. Mr. Chairman, I went to college close to Illinois. In 

fact, I will start with Professor Schwartz because I was a University of Wisconsin undergraduate. 

Let me just ask this, and last night, my staff was together, and 

the 6,437 letters we have sent out for the best part of this year. 

They break it down by category, and we had hundreds of letters 

on immigration, on the Iraq war, several dozen letters on gas 

prices, as you might guess, but not one single letter, and I scan 

through the pages of the categories, and not one was on binding arbitration out of one of our constituents. 

I appreciate and am sympathetic to Ms. Fogal, but just tell me 

how big a concern this really is? I mean, none of the constituents 

in God’s country that I represent in west central and north central 

Ohio have taken the time to call their congressman about this. We 

have evidence suggesting consumers are pretty happy with arbitration when in fact they go there. So tell me a little bit more, professor. 

Mr. SCHWARTZ. Thank you. I have to point out that I am always 

told that I live in Michigan, even though it is Wisconsin. I am in 

one of the ‘‘M’’ states in the Midwest. 

I think it is a very large problem. I think, as the Chairwoman 

cited a study at the beginning of her remarks suggesting that up 

to one-third of consumer contracts now have arbitration agreements. But it is one of those low——

Mr. JORDAN. If the contract has it, are consumers expressing 

frustration with it? Are they saying, ‘‘Yes, this is terrible; I got a 

bad deal’’? I have not heard it again, in letters and things we are 

sent. I have not heard it from our constituents. 

Mr. SCHWARTZ. We hear it in the cases. The thing is that litigation and arbitration both talk about things going wrong. You have 

a consumer transaction or an employment situation that has broken down and gone wrong. So that is not going to be every consumer transaction or every employment situation. But there are 

large numbers of them, and we hear about them through the cases 

that we study. 

The studies that suggest consumer satisfaction, the one that I 

am aware of from the Harris Interactive Group, which is cited to 

say that consumers are very satisfied with arbitration, it turns out 

that they mixed up both consumers and business arbitrations and 

they excluded from their sample any cases where a party was ordered into arbitration by a court. So again, you have a skewed sample that doesn’t really deal with mandatory, compelled arbitration. 

The problem isn’t necessarily a consumer who has a horrific experience like Ms. Fogal did. The problem could be the consumers 

who simply walk away from their cases. A small-dollar amount 

fraud that is going on on a massive scale will go unremedied because no one is going to pursue that claim and a class action is not 

allowed because of the arbitration clause. 

121

Mr. JORDAN. I recognize that, and maybe that exists. But you 

would think at some point it would rise to the level that they would 

let their public officials know that, look, this is not a big deal; I 

didn’t press it; but I got a bum deal. You would think that I would 

have heard about it. I just have not. 

Mr. SCHWARTZ. I think the way that you would hear about it, the 

problem is that they haven’t pursued the arbitration because the 

dollar amount was small so they didn’t pursue a case and have a 

bad experience. The problem is they are going to have experience 

with is my credit card company ripped me off, and there is nothing 

I can do about it. 

Now, I don’t know if you have been getting letters in your office 

with people complaining about banks and credit card companies 

and cell phones for small dollar amount rip-offs. If you haven’t 

heard it, it may be the same problem there, that the effort of writing a congressman is not going to be sparked by the small dollar 

amounts, and yet you have a problem on a wide scale that just 

kind of stays at this low level of public awareness. 

Mr. JORDAN. Thank you. 

Ms. SA ́ NCHEZ. [Presiding.] Thank you, Mr. Jordan. 

The gentleman from Massachusetts, Mr. Delahunt, is recognized 

for 5 minutes. 

Mr. DELAHUNT. To pursue the line of questioning that Mr. Jordan had undertaken, let me submit an opinion and see whether 

you agree. I think part of it is we discussed earlier that people are 

unaware of the availability of arbitration. 

I think as you indicate, Professor Schwartz, in most cases it is 

a small-dollar item and it is not sufficient to pursue, to provoke 

that kind of interest. I dare say that if you are a member of the 

local government, if you serve on the city council or if you are a 

State legislator, the chances are that that is where you are going 

to hear it because it is very much something that is local in nature. 

But the question does I think go to another issue that I would 

like to explore—the relationship between the FAA and State law. 

I have a real concern about the federalization, if you will, the preemption of State consumer protection laws. I happen to be a conservative, a real conservative, one that embraces the concept of 

devolution and States’ rights. 

I believe that when the Federal Government inserts itself in matters that are particularly local—and I am not suggesting that that 

was the case with you, Ms. Fogal—but please describe for us the 

relationship between the FAA—and I will start with you, Mr. 

Bland—and State law. 

Mr. BLAND. The Supreme Court has held a number of times that 

the Federal Arbitration Act strikes down any State law that would 

limit the enforcement of arbitration clauses. There are literally 100 

court decision or more in which courts, particularly Federal courts, 

have struck down a variety of different State consumer protection 

laws, State franchise laws that protect small business franchises 

and that kind of thing, provisions of them. 

In fact, there are splits between some courts in which some 

courts will find that the FAA reaches even further, but there are 

just a ton of cases out there in which courts have struck down——

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Mr. DELAHUNT. Let me ask your opinion in terms of, isn’t it time 

that we have a revolution in this country and respect States’ rights, 

and acknowledge that——

Mr. BLAND. Can I give you an extreme example of this? 

Mr. DELAHUNT. Sure. 

Mr. BLAND. I had my first case in the Supreme Court 1 1/2 years 

ago. I lost. What the case was about was a case involving a payday 

lender and they were charging 500 percent to up to 1,300 percent 

interest. We had a client that had 1,300 percent interest rate. 

Under Florida law——

Mr. DELAHUNT. That is not its interest. [Laughter.] 

Mr. BLAND. Right. They were wearing suits, as Tony does, but 

they were operating a storefront so it is different in that respect 

from the Sopranos. But it was a crime under Florida law, loansharking. Anything that high was considered criminal loansharking. 

Under Florida law, the Florida Supreme Court said that any contract whose principal purpose is criminal, any agreement whose 

principal purpose is criminal doesn’t form a contract, so you don’t 

have an arbitration clause because it is embedded in this thing 

that is a criminal agreement. 

The Supreme Court struck this down. I lost. In the oral argument, Chief Justice Roberts said to the lawyer for the payday lender, gee, what if you had a murder-for-hire contract, some guy hires 

someone to go kill his wife, and it had an arbitration provision. Are 

you saying that Federal law would require you to enforce that? 

And the guy said, oh, well, that is very unlikely; how many murder-for-hires have contracts—you know, this kind of thing. He said, 

but yes, that is our answer; yes, that is our answer; yes, that is 

the answer. And that was what the Supreme Court did under Federal law. They wiped away basic contract law, contract law that is 

true in every single State was wiped away. 

Mr. DELAHUNT. Let me direct this to the Chair of the Committee. 

I think what we are hearing here is an encroachment on State contract law, consumer protection laws, that I dare say Congress has 

a responsibility to review, to examine, to see whether it is time to 

review the Federal Arbitration Act itself, and start to limit its encroachment on State policy. 

With that, I will yield back, unless you want to get into this, Mr. 

Levin. 

Mr. LEVIN. May I add just one comment, Congressman? Section 

2 of the FAA does preserve State law, because it permits a party 

to refuse to arbitrate or to oppose a motion to arbitrate on any 

ground that exists at law or in equity for the revocation of any contract, which means that if you think that——

Mr. DELAHUNT. If you are aware that you have an arbitration 

clause. 

Mr. LEVIN. No. What the FAA says is that any State contract defense that is applicable to contracts generally can be used to defend 

against an arbitration clause. As for people being——

Mr. DELAHUNT. But you still have to go to binding arbitration. 

Mr. LEVIN. Well, not necessarily because you oppose that, for example, if a company files a motion in court to compel arbitration 

of a lawsuit that someone has filed, the judge will look at the deVerDate 0ct 09 2002 11:02 May 13, 2008 Jkt 000000 PO 00000 Frm 00126 Fmt 6633 Sfmt 6601 H:\WORK\COMM\061207\36018.000 HJUD1 PsN: DOUGA
123

fense of whether there are State law contract grounds that can be 

used to defeat the arbitration agreement. If the court—and several 

have—decided that this arbitration clause on some basis that 

arises out of State contract law is an unconscionable contract——

Mr. DELAHUNT. I think I have an additional minute. Let me go 

back to Mr. Bland or Professor Schwartz. 

You have the position of the statement by Mr. Levin. Do you 

agree with the statement, and if you disagree with the statement, 

do we need to clarify the language in the FAA to accomplish what 

he is suggesting? 

Mr. BLAND. If the courts—I am sorry. I was just going to say, if 

you believe in that, you know the phase ‘‘the half-truce’’? That was 

like a one-tenth truce. Yes, there are certain State laws that the 

Federal Arbitration Act doesn’t override, so if you have an arbitration clause it adds a bunch of things separate from arbitration, like 

a ban on punitive damages or repeal of the Consumer Protection 

Act or whatever. Then you have a good argument against that. 

But the basic core problem is Federal law overrides any States 

that deal with them. Yes, the Federal Arbitration Act completely 

squashes all kinds of State consumer protection laws. There are a 

few general contract laws that come out. That is basically what my 

jobs is, is finding the few places where you can get State law to 

beat an arbitration clause. But there are so many injustices that 

you can’t touch, that it is outrageous. 

Ms. SA ́ NCHEZ. I believe the question was for Mr. Schwartz, so I 

want to give him a chance to respond. 

Mr. BLAND. I am sorry. 

Ms. SA ́ NCHEZ. Your time has expired, Mr. Delahunt. I want you 

to know that. 

Mr. DELAHUNT. Again, I want to extend my gratitude for your 

generosity. 

Ms. SA ́ NCHEZ. Mr. Schwartz? 

Mr. SCHWARTZ. The courts have done a terrible job protecting 

State laws from preemption by the Federal Arbitration Act, a dismal job. So bad, in fact, that Justice O’Connor said, ‘‘I am throwing 

up my hands.’’ She wrote an opinion that Congress has to correct 

a mistake that we have made. She said that in a 1995 case. Things 

have not gotten any better. They have only gotten worse. More and 

more State laws are being preempted. 

As I said earlier, what is going to happen is there is going to be 

a major consumer protection gap because State consumer protection law is going to have huge holes in it if things continue to go 

in the direction that the courts are taking them now in interpreting 

the Federal Arbitration Act. You will either have unprotected consumers or you have the Federal Congress having to step in and fill 

this gap. 

Ms. SA ́ NCHEZ. Thank you, Mr. Schwartz. 

I am going to yield to my colleague, the Ranking Member, Mr. 

Cannon. 

Mr. CANNON. Thank you, Madam Chair. 

I just ask unanimous consent that we introduce four items into 

the record. One is a statement—I will just give a brief identification—on consumer arbitration; the second is State court enforcement of arbitration agreements; the third is a Harris study; and 

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the fourth is called Outcomes of Arbitration: An Empirical Study 

of Consumer Lending Cases. 

If we could have those introduced in the record, I would appreciate it. 

Ms. SA ́ NCHEZ. Without objection, so ordered. 

I would like to thank all of our witnesses for their testimony 

today. 

Without objection, Members will have 5 legislative days to submit any additional written questions, which we will forward to the 

witnesses. We ask that you answer those written questions as 

promptly as you can because they will be made a part of the record. 

Without objection, the record will remain open for 5 legislative 

days for the submission of any additional material. 

Again, I want to thank everybody for their time and their patience. 

This hearing of the Subcommittee on Commercial and Administrative Law is adjourned. 

[Whereupon, at 12:12 p.m., the Subcommittee was adjourned.] 

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1 In addition to agreeing to mandatory arbitration, applicants for admission to many nursing 

homes are required to watch a video called ‘‘Setting Realistic Expectations.’’ The video is intended to waive facilities’ liability by treating injuries as normal, unavoidable occurrences and 

getting family members to acknowledge risk and accept responsibility. For example, by signing 

a statement that they have seen the video, applicants acknowledge they know that ‘‘residents 

are unsupervised a great deal of the day’’ and may wander ‘‘into a situation inside or outside 

the facility where there is a potential for injury.’’ If residents refuse to eat because they don’t 

like the food or are depressed, the facility will ‘‘courteously encourage’’ them to eat or drink but 

will not take responsibility for malnutrition or dehydration that occurs as a result—this responsibility once again rests on family members, who ‘‘need to accept full responsibility for any failure of the resident to eat properly or drink enough fluids.’’ (Researchers estimate that 40 percent of nursing home residents are malnourished and that many do not receive fluids on a regular basis because of critical understaffing and high staff turnover.) Likewise, families are advised that their elders in the supposed safety of the nursing home could be at the same risk 

of physical or verbal assault, neglect, and theft that they would be in the community since ‘‘the 

nursing home simply cannot read the minds and consciences of all its employees’’ to ensure that 

they will not abuse their charges. 

There is also a ‘‘Setting Realistic Expectations’’ video for assisted living.

2See the most recent Government Accountability Office report, Nursing Homes: Efforts to 

Strengthen Federal Enforcement Have Not Deterred Some Homes from Repeatedly Harming Residents, March 2007. 3The Faces of Neglect: Behind the Closed Doors of Nursing Homes, NCCNHR, April 2006.

PREPARED STATEMENT OF NCCNHR 

Mandatory binding arbitration agreements are forcing American consumers in almost every avenue of commercial life to waive their constitutional right to seek redress in the courts when the products or services they purchase are defective and 

even dangerous. For thousands of American families with aging parents, mandatory 

arbitration agreements—included in the admissions contracts of nursing homes and 

assisted living facilities—compel them to agree to arbitrate the value of their mothers and fathers’ lives if they are seriously injured or die from neglect or physical 

abuse by the facility’s employees. Some admissions agreements even require families to waive their loved one’s expectation of receiving the quality of services and 

safe environment that the nursing home contracted with the government to provide 

when it was certified for Medicare and Medicaid.1

Families usually have little choice in the matter and must accept the provider’s 

terms. (Nursing home admissions, in particular, frequently occur after unexpected 

medical emergencies and under pressure from hospital discharge planners.) There 

are few options for long-term care in many rural communities, and options are often 

even scarcer for those who depend on Medicaid to pay part of their care. And just 

as options are limited when choosing a nursing home, there are often few or no good 

alternatives to transfer to if the quality of the care turns out to be bad. 

In 2002 and 2005, NCCNHR members voted overwhelmingly to approve resolutions asking the federal government to prohibit long-term care facilities from including binding arbitration clauses in their admissions agreements. Support for the resolutions stemmed from strong concern among consumer advocates across the country that long-term care facilities in most states can neglect and even abuse residents 

with impunity if residents and their families are unable to take them to court. 

Countless government studies have found that in spite of improvements in nursing 

home regulation and enforcement in the past 20 years, state regulators still consistently under-cite the seriousness of deficiencies in which residents are harmed; levy 

fines that are little more than the cost of doing business for profitable corporations; 

and allow facilities to operate year-after-year with serious, repeat problems.2 The 

nursing home industry regards mandatory arbitration agreements as mechanisms 

to protect nursing homes from juries, who are less lenient that regulators when presented with evidence that vulnerable elders were victims of avoidable neglect and 

preventable abuse. 

A book published by NCCNHR in 2006, The Faces of Neglect: Behind the Closed 

Doors of Nursing Homes, documents the gross neglect of 36 long-term care residents 

in 10 states.3 We were able to document these cases because they were litigated. 

Through the discovery process, their attorneys were able to show the failure of nursing homes and assisted living facilities to provide even the most basic care to prevent these men and women from suffering from: 

• Multiple infected, painful pressure sores exposing muscle and bone, often 

leading to amputations;

• Malnutrition, dehydration, and severe weight loss;

• Head injuries;

• Bruises and fractures from a physical assault by another resident;

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• Renal failure from severe dehydration;

• Extreme and often untreated pain;

• Sexual assaults;

• Gangrene and osteomyelitis;

• Multiple lacerations, skin tears, and abrasions;

• Strangulation on a privacy curtain;

• Second degree burns, exposing nerve ends, from 140-degree bath water;

• Disfiguring and extremely painful contractures;

• Drowning;

• Broken leg; amputation of the leg; and broken neck because of staff negligence, all in the same resident;

• Suffocation by choking;

• MRSA infection and multiple urinary tract infections;

• Brain poisoning from untreated dehydration; and

• Usually, death.

When most families sign nursing home or assisted living admissions contracts, 

they have had no experience with how badly care can go wrong or how much suffering their parent or other loved one may experience. Many think that daily family 

visits, careful monitoring, and advocacy for their loved one will ensure good care, 

only to say later, as one California daughter did, ‘‘We were there every day, and 

we still couldn’t make a difference.’’

Consumers might voluntarily choose to arbitrate the purchase of a defective cell 

phone. Few would voluntarily arbitrate the suffering and death of their mother or 

father, because almost always, their mission is to expose poor care and deter future 

abuse. 

NCCNHR and its member groups are urging Congress to end the use of mandatory binding arbitration agreements in long-term care admissions contracts.

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