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FEDERAL ARBITRATION ACT: IS THE CREDIT 

CARD INDUSTRY USING IT TO QUASH LEGAL 

CLAIMS? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MAY 5, 2009 

Serial No. 111–39 

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 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO PIERLUISI, Puerto Rico 

MIKE QUIGLEY, Illinois 

LUIS V. GUTIERREZ, Illinois 

BRAD SHERMAN, California 

TAMMY BALDWIN, Wisconsin 

CHARLES A. GONZALEZ, Texas 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California 

DEBBIE WASSERMAN SCHULTZ, Florida 

DANIEL MAFFEI, New York 

LAMAR SMITH, Texas 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

DANIEL E. LUNGREN, California 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TOM ROONEY, Florida 

GREGG HARPER, Mississippi 

PERRY APELBAUM, Majority Staff Director and Chief Counsel 

SEAN MCLAUGHLIN, Minority Chief of Staff and General Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

STEVE COHEN, Tennessee, Chairman 

WILLIAM D. DELAHUNT, Massachusetts 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

DANIEL MAFFEI, New York 

ZOE LOFGREN, California 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

JOHN CONYERS, JR., Michigan 

TRENT FRANKS, Arizona 

JIM JORDAN, Ohio 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

HOWARD COBLE, North Carolina 

STEVE KING, Iowa 

MICHONE JOHNSON, Chief Counsel 

DANIEL FLORES, Minority Counsel 
(III) 

C O N T E N T S 

MAY 5, 2009 

Page 

OPENING STATEMENTS 

The Honorable Steve Cohen, a Representative in Congress from the State 

of Tennessee, and Chairman, Subcommittee on Commercial and Administrative Law ........................................................................................................... 1 

The Honorable Trent Franks, a Representative in Congress from the State 

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

The Honorable Henry C. ‘‘Hank’’ Johnson, Jr., a Representative in Congress 

from the State of Georgia, and Member, Subcommittee on Commercial 

and Administrative Law ...................................................................................... 3 

The Honorable Lamar Smith, a Representative in Congress from the State 

of Texas, and Ranking Member, Committee on the Judiciary ......................... 5 

The Honorable Daniel Maffei, a Representative in Congress from the State 

of New York, and Member, Subcommittee on Commercial and Administrative Law ................................................................................................................ 6 

The Honorable Howard Coble, a Representative in Congress from the State 

of North Carolina, and Member, Subcommittee on Commercial and Administrative Law ........................................................................................................ 7 

The Honorable Darrell E. Issa, a Representative in Congress from the State 

of California, and Member, Subcommittee on Commercial and Administrative Law ................................................................................................................ 7 

WITNESSES 

Michael D. Donovan, Esq., National Association of Consumer Advocates 

Oral Testimony ..................................................................................................... 9 

Prepared Statement ............................................................................................. 11 

Richard H. Frankel, Esq., Drexel University Earle Mack School of Law 

Oral Testimony ..................................................................................................... 99 

Prepared Statement ............................................................................................. 101 

Christopher R. Drahozal, Esq., University of Kansas School of Law 

Oral Testimony ..................................................................................................... 121 

Prepared Statement ............................................................................................. 123 

David Arkush, Esq., Public Citizen 

Oral Testimony ..................................................................................................... 139 

Prepared Statement ............................................................................................. 141 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Response to Post-Hearing Questions from Michael D. Donovan, Esq., National 

Association of Consumer Advocates ................................................................... 176 

Response to Post-Hearing Questions from Richard H. Frankel, Esq., Drexel 

University Earle Mack School of Law ................................................................ 181 

Response to Post-Hearing Questions from Christopher R. Drahozal, Esq., 

University of Kansas School of Law ................................................................... 185 

Response to Post-Hearing Questions from David Arkush, Esq., Public Citizen 191 

(1) 

FEDERAL ARBITRATION ACT: IS THE CREDIT 

CARD INDUSTRY USING IT TO QUASH 

LEGAL CLAIMS? 

TUESDAY, MAY 5, 2009 

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

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

room 2141, Rayburn House Office Building, the Honorable Steve 

Cohen (Chairman of the Subcommittee) presiding. 

Present: Representatives Cohen, Delahunt, Maffei, Lofgren, 

Johnson, Scott, Franks, Jordan, Smith, Coble, and Issa. 

Staff Present: (Majority) Norberto Salinas, Counsel; Adam Russell, Professional Staff Member; and (Minority) Daniel Flores, 

Counsel. 

Mr. COHEN. This hearing of the Judiciary Subcommittee on Commercial and Administrative Law will now to come to order. 

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

I will now recognize myself for a short statement. 

Within the last year, we have seen an increase in foreclosures 

and job losses and a drop in value of retirement accounts. Several 

congressional Committees have held hearings to determine what 

caused the economic downturn and what impact the downturn has 

had on consumers, workers, and businesses. 

This Subcommittee recently held a hearing to examine whether 

the credit card industry’s practices are bankrupting Americans. We 

heard testimony from witnesses that excessive fees and interest 

rates, unilateral change in term provisions and changes in credit 

limits have exacerbated the burden borne by credit card debtors. 

The growing burden, we learned, has pushed some debtors into 

bankruptcy. 

Just last week, Congress passed the Credit Cardholder’s Bill of 

Rights Act in an attempt to shield cardholders from some of the 

most outrageous practices of the credit card industry. Some of 

these practices have hindered some cardholders’ ability to weather 

this downturn. 

Today’s hearing will focus on arbitration and how its use has impacted consumers, specifically credit cardholders. Nearly every 

credit card issuer includes an arbitration agreement in their terms 
2 

of use of contracts with cardholders. Arbitration agreements were 

initially used to free up the courts from an increasingly heavy 

docket and to allow quicker resolution of 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, shareholders and corporations. 

As arbitration has increased in popularity, what was once a 

choice has become a mandatory more or less adhesion part of a consumer contract. In effect, according to the 2004 survey, one-third 

of all major consumer transactions are covered by mandatory arbitration clauses; and despite all the benefits of arbitration, mandatory arbitration agreements may not always be in the best interest 

of the consumer. 

This hearing will provide Members of the Subcommittee the opportunity to hear testimony about the credit card industry’s use of 

arbitration to resolve disputes with cardholders. We will hear from 

some witnesses who will speak in favor and some who will speak 

against. 

We will also hear testimony about studies which analyzed arbitration decisions concerning credit card disputes and how those decisions impact the credit cardholder; and Members will consider 

whether the inclusion of arbitration clauses is beneficial to the 

credit cardholders or do these clauses simply place an additional 

burden on the cardholders, many of whom are barely keeping up 

mortgage or rent payments, insurance premiums, and credit card 

bills. 

So today’s testimony and hearing is quite relevant to the distress 

that many in America are experiencing. Accordingly, I look forward 

to hearing today’s testimony. 

I now recognize my colleague from Arizona, Mr. Franks, the distinguished Ranking Member of the Subcommittee, for his opening 

remarks. 

Mr. FRANKS. Well, thank you, Mr. Chairman; and thank you for 

calling the hearing. 

Arbitration is indeed an important topic. We examined it more 

than once in the 110th Congress, and I would confess that my 

working conclusion from those hearings is that the theory and evidence both show that arbitration is working well for consumers and 

that our overburdened court system needs the arbitration system 

as a vital relief valve. And I therefore am of the view that if we 

are going to even consider doing anything to reform the arbitration 

system this term, including with regard to credit card arbitration, 

we need to do more oversight and ask more questions about whether that is truly needed. 

The issue of credit cards and arbitration is a good example of our 

need for more information. We last considered this specific issue in 

June of 2007 during our initial hearing on mandatory binding arbitration. At the end of our hearing, there were numerous important 

open questions. We were able to consider only some of those that 

might bear on whether reform on the system makes sense. 

The first set of questions was about what really is happening in 

consumer cases that go to mandatory binding arbitration. Are consumers doing well there compared to litigation? Do they receive a 

fair process? Do they receive timely results? Do they face excessive 
3 

costs? Are they satisfied with the process, with the system, and the 

outcome? If there are shortcomings in these areas, are there things 

we can do to improve mandatory arbitration, rather than to just 

eliminate it? 

A second set of questions concerned voluntary arbitration. If we 

restrict mandatory binding arbitration, will consumers and businesses be able to use it instead of litigation? Or, instead, will one 

side or the other inevitably see that litigation gives it the upper 

hand in such cases if a dispute arises, leading requests for voluntary arbitration to fall on deaf ears? And will the parties who 

have had the advantage in litigation usually be the businesses 

which typically have time and money on their side? 

Another important set of questions concerns that very alternative 

to arbitration which is, of course, litigation, particularly class action litigation. For example, can litigation possibly compete with 

arbitration in its ability to deliver at least some reasonable justice 

promptly? Will litigation attorneys even take the small-money, 

small-fee cases that make up so much of the case load in arbitration? And, if they don’t, won’t that leave millions of working poor 

Americans with no recourse to justice at all? 

More poignantly, with regard to class actions, does the history of 

class actions in producing pro-plaintiff awards that are little more 

than peanuts give us any confidence that class actions pave a better path to justice than arbitration? And what does the class action 

corruption review about the Milberg Weiss scandal tell us? This is 

where, Mr. Chairman, where prominent class action lawyers were 

convicted for essentially buying and selling fake evidence and witnesses in class actions. Shouldn’t we investigate the corruption of 

the class action system to the bottom before we hand another huge 

portion of this country’s disputes over to the class action plaintiff’s 

bar? 

I could go on, Mr. Chairman, but I suspect that you see the 

point. There are many, many questions that we must ask, both 

about arbitration and litigation, before we can reasonably entertain 

proposals to expand the litigation system at the expense of the arbitration system; and, of course, I am as always eager to hear more 

information today. I expect that much of that will confirm our already strong reasons to believe that arbitration is often better for 

consumers and certainly typically no worse than litigation. 

And I reserve the balance of my time, it says here, Mr. Chairman. 

Mr. COHEN. So reserved. I thank the gentleman for his statement. 

I now recognize the distinguished Subcommittee Chairman from 

the great State of Georgia, Mr. Hank Johnson, a distinguished 

Member of the Subcommittee, for an opening statement. 

Mr. JOHNSON. Thank you, Mr. Chairman; and it is always a 

pleasure to come back and learn so much from you. I have been 

sitting at your knee for a long time and listening carefully, so—— 

Mr. COHEN. You have 7 minutes. 

Mr. JOHNSON. All right. And I hope you will continue to allow me 

to gain some experience, Mr. Chairman. 

Ladies and gentlemen, the Federal Arbitration Act, is the credit 

card cndustry csing the act to slam shut the courthouse door for 
4 

users? That’s our topic today. And, Mr. Chairman, forced arbitration has been a concern of mine for some time; and I firmly believe 

that Congress must act in this instance to protect consumers. 

Credit card users are certainly subject to forced arbitration as 

employees, cell phone users, and franchisees. My legislation, H.R. 

1020, the ‘‘Arbitration Fairness Act of 2009,’’ seeks to correct this 

unfair practice where consumers are forced to sign pre-dispute 

mandatory arbitration clauses. In the last Congress, we had 103 cosponsors of the bill. This time we have got almost 60. 

One of our indelible rights is the right to a jury trial. Guaranteed 

by the United States Constitution, this right has been gradually 

eroded through forced arbitration agreements. Just by taking a job 

or buying a product or service, individuals are required to give up 

their right to go to court if they believe that they are harmed by 

the company. According to a recent study, roughly three-quarters 

of Americans incorrectly believe they could sue an employer or 

company should they be harmed or have a major dispute that 

arises, even when they are bound by forced arbitration. 

Businesses defend these forced arbitration agreements by arguing that it is cheaper, more informal, and results—an expedited 

process is the result. But these agreements leave consumers, employees, and small businesses at a distinct disadvantage. 

However, the Arbitration Fairness Act does not forbid arbitration 

clauses. It merely prevents forced pre-dispute arbitration clauses. 

Consumers may still opt to arbitrate a dispute with a company but 

only when that consumer determines that it is the appropriate 

forum at the time the conflict arises and certainly not before. 

Forced arbitration appears fair on its face. What could be wrong 

with being judged by a neutral arbitrator picked by both sides? 

That’s only half the story, though, ladies and gentlemen. Arbitrators tend to favor what we call ‘‘repeat players.’’ These are the people who impose the pre-dispute mandatory arbitration on consumers; and so it is not the consumers that refer the business to 

these arbitrators, it is the businesses. And so they tend to be predisposed, of course, to serve the one that pays them. And that’s 

only human nature. 

Arbitration is also expensive, and individuals still must pay exorbitant legal fees for the ability to go into an arbitration process 

which is stacked against them. These arbitration proceedings may 

be called 4-, 5,000 miles away from where you live or where the 

dispute arose. You have got to pay for travel expenses, going out 

there, hotel expenses. 

Arbitration can also be difficult for individuals to navigate. So, 

oftentimes, you do need an attorney. And, by the way, the corporate attorneys get paid by the hour; and so I think we should 

have tort reform with respect to the hourly fees that are charged 

by these lawyers for commercial interests. And I certainly have no 

problem with lawyers. I am a lawyer myself; and some of my best 

friends are lawyers—and lawyers on both sides, by the way, defense and plaintiffs. 

Importantly—I guess most importantly, Americans are not even 

aware that they are signing these clauses because they are written 

in ‘‘legalese’’ and buried in fine print. 
5 

Mr. Chairman, once again, thank you for holding this hearing; 

and I will yield back 

Mr. COHEN. Thank you, Mr. Johnson. 

Is there somebody on this side that would like to make an opening statement? 

I recognize the distinguished gentleman from the Alamo, San Antonio, the Ranking Member of the full Committee, Mr. Lamar 

Smith. 

Mr. SMITH. Thank you, Mr. Chairman. 

Let me confess at the outset to having a little bit of a vested interest in the subject today. Long ago and far away, when I was a 

County Commissioner in San Antonio, Texas, the City of the 

Alamo, I started the Bexar County Mediation Center, and it has 

grown and prospered and is considered a real success. So I do believe in that concept to a great extent. 

Mr. Chairman, arbitration is vital to this Nation’s dispute resolution system. Consistent with fundamental American values, it is 

fair, low-cost, and easily accessible. It is a beneficial addition to our 

civil courts which are overburdened, understaffed, and clogged with 

abusive lawsuits. Further, unlike litigation, it tends to avoid, rather than hasten the destruction of commercial relationships. 

Advocates of more litigation, particularly the plaintiff’s class action bar, have long sought to eliminate arbitration. Theirs is largely an effort to stamp out the competition that arbitration poses to 

litigation attorneys. 

Today’s hearing might also be called a Hearing on Efforts to Void 

the Federal Arbitration Act: Are Trial Lawyers Trying to Stifle 

Competition? I hope that is not the case. But bills are pending in 

Congress to wipe out large areas of arbitration. They are backed 

by the plaintiff’s trial bar; and they are contrary to the clear and 

growing evidence that consumer arbitration works, is fair, and 

should be preserved. 

Not only that, there is growing evidence that arbitration works 

better than litigation. One of the witnesses at today’s hearing, for 

example, has just released an important, nonpartisan, peer-reviewed study on consumer arbitration. That study, Consumer Arbitration Before the American Arbitration Association, confirms that 

arbitration works and works fast for the consumer. It produces mutual settlements or voluntary dismissals in a large share of cases. 

Consumers win relief in most cases they file. There is no proof that 

companies are favored over consumers. 

Arbitration provides a predictable and low-cost alternative to litigation, particularly a class action litigation with its runaway jury 

awards. That, in turn, lowers the costs of goods and services; and 

in this economy, what consumers need are lower cost goods and 

services, not class action lawyers. 

In the credit card sector, lower cost goods and services means 

more accessible consumer credit at lower interest rates. We should 

do everything we can to preserve what makes credit cheaper and 

more valuable in today’s economy. 

President Obama, less than 2 weeks ago, highlighted the urgent 

need to make more consumer credit available. He also urged credit 

card companies to make their contract terms more understandable 

and more transparent, and he expressed support for curbing some 
6 

credit card practices alleged to be abusive. But he did not identify 

credit card arbitration as an abusive practice, nor did he make any 

suggestion that we should prohibit it. 

The preservation of arbitration is consistent with sound economic 

principles and traditional American values of freedom of contract 

and self-reliance. If we act contrary to these principles and values, 

who will benefit? Consumers will not benefit. They will lose access 

to both a fair means of dispute resolution and cheaper credit. The 

court system will not benefit. It will be overloaded with cases that 

arbitrators can resolve more rapidly and less expensively. Taxpayers will not benefit. They will have to shoulder the burden of 

the court systems’ increased demand for resources. 

Not even plaintiffs in the new and unnecessary litigation that 

trial lawyers seek will benefit in the end. It will take longer for 

them to recover remedies. Their relationships with good companies 

too often will be sacrificed, and the class actions that anti-arbitration interests promote too often pay pittances in damages or nothing at all. 

So who will benefit? Mainly, it will be class action plaintiffs’ lawyers who squeeze millions of dollars in fees from their clients’ 

cases. 

Let’s not let today’s hearing mark the day we begin to throw another log on that fire of citizen outrage by sacrificing our arbitration system to the special interest of trial lawyers. 

Mr. Chairman, you have been very gracious with the time, and 

I yield back. 

Mr. COHEN. Thank you, Mr. Smith. I appreciate your statement. 

Now I would like to recognize a distinguished first-year Member 

from the State of New York, unlike Mr. Johnson, not a lawyer but 

a holder of a credit card, Mr. Maffei. 

Mr. MAFFEI. Thank you, Mr. Chairman. 

Though I must point out to you I cut up my credit card on the 

floor of the House last week, so—actually, I do have two. My wife 

wants me to cut up the other one as well. 

I commend you for holding this hearing, and I do want to thank 

the witnesses for being here today. And I want to be clear that I 

do not oppose the concept of arbitration. 

Indeed, Mr. Smith just brought up a very good point. When used 

appropriately, arbitration can be an extremely useful and effective 

tool as it offers an ability to settle cases much quicker at a lower 

cost. However, we do not currently have a level playing field right 

now; and we must be here and do this kind of hearing to address 

some of these problems. 

The credit card industry, in my view, is one example where businesses have understood the benefits of arbitration and have nearly 

uniformly included binding arbitration agreements and their contracts. Unfortunately, many have gone beyond the congressional intent of the Federal Arbitration Act and abused the system, effectively tilting the scales of justice unfairly in their favor. 

As an example, I would like to tell the story of Anastasia 

Kamarova, a constituent of mine who was wrongfully hurt by 

forced arbitration. In February of 2005, she started getting phone 

calls from debt collectors about a delinquent credit card balance. 

But what is strange is that she did not even have a card with that 
7 

company. In fact, when the card was issued, she hadn’t owned any 

credit cards at all. It turned out that the credit card company had 

the wrong Anastasia, who spelled her name a little differently. 

The debt collector continued to pursue the issue, and she was 

asked to appear before a private arbitrator in Minnesota. Anastasia 

tried to convince the debt collector that they were targeting the 

wrong person, but they did not seem to care, and a judgment of 

over $11,000 was made in favor of the company in this case. This 

judgment immediately became enforceable in court, even without 

Anastasia having a chance to defend herself. 

Under the Federal Arbitration Act, a court would not be able to 

reexamine the decision, even though it was clear that she was a 

victim of mistaken identity or perhaps even identity theft. 

So this hearing comes on the heels of the Credit Cardholder’s Bill 

of Rights. For far too long, the scales have been tilted in the direction of the companies. This, in my opinion, is in large part due to 

the ridiculously broad contracts that virtually all credit card 

issuers issue that include these arbitration clauses. Indeed, very 

few of us can say we understand our credit card agreements; and 

those of us that can say usually understand that they give almost 

all of the power to the issuers. 

I do believe that it is appropriate to have a lawyer when you are 

buying a house, when you are purchasing a house. But none of us 

who are not lawyers should need a lawyer there just to get a credit 

card. 

Arbitration was intended to improve access to justice, and we 

should work to keep it that way and not make it yet another tool 

to collect money from consumers like Mrs. Kamarova. 

I look forward to the testimony from our panel and I thank the 

Chairman for holding this important hearing, and I yield back the 

balance of my time. 

Mr. COHEN. Thank you. Appreciate your statement. 

Without objection, the rules of the Subcommittee are in place 

that all Members who make opening statements have to stay for 

the entire hearing. 

Without objection, that is done. 

I now recognize Mr. Coble for an opening statement. 

Mr. COBLE. Thank you, Mr. Chairman. I will be very brief. 

Thank you for calling this hearing. 

Mr. Chairman and colleagues, one criticism that has been 

brought to my attention alleges that arbitrations are biased; and 

I would like to hear from the witnesses if they aware of any study 

or empirical data that would confirm or reject the notion that only 

arbitrators favorable to the credit card industry oversee these cases 

on the one hand or, conversely, whether arbitrators favorable to 

credit cardholders or consumers oversee these cases. 

And with that, Mr. Chairman, I yield back the balance of my 

time. 

Mr. COHEN. Thank you, Mr. Coble. 

Is there anybody else on the Democratic side who would like to 

make an opening statement? 

If not, anybody on the—Mr. Issa is recognized. 

Mr. ISSA. Thank you, Mr. Chairman. 
8 

And I, too, am both not a lawyer and have a credit card. But unlike some people, perhaps, I have also been on both sides of arbitration. Arbitration has gotten it right, and then also I have lost. We 

will consider those, when arbitration got it wrong. But I am an advocate for arbitration. 

But more importantly here today, I hope to hear from the witnesses how, in fact, we on the dais seem to have the hubris and 

those in the White House seem to have the hubris to believe that 

we can overturn 200 years of contract precedent, that, in fact, what 

we are talking about here today is depriving an arm’s-length relationship between somebody who will extend money to someone with 

virtually no collateral or no collateral, in most cases, in return for 

simply a promise that they will pay it back under the terms that 

they’re offered. 

In addition to being a credit cardholder, I am the former CEO 

of a company that expanded our sales by huge amounts based on 

the reliance on credit card companies. Many of my customers, although all businesses, used their credit cards to extend their credit, 

sometimes as much as $100,000 in credit cards that they would run 

up in purchases of my company’s products. 

I signed a contract. I didn’t like the contract because the contract 

left the credit cardholder in a position where they could dispute a 

bill and I would be immediately debited back. Ultimately, we had 

a system of arbitration if we felt that was unjust, but in fact that 

was part of the deal. We accepted that because it expanded our 

business, and we did so voluntarily and entered into the many contracts. My companies that bought my products entered into their 

contracts. 

What we are talking about here today is preempting the ability 

for companies to offer a contract and individuals to choose that contract. We do so at our peril. 

Just as I believe the preemption of bankruptcy in the Chrysler 

case and a great many other things today cause people around the 

world to question whether we are, in fact, a constitutional republic 

where the rule of law is predictable or whether or not we will simply, from time to time, for convenience, intervene with contracts 

longstanding. 

With that, I yield back. 

Mr. COHEN. Thank you, Mr. Issa. 

If there are no other Members seeking to make an opening statement, they may submit a statement to be entered into the record. 

I am now pleased to introduce the witnesses and hear their testimony for today’s hearing. Thank you all for participating in today’s 

hearing. Without objection, your written statement will be placed 

in the record; and we ask that you limit your oral remarks to 5 

minutes. 

You will note we have a lighting system here. Red is the end, yellow you have got a minute to go, and green you’re on your phone 

for 4 minutes. 

After each witness has presented his or her testimony, Subcommittee Members will be permitted to ask questions, also subject 

to that 5-minute limitation. 

Our first witness is Michael Donovan. Mr. Donovan is a founding 

member of the law firm Donovan Searles. Following graduation 
9 

from Vermont Law School, Mr. Donovan was a trial attorney with 

the SEC in Washington, prosecuted numerous securities cases and 

enforcement matters, including injunctive and disciplinary actions 

against public companies, broker dealers, and accounting firms. He 

has co-authored many publications, including Preserving Judicial 

Recourse for Consumers: How to Combat Overreaching Arbitration 

Clauses. 

Mr. Donovan has appeared as a faculty member and speaker at 

the ABA’s Class Action Forum, the Consumer Credit Regulation 

Forum of the New Jersey Bar, National Consumer Rights Litigation Conference sponsored by the National Consumer Law Center, 

is a member of the ABA and the Chair of the Consumer Law Subcommittee of the ABA Litigation Section’s Class action and Derivative Suit Subcommittee. He is also the former Vice Chair of the National Association of Consumer Advocates and an active member of 

the Trial Lawyers for Public Justice. 

And I guess all that makes you a plaintiffs’ class action lawyer. 

Thank you, Mr. Donovan. You may begin your testimony. 

You need to press a button, I guess. Is that the button? You need 

to turn on the clock. 

TESTIMONY OF MICHAEL D. DONOVAN, ESQ., 

NATIONAL ASSOCIATION OF CONSUMER ADVOCATES 

Mr. DONOVAN. Let me start by answering directly the question 

presented by the title for this Subcommittee hearing. Yes, the credit card industry is using forced arbitration and the Federal Arbitration Act to quash legal claims by ordinary consumers that are in 

each of your districts. 

Congress must pass the Arbitration Fairness Act sponsored by 

Congressman Johnson in order to stop the misuse of Federal law 

to deny the due process rights of my clients and every one of the 

American citizens represented by this panel. 

In 2007, I appeared before the Senate Banking Committee to discuss the problems with the credit card industry. I described the 

many abuses imposed upon my clients and your constituents by the 

unfair practices of the credit card industry. 

Let me point out, Congressman Issa, that the one difference between the credit card contract and 200 years of contract law in this 

country is that the credit card contract, unlike any other common 

law contract with which we are familiar, includes a unilateral 

change in terms provision that allows the stronger party, the party 

with more power, to unilaterally change the terms of that contract 

at any time, for any reason, to impose any penalty, charge, fee or 

term that it wants; and the credit card companies have used this 

abusive change in terms provision over and over and over again. 

No other contract in American history has ever included that 

type of unilateral change in term provision without notice. And the 

card companies are using those provisions today to impose unfair 

penalty rates, trip-wire pricing, tricks, traps, reverse promotional 

offers, undermine promotional offers and, yes indeed, to impose unfair arbitration clauses in which they can sue and have sued my 

clients in distant fora. 

In fact, most of the credit card industry now uses an arbitration 

forum that is, in fact, biased. It is biased because we know from 
10 

arbitrators who have worked for this forum that it is a biased 

forum. The name of the forum is the National Arbitration Forum. 

It is located in Minnesota; and it frequently conducts unfair, onthe-paper arbitrations in which it enters judgment unilaterally 

against consumers, as Mr. Maffei’s constituent experienced. That 

Forum unilaterally entered a mistaken arbitration award against 

his constituent when, in fact, that constituent never even had a 

contract allowing that Forum to perform arbitration. 

Now, is that a unique experience? Does that happen rarely, infrequently? It happens every day. The Web sites are littered with tens 

of thousands, hundreds of thousands of complaints about credit 

card practices, abuses, deceptive misconduct. 

Let me start with an example. One example is the notorious In 

Re Providian Bank. Its credit card portfolio was purchased by 

Washington Mutual. It is now owned in part by JPMorgan Chase. 

What did Providian Bank do? Well, Providian Bank was the target of a class action litigation. Yes, I was involved in the class action litigation. Guess what the class action litigators found in litigating this frivolous case? The reality of it is is what they found 

was that Providian Bank had embedded in the bar codes of its return payment information, those bar codes on the bottom that you 

send your check in with, intentionally embedded the wrong zip 

code in order to ensure that the payments cardholders sent in 

would be late so that Providian could increase its late fee revenues. 

That is what the class action lawyers found. 

And Providian Bank, the reason why they did that was because 

Providian had already sold off its rights to the interest that people 

would pay on those credit card receivables. But for the late fees, 

Providian got to keep those as revenues and could report them to 

their shareholders as higher revenues. 

So this is what the class action lawyers found, was that this conscious deceit, fraud, deception, was performed by Providian on its 

own cardholders. Why did it perform this? To increase its revenue, 

inflate its stock price, and award higher bonuses to all these Wall 

Street titans. That is what Providian did. 

What happened in the Providian case? Well, the class action was 

settled for $105 million. Yes. On a per member basis, is that a lot 

of money? Do people only get back $30? Sure they only get back 

$30 because that is how much they were overcharged. That was the 

late fee. 

They also had to pay penalties because the OCC, their regulator, 

came in late. The OCC has been an abomination. They do not regulate banks. They are owned by the banks. In fact, the banks pay 

almost all of their budget. In fact, people choose—— 

I am over my time. I am sorry. 

Mr. COHEN. Mr. Donovan, somehow or another, you didn’t get to 

go to yellow. So what we will do is split the difference and give you 

30 seconds. 

Mr. DONOVAN. Very good, and I apologize. Congressman, it is my 

temptation as a trial lawyer to call just about everybody Your 

Honor. So if you will permit me that informality—— 

Mr. COHEN. You are down to 17 seconds. 

Mr. DONOVAN. In any case, the fact of the matter is, in the absence of class actions for these small value claims in which con-
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sumers cannot ever gain access to court, you will have tens of thousands of credit card companies continuing to engage in massively 

abusive practices which everyone in the United States knows is ongoing and will continue to be ongoing, particularly with arbitration. 

Thank you. 

Mr. COHEN. Thank you, Mr. Donovan. I appreciate your testimony and your appellation. 

[The prepared statement of Mr. Donovan follows:] 

PREPARED STATEMENT OF MICHAEL D. DONOVAN
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Mr. COHEN. Our second witness is Richard Frankel. Professor 

Frankel teaches at Drexel University School of Law; and his chief 

scholarly interests include consumer, administrative, and immigration law. He served as a teaching fellow and supervising attorney 

for the Georgetown University Law Center’s Appellate Litigation 

Program. While there, he supervised students litigating before the 
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U.S. Court of Appeals for the D.C. Circuit, the Fourth and Ninth 

Circuits, as well as the Board of Immigration Appeals. 

Professor Frankel’s clinical interests include consumer law, appellate advocacy, landlord-tenant law, immigration law, public benefit civil rights and prisoners’ rights. Previously, he was a Goldberg-Dietzler Fellow for Trial Lawyers for Public Justice in Washington, where he litigated class action consumer protection and 

civil rights cases. 

Thank you, Professor Frankel. Will you begin your testimony. 

TESTIMONY OF RICHARD H. FRANKEL, ESQ., 

DREXEL UNIVERSITY EARLE MACK SCHOOL OF LAW 

Mr. FRANKEL. Honorable Members of the Committee, thank you 

for the opportunity to participate in this hearing. 

As several of the Members of the Committee mentioned, there 

has been a lot of debate about empirical evidence, either for or 

against arbitration and about whether consumers fare better in arbitration than they do in court. But what I would like to focus on 

today are problems that exist—with arbitration that exist, the public consequences of giving up your right to a jury trial, problems 

that exist irrespective of the specific outcomes for the private parties in the process. 

And, specifically, the closed nature of the arbitration process relative to court and the expansive reach of Federal preemption that 

prevent States from regulating arbitration clauses and the way 

that they are permitted to regulate any other contract mean that 

no matter who benefits from arbitration, the public, and society at 

large, will suffer. 

In particular, arbitration prevents the law as a whole from developing, growing, and adequately keeping up with changing circumstances; and this is a particular problem in the credit card sector precisely because arbitration clauses are so universally used in 

that area. That essentially allows an entire area of consumer protection law to be removed from public scrutiny by the use of adhesion contracts’ take-it-or-leave-it arbitration clauses. 

Arbitration hearings, unlike judicial hearings, are private matters. Arbitrators have no obligation to provide a written decision 

explaining how they reached their decision or to provide reasons 

justifying that decision. In fact, arbitrators have an incentive to 

write as little as possible in order to insulate their decisions from 

being overturned by courts. 

Arbitrator decisions do not create precedent. They’re not binding 

on anyone, including the arbitrator, who is free to disregard his or 

her own earlier decisions in later cases. And some arbitration providers even require the parties to keep proceedings confidential. 

This prevents the law from taking shape in the way that it normally does. 

Judicial opinions, public, written, well-reasoned decisions play a 

crucial role in adapting the law to changing circumstances. They 

give notice to parties. They explain the meaning of the law to the 

public. They make the legal system transparent to the public at 

large, and they promote deterrence by informing individuals of 

their rights and responsibilities under the law. Without written de-
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cisions that create this kind of precedent, the law stagnates and 

stays in a position essentially of suspended animation. 

And this is true both not just for private law but for public law 

as well. Even statutes, important public statutes like Title VII, our 

Civil Rights Act, the Truth in Lending Act, all of these are essentially removed from an ability for courts to give precedent decisions 

explaining what those laws mean when they are removed and put 

in a system of private arbitration. 

The Honorable Congressman Franks called for a need for more 

information, and I wholeheartedly agree. And I think one of the 

problems with arbitration is that it is so private that we don’t get 

the kind of information that we need in order to make informed decisions, in order to know that our justice system is working, in 

order to inspire public confidence in the way things work. Many arbitration providers, the ones who hold data, won’t even release the 

data that they have unless they are required to by State law. 

Now, I think in all of these potential problems with arbitration 

are exacerbated by a lack of meaningful opportunity for review of 

arbitrator decisions. Closed proceedings might be a little less problematic if the public had confidence that they could be reviewed for 

error. But the Federal Arbitration Act prohibits that from taking 

place. 

Review of arbitration decisions has been called by courts as one 

of the narrow forms of judicial review that exists; and courts have 

said even when arbitrators findings are wacky or silly, or based on 

evidence outside the record, or based on gross errors of law, those 

findings will not be overturned. 

Given all of these things, how or why the public should have any 

confidence in a system that is closed from public view, that involves decisionmakers who don’t have to explain how they reach a 

decision, and that makes those decisions immune from review is 

beyond me. Public confidence in any judicial system, arbitral or 

public system, is important in making it legitimate; and there is no 

reason for the public to have any confidence in the system. 

Now, the last significant problem with arbitration that I would 

like to address is the inability of States to take action to try and 

protect their citizens from the abuses of arbitration. Congressman 

Issa talked about the hubris of why should Congress act to over 

turn 200 years of contract law. But the hubris really is the current 

preemptive reach of the Federal Arbitration Act which precludes 

State legislatures from democratically enacting legislation that protects their citizens from the worst abuses of arbitration clauses. All 

of those are preempted by the Federal Arbitration Act. 

Thank you. 

Mr. COHEN. Thank you, Professor. 

[The prepared statement of Mr. Frankel follows:] 
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PREPARED STATEMENT OF RICHARD H. FRANKEL
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Mr. COHEN. Our third witness is Christopher Drahozal. Professor 

Drahozal teaches at the University of Kansas, which Memphis gave 

a national championship to 2 years ago, and is an internationally 

known scholar whose writing focuses on the law and economics of 

dispute resolution, particularly arbitration. He is the author of 
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multiple books and numerous articles on commercial arbitration 

and has taught and given presentations on the subject in Europe 

and the USA, serving as associate reporter for the ALI’s restatement of the U.S. law of international commercial arbitration. 

Prior to coming to Kansas, the professor practiced law with 

Sidley and Austin in D.C. and served as a law clerk for Justice 

Byron R. White of the United States Supreme Court and Judge 

George H. Aldrich of the Iran-United States Claims Tribunal in 

The Hague, the Netherlands. 

Thank you, Professor Drahozal. Will you please proceed with 

your testimony. 

TESTIMONY OF CHRISTOPHER R. DRAHOZAL, ESQ., 

UNIVERSITY OF KANSAS SCHOOL OF LAW 

Mr. DRAHOZAL. Thank you. 

Chairman Cohen, Ranking Member Franks, Members of the Subcommittee, I really appreciate the opportunity to be here today. I 

did not wear my Jayhawk tie in deference. 

I have been very pleased with the discussion so far with sort of 

interest in empirical work. Because, from my perspective, I think 

sound empirical evidence is really essential for making good public 

policy. In the arbitration area, actually, one commentator recently 

found ‘‘a consensus that the future of arbitration should be decided 

by data, not anecdote.’’ 

The Searle study, which I am the Chair of the Consumer Arbitration Task Force of the Searle Civil Justice Institute, is the most recent and, frankly, the most comprehensive look at consumer arbitration as here administered by the American Arbitration Association. A few sort of background points on the Searle study. 

First of all, there is absolutely no industry funding whatsoever 

for the study. It was funded exclusively by the initial grant of 

money to set up the Searle Center to Northwestern Law School by 

the late Daniel Searle, a Northwestern trustee. I would frankly 

have made a condition of my participation in the study that they 

not use industry money, and that was never an issue because that 

was never the plan. So no industry funding whatsoever for the 

study. 

Searle Civil Justice Institute follows a rigorous research protocol 

governing how we do our work. The report itself, as was mentioned 

previously, was peer reviewed by an array of scholars on arbitration law and empirical work on arbitration law and, frankly, from 

across the ideological perspective, from supporters and critics of 

consumer arbitration. 

We are very comfortable with the methodology of the study. Obviously, our results focusing on the American Arbitration Association are limited to the AAA, as we made clear in the report. Nonetheless, in deciding national policy on arbitration, it seems to me 

that what is done by the oldest and most prominent arbitration association in the country certainly is relevant to that debate. 

Our study did not focus exclusively on credit card disputes but 

certainly includes a significant number of credit card disputes and, 

more broadly, debt collection disputes in our sample. 
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A couple of highlights from the study, and there is a lengthy 

study, plenty to say, but I will just make a couple of points at this 

stage. 

First, the vast majority of the arbitrations in that study arose 

out of pre-dispute clauses, over 96 percent. Only a handful of cases 

arose out of post-dispute clauses. That result is actually consistent 

with every other study that I have seen looking at employment arbitration. 

And, interestingly, international arbitration is the same way. 

The vast majority of disputes arise out of pre-dispute clauses. 

The standard advice in drafting—and the reason I mention international arbitration is there is no question there that you have sophisticated parties on both sides, no concerns about the fairness of 

the process; and yet, even in that setting, if you don’t have a predispute clause, you don’t end up with arbitration. 

The implications of sort of the finding in a consumer setting and 

in the international setting to me are, first, that if you get rid of 

pre-dispute clauses, it is essentially going to get rid of consumer arbitration; and, second, the reason is not because of some unfairness 

in the consumer arbitration process, because that rationale 

wouldn’t apply in the international arbitration process. The reason 

is because, once a dispute arises, parties’ interests and perspectives 

change; and once you have a dispute, somebody’s going to benefit 

from going to court, somebody’s not. And at that point they can’t 

reach an agreement. No reflection on the unfairness of the arbitration process, but allowing a pre-dispute clause enables parties to 

enter into agreements that make them both better off they otherwise couldn’t enter into. 

Second highlight and my final minute of my opening statement 

is we have a variety of findings in the Searle report. One that people have tended to be interested in is how the cases come out. 

What we found is that consumers win some relief in roughly 53 

percent of the cases in which they bring claims, and they are 

awarded just under $20,000 on average. Businesses win some relief 

in roughly 83 percent of the cases they bring and are awarded just 

over $20,000. 

The fact that businesses prevail more often does not show that 

there is any unfairness in the arbitration process. To the contrary, 

what is likely the case is that businesses bring different claims 

than consumers bring. 

The business claimants were very different parties than the business respondents. Business claimants tend to be people who provided or businesses that have provided services and are now collecting debts. Consumer claimants tend to bring claims against 

businesses that have allegedly provided a defective product in some 

way, shape, or form. They are harder to prove, and they are harder 

to quantify damages. 

What that means is you can’t just look at outcome numbers to 

tell whether arbitration is fair or not. So the Public Citizen studies, 

which are very interesting, you can’t evaluate whether a 94 percent 

win rate shows arbitration is fair or unfair without something to 

compare it to; i.e., how comparable cases come out in court. 

Thank you very much. 

Mr. COHEN. Thank you, Professor Drahozal. Appreciate it. 
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[The prepared statement of Mr. Drahozal follows:] 

PREPARED STATEMENT OF CHRISTOPHER R. DRAHOZAL
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Mr. COHEN. Our final witness is David Arkush. Mr. Arkush is 

the Director of Congress Watch. He joined Public Citizen in January, 2008, after working as a staff attorney for Public Justice, 

where he litigated civil rights, environmental, and consumer cases 

primarily in the area of Federal preemption of State law, private 
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standing under consumer protection statutes, and binding mandatory arbitration in consumer contracts. 

Prior to working at Public Justice, Mr. Arkush taught at the Appellate Litigation Program at Georgetown University Law, served 

as the Fuchsberg Fellow at Public Citizen Litigation Group, and 

clerked for the Honorable R. Lanier Anderson, III of the U.S. Court 

of Appeals Eighth Circuit. 

Before clerking, Mr. Arkush worked for the private public interest firm Adkins, Kelston and Chavez; and before law school he 

served as Statewide coordinator of Missouri Voters for Fair Elections. 

Thank you, Mr. Arkush. Will you proceed with your testimony. 

TESTIMONY OF DAVID ARKUSH, ESQ., PUBLIC CITIZEN 

Mr. ARKUSH. Thank you, Mr. Chairman, Members of the Subcommittee. 

Forced arbitration in the credit card industry serves three primary functions. First, it allows credit card companies and debt collectors to wring more unfair fees out consumers, sometimes the 

consumers who are least able to pay them. Second, it makes it easier for debt collectors to collect on debts when they lack sufficient—— 

Mr. COHEN. You might want to pull your microphone up a little 

bit. Thank you, sir. 

Mr. ARKUSH. Second, it enables debt collectors to collect on debts 

when they lack sufficient evidence or even when the debts are unlawful. And, third, it provides a shield from accountability for unfair practices. 

Arbitration, forced arbitration in the consumer context has nothing to do with providing consumers a faster, cheaper, and fair 

forum to bring disputes. 

On the first two points, unfair fees and collection, I have a story 

to tell that illustrates those points. 

Cheryl Betts of North Carolina missed one payment. She was 

late for one payment on her Chase credit card. In response, Chase 

lowered her credit limit from $6,000 to $4,900, charged her extra 

fees, charged her a penalty interest rate. Those fees and penalty 

interest soon pushed her over the new credit limit. That spurred 

a new cycle of fees and penalty interest. She tried to work out a 

payment plan with Chase but wasn’t able to. 

Two years later, she received a letter in the mail saying that she 

was being taken to arbitration. She owed over $6,000; and to her 

debt had been added $602 in legal fees, over 10 percent of the debt. 

She wrote an 11-page response, to which the debt collection law 

firm responded by seeking an adjournment, which indefinitely suspended the arbitration. 

Four months later, she wrote another long letter disputing the 

debt, to which the debt collection firm responded by seeking a 45- 

day extension. One day after the 45-day extension expired and the 

debt collection firm still had not responded to Ms. Bett’s arguments, the NAF arbitrator ruled in the debt collection firm’s favor. 

In sum, in an NAF arbitration, Ms. Betts was first charged extra 

fees; second, the debt collection firm never responded to her arguments; third, the debt collection firm missed its own extended 
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deadline to respond to her arguments; and, fourth, the debt collection firm won. This is not a fair process. This is not a process that 

has anything to do with providing consumers a benefit. 

The third point in terms of what arbitration currently does in the 

credit card industry is that it is a shield from accountability for unfair practices. Because there are no class actions in credit card arbitrations, that means consumers generally can’t bring any claims 

at all. As Judge Posner famously said, only a lunatic or a fanatic 

would bring a small claim individually in court. We need class actions if many of these people are to bring cases at all. 

The evidence bears out that it is too difficult for consumers to 

bring cases individually in arbitration because when we at Public 

Citizen studied 34,000 NAF arbitrations from 2003 to 2007, this is 

34,000 arbitrations, only 118 of them were brought by consumers. 

Forced arbitration is about denying access to justice for consumers. It is not about providing them a fair, efficient, and inexpensive forum. 

Proponents of arbitration try to show benefits. They have failed 

to meet their burden of showing that arbitration benefits consumers. We debunked the majority of these studies that have been 

done last summer in a thorough report. 

There is new study from my colleague to my right here, Professor 

Drahozal, again purporting to show that forced arbitration benefits 

consumers. It suffers from similar flaws to all studies that have 

preceded it. 

First, it is based on Triple A arbitrations. Triple A is not a major 

provider of consumer arbitration. It is not the right place to look 

if you want to find answers to these questions. 

Second, the study’s own data shows that consumers do worse 

than businesses. Consumers won 53 percent of the time and got 52 

percent of what they asked for. Businesses won 83 percent of the 

time and got 93 percent of what they asked for. That means consumers overall got 28 percent of what they wanted and businesses 

got 78 percent of what they wanted. That doesn’t look fair at a 

glance. 

The study is also missing key data largely because of timing. We 

have done a preliminary analysis of cases that they missed. Of 

61,000 cases since 2004, 45,000 come from a single debt collection 

firm, Midland Credit Management, that came in after this study’s 

data set concluded. In 87 percent of those cases, Triple A awarded 

exactly amount that Midland Credit Management sought. 

The fourth problem is that there is no independent verification 

of these kinds of numbers that are in the study. The proponents 

of arbitration have all of the evidence in their hands, and they are 

afraid to give it up. Instead, we are forced to fight with table scraps 

of evidence, and we are still winning the fight on this side. 

This empirical debate, with all due respect, is a bit of a distraction. Common sense says that a system where the arbitrators are 

competing for the business of one side is not fair to the other. 

Mr. COHEN. Thank you, Mr. Arkush. 

[The prepared statement of Mr. Arkush follows:] 
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PREPARED STATEMENT OF DAVID ARKUSH
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Mr. COHEN. We will now begin the questioning, and I will begin 

by recognizing myself for 5 minutes. 

Mr. Donovan, in your prepared statement for this hearing you 

offer several recommendations for Congress to consider to protect 

credit cardholders. One of these is no mandatory arbitration either 

for consumer claims or for collection against consumers. Why do 

you suggest that and how has the credit card industry used mandatory arbitration which would lead you to this recommendation? 

Mr. DONOVAN. Thank you for your question, Mr. Chairman. 

Three reasons I suggest that. First, this Congress has wisely 

looked at the exact same question with regard to credit extended 

to our service members. This Congress has wisely determined that 

for credit extended to our service members you should outlaw arbitration because the process, as portrayed and exercised with regard 

to service member credit, is unfair and it is unwise to force service 

members to go through biased arbitration. 

This Congress has also looked at the exact same question when 

it came to car dealers dealing with car manufacturers, franchisees 

dealing with franchisors. This Congress has looked and said, look, 

a car dealer is a smaller operation. It is usually a mom and pop, 

a small business operation, and it cannot defend itself or fight off 

mammoth car manufacturers who dictate what the terms of the 

franchise agreement is going to be. So this Congress wisely, I believe, Republicans and Democrats alike, have determined that you 

should outlaw arbitration between car dealers and car manufacturers. 

What are the bases of those two decisions? The bases of those 

two decisions is that this Congress determined that arbitration is 

unfair when you use—when the stronger party has an unfair advantage over the weaker party. 

The second point, arbitration is doubly unfair when you are talking about small claims. The claims involving credit cards are ordinarily claims relating to payment processing practices, late fees, 

over limit fees, or a misapplication of payments for an unfair 

change in terms. 

Those are generally small cases, generally not in excess of a couple of hundred dollars at most. Almost no consumer can find a lawyer or has any wherewithal or ability to map themselves through 

an unfamiliar arbitration process. So what you need is you need a 

system in which you have lawyers and advocates who are able to 

weed through the good from the bad cases and bring the good cases 

and not pursue the bad cases, and what happens is the class action 

does that. 

Third reason, merchants are also subjected to arbitration clauses. 

Mr. Issa pointed out that he was a business owner. The business 

owners here have also been subjected to unfair arbitration clauses. 

Merchants have agreements with all the credit card issuers. 

In fact, one of the biggest class action plaintiffs in the bigger 

credit card class actions in the United States was Wal-Mart stores. 

It was a representative plaintiff in a class action. It brought that 

class action and settled it for $3 billion. That is a major manufacturer that will now be exposed to unfair arbitration terms foisted 

upon it by the credit card industry because it is going to be forced 

to pay unfair merchant fees that can change at any time. 
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So not only do ordinary consumers need the Arbitration Fairness 

Act to be enacted, but also every entrepreneurial decent business 

in the United States needs the Arbitration Fairness Act to be 

adopted and changed. 

Thank you. 

Mr. COHEN. Thank you, sir. 

Professor Frankel, are there alternatives to mandatory binding 

arbitration less than the bill that are under consideration that you 

think might be offered that would be fair to consumers and businesses both? 

Mr. FRANKEL. One alternative that I think is a good alternative 

is the one proposed in the Arbitration Fairness Act which would 

make post-dispute, voluntarily agreed to arbitration where both 

parties, after the dispute, decide they want to arbitrate. That is one 

alternative. That creates an opportunity for greater fairness, for 

not having specific terms foisted upon it. That really is a voluntary 

agreement. 

And I think there is a big difference, as you can tell from I think 

most companies’ own behavior, that they see a big difference between voluntary arbitration and forced arbitration. Most companies 

that negotiate arm’s-length contracts with other companies don’t 

put arbitration clauses into these contracts. Where they do use arbitration clauses is in where they have a chance to do it unilaterally against consumers. 

Mr. COHEN. Thank you. My time has expired; and I now yield to 

the Ranking Member, Mr. Franks, for questions. 

Mr. FRANKS. Well, thank you, Mr. Chairman. 

Professor Drahozal, the second phase of the study that you have 

been working on will specifically examine the relative merits and 

demerits of arbitration and class actions. That is kind of the bottom 

line for the specific topic of today’s hearing. When do you expect 

your study to be complete, and what specific questions will you research? 

Mr. DRAHOZAL. Well, the important part of the second phase will 

be looking at how our results compare to other comparable cases 

in the court system. You can’t really evaluate whether something 

is fair on its face simply by looking at what happens in arbitration. 

So what you have to look at is how it, arbitration, compares to 

other court cases. 

I was actually doing some preliminary reading on that question. 

Which we have a while to go, unfortunately, before we will have 

final resolution. But I came across a study that found that corporations won 90 percent of their claims against individuals, and individuals won 50 percent of their claims against corporations, which 

looks a lot like our results from arbitration. 

What was interesting is that was a study of Federal court diversity cases, which are large claims, not in arbitration. And you get 

very similar results. Now, we will focus on sort of comparable 

claims, which typically are smaller claims, but I sort of anticipate 

finding similar sorts of things. 

Other aspects of what we will do in the second phase will be, as 

you say, look at the extent to which class actions are potential substitutes or comparable cases for arbitration claims. Presumably 

looking at the cases that, as Mr. Arkush pointed out, were after the 
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time period that we were studying in the initial phase. I wish I 

could promise a date by which that will be done. My dream date 

is realistically the end of the year. I mean, this is sort of very intense data collection and then writing. We will have to see. 

I had the benefit this year of being on sabbatical to do the first 

phase. I will be back teaching next semester and will have competing demands on my time. That is my hope. 

Mr. FRANKS. Well, thank you. 

I suppose, just from a common sense perspective, that doesn’t 

surprise me a great deal, you know, that businesses, before they go 

after one of their customers, they are going to probably want to 

have a pretty strong case; and that they would win 90 percent of 

those doesn’t surprise me at all. So what you say makes sense. 

I guess my concern is that if we put this where class actions are 

the main—you know, the main mechanism for solving these things, 

it is a little like the old statement that, you know, a lot of times 

lawyers challenge two people to strip for a fight and then they steal 

their clothes. And it is a difficult situation to deal with. 

So let me ask you, how do you answer Public Citizens’ criticism, 

Mr. Arkush’s criticisms there of your study? How do you respond 

to that? 

I want to give you an opportunity because he took your name in 

vain in some pretty significant ways there. 

Mr. DRAHOZAL. Mostly, it was a sort of fair debate, I would say. 

I do not feel slandered in any way, shape or form. 

The main response, again, is to some extent the one I just gave, 

which is—well, first of all, it seems to me the AAA results—while 

I agree that that is one provider out of several—are certainly relevant to the debate. We cannot focus on just one provider, like the 

National Arbitration Forum to the exclusion of others. 

What is interesting about the AAA consumer database or consumer claims is, in our sample, there was a much higher proportion of claims brought by consumers. So, if we really want to see 

how consumers do when they bring claims, we really need to look 

at not just the NAF, but also at the AAA, which is what we are 

able to do. 

The second point is the second phase of the study, that to really 

understand what our results mean from the first phase, we cannot 

just look at the numbers and say 90 percent is bad, and that is all 

we need to know; we need to have something to compare it to. 

Mr. FRANKS. Do you have any methodological or other flaws that 

you would point out or opine resulted to Public Citizen study of the 

credit card arbitration in California? 

Mr. DRAHOZAL. Well, there certainly are some disputes, and I 

have not studied the NAF in the same way that I have studied the 

American Arbitration Association, so I cannot sort of talk about 

what exactly the practices are. 

Looking at the empirical results, there is a dispute about how 

you treat settlements, for example. I mean settlements benefit the 

consumer, so they should be seen as sort of a, quote/unquote, ‘‘win’’ 

for the consumer. 

My main comment on Public Citizen’s study is the interpretation 

of the data, and again, it is the same point: Even if businesses win 

90-plus percent of the time, that does not necessary mean the proc-
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ess is unfair. Again, this is part of what we are going to be doing 

in the next phase of the study, but if you look at studies of small 

claims courts, which involve business debt collection, it looks amazingly like the way the Public Citizen describes the NAF arbitration. 

Businesses almost always win; the consumers almost never show 

up. So this is not a problem with arbitration. 

Again, we may find out differently in the next phase, and so to 

that extent, I reserve judgment; but from what I have seen so far, 

the problem is not with arbitration. There may be issues with debt 

collection—I mean, if consumers, in fact, owe the money, it is not 

surprising they do not show up, for example. So I think a lot of this 

has to do with the type of claim rather than the process that is involved. 

Mr. FRANKS. Mr. Chairman, the light is red. Thank you. 

Mr. COHEN. Thank you, Mr. Franks. 

I now recognize the distinguished vice Chairman from the Bay 

State and former prosecutor, Mr. Delahunt. 

Mr. DELAHUNT. Well, thank you, Mr. Chairman, for that rather 

generous introduction. 

I just have one question, and I apologize for being tardy, but we 

always hear how different approaches will save the consumer 

money. For example, arbitration will lower the litigation cost, and 

that is, as a result, a savings that is passed on to the consumer. 

Is there any data to support that, Mr. Arkush, or is that just 

simply, you know, credit card industry-speak? 

Mr. ARKUSH. If it is not nothing more than credit card industryspeak, it is barely more. I mean, we have seen no data to support 

that claim, and in fact, there are plenty of data points that indicate 

the opposite. 

During this same period of time when arbitration—when the 

practice of forced arbitration proliferated throughout the credit 

card industry, the industry was raising fees and raising penalty interests, basically erecting all of the tricks and traps that that industry now uses. And the full House of Representatives just acted 

to ban some of those practices this past week. 

Mr. DELAHUNT. Professor Frankel. 

Mr. FRANKEL. I agree. The only thing that I would add is that, 

in some way, you could actually perceive it as raising costs on the 

consumer because the consumer’s credit card, to some extent, is 

less valuable. The more time that they have to spend monitoring 

credit card companies because they do not have litigation as a 

forum, the more care they have to take. So it reduces the value of 

their card at the same time that credit card companies are charging the same price. 

Mr. DELAHUNT. Professor Drahozal. 

Mr. DRAHOZAL. I would love to be able to do that study. It is really difficult to do. 

The way that I think about this issue is: What would happen if 

arbitration—if credit card companies could not use arbitration? My 

prediction would be that prices would probably go up, that interest 

rates would go up; and what that suggests to me is, by using arbitration, implicitly the interest rates have gone down. 

Again, that is in just sort of a rough sense. I cannot cite empirical studies. 
159 

Mr. DELAHUNT. Right. There is no data. 

I remember during the hearings that we had on the so-called 

‘‘bankruptcy reform act’’ that we were told that an average family 

would save somewhere in the neighborhood of $400 a year if we 

passed that particular legislation. 

I have not seen that kind of savings, have you, Mr. Arkush? 

Mr. ARKUSH. No, we have seen nothing like it. In fact, we get 

these types of claims repeatedly on not just bankruptcy issues, but 

on any sort of so-called ‘‘reform’’ of the justice system. You frequently see claims that costs will be passed on to consumers, and 

they are never—as far as I can tell, they have never been borne 

out by the evidence. 

In fact, what we can really expect is restoring a robust system 

of accountability and liability for bad practices. That is what would 

reduce costs for consumers. 

Mr. DELAHUNT. Mr. Donovan. 

Mr. DONOVAN. Congressman, let me build on that very point. 

We have to understand that the credit card industry, much like 

the subprime lending industry, is structured based upon a 

securitization product. Almost all of the credit card receivables are 

securitized. To the extent that the investment community does not 

have confidence in that securitized product because people are 

using arbitration to hide their bad practices, that increases costs. 

It increases expenses. It increases credit throughout the United 

States. 

The industry right now has used arbitration falsely, in a lie, to 

say costs will go down when, in fact, costs will go up directly because of arbitration, because it hides material information from investors as well as from consumers. And there is no doubt that it 

hides material information; the whole idea of arbitration is to be 

secret so that nobody else catches on to the fact that you are committing bad practices. 

Mr. DELAHUNT. I can remember this one statistic, and I think it 

occurred maybe in the late 1980’s-early 1990’s, where the Federal 

funds rate went down to about 3 percent, and yet the average interest rate of a credit card was around 14 percent. It did not go 

down. It never seems to go down. There never seems to be a savings for the consumer. 

Now, I can understand that, you know, there is a marketplace, 

but when the marketplace is—really, the construct of the marketplace is, at best, an adhesion contract. And it does not just stop 

there, because it is not just the individual consumer who is hurt. 

What we saw with subprime lending was that an entire global 

economy is put at risk. So, if we do not address these issues from 

a public policy perspective, we put the free marketplace at risk. 

Does anyone want to comment on that? 

Mr. DONOVAN. I just want to second that. I think that is exactly 

right. 

The reality of it is that the securitization product here is out 

there, and it is trading now. To the extent that there are issuers 

who are engaged in bad practices and those things are disclosed, 

that securitization product then plummets. That requires banks to 

increase their reserves, that requires investors to buy credit default 

swaps, and that increases the direct costs that the banks—and we 
160 

see this evidenced right now. Every one of the banks in the United 

States is now increasing their fees on credit card consumers, and 

they are doing that because they know that they have now been 

caught and that they have to increase their reserves. 

So arbitration will permit them to continue that bad practice in 

order—and then when it finally comes to the fore, the 

securitizations will fall, and that will undermine another part of 

the credit market that we already saw undermined with the 

subprime lending market. So, to support the free market system, 

one should outlaw arbitration. 

Mr. DELAHUNT. Mr. Chairman, I thank you for the time. And I 

think that Mr. Donovan speaks with a sense of urgency, and I 

would hope that Mr. Johnson’s bill might be considered for a markup in this particular Subcommittee. 

With that, I yield back. 

Mr. COHEN. Thank you, Mr. Delahunt. 

I now recognize Mr. Coble from the State of North Carolina, 

whose national champions are being honored today on the House 

floor. 

Mr. COBLE. Thank you for that unsolicited endorsement, Mr. 

Chairman. I appreciate that. 

The Jay Hawker may not like that idea, though. 

Mr. DRAHOZAL. Yes. We can talk about that afterwards. 

Mr. COBLE. Professor Drahozal, in my opening comments, I indicated some thought that maybe these arbitration matters are biased, either on the one hand to the benefit of the credit card companies, or on the other hand to the benefit of the consumers. Any 

kind of comment on that? 

Mr. DRAHOZAL. Certainly, in the study that we did—I mean, a 

sort of common concern, which has been expressed by various 

members on the panel and by the Committee, is the idea that arbitration may favor repeat businesses over nonrepeat businesses. The 

study that—there have been a number of studies looking at that 

type of bias of the arbitration process. Typically, what we have find 

is, under some measures of repeat businesses, there was no evidence, there was no statistically significant evidence of any sort of 

bias or of any difference in result. 

With other measures, we found some evidence that repeat businesses fare better than nonrepeat businesses, but the reason for 

that was that the repeat businesses were more sophisticated at 

handling disputes, that the evidence suggested that they tend to 

settle disputes more readily than nonrepeat businesses, and they 

settle the strong claims against them, which means what is left to 

litigate are the weaker claims such that they then tend to do better. But it is not evidence of bias; that it is really just evidence of 

different claims-handling practices. 

Mr. COBLE. I thank you, sir. 

Professor Frankel, do you have any empirical or supported reason to believe that the State courts would be able to provide trials 

to the countless single plaintiff or class action plaintiffs who will 

show up on their doorsteps if the credit card and other consumer 

arbitration are eliminated? Any idea on that one way or another? 

Mr. FRANKEL. Let me make sure I understand your question correctly. 
161 

I think, if consumers were allowed to go to court, there might be 

class act—there might be some class actions that proceed in State 

courts; and I think State courts are perfectly qualified—that State 

court judges are perfectly capable of handling those class actions. 

Mr. COBLE. I am concerned that perhaps a plaintiff may not be 

entitled to a class action. He may not be able—Mr. Donovan, do 

you want to weigh in on this either way? 

Mr. DONOVAN. Congressman, I think I understand your question, 

and that is, if you have an individual case that is unique and that 

is not suitable for a class case—and there are thousands and thousands of those. The reality of it is that those individual cases are 

almost always filed very quickly in small claims courts, small 

claims courts handle them. And almost always the credit card 

issuers will settle those fairly quickly because they do not want to 

hire counsel to appear in small claims courts; and you get them resolved. 

By contrast, Congressman, with the National Arbitration Forum 

specified in the contract, the credit card companies uniformly 

refuse to settle. Why? Because they own that forum, that is why. 

That is why they put it in the contract, and they will fight those 

cases. 

So what happens is, arbitration prevents settlement, it prevents 

dispute resolution, and it is, in fact, counterproductive at least in 

the credit card contract. 

Now, for class cases, you know, class cases are unique. You need 

a common question, a common, uniform practice. They are particularly suitable in the credit card industry because it is almost all 

computer program. If it happens to one, it happens to all the credit 

cardholders; and they are particularly suitable for payment processing problems. 

I think I discussed one of the biggest things, and I am sure your 

constituents have this problem; they say, ‘‘Hey, I sent the payment 

in 2 weeks ago.’’ They did not credit it, and they imposed a late 

fee on me. Well, what is happening is, many times, these credit 

card companies will change the P.O. Box address where you are 

supposed to send the payment without telling anyone, and yet they 

impose the late payment still. 

Guess what? Anybody can complain. They could say, ‘‘Hey, look, 

you never told us that the P.O. Box has been changed; you should 

credit me the late payment.’’ They say, ‘‘No, we are not crediting 

you a late payment.’’ What do you need? You need a class action. 

Mr. COBLE. My time is about to expire, Mr. Donovan. Let me extend this to Mr. Arkush. 

Mr. Arkush, I have generally the same question: If we eliminate 

mandatory binding arbitration, it seems to me the hordes of credit 

card customers will either not qualify for class action, as we just 

indicated, or will not be able to afford counsel in their individual 

cases; and if I am on the right track, these people may well be denied justice. 

What does Public Citizen say about this? 

Mr. ARKUSH. If we have a well-functioning small claims system, 

then people can go there without being able to afford counsel. 

Those same people you are describing right now are getting no jus-
162 

tice from forced arbitration. As I said, in 34,000 NAF cases, only 

118 were brought by consumers. 

The other thing that is important to realize here, I think, is that 

an important value that we get from being able to hold a company 

accountable in court is deterrence of bad practices. So one answer 

to what happens to, you know, the supposed flood of cases that 

would go into the civil courts is, there would be fewer cases; there 

would be fewer disputes because the companies would know that 

they could be held liable, and they would, therefore, act better to 

avoid liability. 

Mr. COBLE. Well, thank you, gentlemen. My time has expired. 

I yield back, Mr. Chairman. 

Mr. COHEN. Thank you. 

I recognize the gentleman from Georgia, Mr. Johnson, for 5 minutes. 

Mr. JOHNSON. Thank you, Mr. Chairman. 

I would like to hear some discussion about why a public proceeding, as opposed to a secret proceeding like you have in arbitration—why it is important for the freedoms that we hold dear under 

our Constitution. 

Also, you know, this secrecy with respect to publishing a calendar so that the public—if it were not a secret proceeding, the 

public would be able to, you know, just for the heck of it, decide 

I am going to go just like I am going to go watch this civil trial 

in court. You cannot do the same thing in arbitration. 

So I would like for you all to talk on that; also, the issue of mandatory rules procedurally; also the application of substantive law, 

the requirements or lack thereof in the secret arbitration process. 

Lastly, there are some who believe, including myself, that there 

is really no meaningful right to appeal any decision that is made 

by these arbitrators. I will say that I am a big fan of all forms of 

alternative dispute resolution, including mediation, including arbitration and any other processes that are available, but I just firmly 

believe that those should—that those selections should be made 

after the dispute arises and not before the dispute arises. 

So could I get some response, please? 

Mr. DONOVAN. Congressman, maybe I am one of the few class action trial attorneys in the country, but I have had the honor of trying four class actions in the last 4 years, successfully each time, 

and I can tell you this. The need to have—there is a psychological 

benefit that is a civic benefit as well to people believing that they 

obtained justice in a public way; and it happens not just for the 

plaintiff who may succeed, but it is also for the defendant and for 

the members of the jury. 

It is remarkable how empowered and important and good they 

feel about being part of the American fabric and of the American 

community by participating in what is, in essence, the most American thing you can participate in, and that is a jury trial. Even if 

you lose, I think everyone comes out of a jury trial feeling that, 

Well, look, I got a fair shake; I got a fair chance at justice. And 

this is, in essence, the American dream to present your case and 

to hear it and have it judged fairly with an American jury. 
163 

With respect to how that contrasts with what has happened in 

arbitration, I think the proof is in the pudding that arbitration is 

so—let me start with this, sir: 

I, too, believe in mediation and in arbitration. In fact, in most of 

our cases, we resolve them by using mediators from the American 

Arbitration Association, from JAMS; and those are retired judges, 

and they mediate and resolve the cases, and we have used them. 

The difference is, we have decided to do so voluntarily, and each 

side approaches it with that idea, and they work out fine. We pay 

for it, and we think we have obtained justice. 

However, when that decision has been made in advance, all of 

my clients who have experienced that arbitration process have felt 

wronged. They have felt disgusted and dirty by the process because 

that forced arbitration is not American. That forced arbitration is 

a perversion of justice, and the proof is in the pudding. 

There are some instances in which courts have ordered cell 

phone companies and credit card companies to proceed in arbitration on a class-wide basis. In fact, I have had several cases where 

a court has said, Okay, you can go to arbitration, credit card company, defendant company, but you are going to go to arbitration on 

a class-wide basis—in other words, the arbitrator will decide class 

certification. 

What has the defendant done in every one of those instances? 

No, no, no. We waive our right to arbitration. Why? Because they 

know that that would be unfair to them, at least in their perception. 

So the whole goal of the proarbitration group is to do one thing, 

and that is to deny access to justice to American consumers. That 

is the only, sole goal for proarbitration in consumer credit card contracts, to deny access to justice; and I just think that is unpatriotic 

and wrong. 

Mr. COHEN. Thank you for your questions, Mr. Johnson. 

I now recognize the gentleman from California, Mr. Issa, for 5 

minutes. 

Mr. ISSA. Thank you, Mr. Chairman. 

I will try to get the name right. Professor Drahozal. 

Mr. DRAHOZAL. Very good. 

Mr. ISSA. Last week—or actually, I guess it was last week at this 

point—we passed a reform bill out of the House overwhelmingly, 

that included changes as to whether contracts could, in fact, be 

changed at will. 

Are you familiar with the legislation leaving the House? 

Mr. DRAHOZAL. I know of the legislation. I cannot claim to be familiar with it. 

Mr. ISSA. Well, would you say that it was consistent with limitations that we can place on government or, as government, on the 

private sector to say that a contract that is to be changed must be 

changed with notice and that that might have been a reasonable 

reform that would have responded to some of the other witnesses’ 

statements that they made earlier, that this was an outrageous 

trend to sign binding arbitration and to have changes made without notice? 
164 

Mr. DRAHOZAL. Certainly—I mean, to the extent the concern is 

that consumers do not know what is happening, a notice requirement would be a direct response to that, absolutely. 

Mr. ISSA. So, looking at binding arbitration changes versus 

changes in what we allow to be in the contract or in the fairness 

of contract in the first place, which would you prefer that we do, 

since it appears as though we have bills for both? 

Mr. DRAHOZAL. Yes. I mean, given my role with the Searle task 

force, I am not really in a position to state a preference for what 

you all should do. 

Clearly, there are alternatives to getting rid of consumer arbitration, through pre-dispute or otherwise. Altogether changing notice 

provisions would be one. I know Senator Sessions has, in the past, 

introduced a bill that would set out various procedural requirements to be followed in a consumer arbitration. 

I mean, the other alternative, frankly, is that courts do actively 

police these, in particularly, class arbitration waivers. It is sort of 

striking. Increasingly courts are—when they are troubled by those 

sorts of clauses, stepping in and holding them unconscionable or 

otherwise unenforceable. 

So there are other—I mean, we are not sort of comparing an anything-goes system to getting rid of predispute arbitration clauses. 

There are other, sort of intermediate steps. 

I guess the final thing, just to mention briefly, is that at least 

some arbitration providers, like the American Arbitration Association, which is part of what we focus on in our study, have their own 

private fairness standards, which are similar anyway to the ones 

that were in Senator Sessions’ bill, which they do effectively apply. 

Mr. ISSA. Thank you. 

Mr. Donovan, you know, you probably are a plaintiffs’ trial lawyer. 

Mr. DONOVAN. Yes. 

Mr. ISSA. So I will not call you a hostile witness, but I will say 

you are predetermined to give certain answers and, perhaps, fair 

to give others. 

If, in fact, we were to eliminate the preemption, the Federal preemption that we are dealing with and allow the States to each have 

authority over credit card disputes, would you generally favor that 

as a plaintiffs’ trial lawyer? 

Mr. DONOVAN. Well, you are talking to the lawyer who argued 

Smiley v. Citibank before the United States Supreme Court, and 

that was, of course, the case that said that, contrary to 190 years 

of history, late fees will now be deemed interest, because the OCC 

redefined ‘‘late fees’’ to be interest so as to preempt every State’s 

law that limited late fees. 

No. No. I think, with regard to credit card contracts, that it is 

appropriate to have a certain amount of uniformity under the 

Truth in Lending Act and certain centralized regulation. 

What is wrong is for the Federal Arbitration Act to basically nationalize 50 States’ laws and preempt those laws when it comes to 

contractual doctrines like unconscionability. Right now, the problem—and this is the reason why Congress needs to act. You have 

certain States that have said, California and the Second Circuit in 
165 

New York have said, Well, these certain provisions of credit card 

arbitration clauses are unconscionable, and they are unenforceable. 

You have other States that say, Oh, we are sorry. We understand 

you have a very legitimate claim, ma’am, and you have a really 

good case, but—and we do not care how unconscionable the clause 

is, Federal law preempts. 

Mr. ISSA. Let me do one follow-up for Professor Frankel. 

A hypothetical: If we were to continue to allow States to reach 

different conclusions—and let us say that Visa or MasterCard or 

both chose not to do business in that State because it became punitive—even if competition came in and set up a one-State credit 

card system, would that be in the best interest of commerce to have 

essentially 49 States with one system, one with another, and no 

way for somebody to take their credit card and traverse the world? 

Mr. FRANKEL. I mean, honestly, I do not see a realistic prospect 

of that happening. I think—that comes up in every situation, I 

think, where there is a request made to have Federal preemption 

in legislation that you cannot have this patchwork of different 

State laws. But I think the risk of that is more myth than reality, 

and there is not really much empirical evidence in that respect; 

and I think—— 

Mr. ISSA. Well, Mr. Chairman, if I could just broaden the question to anyone who wants to answer it. We have that in insurance, 

and insurance companies in many cases do not operate in California or in other States. So, if we assume for a moment that we 

mirror States’ use in insurance and that occurs, is that in the best 

interest, from this side of the dais, to allow it to occur? 

Anyone who wants to answer on that. 

Mr. DONOVAN. The only difference is, in certain respects, Congressman, that does prevent systemic failures, as we saw with unregulated insurance companies like AIG and other activities that 

are not covered by State regulations. So, in that respect, you will 

prevent systemic failures. 

In the credit card industry, I do not think it is realistic, because 

we do have a fair amount of uniformity in terms of national banking; and that was a system that was set up after the Civil War and 

in the midst of the Civil War. 

I think what needs to be prevented—— 

Mr. ISSA. That was before I came to Congress. 

Mr. DONOVAN. Yes. Me, too. 

What needs to be prevented is this patchwork of arbitration decisions that you are now seeing, where some States are saying that 

you cannot have arbitration for credit card contracts and where 

other States are saying that you can, so that the person in Texas 

gets no justice and the person in California gets all the justice. 

And that is what has really happened right now, so Congress 

needs to step in. 

Mr. ISSA. Thank you. 

Thank you, Mr. Chairman. 

Mr. COHEN. Thank you, Mr. Issa. 

I now recognize the Subcommittee Chairman on criminal law, 

the distinguished gentleman from Virginia, Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. 
166 

My friend from California’s opening remarks mentioned centuries 

of jurisprudence, suggesting that credit card issuers may have an 

absolute right to these binding arbitration agreements. 

Can somebody speak to the centuries of jurisprudence and how 

they apply to these claims, especially on adhesion contracts and 

antitrust, to demonstrate that we, consistent with centuries of jurisprudence, do have the authority to regulate these contracts? 

Mr. DONOVAN. I hate to be hogging the floor, but it is my job, 

Congressman. Yes, I can speak to that. 

You are alluding to the Second Circuit’s decision in Ross v. American Express where that court has now allowed claims, that the 

credit card industry has conspired to all include arbitration clauses 

in their agreements, to go forward. 

The fact of the matter is that there is a lot of evidence of that, 

because I saw the meetings. The lawyers for the credit card companies would get together at the American Bar Association meetings 

and come to agreements on what language they would include in 

credit card contracts, and they would all use that same language 

in their arbitration clauses. And they all got together and said: Oh, 

yes, yes, let us use this; this is good language. 

Now, what they are trying to do is to provide, you know, a fine 

print opt-out. So, if the consumer receives this 25-page credit card 

agreement and does not opt out within 20 days of receiving it, that 

will be deemed consent to participate in arbitration. I mean, how 

silly is that? 

I mean, that is ridiculous, but that is what—we are talking about 

people who are paid hundreds of thousands of dollars and who 

have earned major league MBAs to see how they can get $30 additional out of each one of their cardholders, because that brings $30 

million to the bottom line this month. 

That is what the reality of it is, and that is what they do. They 

go to school for it, and they get trained for it, and that is what is 

happening. 

Now, in terms of 100 years or 200 years of jurisprudence, there 

has been 200 years of jurisprudence that has prohibited unfair, unconscionable, adhesive contracts. Those are contracts that are offered by the stronger party that take unfair advantage of the weaker party. 

The definition of an ‘‘adhesive, unconscionable contract’’ is a credit card contract with an arbitration clause. And I am not the only 

one who says that; the California Supreme Court has said it, the 

Ninth Circuit Court of Appeals has said it. The only court that has 

not come out and directly said that is the United States Supreme 

Court, and the reason basically is that, until now, it basically has 

not had to confront that issue because, to the extent that it ever 

gets to that point, the credit card industry is wise enough to say, 

Okay, we give up, we settle; here is your $105 million. So that is 

basically it. 

But the problem, Congressman, is that there are courts that will 

enforce these provisions. I mean, the Fifth Circuit enforces arbitration clauses, the Fourth Circuit enforces arbitration clauses; until 

recently, the Third Circuit Court of Appeals, my own court in 

Philadelphia, enforced arbitration clauses that required people with 

foreclosure disputes to go both before an arbitrator while their 
167 

home was being foreclosed upon by a court. And this split-forum effect was that people had to have—you know, had to go to two different places at the same time to save their houses. They were enforcing those. 

The reason why we need this Congress to act is because that is 

wrong. It is just not right. It should not happen, and the Arbitration Fairness Act should be passed. 

I also want to say thank you to Congressman Johnson for pursuing this each year. I appreciate it. 

Mr. SCOTT. So the point is, there is nothing inconsistent with 

centuries of jurisprudence? It is in no way inconsistent with centuries of jurisprudence? 

Mr. DONOVAN. Not at all. 

Mr. SCOTT. Mr. Arkush, can you tell me the status of the case 

that is pending, the Komarova case that you mentioned in your 

statement? Where is it procedurally? 

Mr. ARKUSH. I believe, actually, that she has finally managed to 

get the award against her thrown out. 

Mr. SCOTT. And is that a final decision, do you know? 

Mr. ARKUSH. I believe so. Does anybody else know? I believe so. 

Mr. DRAHOZAL. That would not surprise me because ground for 

vacating an award is if you never agreed to arbitrate in the first 

place. But I do not know the case. 

Mr. SCOTT. Thank you. 

Finally, Mr. Donovan, can you just make a quick statement? You 

have talked around this. 

If a company comes up with a scheme where you rip off and defraud millions of people of a couple of dollars, what does prohibition 

against the class action do to those claims? 

Mr. DONOVAN. Well, it basically prevents anybody from pursuing 

those claims. 

But, you know, the real question here, Congressman, is there is 

a fine-line difference between, you know, a banker and a bank robber. A banker, if you take $1 from a million people, you are called 

a ‘‘banker,’’ but if you take $1 million from one bank, you are called 

a ‘‘bank robber.’’ Really, if, in fact, the 1 million people had as 

much clout as the banks have had, well, then those people would 

have outlawed this type of bank robbery. 

Mr. COHEN. Thank you, Mr. Scott. 

We are ready for our second round. 

Mr. Franks. 

Mr. FRANKS. Well, Mr. Chairman, I hardly know where to start. 

I have learned that a Federal trial is the most American thing we 

can do. You know, sometimes I think I want to step back here for 

a moment and ask myself, What are we really discussing here? 

Really, what we are discussing is the agreement on the part of 

the credit card companies. They put in their agreements that—because there are oftentimes people who do not pay their bills, they 

put in the contract clause something that would require, as part of 

receiving the credit card, that people subject themselves to agreed 

binding arbitration. 

My fear is that, if we do away with that, we will end up hurting 

a lot of people where they just do not get credit, because sometimes 

I think that my dear friends on the other side of the aisle feel that 
168 

somehow, in Congress, we can repeal the laws of cause and effect 

in mathematics. 

We saw that, I think, in the whole housing situation where wellmotivated, well-intentioned efforts to help people have homes put 

great pressure on banks to make subprime loans and things like 

this that simply could not withstand the test of reality; and we 

ended up, I think, having largely a government-incented economic 

meltdown because of it. 

If we continue to put more and more and more load on the economy and on the businesses and on the private sector here that are 

trying to make things happen that are ultimately good for everyone, I think we are going to wake up some morning and realize 

that we are kind of under all of it. 

So I guess, Mr. Drahozal, I will just go ahead and ask you. The 

bottom line of your study, that consumer arbitrations you examined 

were faster than litigation, were cheaper than litigation and were 

essentially fair, was that pretty much the bottom line of your 

study? 

Mr. DRAHOZAL. I cannot say quite that strongly at this point 

without the second phase of the study because, as you sort of—the 

comparison we have not yet done. Certainly, we found evidence 

that costs to the consumer, the up-front costs, actually are even 

lower than the low-cost arbitration rules provide for the AAA, and 

that the proceedings seemed to go at a fairly quick rate. There was 

certainly no evidence of any repeat player bias, as I discussed before. 

So I guess I would agree with your statement with the caveat 

that we are not yet able to compare it to litigation, but that that 

phase will be coming. 

Mr. FRANKS. Okay. Well, do you think it would be helpful to do 

additional research then in the process of doing that? 

Mr. DRAHOZAL. Absolutely. Again, I have been very pleased with 

the focus that the Committee and commentators have had on empirical work, and it really seems to me important to know what you 

are getting into before you do it. And as you noted, the work is in 

progress, and we will be doing it as quickly as we reasonably and 

sort of conscientiously can do. 

Mr. FRANKS. This is, rather, an obvious question, but when there 

are class actions on behalf of a group of consumers, isn’t it true 

that most consumers receive a very, very, very small pittance 

amount for their part of the class action? 

Mr. DRAHOZAL. There certainly are class actions like that. I 

mean, that seems to me to be actually another area where more detailed knowledge would be useful to know exactly how often, how 

much, and what consumers get and to what degree. 

There was a recent study on employment arbitration, which obviously isn’t directly applicable, but that compared what employees 

got in class actions to studies of what employees got in arbitration. 

And there are some issues with the study, but the study basically 

found that employees got more in arbitration than they did in class 

actions. 

So that type of study would certainly be very useful to do in the 

consumer setting. 
169 

Mr. FRANKS. We have been told that there is a fine line here between bankers and bank robbers this morning. I am wondering, 

what group is favored the most with these class actions? Who 

makes the most money out of it? 

Mr. DRAHOZAL. Well, with that one, I am not in a position to say. 

There are obviously various parties that make money, the lawyers 

probably on both sides. Presumably, the bankers do not make 

money through the class actions. 

Mr. FRANKS. I would not think so. 

Mr. DRAHOZAL. But, again, that is not something I can answer 

sort of definitively because it is beyond my area of expertise. 

Mr. FRANKS. Well, it sounds like in class actions the consumers 

do not make a lot of money and the bankers do not make a lot of 

money, but it seems that it is pretty clear that the lawyers make 

a great deal of money. 

I am being, you know, a little facetious here, but I felt like there 

had to be some response to some of the comments made here. So 

I guess the bottom line, Mr. Chairman, is that when we inject ourselves into the private market and say that you cannot make these 

kinds of agreements—because that is really what we are doing 

here. 

There is nothing that forces arbitration on anyone that they do 

not agree to say, ‘‘Yes, I agree that I will subject myself to arbitration’’; and to take that tool away from business is not only to clog 

our courts, but to make credit harder and more difficult to make 

available for the very people who need it most. 

With that, I yield back. 

Mr. COHEN. Thank you, sir. 

Professor Drahozal, do you see a virtue in class action suits in 

general? 

Mr. DRAHOZAL. Certainly, in theory, they are a very sensible way 

to resolve disputes if you aggregate small disputes. 

Mr. COHEN. Does the class action attorney serve somewhat as a 

private attorney general in terms of showing up some defect in the 

business, the contract of the relationship, which could then be 

cured by the imposition of a large class action judgment? 

Mr. DRAHOZAL. Again, that certainly is the theory behind class 

actions as well as attorneys’ fees—shifting statutes and so forth. 

There are various ways that the justice system has structured 

things to try to give private parties incentives. 

Mr. COHEN. So is there a way that you can see where you could 

have arbitration for smaller cases, individual cases, but still permit 

class action suits, so that when there is a uniform—not an individual but a uniform policy or activity that is taking place, such as 

the changing of the address on the barcode—that justice could be 

had through the civil courts? 

Mr. DRAHOZAL. It seems to me there are two possibilities. One 

is a number of courts, as I noted earlier, have, in fact, refused to 

enforce class arbitration waivers, which has had the effect of the 

cases proceeding as class actions. I mean, that is, under the current 

structure of the Federal Arbitration Act, a permitted approach, and 

State courts have increasingly been doing that. 

A second alternative would be arbitration on a class basis, 

which—I think, the AAA has several hundred cases now that it is 
170 

administering on a class-wide basis. So there are ways in which arbitration can coexist with class relief. 

Mr. COHEN. Professor Frankel, is there a way to have a bifurcated system where certain claims can go to class actions and jury 

trials and where others might be still limited to arbitration? 

Mr. FRANKEL. I think that is certainly preferable to the system 

that we have now. 

Just to build on what Professor Drahozal said in terms of courts 

that are refusing to enforce class action bans, I do not think that 

is an adequate substitute, because what is happening now is that 

credit card companies will write in, in their contracts, to apply that 

their contracts must be governed by the laws of States that will enforce class action bans. So they are getting around that by the way 

that they draft their contracts. So I do not think that is going to 

be an adequate substitute. 

I think, you know, how you deal with their—there are still, I 

think, potential problems that some of the other witnesses have 

mentioned about individual cases, but I think removing sort of the 

class action types of cases in either saying, those can proceed in a 

class-wide arbitration or can proceed in class actions is certainly a 

benefit, but you have to make sure that there are the procedural 

protections that occur in class actions also. 

Mr. COHEN. Thank you. 

Mr. Donovan, you heard as I heard the statement that was repeated, I think, by quite a few Congress people, ‘‘plaintiff class action attorney,’’ as if, you know, I guess, it is redundant. I guess you 

could be a defense class action attorney; I do not know. 

In your case where the credit card company was changing the 

address, now, you were capable of going to court because that jurisdiction or that circuit does not recognize the ban; is that correct? 

Mr. DONOVAN. Several of these cases preexisted the imposition of 

class prohibitions in arbitration or preexisted arbitration clauses in 

the credit card contracts. The credit card contracts basically started 

having arbitration clauses installed in them in about 2002. That is 

when the industry met at an ABA meeting and decided, ‘‘Let’s put 

arbitration clauses in all of these contracts in order to destroy 

these claims that the industry was confronting.’’ 

So Providian predates that and the Rossman v. Fleet case where 

they said they promised no annual fee, but then they imposed an 

annual fee on everybody within 3 months. A lot of those cases predated arbitration. The subsequent cases are cases that emanate out 

of California where the California courts have found arbitration 

clauses that prohibit class actions to be unconscionable. So those 

proceed that way. 

Mr. COHEN. In your particular case, what jurisdiction were you 

in? 

Mr. DONOVAN. For the Fleet case, we were in Philadelphia. We 

were in the Federal court in Philadelphia and the Third Circuit 

Court of Appeals. 

Mr. COHEN. So that was a preexisting situation? 

Mr. DONOVAN. Correct. 

Mr. COHEN. What was their defense? Did they say it was a mistake or did they just say, ‘‘We screwed people’’? 
171 

Mr. DONOVAN. Well, in the Providian matter, the Providian matter was, you cannot bring any State law claims because they are 

all preempted by Federal law. In Federal law, the Truth in Lending 

Act allows us to do this, and, Oh, by the way, we are allowed to 

charge these late fees because they are permitted by the Truth in 

Lending Act. They basically had a preemption defense to that 

claim. 

Mr. COHEN. I am talking about the one where they changed the 

address on the barcode. 

Mr. DONOVAN. With changing the address on the barcode, we did 

not get to hear the defense because, once we pointed that out and 

the witness who testified about it, they settled. 

Mr. COHEN. Never did they claim it was an accident? 

Mr. DONOVAN. No, they never claimed it was an accident. In fact, 

there was a memo saying, Well, if we have everything sent to this, 

we will increase revenues by this amount. 

Mr. COHEN. Under the system we have today, could you bring 

that action under a fraud charge and get around this, or would you 

be barred under the arbitration act? 

Mr. DONOVAN. I do not think we would bring it as a fraud charge 

per se because fraud charges are hard to get certified as a class action. What you bring it as is a violation of the Truth in Lending 

Act. You bring it as a breach of contract. You bring it as an unfair, 

deceptive practice because there really was not a representation, a 

promise that said, Oh, by the way, this barcode says it is going to 

the right address, because nobody can read barcodes, so you cannot 

really have a fraud claim, but you could have an omission claim, 

and you could have that certified. 

Could you bring that in an arbitration case? What it took was— 

it actually took a fair amount of forensic, you know, analysis. We 

had to spend the money to find out that is what was happening, 

because we could not figure out, Why are people sending these 

things 2 weeks in advance, but the bank is saying we did not get 

them? We finally figured it out, and then finally they came clean 

that, Oh, yes, we intentionally did that. 

So—and then, you know—and then changing, you know, the 

Fleet case. What Fleet said was, Oh, yes, when we sent out the 

promotional rate that said ‘‘no annual fee,’’ 3 weeks later the Federal Reserve increased interest rates, so therefore we have to put 

the annual fee on because otherwise our revenues will not be 

enough. 

They sent out a letter saying, Because the Federal Reserve increased interest rates, we are going to impose an annual fee; and 

the court said, Uh-uh, ‘‘no annual fee’’ means at least no fee for the 

first year. Otherwise, it is a breach of contract. 

Now, if there was an arbitration clause, you know, we were— 

Ballard Spahr was defense counsel. They were a very good firm, 

honorable, decent. They defended the case, and they came up with 

a lot of good arguments, preemption and everything. One individual person could not beat those lawyers; they are good lawyers. 

If they did not have other counsel, they would have lost. So you 

had to pursue that as a class case. 

This happens—you know, look. The reality of it is that Citibank, 

Bank of America, Wells, they hire the best, brightest lawyers in the 
172 

Nation. Included among them is Sidley & Austin. I mean, you 

know, the Sidley & Austin firm defends the tax evasion, you know, 

the tax shelter cases, you know, where everybody said they got hit 

by the IRS because of tax shelters that were disallowed, and they 

bring claims against the accountants and the lawyers. 

Well, the first thing that the defendants do in those cases is say, 

Oh, arbitration; oh, yes, we know we did not sign the arbitration 

clause, but a third party that we are related to, you know, by second-cousin status signed one, so we are subject to that arbitration 

clause. 

And that is what the defendants do. 

Mr. COHEN. Thank you, sir. 

Mr. DONOVAN. So this has to be passed. The Arbitration Fairness 

Act has to be passed. 

Mr. COHEN. Mr. Delahunt. 

Mr. DELAHUNT. Yes. Thank you, Mr. Chairman. 

If there is a provision in a credit card contract that says at the 

end of the terms and conditions that the credit card company or 

issuer can change the terms at any time they want, and all the 

terms and conditions that were enumerated previously, would that 

fit the definition of an ‘‘adhesion contract’’? 

Mr. DONOVAN. Well, that is what the credit card contracts are 

now. Yes, they are adhesion contracts because they are take-it-orleave-it contracts. You either take it or you leave it. That is what 

the adhesive thing is. 

The thing that is different about the credit card contract—and 

they try to justify this because it is a revolving line of credit—is 

that they can change any term at any time for any reason. So if 

you are counting on having this money at 6 percent interest for a 

year, because that is when the date of your expiration on your card 

is—— 

Mr. DELAHUNT. Mr. Donovan—and my point is and I obviously 

agree with you and I understand that, but to call that a ‘‘contract’’ 

is, you know, flattery taken to a different level. I mean, that is 

just—that is a joke. That is what it really is. Of course, it is an 

adhesion contract. 

When I hear that, Well, you have contractual obligations, that is 

not a contract. It just is not a contract. 

In terms of class actions, one aspect of the rationale for class action suits is to serve as a deterrent to bad practices. In other 

words, it is not just simply above compensating or redressing those 

members of the class, but it is preventing bad behavior post the 

ruling, the decision in the case. 

Am I stating it accurately, Mr. Donovan? 

Mr. DONOVAN. The way I like to look at it, Your Honor, is—because we always talk about this from the perspective of consumers 

or homeowners or anything. It is a moral hazard. This device imposes a moral hazard on credit card companies to ‘‘do not do this, 

or else you are going to increase the cost on you alone.’’ So it imposes a moral hazard on the whole thing so others who are observing it will not do that, too. 

The benefit is that that helps investors to have confidence to buy 

these securities that are backing up the credit card product; and 

the moral hazard is then presented on the bad actor alone, pin-
173 

pointed, and the others get to observe, and they are deterred from 

engaging in the same bad practice. 

Mr. DELAHUNT. Thank you. That is all I have. 

Mr. COHEN. Mr. Johnson, do you have any further questions? 

Mr. JOHNSON. Not at this time, Mr. Chairman. I would be happy 

to yield the balance of my time to either one of my colleagues here, 

Mr. Delahunt or to, of course, Mr. Scott. 

Mr. COHEN. Thank you, sir. 

Mr. Scott, you are recognized with the balance of Mr. Johnson’s 

time. 

Mr. SCOTT. Thank you, Mr. Chairman. 

I do not have any questions, but I would just thank the panel, 

particularly Mr. Donovan, for pointing out that adhesion contracts 

do not have to be enforced, and that is absolutely consistent with 

centuries of jurisprudence. 

Furthermore, if you conspire with others to put the same provisions in a contract, that violates that antitrust law so that what 

we are doing with these bills—what we are doing is absolutely consistent with centuries of jurisprudence. What the bills would do 

would be to add some consistency, so regardless of what State you 

are in, you can benefit from reasonable consumer law. 

I would yield back. 

Mr. COHEN. Thank you, Mr. Scott. 

I do not know if we need another round or not but, Mr. Franks, 

do you have any further questions? 

If not, I think we have had a very healthy discussion, and I think 

there has been the best attendance that we have had at this Subcommittee. I want to thank the witnesses on the issue for eliciting 

that. We thought we had to call the fire marshal at one point—too 

many Members up here—but we did not, so I would like to thank 

you all for your testimony and for your attemtiveness. 

Without objection, Members have 5 legislative days to submit 

any additional written questions, which we will forward to the witnesses and will ask you to answer as promptly as you may, and it 

will be made part of the record. 

Without objection, the record will remain open for 5 legislative 

days for the submission of any other additional materials. 

I thank everyone for their time and patience. This hearing of the 

Subcommittee on Commercial and Administrative Law is hereby 

adjourned. 

[Whereupon, at 12:04 p.m., the Subcommittee was adjourned.] 

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A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD
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RESPONSE TO POST-HEARING QUESTIONS FROM MICHAEL D. DONOVAN, ESQ., 

NATIONAL ASSOCIATION OF CONSUMER ADVOCATES
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RESPONSE TO POST-HEARING QUESTIONS FROM RICHARD H. FRANKEL, ESQ., 

DREXEL UNIVERSITY EARLE MACK SCHOOL OF LAW
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RESPONSE TO POST-HEARING QUESTIONS FROM CHRISTOPHER R. DRAHOZAL, ESQ., 

UNIVERSITY OF KANSAS SCHOOL OF LAW
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RESPONSE TO POST-HEARING QUESTIONS FROM DAVID ARKUSH, ESQ., PUBLIC CITIZEN
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