[House Hearing, 110 Congress]
[From the U.S. Government Printing Office]




                               BEFORE THE

                            SUBCOMMITTEE ON

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION


                             JUNE 12, 2007


                           Serial No. 110-69


         Printed for the use of the Committee on the Judiciary

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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. (BOBBY) SCOTT, Virginia    HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
MAXINE WATERS, California            DANIEL E. LUNGREN, California
MARTIN T. MEEHAN, Massachusetts      CHRIS CANNON, Utah
WILLIAM D. DELAHUNT, Massachusetts   RIC KELLER, Florida
ROBERT WEXLER, Florida               DARRELL ISSA, California
LINDA T. SANCHEZ, California         MIKE PENCE, Indiana
STEVE COHEN, Tennessee               J. RANDY FORBES, Virginia
HANK JOHNSON, Georgia                STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois          TOM FEENEY, Florida
BRAD SHERMAN, California             TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York          JIM JORDAN, Ohio
ADAM B. SCHIFF, California

            Perry Apelbaum, Staff Director and Chief Counsel
                 Joseph Gibson, Minority Chief Counsel

           Subcommittee on Commercial and Administrative Law

                LINDA T. SANCHEZ, California, Chairwoman

JOHN CONYERS, Jr., Michigan          CHRIS CANNON, Utah
HANK JOHNSON, Georgia                JIM JORDAN, Ohio
ZOE LOFGREN, California              RIC KELLER, Florida
WILLIAM D. DELAHUNT, Massachusetts   TOM FEENEY, Florida
MELVIN L. WATT, North Carolina       TRENT FRANKS, Arizona
STEVE COHEN, Tennessee

                     Michone Johnson, Chief Counsel

                    Daniel Flores, Minority Counsel

                            C O N T E N T S


                             JUNE 12, 2007


                           OPENING STATEMENTS

The Honorable Linda T. Sanchez, a Representative in Congress from 
  the State of California, and Chairwoman, Subcommittee on 
  Commercial and Administrative Law..............................     1
The Honorable Chris Cannon, a Representative in Congress from the 
  State of Utah, and Ranking Member, Subcommittee on Commercial 
  and Administrative Law.........................................     2
The Honorable Hank Johnson, a Representative in Congress from the 
  State of Georgia, and Member, Subcommittee on Commercial and 
  Administrative Law.............................................     4


Mr. F. Paul Bland, Jr., Public Justice, Washington, DC
  Oral Testimony.................................................     5
  Prepared Statement.............................................     8
Mark J. Levin, Esquire, Ballard Spahr Andrews and Ingersoll, LLP, 
  Philadelphia, PA
  Oral Testimony.................................................    43
  Prepared Statement.............................................    45
Ms. Jordan Fogal, Political Activist, Houston, TX
  Oral Testimony.................................................    68
  Prepared Statement.............................................    70
Mr. David S. Schwartz, University of Wisconsin Law School, 
  Madison, WI
  Oral Testimony.................................................    82
  Prepared Statement.............................................    84


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

                        OFFICIAL HEARING RECORD
      Material Submitted for the Hearing Record but not Reprinted

Publication by the U.S. Chamber Institute for Legal Reform entitled 
    Arbitration: Simpler, Cheaper, and Faster Than Litigation, April 
    2005. This report is available at the Subcommittee and can also be 
    accessed at:


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


Publication by the U.S. Chamber Institute for Legal Reform entitled 
    State Court Enforcement of Arbitration Agreements, by John M. 
    Townsend, October 2006


Document by the American Arbitration Association, Dispute Resolution 
    Services Worldwide entitled Consumer Due Process Protocol, 
    Statement of Principles of the National Consumer Disputes Advisory 




                         TUESDAY, JUNE 12, 2007

              House of Representatives,    
                     Subcommittee on Commercial    
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:37 a.m., in 
Room 2237, Rayburn House Office Building, the Honorable Linda 
Sanchez (Chairwoman of the Subcommittee) presiding.
    Present: Representatives Sanchez, Johnson, Delahunt, 
Cannon, and Jordan.
    Staff present: Norberto Salinas, Majority Counsel; and 
Daniel Flores, Minority Counsel.
    Ms. Sanchez. Good morning. I would bang my gavel, but I 
don't have a gavel presently, but we are going to call this 
Subcommittee on Commercial and Administrative Law to order.
    I will recognize myself for a short statement.
    In 1925, Congress passed the Federal Arbitration Act to 
free up the courts from an increasingly heavy docket and to 
place arbitration agreements on the same footing as contracts. 
At the time, Congress found several benefits to arbitration, 
including lower costs than litigating in courts, a choice of 
neutral arbitrators with expertise in the disputed area of law, 
and a quicker resolution to the dispute.
    However, the use of arbitration has expanded from simply 
involving disputes between commercial parties, to issues 
between consumers and businesses, employees and employers, and 
shareholders and corporations. This once-rare alternative to 
litigation has become commonplace and arbitration clauses are 
now frequently included in legal contracts of every variety.
    As arbitration has increased in popularity, what was once a 
choice has become a mandatory part of many consumer contracts. 
In fact, according to a 2004 survey, one-third of all our major 
consumer transactions are covered by mandatory arbitration 
clauses. Despite all the benefits of arbitration, mandatory 
arbitration agreements may not always be in the best interests 
of consumers.
    Mandatory binding arbitration clauses in agreements may 
require consumers to pay fees to arbitrate a claim or travel 
several States away for complaint proceedings. Advocates also 
have shown that businesses often fare better than consumers in 
arbitration matters. In fact, in one instance, it was reported 
that a particular bank won an astonishing 99.6 percent of the 
almost 20,000 arbitration cases in which it participated. 
Besides the advantage of regular customers in the arbitration 
game, there are real questions about due process and the non-
public nature of arbitration decisions.
    Considering that the Federal Arbitration Act was created 
only to cover businesses in equal bargaining positions, we have 
to wonder how today's current use of arbitration agreements 
comport with the legislative history and the spirit of the act. 
Congress must now carefully consider whether arbitration is 
fair for all of the parties to a dispute.
    Today's oversight hearing will provide an opportunity to 
learn more about the effect of arbitration on consumers and 
whether mandatory binding arbitration clauses are an equitable 
use of the arbitration process. First, we must review the 
history of arbitration and the reason that Congress codified 
    Second, we must understand how the use of arbitration has 
evolved since 1925 and how it came to be used in the consumer 
business context of today. Finally, we must decide how best to 
ensure that the benefits of arbitration are maintained, while 
addressing its negative aspects. It is also important to note 
that several bills regarding arbitration agreements have been 
    To help us learn more about mandatory and binding 
arbitration agreements, we have four witnesses here with us 
this afternoon. We are pleased to have F. Paul Bland, Jr., an 
attorney at Trial Lawyers for Public Justice; Mark Levin, a 
partner at Ballard Spahr Andrews and Ingersoll; Jordan Fogal, 
an author and consumer advocate; and David Schwartz, a 
professor at the University of Wisconsin Law School.
    Accordingly, I look forward to today's testimony, and I 
welcome all of our witnesses.
    At this point, I would now like to recognize my colleague, 
Mr. Cannon, the distinguished Ranking Member of the 
Subcommittee, for his opening remarks.
    Mr. Cannon. Thank you, Madam Chair.
    Mandatory binding arbitration clauses in consumer contracts 
have become more common in recent years. Some consumer 
advocates argue that this is unfair. The claim is that the 
practice excessively benefits companies over consumers and urge 
that use of mandatory binding arbitration clauses in consumer 
contracts be restricted. Proposals to restrict the freedom of 
contract should be viewed cautiously and proposals to restrict 
the freedom of contracting mandatory arbitration should be 
viewed with special caution.
    Arbitration is the classic means of alternative dispute 
resolution for those wishing not to bring their dispute before 
Federal or State courts. For many years, the law and the courts 
have strongly encouraged arbitration. It can efficiently afford 
justice and it eases the burden on our strained court system.
    Free access to efficient arbitration is particularly useful 
in the area of consumer contracts. Consumers benefit from a 
quicker, less cumbersome and less expensive way of resolving 
their often small-scale disputes, and companies benefit from 
these same advantages because consumer claims can be repetitive 
and large in number.
    The use of mandatory binding arbitration clauses has risen 
not because companies want to disadvantage consumers, but 
because companies increasingly believe they need to protect 
themselves from abusive class action suits. Actual or perceived 
abuses of class action tort cases and class action lending 
disclosure suits, along with the web of inconsistent 
substantive law and civil procedure in competing jurisdictions 
entertaining such lawsuits have prompted companies to resort 
more and more to mandatory binding arbitration.
    In this way, companies have sought to introduce a more 
orderly, less expensive and more consistent set of rules for 
the resolution of customer disputes. They are not seeking to 
create a problem for consumers. They are trying to solve the 
serious problem they confront themselves.
    Is this solution working for both sides? I expect that the 
evidence today will support the conclusion that it is, that 
consumers are being fairly treated. For example, aware of 
consumer protection concerns, companies have developed what are 
known as ``fair'' clauses in consumer contracts. These clauses 
protect against undue advantage to companies in arbitration.
    They include provisions that comply with consumer due 
process procedures of the major arbitrating services; allow 
either the consumer or the company to invoke arbitration; 
provide for fee-shifting, including for indigent consumers; and 
open off-ramps to small claims court for certain claims.
    In addition, consumer contracts increasingly include opt-
out clauses. These clauses allow consumers during a specified 
time after entering into a contract to opt out of mandatory 
binding arbitration clauses. Consumers who opt out will still 
preserve the rest of the bargain embodied in their contract. 
The National Arbitration Forum recently published a synopsis of 
independent studies and surveys on the benefits of consumer 
    The results of these studies included the following. 
Consumers prevail 20 percent more often in arbitration than in 
court. Monetary relief for individuals is higher in arbitration 
than in lawsuits. Arbitration is about 36 percent faster than 
litigation, and 64 percent of American consumers would choose 
arbitration over a lawsuit for monetary damages, and 93 percent 
of consumers using arbitration find it to be fair.
    The evidence from empirical studies suggests that mandatory 
binding arbitration is fair to consumers. Institutional and 
market forces appear to be working to promote the use of fair 
arbitration clauses in procedures, and in turn, arbitration is 
delivering fair results to consumers. There does not appear to 
be an urgency for Congress to intervene in this area.
    Restricting the freedom of contract over how to enter into 
arbitration would reduce the options available to consumers and 
it would reduce competition in the legal services and dispute 
resolution markets. When the consumer confronts fewer services 
and less competitive markets, the consumer inevitably suffers. 
Trial lawyers and public advocacy groups--the lawyers who bring 
class actions--might gain from restrictions, but consumers 
likely would not.
    I look forward to the testimony today, and I yield back.
    Ms. Sanchez. I thank the gentleman for his statement.
    I would now like to recognize the gentleman from Georgia, 
Mr. Johnson, for his opening statement.
    Mr. Johnson. I want to thank the Chairwoman for holding 
such an important oversight hearing today.
    The right to a jury trial is guaranteed by the Federal 
Constitution, yet this right is lost as more and more 
businesses impose arbitration agreements on their customers. 
Although today's hearing focuses on consumers, this problem has 
also permeated the employment and healthcare industries.
    The Federal Arbitration Act was enacted as an alternative 
to resolve disputes between businesses on equal footing. But 
today businesses impose these so-called ``agreements'' through 
envelope stuffers or in small-print notices which are often 
overlooked by the average consumer. This take-it-or-leave-it 
position leaves consumers, employees, and small businesses at a 
disadvantage. Coupled with high administrative fees, lack of 
discovery and limited opportunity to appeal, it has swayed away 
from its original purpose as a voluntary expedited process to 
resolving disputes, and it has become a tool for businesses to 
divert disputes into a private legal system.
    A fundamental feature of a fair justice system is that both 
sides to a dispute have equal access to that system. Mandatory 
arbitration agreements give one side the upper hand. It is my 
hope, Madam Chair, that although we are looking only into the 
issue of consumer arbitration agreements today, we will have 
other hearings in other areas such as employment.
    Thank you very much.
    Ms. Sanchez. Thank you, Mr. Johnson.
    Without objection, other Members' opening statements will 
be included in the record.
    Without objection, the Chair will be authorized to declare 
a recess of the hearing at any moment.
    I am now pleased to introduce our panel of distinguished 
witnesses for today's hearing.
    Our first witness is Paul Bland, a staff attorney for 
Public Justice. Mr. Bland serves as a member and former co-
chair of the board of directors of the National Association of 
Consumer Advocates. Mr. Bland is also the co-author of Consumer 
Arbitration Agreements, published by the TLPJ Foundation and 
the National Consumer Law Center.
    Our second witness is Mark Levin, a litigation partner at 
Ballard Spahr Andrews and Ingersoll. Mr. Levin concentrates his 
practice in complex commercial and class action litigation, 
with particular expertise in consumer financial services 
litigation and the structuring and enforcement of consumer 
arbitration clauses. Mr. Levin has co-published several 
consumer financial services and arbitration articles which have 
appeared in Arbitration of Consumer Financial Services 
Disputes, and The Business Lawyer.
    Our third witness is Jordan Fogal. Ms. Fogal, a political 
activist, has waged a public advocacy campaign in the Houston 
area for homeowners affected by questionable practices of 
developers. Ms. Fogal has also been active in calling attention 
to the lack of lending laws to protect homeowners who get 
tricked into buying defective homes.
    Our final witness is David Schwartz, associate professor at 
the University of Wisconsin Law School. Professor Schwartz's 
research interests include federalism, workers' rights and the 
law of the workplace. Prior to joining the University of 
Wisconsin Law School faculty, Professor Schwartz was senior 
staff attorney at the American Civil Liberties Union of 
Southern California in my home town of Los Angeles.
    I want to thank all of the witnesses for their willingness 
to participate in today's hearing.
    Without objection, your written statements will be placed 
in their entirety into the record of these proceedings. We 
would ask that you limit your oral remarks to 5 minutes.
    You will note that we have a lighting system that starts 
with a green light. After 4 minutes, it will turn yellow to 
warn you have 1 minute remaining. Then it will turn red when 
the 5 minutes have expired. At that time, if you still have not 
finished your testimony, I would ask you to just conclude your 
final thought so that we have an opportunity to hear from all 
of our witnesses.
    After each of you has presented your testimony, 
Subcommittee Members will be permitted to ask questions, 
subject to a 5-minute limit. Those are the ground rules.
    So at this point, we are ready to proceed with the 
testimony. I would ask Mr. Bland if he would pleased proceed.


    Mr. Bland. Thank you very much, Chairwoman.
    Arbitration, the way it is practiced in consumer cases 
today in America, has essentially become a lawless system. It 
is a system without rules. The arbitrators have a huge 
incentive to tilt the playing field. There are a lot of 
companies who compete for work as private arbitration 
companies. They compete against each other. It is lucrative 
work. Private arbitrators frequently make $300, $400, even $500 
an hour in this city and a lot of other cities, and they want 
this work.
    Now, the companies, the corporations are the ones who right 
standard-form contracts. I am sure that every Member of this 
Committee and everyone in this room has a cell phone and a 
credit card. None of you wrote the terms of the agreement that 
govern your cell phone or your credit card. They were written 
by the bank, the cell phone company, whoever. Those are the 
companies who are picking the arbitration providers.
    So if you are an arbitration provider and you want this 
lucrative work, what you have to do is you have to pitch your 
services toward the companies who are writing the contracts. 
That is how you get the work. That is how the market works. So 
as a result, it creates a dynamic which is a race to the 
bottom. It shows up in a bunch of different ways. I spelled out 
a huge number of illustrations of this in my testimony.
    For example, one problem is again and again every time a 
private arbitrator rules in favor of a consumer in a 
significant way, they get blackballed and they don't hear any 
more cases. So if you want to work as an arbitrator, and you 
want to be able to charge $500 an hour, you better work for the 
company who is picking you. If you bite the hand that feeds you 
and you rule for the consumer, you may never work as an 
arbitrator again. This has happened a lot. That is a problem.
    A second problem is the arbitration companies, like the 
National Arbitration Forum referred to by the Ranking Member, 
send out advertisements to corporations, to banks, trying to 
get them to pick them. So they will send out an advertisement 
that says, we want a better system--the American Arbitration 
Association--because if you pick us, we can set up the 
following things that will make for rules favored on your side 
against the consumer.
    Now, when companies start advertising for business like 
that, that is a problem. You don't get that in the court 
system. I never have gotten in my 20 years of practicing as a 
lawyer a letter from a judge saying, ``Hey, file your case in 
this district of Texas and we are going to see you get a really 
big bang-up result.'' If I did get that letter, I can guarantee 
you the judge would be disbarred and it would be on the 
editorial page of The Wall Street Journal. But the arbitration 
companies act like this all the time. That is another problem.
    Another example is they have loaded panels. Who is going to 
be the arbitrator? When the companies go to pick the 
arbitration panels, the people who they pick, who show up on 
the panels, are a problem. Let me give you an example. Someone 
recently approached us about a health insurance case in 
Michigan. It was a medical malpractice case. The woman has 
breast cancer. Her doctor proposes a certain course of 
treatment. The HMO won't do it. They won't cover it.
    As a result, she ends up not getting the treatment and 
metastasizes. She is dying. She considers this a medical 
malpractice case. She wants to go to court. They want to force 
her into arbitration. She gets a list from the American 
Arbitration Association of seven names.
    Okay, so instead of a jury of her peers, she has these 
seven names. This is the universe of people who can decide her 
case. Every single person on the list from the American 
Arbitration Association, notwithstanding the due process 
protocols and everything, is somebody who works for an 
insurance company or they work for a law firm where all the 
work they do is for an insurance company.
    So if it was your spouse or if it was you who had a medical 
malpractice claim or any other claim against a corporation who 
you felt had really done something wrong to you, do you want to 
have a jury or do you want to have a defense lawyer who works 
for that industry deciding the case?
    Now, why do I say it is lawless? I say it is lawless 
because courts do not meaningfully review arbitration 
decisions. In order to make it so quick and so streamlined, the 
court system has established a set of rules and they have 
interpreted the 1924 act to basically say that there is 
virtually no judicial review of arbitration decisions. There 
was a case last year from the Seventh Circuit Court of Appeals. 
Judge Posner wrote that even if an arbitrator's decision was 
wacky--``wacky,'' think about that word--as a matter of law, 
and that was not grounds for overturning it.
    The year before, the Third Circuit Court of Appeals in 
Philadelphia found that even if an arbitrator's decision had 
gross errors of law, that was not grounds for overturning a 
decision. In a case involving Steve Garvey, the U.S. Supreme 
Court, with Justice O'Connor writing for the court, said that 
even if an arbitrator's fact-finding was silly--``silly'' fact-
finding--that was not grounds for overturning the case.
    About once a week in my practice of law, because I wrote a 
book on this and I do a lot of cases in this area, about once a 
week some consumer or employee someplace in America contacts 
our firm and says, we had an arbitrator who issued a terrible 
decision, that ignored all the evidence; they just ruled for 
the company and they wouldn't even listen to me; they fell 
asleep while I was talking; it was completely unfair.
    And I will say, gee, were the errors of law wacky? Yes. Was 
the fact-finding silly? Well, according to the courts, you have 
no remedy at all. We turn that case down every time because it 
is next to impossible to get these cases overturned. It is a 
problem when you have a private system of justice, where you 
have an incentive to suck up to one side, and then no one is 
looking over their shoulders. Even if they were the best people 
in the world, honest and intelligent people make mistakes. But 
when there is no appeal, that is a problem.
    [The prepared statement of Mr. Bland follows:]

                Prepared Statement of F. Paul Bland, Jr.

    Ms. Sanchez. The time of the gentleman has expired. I thank 
you for your testimony.
    Mr. Levin, would you please proceed?


    Mr. Levin. Madam Chair, Ranking Member Cannon, I know and 
like and respect Mr. Bland, but I could not disagree more 
conceptually and intellectually with his positions.
    It is my position, as one who has practiced law for 30 
years and been a practitioner in the consumer arbitration area 
for more than a decade, that arbitration agreements are fair to 
consumers because there is a dynamic presently in place that 
ensures fairness to consumers and to all other parties 
    That system has never worked better than it does today. It 
involves four components. First, the Federal Arbitration Act 
itself. The Supreme Court has noted that the FAA, was enacted 
with consumers, among others, in mind, and it has operated 
effectively for more than 80 years through ever-changing 
economic, social and political times, to ensure that 
arbitration agreements are as enforceable as other contracts 
and that arbitration agreements and arbitration proceedings are 
    Contrary to what Mr. Bland said, courts do scrutinize 
arbitration agreements that are alleged by consumers to be 
unfair, and they do that because the FAA makes them do that. 
The courts determine the validity of these contracts. The 
Supreme Court has called them the ``gatekeepers,'' and they do, 
from personal experience, a superb job of doing that. Courts 
also have some powers of review following an arbitration award 
to ensure that the proceeding was not biased and that the 
arbitrator did not manifestly disregard the law.
    The second component of the system is the companies with 
whom consumers deal. In my experience, companies do act in good 
faith to draft arbitration agreements that are fair to the 
consumer, even giving the consumer a right to reject the 
arbitration agreement at the outset of the transaction with no 
strings attached. Today, the vast majority of arbitration 
agreements require the arbitrator to apply substantive law and 
authorize the arbitrator to award the same remedies that a 
consumer could obtain if he or she were in court.
    This includes, very importantly, the ability of the 
consumer who prevails in arbitration to recover attorneys fees 
and costs if applicable law so provides. I note that in almost 
all Federal and State consumer protection statutes do require 
fee-shifting, so this right is preserved in arbitration. The 
U.S. Supreme Court has said time and time again that when you 
go to arbitration, you are not losing your substantive claims. 
You are merely changing the forum for resolving them.
    The third component, the arbitration administrators. Again, 
I hear Mr. Bland's apocryphal stories, but I think the best 
testimony on behalf of organizations such as the AAA and the 
NAF is the consumer protocols, consumer procedural rules and 
the consumer fee schedules that are especially designed to 
ensure that consumers are treated fairly.
    I note that the AAA's, the American Arbitration 
Association's, consumer due process protocol was drafted with 
the intense involvement of all consumer groups that had an 
interest in working with that group and devising due process 
protocols. That is in my statement. There is a list of the 
participants at the end.
    The administrators will not deal with the agreements of 
companies that do not meet their fairness standards. The 
arbitration fees for small claims are actually far less than 
the fees for filing a lawsuit in court. Justice Ginsburg 
herself has called the fees charged by the AAA and the NAF, 
``models for fair costs in fee allocation.'' Both organizations 
will even waive that small fee if the consumer can't afford to 
pay it.
    And finally, the courts. Again, based on my experience, 
courts very rigorously scrutinize arbitration agreements to 
make sure that they are fair, and they are quite vigilant in 
refusing to enforce those relatively few agreements that they 
conclude do not pass muster under applicable State and Federal 
laws. They take their job as gatekeepers very seriously.
    To the extent there are comments made in the witness 
submissions that have been made or at today's hearing about 
cases in which arbitration agreements were not fair, the courts 
invalidated them. I think that shows that the system is working 
as it was intended to do. It should not be viewed as an 
indictment for all consumer arbitration agreements, the vast 
majority of which are drafted in order to be fair and 
scrupulously complied with applicable laws.
    My final thought, in closing, is that I submitted a good 
bit of empirical evidence, which I believe rebuts the testimony 
about the unfairness of arbitration. That empirical evidence 
shows that arbitration is fair to consumers, and also 
arbitration does reduce the cost of providing goods and 
services to consumers, which is another element of fairness.
    Thank you.
    [The prepared statement of Mr. Levin follows:]

                  Prepared Statement of Mark J. Levin

    Ms. Sanchez. Thank you, Mr. Levin.
    Ms. Fogal, you are up next.


    Ms. Fogal. On April 15, we moved into what was going to be 
our last home. It had all the eye candy, even an elevator. The 
children told everybody at school that their grandmother had an 
elevator. We are senior citizens. We had a 30-year mortgage, 6 
percent interest rate. We could afford our payments. We had an 
elevator in case our knees went. We had a medical center close 
by, and a funeral home three blocks away.
    The first night in our new home, my husband tried out new 
Jacuzzi tub on the third floor. When he pulled the plug, 100 
gallons of water crashed through our dining room ceiling into 
the dining room. This was not one overlooked plumbing 
connection, as my husband and I so desperately wanted to 
believe. It was a preview of coming attractions.
    For 29 months, we begged our builder to fix our house. They 
would come in and seal up the windows inside so the water 
wouldn't run in, and then they would seal up the crack on the 
outside in the stucco so the water couldn't run out. So the 
house just filled up with water, and the mold grew. An 
accredited laboratory said they had never seen toxic readings 
that high in an inhabited dwelling.
    Our doctor told us to move out immediately. We sent the 
reports to the builder. He lied under oath, saying that he 
never received it, and the engineer received it that day, his 
engineer. We moved out. We had estimates for over $150,000 and 
our new home did not last 29 months.
    After we exhausted all other remedies, I began protesting 
my builder's new property. I felt foolish standing on a street 
corner holding up a sign because it was the only option left to 
me. We did not file on our builder an arbitration. Our builder 
filed on us for taking advantage of the only thing we had left, 
our first amendment rights.
    He warned me that his attorneys would take care of me in 
arbitration. Two weeks after I stepped out on that corner, we 
received our arbitration papers. The builder filed a fast-track 
to dispose of us more expediently than regular arbitration.
    We couldn't afford a lawyer anymore. We were paying for our 
new house, moving costs, deposits on the apartment, storage for 
our things. We had to keep the insurance and lights on in our 
new house, even if we couldn't live there, because the builder 
said that we had caused the damage. We knew that he was not 
going to buy it back. He told us he only sold houses. He didn't 
buy them.
    We also called the mortgage company and sent them the 
reports. After never being late with one payment, we allowed 
our home to go into foreclosure. We felt ashamed. At the same 
time, we also were paying for engineering, moisture, infrared, 
mold and air quality testing, and our builder knew that all of 
this was unnecessary.
    In arbitration, all the burden of proof is on the 
homeowner. The builder lets you do all the work and pay for it, 
and he sit there smugly knowing all the while that you will run 
out of money, shut up, go away, or he will win in arbitration. 
We did everything right. We had our house inspected. We hired a 
licensed realtor. We paid $3,400 a year for homeowners 
insurance, but substandard construction and builder defects are 
not covered by homeowners insurance. We were not in good hands 
with Allstate.
    We paid good money for an uninhabitable house and had no 
recourse. We were constantly tormented by the American 
Arbitration Association and billed a $6,000 counterclaim fee 
that got us out of fast-track and into regular arbitration. We 
were billed for case service fees, arbitration fees, even for 
the rent on the room. After receiving hardship, our case was 
dismissed due to failure of payment of fees by both parties.
    Now, we could finally file in court and charge the builder 
with fraud. We were dragged through 10 hearings before the 
judge ordered us to return to arbitration. Once again in 
arbitration, 2 years passed. We have not had a Christmas tree. 
We have not grilled out. We have not planted a flower. We have 
not had company. Our grandchildren have no place to stay with 
us. We live in a small third-story apartment, a temporary 
situation because surely justice was going to come soon.
    After successfully proving fraud, my net award, including 
my attorney fees, is $26,000. I had to pay $1,690 for a study 
after arbitration was over before the arbitrator would issue 
her award. They do not have to face you when they render their 
verdicts. I feel an overwhelming responsibility as I sit here 
before you today because I feel like I have to represent the 
hundreds of families I have talked to over the years and the 
hundreds of thousands that I have never met who have suffered 
so much more than I have.
    Please don't tell us that our houses would cost more if 
they were built correctly, or tell us that arbitration works so 
well. If it worked so well, why does it have to be mandatory? 
By mandatory arbitration, we have lost our seventh amendment 
rights to a trial by jury, and maybe a fight to getting their 
first amendment rights due to the abuses and harassment from 
arbitrators and unethical corporations.
    In closing, I would like to quote our second president: 
``Representative government and a trial by jury are the heart 
and lungs of liberty. Without them, we have no other 
fortification against being ridden like horses, fleeced like 
sheep, worked like cattle, and fed and clothed like swine.'' 
Mr. Adams must have had a premonition about the privatization 
of the justice system we now refer to as arbitration.
    Thank you.
    [The prepared statement of Ms. Fogal follows:]

                   Prepared Statement of Jordan Fogal

    Ms. Sanchez. Thank you, Ms. Fogal.
    Mr. Schwartz, please proceed with your testimony.

                      SCHOOL, MADISON, WI

    Mr. Schwartz. Chairman Sanchez and Members of the 
Committee, thank you so much for inviting me to testify today 
at this hearing.
    I would like to emphasize four brief points. First, the 
most basic principle of fairness in any dispute resolution 
system is never let one part to a dispute make the rules. The 
second basic principle of fairness in any dispute resolution 
system is never let one party to a dispute choose the decision 
    Mandatory arbitration violates both of these fundamental 
principles. It gives the company writing the contract--the 
bank, the credit card company, the employer--the sole and 
exclusive say about whether its disputes against consumers or 
employees will go to arbitration or go to court.
    Second, a basic pre-dispute arbitration agreement--and that 
is what we are talking about here, agreements to arbitrate 
before the dispute has arisen--one that simply picks 
arbitration over a court is unfair enough for the reasons that 
you heard from the previous witnesses, Ms. Fogal and Mr. Bland. 
It deprives consumers of needed procedural rights like 
discovery, that is the right to get information from the other 
side and the right to appeal.
    Many large businesses push the envelope by trying to 
deprive consumers not only of their access to courts, but also 
a crucial remedy that the law affords them: compensatory and 
punitive damages, attorneys fees, and particularly class 
actions. The class action remedy is vital to consumer 
    I believe that the primary goal of many companies that use 
mandatory arbitration clauses is to gain immunity from class 
actions, which can become in effect immunity from liability for 
widespread, but small-dollar per capita, consumer frauds and 
wage and hour violations.
    Third, the surest way to tell that arbitration is unfair to 
consumers is to look at the behavior of the people involved. 
Who endorses mandatory arbitration?: The banking industry, the 
Chamber of Commerce, large employers, and their lawyers. Do any 
bona fide consumer groups endorse mandatory arbitration? No.
    Mandatory arbitration boosters argue that mandatory 
arbitration produces fair results indistinguishable from court, 
maybe even better than court, but that is false. There is not 
one reputable, impartial study showing that mandatory 
arbitration produces fair results for consumers.
    There are a handful of studies commissioned by pro-
mandatory arbitration partisans--the banking industry, large 
employers and the attorneys who represent them--that claim that 
arbitration produces fair results, but those studies I am 
afraid to say are junk social science. They are based on very 
small samples and very biased samples of cases to study. They 
are not valid research.
    If arbitration is a good deal for both sides, if it really 
is faster, cheaper, but equally fair, then both sides would 
choose it after they have a dispute. The only reason for 
businesses to opt for mandatory pre-dispute arbitration is 
because they believe, with good reason, that they will get 
better results because they will reduce their overall 
liability. In effect, they view mandatory arbitration as do-it-
yourself tort reform.
    Fourth, the Federal Arbitration Act has been interpreted to 
displace State law. This is a seriously mistaken Supreme Court 
ruling that has thrown the lower courts across the country into 
wide confusion about how much State law is in fact preempted, 
essentially nullified by the Federal Arbitration Act.
    Business defenders today are increasingly arguing in court 
that the Federal Arbitration Act nullifies various State 
consumer protection laws. Since most consumer protection law is 
still State law in the United States, this doctrine of Federal 
Arbitration Act preemption poses a serious threat of creating a 
consumer protection gap that could only be filled by new 
Federal regulations.
    To conclude, the Federal Arbitration Act was not intended 
by Congress to apply to consumer or employment claims. It was 
not intended to preempt or nullify any State laws. We are in 
this mess because of a serious of legally incorrect and 
misguided court interpretations of the FAA. Unfortunately, the 
courts are not going to correct their own mistakes because they 
find that the caseload-reducing effect of arbitration, of 
mandatory arbitration, is an irresistible temptation.
    It is time for Congress to step in and clean up this mess. 
Thank you.
    [The prepared statement of Mr. Schwartz follows:]

                Prepared Statement of David S. Schwartz

    Ms. Sanchez. Thank you, Mr. Schwartz, for your testimony.
    We will now begin a series of question rounds. I would like 
to recognize myself for 5 minutes for questions. I would like 
to start with Ms. Fogal.
    In your testimony, which is very compelling, I must say, 
for this hearing, you describe your experience in having gone 
through the arbitration process, and you indicate that you feel 
like you are representing other consumers who may have been in 
a similar situation.
    I am wondering, how many other people have you spoken with 
who had a similar experience with arbitration or a better or 
worse experience with arbitration?
    Ms. Fogal. There are two consumer groups that track this 
information: HOBB, which is Homeowners for Better Building, and 
HADD, which is Homeowners Against Defective Dwellings. They did 
statistics every week and get phone calls. I talked to these 
people. I talked to people who would call me and ask me, what 
can we do? And all I can tell them is, I don't know.
    Ms. Sanchez. I don't mean to interrupt you.
    Ms. Fogal. That is okay.
    Ms. Sanchez. Do you find that people's experience with 
arbitration has been about as bad as yours has been, or better, 
or worse?
    Ms. Fogal. What I found is that they are usually horrible, 
if they can talk about them, but when you come out of 
arbitration, a lot of people are under secrecy agreements. 
Like, I can go to their houses and see that their houses are 
still in horrible condition, but they can't talk to me.
    Ms. Sanchez. Okay. One of the many arguments that have been 
used to advance arbitration is that it is less costly than 
litigating in a traditional court system. Have you personally 
found arbitration to be less costly than what you would expect 
to pay if you took your claim to court?
    Ms. Fogal. What I really hate is when they say 
``arbitration costs,'' because first you have arbitration costs 
paid to the arbitration company itself, and then you have costs 
of arbitration, which is like being on a trial. So you have the 
same trial costs of getting witnesses, testimony. You even have 
to pay to send out your own subpoenas for $50. You have all the 
costs of a trial and you better put on a good one, or it really 
didn't matter. You have all the same costs. Sometimes it is 
    Ms. Sanchez. Okay.
    Mr. Schwartz, how did mandatory binding arbitration between 
equal commercial entities expand into the consumer business 
realm where the parties generally are not on equal footing?
    Mr. Schwartz. Well, basically for 60 years, from 1925 until 
the mid-1980's, the courts uniformly correctly interpreted the 
Federal Arbitration Act to apply only, as you said in your 
opening statement, in business-to-business kinds of disputes. 
And then suddenly in the 1980's, the Supreme Court essentially 
surprised everybody with a series of decisions saying, oh, we 
have this new view of arbitration. It is much better than we 
previously realized.
    They don't come out and say this in their court opinions, 
but that happened to correspond with the views of the chief 
justice then, Warren Burger, and subsequently the views of 
Chief Justice Rehnquist, that there are too many cases in 
Federal courts and too few judges. Whether that is true or not, 
it doesn't seem that the way to reform the Federal caseload is 
to place the cost of it onto consumers and employees who have 
no say in whether they are going to arbitrate or not.
    Ms. Sanchez. Thank you. I have several questions for you. 
Are mandatory binding arbitration agreements really mandatory, 
because we have heard the argument that if a consumer is 
unhappy with an arbitration agreement, they can simply refuse 
the agreement and take their business to a competitor. What is 
your response to that?
    Mr. Schwartz. There are two problems with that argument. 
The first is that for a lot of businesses, there are no 
competitors who give you a choice. Every cell phone company and 
every credit card company today--and those are perfect 
examples--has an arbitration agreement. So you cannot get a 
credit card or a cell phone without agreeing to that. It is 
becoming more and more true in the healthcare situation.
    Second of all, with a lot of situations, do people really 
have the freedom to go do something else? If somebody has 
looked for several months to find a job and they desperately 
need a job, and that employment agreements says, okay, here is 
a mandatory arbitration agreement if you want to come to work 
for us. Is a person going to refuse the job because of some 
possibility that they might down the road have a dispute with 
that person?
    Ms. Sanchez. Along that same vein, I was thinking of 
examples in my life where I have seen actual arbitration 
agreements that you have to sign. I am a sophisticated consumer 
here. I am an attorney and I am a Member of Congress, but I can 
remember, and probably never even realized that my credit card 
and cell phone had mandatory arbitration agreements.
    But I do remember one time I broke a tooth and went to the 
dentist. And before I got service from the dentist, I was asked 
to sign a binding arbitration agreement. It seemed to me that I 
was in so much pain that had I even really thought about it, 
because I will quite honestly tell you I was in so much pain 
that I signed it. I would have signed anything in order to get 
the services that I needed in order to not feel that pain.
    So I understand perfectly what you are saying and I 
appreciate your testimony.
    My time has expired, so at this time I would like to allow 
the Ranking Member, Mr. Cannon, 5 minutes for questions.
    Mr. Cannon. Thank you, Madam Chair.
    Ms. Fogal, I empathize with what you are saying. I decided 
after my last building experience that I would never, ever 
build anything again in the future because builders are very 
difficult. They control the facts of their world, and quality 
is iffy.
    I am wondering, as I listened to you, if there isn't some 
other kind of way to deal with the problem. You had a very 
intense experience with a very big issue, a house, as opposed 
to, say, for instance, cell phones. Cell phones have 
arbitration clauses, but they tend to be small amounts of 
money. And cell phone companies tend to compete.
    On the other hand, in the same vein, if cell phones have 
arbitrary elements to their contracts, people would tend to 
move away from one company with their cell phone and go to a 
company that is better. So I am wondering if there isn't a way 
that we could have a kind of quality assurance like you have on 
eBay so that people can understand who the good builders are 
and who aren't.
    In other words, you had a terrible problem with a builder 
who was a jerk, apparently. I don't know this guy so I am not 
maligning him.
    Ms. Fogal. He was.
    Mr. Cannon. And you don't necessarily need to go there. The 
short of it is he was in business and you weren't.
    Ms. Fogal. Right.
    Mr. Cannon. And you ended up with a house and all the 
burdens of a house and a mortgage, and he just had the 
relatively minor costs of opposing you. That is a very 
different environment, it occurs to me. But I don't know if you 
built or if you just bought from a builder, but wouldn't you 
have liked to have known something about his quality and all 
the other houses he built and all the other people who have 
lived in the houses that he built?
    Ms. Fogal. Yes. That is why you go to the Better Business 
Bureau and he had a perfectly legitimate rating with the Better 
Business Bureau. Because he had operated under so many 
different names, when they would complain under one name, he 
would just change it.
    So after we went there, and he was the fourth-largest 
builder in Houston, and I did see other houses he had built. So 
I felt like, oh, very nice. But I also, after all this started 
happening, found out that he could build $1.3 million with 
$300,000 worth of foundation damage, or $120,000 that was 
uninhabitable. So you know, he was kind of an equal-opportunity 
    Mr. Cannon. Would your problem be somewhat lessened if 
there was a world in which you could identify your builder, 
having been able to identify your builder, and found out that 
other people had rated him and he was poorly rated.
    Ms. Fogal. Yes, that might have helped, but I also thought 
that anybody that was going to build a house, why would they 
need an arbitration agreement? Why wouldn't they build a house 
that they believed in enough that they didn't have to have me 
sign that? In Texas, you can't buy a new house without an 
arbitration agreement. It is a contract of adhesion. You either 
buy it or you don't get one.
    Mr. Cannon. The nice thing is you can rent, but that is a 
different issue, I suppose. There are alternatives.
    Ms. Fogal. Well, there goes your homeownership.
    Mr. Cannon. It is not really adhesion because you have lot 
of options in life.
    Mr. Schwartz, would you address the point of the difference 
between a cell phone company that has an arbitration clause in 
a highly competitive environment, and, say, the problem that 
Ms. Fogal had?
    Mr. Schwartz. Yes, they are both bad for different reasons. 
With the cell phone company, their goal is to avoid class 
actions because they figure that most of the disputes they are 
going to have are going to be for small dollar amounts. They 
could rip off 50,000 customers for $50 each and no one is going 
to sue them individually because it is too costly to bring an 
individual case. What you need is a class action.
    So I think the goal of the cell phone company----
    Mr. Cannon. The key probably is a better cell phone 
provider. In other words, I see the distinction of where you 
are headed, but the market needs to be a little robust.
    In fact, Mr. Bland, you have dealt with class actions. How 
many class action settlements are you aware of where individual 
plaintiffs recover even 20 percent of the economic damages they 
were seeking?
    Mr. Bland. Actually, there is a study that was done a few 
years ago by the head of a periodical called Class Action 
Report. He was sort of a green eyeshade guy and he collected 
every class action settlement anywhere in the country that he 
could find. He found that across the board, collectively in the 
aggregate for consumer class actions that about 80 percent of 
the economic value went to the consumers.
    Now, there are some really bad abusive settlements. I 
personally have objected to bad settlements where most of the 
money goes toward----
    Mr. Cannon. This guy died. When did he stop collecting 
    Mr. Bland. He died 2 years ago in an accident.
    Mr. Cannon. I have had like dozens of invitations to join 
class actions over the last 10 years. They are all frivolous. 
They are all flaky.
    Mr. Bland. Sir, if I can give you an example. I just 
settled a case as a class action where a bank promised people 
that they would never charge them more than 24 percent 
interest, then it broke that promise and charged people 30 
percent interest. The individual damages to people were $100 at 
the most. We settled that case for $16 million and we have sent 
out checks, or we are in the process of sending out checks to 
280,000 people. Plus, we fixed everybody's credit records.
    There are bad class action settlements, but that is not the 
majority of it. I feel very proud about the case that I just 
    Mr. Cannon. My time has expired, Madam Chair. Would the 
Chair indulge me to just ask what your fees on that case were?
    Mr. Bland. The fees were 20 percent of the amount that was 
    Mr. Cannon. So it was $4 million?
    Mr. Bland. About $4 million.
    Ms. Sanchez. We may have time for a second and possibly 
even a third round of questions. I would like to give everybody 
an opportunity in this round, so I will recognize Mr. Johnson 
for 5 minutes of questions.
    Mr. Johnson. A 20 percent contingent fee is definitely a 
reasonable fee in a situation like that. I don't know who could 
argue with the fact that attorneys serving a public purpose 
should not be fairly compensated for the work that they do.
    But let me ask you, Mr. Levin, do you agree generally with 
the principle that whoever is paying the piper calls the tune?
    Mr. Levin. No, I do not.
    Mr. Johnson. Do you disagree with that generally?
    Mr. Levin. Well, if by that you mean that if a company is 
paying the cost of arbitration, they are going to be favored. 
Is that your question?
    Mr. Johnson. My question is generally, just taking it away 
from legalities. Whoever is paying the piper generally is 
calling the tune, is telling the piper what tune to play. Is 
that not a general----
    Mr. Levin. I disagree with that. I think the major 
arbitration organizations such as the American Arbitration 
Association and the National Arbitration Forum have put their 
rules and their procedures in writing. Their arbitrators are 
sworn to uphold those rules. The rules call for neutrality and 
fairness at every stage of the procedure. The rules give each 
side the right to strike arbitrators. I think there is a 
difference between saying----
    Mr. Johnson. You are not really answering my question.
    Mr. Levin. I am sorry. Maybe I misunderstood your question.
    Mr. Johnson. I asked you this question.
    Mr. Levin. Okay.
    Mr. Johnson. In your statement, you have written that in 
the vast majority of cases the existing system works and works 
well. That is this arbitration.
    Mr. Levin. Yes.
    Mr. Johnson. Because companies and employers have gone to 
great lengths to make arbitration programs fair, to the point 
of giving the consumers unfettered and unconditional rights to 
reject arbitration when they enter into the transaction. Can 
you cite some specific instances of that statement?
    Mr. Levin. All of the arbitration agreements that I have 
had a hand in working on, drafting, providing legal comment on 
for the past several years have included a right to reject 
    Mr. Johnson. Now, I want you to hold up right there.
    Mr. Levin. Yes.
    Mr. Johnson. Mr. Bland, how would you respond to that 
    Mr. Bland. I have seen that type of clause in maybe eight 
banks' contracts. I have never seen an opt-out right in a 
nursing home contract, a car sale, a cell phone, or employment 
or any other type of contract. But there are some banks that 
are doing it. The problem with it--if I can just quickly add--
is that it is in the fine print of a contract, usually and 
literally like the seven-size font. I am physically incapable 
of reading these things. It is in legalese that is very hard to 
    The typical sentence in some of these contracts will be 
over 200 words, and people just don't even know it is there. No 
one opts out. They opt-out rate is like 1 percent or less. It 
is like .01 percent. Nobody reads the fine print of contracts. 
There is a word in America for people who read every word of 
the fine print of their contracts. It is ``paranoid.''
    How many people in this room know whether their cell phone 
company chose the National Arbitration Forum or the American 
Arbitration Association? How many people know whether their 
cell phone contract requires them to do their case here or 
there? Nobody in this room knows those things.
    Mr. Johnson. All right. I understand. All right.
    Mr. Levin, you were champing at the bit wanting to get back 
in there.
    Mr. Levin. Yes, thank you, Congressman.
    Certainly with respect to the arbitration agreements that I 
am familiar with on behalf of consumer financial services 
companies, such as banks and credit card companies, we make 
sure that we do not----
    Mr. Johnson. Mr. Bland said he has seen eight in his----
    Mr. Levin. Well, but he also said that they were buried in 
small type, but certainly----
    Mr. Johnson. I am just talking about the opportunity for 
people to actually reject arbitration when they enter into 
their various agreements.
    Mr. Levin. Yes. We make----
    Mr. Johnson. Mr. Bland says he has seen it eight times in 
his 20-year career. How many times have you seen it?
    Mr. Levin. A lot more than that. I can't give you an exact 
number, but that represents agreements that may be in the hands 
of millions of people, because these credit card companies and 
banks have a lot of customers. The right to opt out of 
arbitration we always make sure is in boldface type, put right 
at the beginning, even before it describes our----
    Mr. Johnson. By ``we,'' who are you referring to?
    Mr. Levin. As a lawyer, advising a client.
    Mr. Johnson. Your law firm?
    Mr. Levin. As a lawyer advising a client how to structure 
an arbitration agreement. We urge them to put the right to 
reject right up front, distinguished by either capital or 
boldface letters.
    Mr. Johnson. Okay. Well, let me ask you----
    Ms. Sanchez. The time of the gentleman has expired.
    Mr. Johnson. All right. Thank you.
    Ms. Sanchez. I am sorry to say. It goes quickly.
    Mr. Jordan is recognized for 5 minutes of questions.
    Mr. Jordan. Thank you, Madam Chair.
    Mr. Levin, you said in your work, your presentation, you 
thought the judicial review process was pretty good. So 
elaborate on that. Try to help me understand the sharp 
contrasts out there, and how the review process does in fact 
    Mr. Levin. Well, I think what Mr. Bland is saying is that 
once you get outside the court system in to any alternative 
dispute resolution program, in a sense you are operating 
``technically outside the law,'' because there is not a court 
    But in fact, the United States Supreme Court and the vast 
majority of courts in this country, both State and Federal, 
have recognized arbitration as a very valuable and significant 
way of making sure that everyone has access to justice and 
making sure that the courts do not get overburdened and that 
the costs of reducing costs for both consumers and companies 
are reduced by reducing litigation costs.
    The companies try to write their arbitration agreements in 
a very fair and equitable way. They try to write them so that 
they will be enforced by arbitration organizations which have 
adopted formal due process standards and protocols and 
standards of fairness for consumers.
    As I mentioned in my introductory remarks, the consumer 
protocols that were prepared by the American Arbitration 
Association were done so with the input and very active 
involvement of many, many consumer advocate groups to make sure 
that what came out was something that satisfied everyone 
involved in this process.
    The courts also provide an important check and balance by 
making sure that if someone claims that an arbitration 
agreement is unfair, that agreement is scrutinized and 
scrutinized very intensely. If a court rejects an arbitration 
agreement, that to me shows that due process is working because 
it has gone through court review. Again, there is court review 
going in and some amount of court review coming out.
    But I think it is all of these elements coming together and 
coalescing that produces a system which, in the vast, vast 
majority of cases, works and works very well. I am sympathetic 
to Ms. Fogal's comments. I can't comment on them. I have no 
personal knowledge of them.
    But I can say in the vast majority of cases, the system 
does work and arbitration does produce fair results, and it has 
been endorsed by not only the vast majority of courts, but by 
virtually every State. Virtually every State has its own 
Uniform Arbitration Act, which is another system of arbitration 
in addition to the Federal Arbitration Act.
    Mr. Jordan. Mr. Bland, does your organization represent 
folks in arbitration cases situation or just in the courtroom?
    Mr. Bland. We have done some cases in arbitration.
    Mr. Jordan. As a public interest group, do you do a fair 
amount of educational work with consumers out there about the 
dangers of arbitration? Tell me about your----
    Mr. Bland. Mostly what we do is we provide training 
information to consumer lawyers and employment lawyers where 
they get an arbitration clause that in addition to sending you 
to arbitration, adds some other provision like it strips you of 
some of your rights under some statute or something like that, 
which is very common. We try and train lawyers in how to 
respond to those.
    A lot of consumers come to us because of what they googled 
on different issues relating to arbitration. They find us and 
come to us, so we spend a lot of time talking to individual 
consumers over the phone or who come into our office, but we 
don't have a true educational program.
    Mr. Jordan. Thank you, Madam Chair.
    Ms. Sanchez. Thank you. The gentleman yields back his time. 
Thank you.
    The gentleman from Massachusetts, Mr. Delahunt, is 
    Mr. Delahunt. Thank you, Madam Chair.
    This is a very interesting discussion, but let me go back 
to a point I think that was raised by Mr. Bland. We can talk 
about the size of the font. We can talk about national 
arbitration groups, whether it is the American Arbitration 
Society, et cetera. But I think we have to deal in the real 
    I think the point that you made, Mr. Bland, was how many 
people actually read the solicitation or the credit card 
agreement, 1 percent? I dare say it would be far less than 1 
percent. I mean, substantially less than 1 percent.
    So we can talk about due process. We can talk about the 
nuances and the rules of arbitration, the right to appeal, et 
cetera. But in the end, a credit card agreement is an adhesion 
contract between the parties. You either get a credit card or 
you don't, particularly when all of the credit card issuers 
have these clauses within them.
    It really comes down to, I believe, a public policy issue 
which, you know, I think is really worthy of great debate, but 
to talk, I mean, is there a Member on this panel that has ever 
read--Mr. Jordan? Mr. Cannon? Mr. Johnson? Ms. Sanchez?--have 
you ever read your credit card statement?
    Mr. Cannon. Absolutely not. [Laughter.]
    Mr. Delahunt. Is there anybody in the audience--please 
raise your hand? So, three.
    Mr. Cannon. Probably lawyers.
    Mr. Delahunt. I am a lawyer. I have never read that.
    Mr. Cannon. Paid to read it; paid to read it.
    Mr. Delahunt. Thank you. I will pay you. [Laughter.]
    I mean, the reality is that we are dealing with a subject 
that is esoteric at best; that simply creates a situation 
where, I don't know what the precise definition of an adhesion 
contract is, but it fits my definition.
    Then I think it is an issue of what we do as a Committee, 
as a Congress, where it is documented, where if it can be 
documented by solid studies that implicate a scientific 
methodology, that there are abuses relative to consumers.
    And by the way, small businesses dealing, and I would even 
go so far as to say the business-to-business arbitration issue 
ought to be reviewed. I dare say there are a lot of small 
businesses that don't have many options other than to accept a 
binding arbitration agreement from some single-source supplier. 
Is it fair to, you know, everyone in the business community? It 
really comes down to a question of fairness.
    I am sure, Mr. Levin, the documents that you draft are 
fair, are balanced, and the font is huge. It is right at the 
beginning, and it is probably in glaring red, but I have to 
tell you, nobody is reading it. That is the real world that we 
are dealing with.
    Mr. Cannon. Would the gentleman yield?
    Mr. Delahunt. I yield.
    Mr. Cannon. The question is really actually very 
interesting. This Committee certainly has jurisdiction over it. 
One of the problems is where we see a proliferation of 
standardized contracts. So for instance, have you ever bought 
software online and read the agreement that you have to say you 
    Mr. Delahunt. Of course not.
    Mr. Cannon. Absolutely not. [Laughter.]
    And may I suggest that what I think Mr. Levin is saying and 
others is that there are procedures that help protect consumers 
in the process.
    Mr. Delahunt. I would ask the Chair for an additional 2 
    Ms. Sanchez. The Chair will be generous and grant the 
gentleman from Massachusetts 2 minutes
    Mr. Delahunt. I thank the Chair for her generosity.
    Ms. Sanchez. Although I might add, it seems that there is 
enough interest to do a second round of questions, so perhaps 
that might be a better way to tackle that.
    Mr. Delahunt. I will defer to whatever the Chair rules.
    Mr. Cannon. If the gentleman would continue to yield, one 
of the really interesting things to do here, and our role is to 
be part of that process for creating a system that can work.
    Mr. Delahunt. Reclaiming my time.
    Mr. Levin, would you object to, you know, the choice of the 
arbiter, I think, is significant. How would you feel about 
legislation dealing with credit cards that would allow the 
consumer to select the arbiter? How would you feel about that?
    Ms. Sanchez. The time of the gentleman has expired, but I 
will allow Mr. Levin to answer that before we move on to our 
second round of 5-minute questions.
    Mr. Levin. In fact, I believe that National Arbitration 
Forum rules permit the parties to select an arbitrator who is 
not with the National Arbitration Forum.
    Mr. Delahunt. No, no, I am saying how would you feel about 
legislation that would allow, that would mandate in binding 
arbitration agreements by the credit card industry that the 
arbitrator will be selected by the credit card holder, by the 
issuer, not by the credit card company?
    Mr. Levin. All the agreements that our firm participates in 
drafting give the consumer the right. Now, we do identify the 
major national organizations because they have promulgated 
standards of fairness that we have confidence in. But we give 
them the right to choose which organization they would like. We 
are not trying to force them to choose one or the other.
    That is true even if the company initiates arbitration, we 
give the consumer the right to choose which organization. Once 
you are within that organization, there are all sorts of 
internal procedures that are in the organization's rules for 
choosing specific arbitrators, but we do try to give the 
consumer the right to do that.
    I think in terms of legislation, it would have to be 
drafted very carefully because it is a contract. You do want 
both sides, and this is something that both sides are supposed 
to agree upon. So the reason the company's names the AAA or the 
NAF is because you can get a copy of their rules; you know what 
they are supposed to stand for; and you can understand what is 
going to happen to you in arbitration.
    But within that context, we always give the consumer the 
right to choose.
    Ms. Sanchez. Thank you, Mr. Levin.
    We are now going to move on to our second round of 5-minute 
questions. I get to start. I have a couple of questions I have 
been dying to ask.
    Mr. Bland, according to proponents of mandatory 
arbitration, the courts rigorously protect consumers from 
unfair arbitration agreements. Are they correct? Can we not 
just depend on the courts to protect consumers from unfair 
arbitration clauses?
    Mr. Bland. If a company just has the arbitration clause 
that I talked about at the beginning, where they pick the 
arbitration firm who is going to give you basically a defense 
lawyer, I mean, that industry, as your decision maker and there 
is no judicial review other than the incredibly limited review, 
that is always enforceable.
    Now, if a company gets greedy and they start tacking on 
other things, not only do you have to go to arbitration instead 
of court, but also we are going to repeal the consumer 
protection laws of your State--which, by the way, is shocking, 
and a shocking number of companies do. Then you can go to court 
and fight it.
    I mean, my career is basically finding cases where we have 
been able to get some courts to strike down companies that 
added on these unfair bells and whistles to the arbitration 
    Some courts are striking them down. A lot of courts aren't. 
There are some courts in this country where they think there is 
such a strong Federal policy in favor of arbitration that they 
would enforce an arbitration clause of anything short of a gun 
to the head of somebody.
    The Connecticut Supreme Court upheld an arbitration clause 
that required this guy to arbitrate a case against an 
accounting firm where the arbitrators were partners in the 
accounting firm. And they said, well you know, just because the 
arbitrator might rule for the guy, they would each only have to 
pay $1,200 themselves, so they would never be biased by that.
    Can you imagine when they start offering judges $1,200 to 
rule for me? And the Connecticut Supreme Court unanimously 
said, no problem with that. I thought that was like the 
unlosable case. So yes, we win some cases when companies really 
rig the system. It is not like my entire career is going around 
losing cases, but there are a lot of cases where courts will 
uphold things that are shocking.
    Ms. Sanchez. The point is well-taken.
    Mr. Levin, if I could ask you, you are counsel and you deal 
with arbitration clauses. Do you ever urge corporations to 
select arbitration companies which structure arbitration rules 
in a way that favors the corporate clients that you have?
    Mr. Levin. No. There are really only a few major national 
organizations, so those are the ones we tend to think of 
because they have the published protocols, rules and 
procedures. Certainly, in our own clients' interests, we want 
to make sure that whatever rules we are suggesting are fair to 
both sides. So to the extent, do we look at whether it protects 
the company? Yes, but we also look to see whether it protects 
the consumer. It should be----
    Ms. Sanchez. Do you believe that they are absolutely 
equally balanced?
    Mr. Levin. I do.
    Ms. Sanchez. Ms. Fogal, I wanted to give you an 
opportunity, and I wanted to recognize something--as some of my 
colleagues here have talked about--consumers educating 
themselves about services that they may be buying and going to 
other places. I want to touch on that, but I also want to 
recognize that you have made a concerted effort to try to 
inform other future consumers about the bad experiences that 
you had with somebody.
    I appreciate that because I think a lot of people here 
would have just felt so defeated that they would have just 
walked away and kept their mouth shut. So I really do want to 
recognize the work that you are doing in terms of trying to 
help other people avoid that pitfall.
    Ms. Fogal. Thank you.
    Ms. Sanchez. Let's talk about the Houston housing market. I 
think you made a statement that all homebuilders in Houston 
have the arbitration agreements, so if you want to buy a home--
    Ms. Fogal. A new home.
    Ms. Sanchez.--a new home, you don't really have a choice of 
declining one because he has a mandatory arbitration agreement, 
and selecting some other new homebuilder. Am I correct in that 
    Ms. Fogal. Yes. Now, if you buy a home from someone else 
that is not a builder, or an older home, you can sue them. You 
can sue each other. You just can't sue a builder.
    Ms. Sanchez. Right.
    Ms. Fogal. That is how it is equal.
    Ms. Sanchez. So in that particular market, there really 
isn't another option. If you want to purchase a new home----
    Ms. Fogal. No. We had a representative from our State try 
to buy one and she couldn't find one.
    Ms. Sanchez. I am assuming, and I heard in your testimony--
and I don't want to add facts that are not in evidence----
    Ms. Fogal. That is okay.
    Ms. Sanchez. You talked about being senior citizens and 
wanting a home with an elevator and sort of looking ahead 
prospectively to the future. I have to imagine that probably 
one of the considerations that you put into buying a home was 
that you wanted a newer home that perhaps would not have the 
maintenance costs of an older home.
    Ms. Fogal. Exactly. No repairs.
    Ms. Sanchez. Unfortunately, you ended up in the exact 
worst-case scenario of that.
    I think I have finished my questioning, so I will now turn 
to Mr. Cannon for 5 minutes of questions.
    Mr. Cannon. Thank you, Madam Chair.
    Just following up on our discussion with Mr. Delahunt, let 
me just point out that one of the possibilities that we ought 
to consider as a Committee is standardized language that we put 
in statute, and then require people to explain the variations 
from that standardized language. Now, you might end up with 
lots and lots of explanations, but it is something we may want 
to consider as a Committee.
    I just wanted to follow up. The question about your 
attorney fees, I don't ask that to question the value of your 
services or the fees, but only to put into contrast the fact 
that there are huge attorneys' fees here. How much was the 
average benefit to each of the members of the class?
    Mr. Bland. The cash that the individual class members, 
because there were so many claims, the average is going to be a 
little over $25. Some people are going to get over $1,000, 
depending on what their damages were, but for most people it is 
going to be like $25.
    Now, the injunctive relief by cleaning everybody's credit 
reports and getting false information off, that is going to 
lower people's interest rate, so people are going to actually 
make a lot more money in terms of savings. But the cash is 
relatively low per person compared to the attorney fees, no 
doubt about it.
    Mr. Cannon. And that really is the core of the issue of 
what we are dealing with here. Is it better and, granted, for 
attorneys that are bringing these lawsuits, there is a loss, 
but is the system better off if people get robust and we have a 
market where people can understand what they are getting into 
and decide which bank or which cell phone company they want to 
use, or which builder.
    I had a builder that I actually thought I had blackballed 
because I reported his failures. And 3 years later, I saw him 
driving around in a truck with a new name. So we have to have 
some identifiers, especially on the high-end activity.
    But it just seems to me that the cost of the lawyering in 
these cases, the cost of the defense to companies, is great, 
but obviously in the particular case you mention, you got what 
sounds like a clear violation--24 percent promised, 30 percent 
charged--and people are getting money. I suspect that the 
effect of those costs in some of those cases where people had 
their credit smashed because they started bouncing checks 
because they didn't expect the higher interest rate.
    I have a very young son who just experienced his first 
cascading effect of overdrawing his account, $350 in fees later 
and a problem with his credit report, which I think we solved. 
He realized that a little mistake redounds to huge benefits to 
    This is not a defense of banks. It is not even a criticism 
of lawyers or the way you do business. As a society, are we 
better off with devices and methods and processes to protect us 
from the big fraud artists who build houses that are hundreds 
of thousands of dollars on the one hand, and protect us from 
companies who might cheat us by $50 here or there?
    But again, with those companies that cheat on cell phones, 
if you have a robust market, how much is it worth to a bank to 
cheat somebody out of $25 with a little higher interest rate? 
When people find out that they were being charged 30 percent, 
they tell all their friends that that bank is creepy, or that 
my cell phone was bumped up because of something I don't agree 
with and therefore--and we have all had I think some 
experiences for instance with texting and how the texting 
system works.
    At least I have had experience with my kids over texting. 
And you go with the $5 plan it doesn't cost you anything, but 
you don't do the $5 plan, you are at $400 or something like 
    So we have all these pickups in the market, but what 
happens when you starting saying, I don't like this cell phone 
company, because they hurt me by charging this horrendous 
amount. Well, that hurts the company more than I think the $25 
they gained in your case, or the $50 that you mentioned, Mr. 
Schwartz, in the case of cell phone companies.
    Our question is: How do we actually solve this problem in a 
way that doesn't enrich a class of lawyers, for instance, and a 
much higher cost to society by litigation which is expensive, 
which may have merit, but which for any individual who has only 
$25, as I said earlier, I have had dozens of--maybe not dozens, 
but it seems like dozens--of requests to join a class where 
there might be something like, you know, I look at it a and say 
how much could I have possibly lost, if I really lost something 
here, $25, $10, $2?
    So it seems to me that what we are dealing with here 
transcends the narrow parochial interests in how we structure 
ourselves so that we actually make this all work, because I 
don't think anybody on the panel is going to disagree that 
these costs get passed back onto consumers.
    Mr. Bland, is this not going to be a matter of 
    Mr. Bland. Actually, I do disagree because I think that 
what a lot of class actions do is a company will promise one 
thing and then charge something that is quite a bit higher. If 
you bring a successful class action, it forces them to keep to 
their promise to actually lower their prices back to what they 
originally promised.
    I think that Public Citizen, an organization, did a report 
last year around the successful tort reform bill to federalize 
all class actions, where they went through a series of 
industries and found that class actions actually lowered the 
prices of a lot of goods, because what was happening is you had 
bait-and-switch types of things where a company would promise 
one price, then charge something higher, and they already had 
the consumer on the hook. The class action caused them to go 
back to their honest price.
    Ms. Sanchez. The time of the gentleman has expired. I am 
    Mr. Cannon. I yield back.
    Ms. Sanchez. The gentleman from Georgia, Mr. Johnson, is 
recognized for 5 minutes.
    Mr. Johnson. Thank you.
    Mr. Levin, I hate to pick on you, but you provide me with 
some interesting material here, particularly the fact that your 
paper seems to be weighted down with information about 
empirical studies that have been conducted which would tend to 
support arbitration as being consumer-friendly and basically 
something that is pretty benign and fair.
    Yet, it appears that the firms that called for the studies 
to be done were actually from the business community that uses 
the arbitration clauses, and then the results seem to 
substantiate the version that you would expect that they would 
want to hear, and that is arbitration is a good thing.
    How could you respond to the assertion I believe, and I am 
not sure if it was Mr. Schwartz or Mr. Bland made about the 
selective samples that were used, the definitions that perhaps 
people use when they say ``winning,'' that kind of thing? How 
can you justify who paid for the studies and whether or not 
those studies were actually done in a way that would pass 
muster as far as a statistician is concerned?
    Mr. Levin. I think that the fact that a study might have 
been commissioned by a business does not mean that the outcome 
of that study was in any way influenced by the fact that it was 
commissioned. Businesses are frankly used to hearing the kinds 
of comments that Mr. Bland and Professor Schwartz have made, 
and are interested in trying to gather factual information.
    Mr. Johnson. You don't think that it would perhaps be 
    Mr. Levin. I would hope not. I think they are undertaken in 
good faith.
    Mr. Johnson. And you also don't think that who pays the 
arbitrators, who selects them and gives them their business, 
would probably be favored by the arbitrators themselves?
    Mr. Levin. No, I don't, because there is a difference 
between an arbitration organization and an individual 
arbitrator deciding a case.
    Mr. Johnson. Where does the arbitrator get their assignment 
from? Don't they get their assignment from the arbitration 
    Mr. Levin. There are usually panels of arbitrators' names 
and the parties through a process of give-and-take settle upon 
    Mr. Johnson. And the arbitration company pretty much is 
free to decide who the individual arbitrators might be?
    Mr. Levin. They have their own ways of doing that.
    Mr. Johnson. And if the arbitration company is owned by, 
say, the brother-in-law of the company that writes the contract 
imposing the arbitration agreement, don't you think that that 
brother-in-law is going to make sure that all of the 
arbitrators are friendly toward those who are paying the bills?
    Mr. Levin. I certainly don't know that to be the case, but 
there are safeguards built into the selection process for an 
arbitrator where disclosures have to be made. Most of these 
arbitrators, a lot of them are retired judges. A lot of them 
are very experienced lawyers on both sides of the fence.
    Mr. Johnson. Let me ask Mr. Schwartz to respond to that.
    Mr. Schwartz. I would just repeat the statement that Mr. 
Bland made. I think he is absolutely correct, that there is 
going to be a preponderance of industry lawyers as panels of 
arbitrators. Yes, the American Arbitration Association and 
these other companies have their system of choosing the seven 
arbitrators that you can pick from, and one is going to be 
worst than the next.
    The thing that I don't understand is that we hear from 
folks like Mr. Levin that arbitration is fair, it is fast, it 
is cheap, it is efficient, it is the greatest thing since 
sliced bread. What I have never understood to this day, in the 
more than a decade that I have been studying these, if 
arbitration is so great, then why do the companies have to say 
it is so great for you, Mr. Consumer, that we are going to 
force you whether you like it or not to accept it.
    Mr. Johnson. Now, let me stop you at that point and ask Ms. 
Fogal. Ma'am, when you first saw this home plan and thought it 
was so beautiful, you were so happy.
    Ms. Fogal. Right.
    Mr. Johnson. And then you went and signed the contract. Do 
you feel like you had a choice at that time of rejecting 
    Ms. Fogal. It was in my earnest money contract, and I could 
have not purchased the house. I could have not purchased a new 
home in Houston. My builder was on the Harris County Housing 
Authority, so I assumed he knew what he was doing.
    Mr. Johnson. Could you have purchased a house through any 
other builder in Houston?
    Ms. Fogal. Not without signing an arbitration clause.
    Mr. Johnson. Because all of the builders in Houston insist 
on arbitration clauses----
    Ms. Fogal. Arbitration clauses.
    Mr. Johnson.--and are mandatory in their agreements?
    Ms. Fogal. That is correct, sir.
    Mr. Johnson. Thank you.
    Ms. Fogal. You are welcome.
    Mr. Delahunt. [Presiding.] I am not Congresswoman Sanchez, 
but let me take the gavel and recognize the gentleman from 
Illinois, Mr. Jordan, for his time.
    Mr. Jordan. I am from the Midwest, but Ohio. [Laughter.]
    Mr. Delahunt. Anything west of Boston is west. [Laughter.]
    Mr. Jordan. Mr. Chairman, I went to college close to 
Illinois. In fact, I will start with Professor Schwartz because 
I was a University of Wisconsin undergraduate.
    Let me just ask this, and last night, my staff was 
together, and the 6,437 letters we have sent out for the best 
part of this year. They break it down by category, and we had 
hundreds of letters on immigration, on the Iraq war, several 
dozen letters on gas prices, as you might guess, but not one 
single letter, and I scan through the pages of the categories, 
and not one was on binding arbitration out of one of our 
    I appreciate and am sympathetic to Ms. Fogal, but just tell 
me how big a concern this really is? I mean, none of the 
constituents in God's country that I represent in west central 
and north central Ohio have taken the time to call their 
congressman about this. We have evidence suggesting consumers 
are pretty happy with arbitration when in fact they go there. 
So tell me a little bit more, professor.
    Mr. Schwartz. Thank you. I have to point out that I am 
always told that I live in Michigan, even though it is 
Wisconsin. I am in one of the ``M'' states in the Midwest.
    I think it is a very large problem. I think, as the 
Chairwoman cited a study at the beginning of her remarks 
suggesting that up to one-third of consumer contracts now have 
arbitration agreements. But it is one of those low----
    Mr. Jordan. If the contract has it, are consumers 
expressing frustration with it? Are they saying, ``Yes, this is 
terrible; I got a bad deal''? I have not heard it again, in 
letters and things we are sent. I have not heard it from our 
    Mr. Schwartz. We hear it in the cases. The thing is that 
litigation and arbitration both talk about things going wrong. 
You have a consumer transaction or an employment situation that 
has broken down and gone wrong. So that is not going to be 
every consumer transaction or every employment situation. But 
there are large numbers of them, and we hear about them through 
the cases that we study.
    The studies that suggest consumer satisfaction, the one 
that I am aware of from the Harris Interactive Group, which is 
cited to say that consumers are very satisfied with 
arbitration, it turns out that they mixed up both consumers and 
business arbitrations and they excluded from their sample any 
cases where a party was ordered into arbitration by a court. So 
again, you have a skewed sample that doesn't really deal with 
mandatory, compelled arbitration.
    The problem isn't necessarily a consumer who has a horrific 
experience like Ms. Fogal did. The problem could be the 
consumers who simply walk away from their cases. A small-dollar 
amount fraud that is going on on a massive scale will go 
unremedied because no one is going to pursue that claim and a 
class action is not allowed because of the arbitration clause.
    Mr. Jordan. I recognize that, and maybe that exists. But 
you would think at some point it would rise to the level that 
they would let their public officials know that, look, this is 
not a big deal; I didn't press it; but I got a bum deal. You 
would think that I would have heard about it. I just have not.
    Mr. Schwartz. I think the way that you would hear about it, 
the problem is that they haven't pursued the arbitration 
because the dollar amount was small so they didn't pursue a 
case and have a bad experience. The problem is they are going 
to have experience with is my credit card company ripped me 
off, and there is nothing I can do about it.
    Now, I don't know if you have been getting letters in your 
office with people complaining about banks and credit card 
companies and cell phones for small dollar amount rip-offs. If 
you haven't heard it, it may be the same problem there, that 
the effort of writing a congressman is not going to be sparked 
by the small dollar amounts, and yet you have a problem on a 
wide scale that just kind of stays at this low level of public 
    Mr. Jordan. Thank you.
    Ms. Sanchez. [Presiding.] Thank you, Mr. Jordan.
    The gentleman from Massachusetts, Mr. Delahunt, is 
recognized for 5 minutes.
    Mr. Delahunt. To pursue the line of questioning that Mr. 
Jordan had undertaken, let me submit an opinion and see whether 
you agree. I think part of it is we discussed earlier that 
people are unaware of the availability of arbitration.
    I think as you indicate, Professor Schwartz, in most cases 
it is a small-dollar item and it is not sufficient to pursue, 
to provoke that kind of interest. I dare say that if you are a 
member of the local government, if you serve on the city 
council or if you are a State legislator, the chances are that 
that is where you are going to hear it because it is very much 
something that is local in nature.
    But the question does I think go to another issue that I 
would like to explore--the relationship between the FAA and 
State law. I have a real concern about the federalization, if 
you will, the preemption of State consumer protection laws. I 
happen to be a conservative, a real conservative, one that 
embraces the concept of devolution and States' rights.
    I believe that when the Federal Government inserts itself 
in matters that are particularly local--and I am not suggesting 
that that was the case with you, Ms. Fogal--but please describe 
for us the relationship between the FAA--and I will start with 
you, Mr. Bland--and State law.
    Mr. Bland. The Supreme Court has held a number of times 
that the Federal Arbitration Act strikes down any State law 
that would limit the enforcement of arbitration clauses. There 
are literally 100 court decision or more in which courts, 
particularly Federal courts, have struck down a variety of 
different State consumer protection laws, State franchise laws 
that protect small business franchises and that kind of thing, 
provisions of them.
    In fact, there are splits between some courts in which some 
courts will find that the FAA reaches even further, but there 
are just a ton of cases out there in which courts have struck 
    Mr. Delahunt. Let me ask your opinion in terms of, isn't it 
time that we have a revolution in this country and respect 
States' rights, and acknowledge that----
    Mr. Bland. Can I give you an extreme example of this?
    Mr. Delahunt. Sure.
    Mr. Bland. I had my first case in the Supreme Court 1 1/2 
years ago. I lost. What the case was about was a case involving 
a payday lender and they were charging 500 percent to up to 
1,300 percent interest. We had a client that had 1,300 percent 
interest rate. Under Florida law----
    Mr. Delahunt. That is not its interest. [Laughter.]
    Mr. Bland. Right. They were wearing suits, as Tony does, 
but they were operating a storefront so it is different in that 
respect from the Sopranos. But it was a crime under Florida 
law, loans-harking. Anything that high was considered criminal 
    Under Florida law, the Florida Supreme Court said that any 
contract whose principal purpose is criminal, any agreement 
whose principal purpose is criminal doesn't form a contract, so 
you don't have an arbitration clause because it is embedded in 
this thing that is a criminal agreement.
    The Supreme Court struck this down. I lost. In the oral 
argument, Chief Justice Roberts said to the lawyer for the 
payday lender, gee, what if you had a murder-for-hire contract, 
some guy hires someone to go kill his wife, and it had an 
arbitration provision. Are you saying that Federal law would 
require you to enforce that?
    And the guy said, oh, well, that is very unlikely; how many 
murder-for-hires have contracts--you know, this kind of thing. 
He said, but yes, that is our answer; yes, that is our answer; 
yes, that is the answer. And that was what the Supreme Court 
did under Federal law. They wiped away basic contract law, 
contract law that is true in every single State was wiped away.
    Mr. Delahunt. Let me direct this to the Chair of the 
Committee. I think what we are hearing here is an encroachment 
on State contract law, consumer protection laws, that I dare 
say Congress has a responsibility to review, to examine, to see 
whether it is time to review the Federal Arbitration Act 
itself, and start to limit its encroachment on State policy.
    With that, I will yield back, unless you want to get into 
this, Mr. Levin.
    Mr. Levin. May I add just one comment, Congressman? Section 
2 of the FAA does preserve State law, because it permits a 
party to refuse to arbitrate or to oppose a motion to arbitrate 
on any ground that exists at law or in equity for the 
revocation of any contract, which means that if you think 
    Mr. Delahunt. If you are aware that you have an arbitration 
    Mr. Levin. No. What the FAA says is that any State contract 
defense that is applicable to contracts generally can be used 
to defend against an arbitration clause. As for people being--
    Mr. Delahunt. But you still have to go to binding 
    Mr. Levin. Well, not necessarily because you oppose that, 
for example, if a company files a motion in court to compel 
arbitration of a lawsuit that someone has filed, the judge will 
look at the defense of whether there are State law contract 
grounds that can be used to defeat the arbitration agreement. 
If the court--and several have--decided that this arbitration 
clause on some basis that arises out of State contract law is 
an unconscionable contract----
    Mr. Delahunt. I think I have an additional minute. Let me 
go back to Mr. Bland or Professor Schwartz.
    You have the position of the statement by Mr. Levin. Do you 
agree with the statement, and if you disagree with the 
statement, do we need to clarify the language in the FAA to 
accomplish what he is suggesting?
    Mr. Bland. If the courts--I am sorry. I was just going to 
say, if you believe in that, you know the phase ``the half-
truce''? That was like a one-tenth truce. Yes, there are 
certain State laws that the Federal Arbitration Act doesn't 
override, so if you have an arbitration clause it adds a bunch 
of things separate from arbitration, like a ban on punitive 
damages or repeal of the Consumer Protection Act or whatever. 
Then you have a good argument against that.
    But the basic core problem is Federal law overrides any 
States that deal with them. Yes, the Federal Arbitration Act 
completely squashes all kinds of State consumer protection 
laws. There are a few general contract laws that come out. That 
is basically what my jobs is, is finding the few places where 
you can get State law to beat an arbitration clause. But there 
are so many injustices that you can't touch, that it is 
    Ms. Sanchez. I believe the question was for Mr. Schwartz, 
so I want to give him a chance to respond.
    Mr. Bland. I am sorry.
    Ms. Sanchez. Your time has expired, Mr. Delahunt. I want 
you to know that.
    Mr. Delahunt. Again, I want to extend my gratitude for your 
    Ms. Sanchez. Mr. Schwartz?
    Mr. Schwartz. The courts have done a terrible job 
protecting State laws from preemption by the Federal 
Arbitration Act, a dismal job. So bad, in fact, that Justice 
O'Connor said, ``I am throwing up my hands.'' She wrote an 
opinion that Congress has to correct a mistake that we have 
made. She said that in a 1995 case. Things have not gotten any 
better. They have only gotten worse. More and more State laws 
are being preempted.
    As I said earlier, what is going to happen is there is 
going to be a major consumer protection gap because State 
consumer protection law is going to have huge holes in it if 
things continue to go in the direction that the courts are 
taking them now in interpreting the Federal Arbitration Act. 
You will either have unprotected consumers or you have the 
Federal Congress having to step in and fill this gap.
    Ms. Sanchez. Thank you, Mr. Schwartz.
    I am going to yield to my colleague, the Ranking Member, 
Mr. Cannon.
    Mr. Cannon. Thank you, Madam Chair.
    I just ask unanimous consent that we introduce four items 
into the record. One is a statement--I will just give a brief 
identification--on consumer arbitration; the second is State 
court enforcement of arbitration agreements; the third is a 
Harris study; and the fourth is called Outcomes of Arbitration: 
An Empirical Study of Consumer Lending Cases.
    If we could have those introduced in the record, I would 
appreciate it.
    Ms. Sanchez. Without objection, so ordered.
    I would like to thank all of our witnesses for their 
testimony today.
    Without objection, Members will have 5 legislative days to 
submit any additional written questions, which we will forward 
to the witnesses. We ask that you answer those written 
questions as promptly as you can because they will be made a 
part of the record.
    Without objection, the record will remain open for 5 
legislative days for the submission of any additional material.
    Again, I want to thank everybody for their time and their 
    This hearing of the Subcommittee on Commercial and 
Administrative Law is adjourned.
    [Whereupon, at 12:12 p.m., the Subcommittee was adjourned.]

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               Material Submitted for the Hearing Record


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                      Prepared Statement of NCCNHR
    Mandatory binding arbitration agreements are forcing American 
consumers in almost every avenue of commercial life to waive their 
constitutional right to seek redress in the courts when the products or 
services they purchase are defective and even dangerous. For thousands 
of American families with aging parents, mandatory arbitration 
agreements--included in the admissions contracts of nursing homes and 
assisted living facilities--compel them to agree to arbitrate the value 
of their mothers and fathers' lives if they are seriously injured or 
die from neglect or physical abuse by the facility's employees. Some 
admissions agreements even require families to waive their loved one's 
expectation of receiving the quality of services and safe environment 
that the nursing home contracted with the government to provide when it 
was certified for Medicare and Medicaid.\1\
    \1\ In addition to agreeing to mandatory arbitration, applicants 
for admission to many nursing homes are required to watch a video 
called ``Setting Realistic Expectations.'' The video is intended to 
waive facilities' liability by treating injuries as normal, unavoidable 
occurrences and getting family members to acknowledge risk and accept 
responsibility. For example, by signing a statement that they have seen 
the video, applicants acknowledge they know that ``residents are 
unsupervised a great deal of the day'' and may wander ``into a 
situation inside or outside the facility where there is a potential for 
injury.'' If residents refuse to eat because they don't like the food 
or are depressed, the facility will ``courteously encourage'' them to 
eat or drink but will not take responsibility for malnutrition or 
dehydration that occurs as a result--this responsibility once again 
rests on family members, who ``need to accept full responsibility for 
any failure of the resident to eat properly or drink enough fluids.'' 
(Researchers estimate that 40 percent of nursing home residents are 
malnourished and that many do not receive fluids on a regular basis 
because of critical understaffing and high staff turnover.) Likewise, 
families are advised that their elders in the supposed safety of the 
nursing home could be at the same risk of physical or verbal assault, 
neglect, and theft that they would be in the community since ``the 
nursing home simply cannot read the minds and consciences of all its 
employees'' to ensure that they will not abuse their charges.
  There is also a ``Setting Realistic Expectations'' video for assisted 
    Families usually have little choice in the matter and must accept 
the provider's terms. (Nursing home admissions, in particular, 
frequently occur after unexpected medical emergencies and under 
pressure from hospital discharge planners.) There are few options for 
long-term care in many rural communities, and options are often even 
scarcer for those who depend on Medicaid to pay part of their care. And 
just as options are limited when choosing a nursing home, there are 
often few or no good alternatives to transfer to if the quality of the 
care turns out to be bad.
    In 2002 and 2005, NCCNHR members voted overwhelmingly to approve 
resolutions asking the federal government to prohibit long-term care 
facilities from including binding arbitration clauses in their 
admissions agreements. Support for the resolutions stemmed from strong 
concern among consumer advocates across the country that long-term care 
facilities in most states can neglect and even abuse residents with 
impunity if residents and their families are unable to take them to 
court. Countless government studies have found that in spite of 
improvements in nursing home regulation and enforcement in the past 20 
years, state regulators still consistently under-cite the seriousness 
of deficiencies in which residents are harmed; levy fines that are 
little more than the cost of doing business for profitable 
corporations; and allow facilities to operate year-after-year with 
serious, repeat problems.\2\ The nursing home industry regards 
mandatory arbitration agreements as mechanisms to protect nursing homes 
from juries, who are less lenient that regulators when presented with 
evidence that vulnerable elders were victims of avoidable neglect and 
preventable abuse.
    \2\ See the most recent Government Accountability Office report, 
Nursing Homes: Efforts to Strengthen Federal Enforcement Have Not 
Deterred Some Homes from Repeatedly Harming Residents, March 2007.
    A book published by NCCNHR in 2006, The Faces of Neglect: Behind 
the Closed Doors of Nursing Homes, documents the gross neglect of 36 
long-term care residents in 10 states.\3\ We were able to document 
these cases because they were litigated. Through the discovery process, 
their attorneys were able to show the failure of nursing homes and 
assisted living facilities to provide even the most basic care to 
prevent these men and women from suffering from:
    \3\ The Faces of Neglect: Behind the Closed Doors of Nursing Homes, 
NCCNHR, April 2006.

          Multiple infected, painful pressure sores exposing 
        muscle and bone, often leading to amputations;

          Malnutrition, dehydration, and severe weight loss;

          Head injuries;

          Bruises and fractures from a physical assault by 
        another resident;

          Renal failure from severe dehydration;

          Extreme and often untreated pain;

          Sexual assaults;

          Gangrene and osteomyelitis;

          Multiple lacerations, skin tears, and abrasions;

          Strangulation on a privacy curtain;

          Second degree burns, exposing nerve ends, from 140-
        degree bath water;

          Disfiguring and extremely painful contractures;


          Broken leg; amputation of the leg; and broken neck 
        because of staff negligence, all in the same resident;

          Suffocation by choking;

          MRSA infection and multiple urinary tract infections;

          Brain poisoning from untreated dehydration; and

          Usually, death.

    When most families sign nursing home or assisted living admissions 
contracts, they have had no experience with how badly care can go wrong 
or how much suffering their parent or other loved one may experience. 
Many think that daily family visits, careful monitoring, and advocacy 
for their loved one will ensure good care, only to say later, as one 
California daughter did, ``We were there every day, and we still 
couldn't make a difference.''
    Consumers might voluntarily choose to arbitrate the purchase of a 
defective cell phone. Few would voluntarily arbitrate the suffering and 
death of their mother or father, because almost always, their mission 
is to expose poor care and deter future abuse.
    NCCNHR and its member groups are urging Congress to end the use of 
mandatory binding arbitration agreements in long-term care admissions