Meet Sharon Kruse, a 63-year-old widow from Dundee, Michigan, and the US Chamber of Commerce’s latest poster child. Last month, Kruse headlined a new video the chamber released at a press conference devoted to preserving big business’ use of binding mandatory arbitration clauses in consumer and employment contracts. That’s the small print that forces people to waive their right to sue in order to get a cell phone or medical care or even a job. Such clauses require any disputes to be heard by a private arbitrator, usually hired by the alleged wrongdoer. Consumer advocates and many congressional Democrats have blasted the clauses for forcing people to give up their constitutional rights in exchange for ordinary goods and services, a practice they find not just unfair but un-American. Kruse, though, believes otherwise.
Filmed sitting on her living room sofa in Michigan, she tells how she scored a major consumer victory thanks to mandatory arbitration. In her grandmotherly, Midwestern way, she explains that for 27 years she had maintained regular contracts with Sears for annual service of her home’s boiler. But in 2006, Sears paid for the standard cleaning and maintenance but refused to cover some additional repairs. Kruse was upset, but, after reviewing her contract, realized she could take the company to arbitration over the disputed charges. Kruse talks about how easy it was, how she could do it by mail, and how after paying a $25 fee she won an award against the company. “I thought ‘Oh, by George, I won!’ This made me feel really good,” she says.
Her winnings? A whopping $281, plus the arbitrator’s fee. Kruse concludes that without arbitration, “The normal person just wouldn’t be able to do that. They’d have to hand it all over to some lawyer to speak for them.” She says that arbitration is “a convenient and fair way to go at your problems. It would be not right to take that right to arbitrate away.”
Kruse’s story is designed as an antidote to a year’s worth of arbitration horror stories that have played on Capitol Hill since the Democrats regained control of Congress. Democrats have held hearings related to nearly a dozen bills currently pending to ban mandatory arbitration clauses in contracts governing everything from meatpacking to the employment of military reservists. Some of these bills are even supported by Republicans, including Ken Connor, a Virginia lawyer who represented Jeb Bush in the Terri Schiavo case, and Sen. Mel Martinez (R-Fla.), who cosponsored the most recent bill to ban arbitration clauses in nursing home contracts. The slew of public hearings, complete with compelling victims, has put a big black eye on the practice that the chamber hopes Kruse will counter with her down-home message.
Her story is cute, for sure, and her consumer activism would make Nader proud. (She did not return calls for comment.) But after watching the video, I had to wonder: With all the money and resources available to the world’s biggest business lobby, is this the best they could do? Because the disputes forced into mandatory arbitration these days often involve a lot more than $281, and the fate of the plaintiffs in those disputes is frequently far more dire, as many have told Congress over the past year.
For instance, in June 2007, Texas grandmother Jordan Fogal testified before the House Subcommittee on Commercial and Administrative Law about the new house she and her husband purchased in 2002 for $360,000. The day after they moved in, her husband tested out the new Jacuzzi on the second floor. After finishing his bath, he pulled the plug on the tub, which promptly sent 100 gallons of water gushing into the living room below. The builder, it turned out, had failed to connect the tub drain. Fogal would later learn that the new home needed $150,000 worth of repairs—fixes that the builder steadfastly refused to make. Thanks to windows installed upside down and an utterly defective roof, the house became uninhabitable, and the Fogals eventually had to let the house go into foreclosure.
Despite clear evidence of fraud by the builder, Fogal was unable to sue to recoup her losses. Her sales contract contained a clause requiring her to submit any claims over the home to mandatory binding arbitration. The arbitrator came from the American Arbitration Association, a private group preselected by the builder. As a private justice system, AAA charged Fogal for every last piece of paper, meeting, and subpoena generated in arbitration, not to mention the arbitrator’s time, which ran as much as $475 an hour. It even charged her for renting the room where the arbitration took place. In 2006, the arbitrator awarded the Fogals a mere $40,000, even after finding that the builder had engaged in fraud. Adding insult to injury, she then ordered the Fogals to pay the builder $14,000 for some of its legal fees for the trouble they caused the builder.
The net award didn’t come anywhere close to the losses the Fogals had incurred, much less the cost of the arbitration itself. “This last year, arbitration cost us over $30,000 dollars,” Fogal testified. “Three years have passed. We have not had a Christmas tree; we have not grilled out; we have no garage; 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…We have been treated worse than dogs and forced to chase our tails in a circuitous route to nowhere. Arbitration is the most disheartening, disgusting, and disillusioning thing we have ever been through…Arbitration is like a metastasizing cancer, spreading throughout this county, infecting our lives and our families.”
The business world, which has racked up a string of favorable rulings in the Supreme Court upholding the use of arbitration, seems caught off guard by the Democrats’ legislative maneuvering to help people like Fogal. But corporate America is not about to watch its favorite “do-it-yourself-tort-reform” tool disappear without a big, expensive fight. That’s what the chamber’s April press conference was all about. But the chamber’s counteroffensive, and its use of Kruse as a headliner, also suggests that the nation’s biggest business group is in a bit of a bind when it comes to defending arbitration.
The only real way to counter stories like Fogal’s is not with Kruse’s $281 victory, but with someone who won $281,000 or $2.8 million in arbitration, something comparable to a significant jury verdict. Those people, I suspect, are few and far between. After all, arbitration firms market their services to big businesses specifically as a way of reducing their legal liability and preventing the “million-dollar lawsuit.” (Some arbitration clauses specifically ban the award of punitive damages, for instance.) In addition, major arbitration victories by consumers or employees tend to be extremely short-lived. Despite U.S. Supreme Court rulings that severely restrict the ability of people to appeal arbitration awards, big businesses nonetheless have quite a bit of success overturning those rare cases they do lose.
A new study by Michael LeRoy, a labor and employment law scholar at the University of Illinois law school, found that state courts only uphold awards in 57 percent of all arbitrations won by employees, while they confirmed 87 percent of the awards for businesses. LeRoy told the National Law Journal last month that “Corporations are repeat players in either the employment or credit card arbitration systems and they learn the system. Even if they lose, they are smarter about how to make the system work to their advantage. In any given dispute, they go up against a one-shot player.”
In early May, the Texas Supreme Court overturned an $800,000 arbitrator’s award given to Jane and Bob Cull, a couple who’d bought a defective house from homebuilder Bob Perry. Perry has given millions of dollars to Republican political causes and helped underwrite the Swiftboat Veterans for Truth, whose media campaign derailed John Kerry’s presidential bid in 2004. Perry’s company has aggressively used mandatory arbitration clauses in building contracts to avoid litigation over alleged construction defects. But when the arbitrator made the rare ruling against him, Perry refused to pay. He appealed to the state Supreme Court, where he and his family had donated more than $260,000 in campaign contributions to all nine sitting justices. The court sided with him, and the Culls are out hundreds of thousands of dollars in repair and legal costs.
Even if the chamber could find some big-ticket consumer victories in arbitration, they probably don’t want to promote them. After all, that would entail bad PR for one of their members caught defrauding or otherwise injuring someone. So instead, the chamber has chosen to reframe the debate by focusing on tiny awards like Kruse’s. While the move smacks of desperation, there is a kernel of genius in it. The chamber has smartly tapped into a real American pet peeve, which is getting nickeled and dimed by big companies.
At its April press conference kicking off a counterattack against the “trial lawyer assault on arbitration,” the chamber released the results of a new survey it commissioned designed to prove that Americans actually love being forced into private arbitration. Conducted by Joel Benenson, Barack Obama’s pollster, along with a Republican counterpart, the survey claims that “71 percent of likely voters oppose efforts by Congress to remove arbitration agreements from consumer contracts.” But the survey also shows that Americans don’t think too highly of many of the chamber’s big donors, either. Most of the voters polled think they have virtually no chance of resolving a dispute with a company. Of course, Kruse notwithstanding, mandatory arbitration won’t change that, and in fact, it usually impedes real consumer-instigated change of corporate behavior.
Companies like Sears are more than willing to cough up $281 in small disputes with people like Kruse because arbitration clauses facilitate much bigger rip-offs. Here’s how it works: Let’s assume, hypothetically, that Kruse’s case is not an isolated one. Let’s say Sears has been gypping lots of people on boiler service contracts, maybe even every single one of its customers in the state of Michigan. While the arbitration clause in the service contract may allow Kruse to reclaim her $281, most of Sears’ victims probably won’t go that route. They’ll just eat the relatively small loss, while Sears ends up with a huge windfall.
Meanwhile, standard arbitration clauses these days would prevent Kruse from joining with other similarly aggrieved consumers in bringing a class action to force Sears to stick by the terms of its contract for all of its customers, not just the ones who complain, and to disgorge some of its ill-gotten profits. Such a suit could result in sizable damages, not to mention legal fees. The chamber has spent the last 10 years trying to get rid of these kinds of suits, and arbitration clauses have been a useful tool in that regard. That’s why businesses are so eager to preserve them.
Despite the weak elements of its new defense campaign, the chamber remains a formidable lobbying force in Washington. Already, it’s persuaded the Washington Post to take up its cause. In mid-April, not long after the press conference, the Post editorialized against the passage of the Arbitration Fairness Act, arguing that it “goes too far” in limiting an alternative to litigation, an argument straight from the chamber’s talking points.
But the chamber is still working with a bad set of facts that is only getting worse. Last month, for instance, the San Francisco district attorney sued one of the country’s biggest arbitration firms, the National Arbitration Forum, for unfair and unlawful business practices. The suit challenges the NAF’s claim to being a neutral arbiter, stating, “NAF is actually in the business of operating an arbitration mill, churning out arbitration awards in favor of debt collectors and against California consumers, often without regard to whether consumers actually owe the money sought by the debt collectors. NAF’s arbitration process is the antithesis of fair…according to NAF’s own disclosures, in NAF arbitrations involving claims by business entities against consumers that were disposed of by hearing in California, the NAF arbitrator decided in favor of the business entity and against the consumer 100% of the time.” (Emphasis in complaint.)
More recently, the Second Circuit Court of Appeals reinstated an anti-trust class action against Bank of America and a host of the country’s biggest banks alleging they illegally colluded to force cardholders to accept mandatory arbitration provisions in their credit card agreements. The lawsuit seeks to void the arbitration agreements in millions of credit card accounts. If it’s successful, it might accomplish part of what trial lawyers and consumer advocates are seeking in Congress.
Such stories are chipping away at the chamber’s assertions that arbitration is “faster, fairer, cheaper” than going to court. What really might sink the chamber’s new campaign, though, is its false premise that if Congress bans mandatory arbitration, consumers will be left defenseless. Indeed, even Kruse had a few other options available to get her money back from Sears without arbitration, namely complaining to the Better Business Bureau, of which Sears has been a member since 1926. As a BBB member, Sears is obligated to respond to her complaint to remain in good standing, and the BBB offers its own mediation services, free of charge. She wouldn’t have even needed a lawyer.