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This is the second story in our three-part series that looks at the extraordinary growth in mandatory arbitration clauses in contracts for everything from jobs to cell phones to medical care. Check out Part One and Part Three.
A decade ago, California lawmakers decided to act in response to a startling trend in consumer law.
Corporations across the country had increasingly been inserting clauses into their contracts that barred consumers from taking them to court. Instead, consumers who signed the contracts were limited to challenging the companies in arbitration, a privatized form of justice that some experts and attorneys say is often heavily biased in favor of companies.
Mandatory arbitration clauses were becoming a part of almost every consumer contract from cell phones to car rental to medical care. Employers were inserting mandatory arbitration clauses into their workers’ contracts, barring employees who challenged their dismissal from taking their hearings to court.
Concerned about the growing ubiquity of mandatory arbitration, the state Assembly’s Judiciary Committee put together an aggressive, bipartisan package of legislation aimed at protecting consumers. One of the key bills to come out of that effort in 2002 required arbitration providers to make public key information about the thousands of cases being heard by their private judges.
If arbitration was to become widespread, lawmakers at least wanted the process to be transparent.
But a decade later, as arbitration has expanded into almost every corner of Californians’ lives, this private world of justice remains as secretive as ever. Many of the providers of arbitration in the state have paid little or no attention to the legal requirement to provide data about their cases, and when companies do provide information, it’s almost always unwieldy and hard to find.
That’s prompted the Judiciary Committee to take a fresh look at its efforts to regulate arbitration. After a March hearing in which the committee learned that arbitration firms are frequently ignoring the law, the committee chairman introduced a new bill AB 802 proposing hefty fines for violations.
“We want to be very clear that if you don’t do this, here’s the penalty,” said Democratic Assemblyman Bob Wieckowski, who chairs the committee. “These people are flouting the law and they’ve got enormous power over people’s lives.”
By compelling arbitration firms to be transparent, lawmakers and academics hope to answer a key question: Is arbitration as biased as its critics say, or as fair as its proponents claim?
In addition to anecdotal evidence from attorneys and academics who complain that the system is an uneven playing field, consumer advocates got some stark proof of just how one-sided arbitration can be a few years ago.
One of the country’s leading arbitration providers, the National Arbitration Forum, was sued separately in 2008 by San Francisco City Attorney Dennis J. Herrera, and in 2009 by Lori Swanson, state attorney general of Minnesota, where the company is based.
The claims made in the lawsuits were extraordinary: Herrera said NAF was finding in favor of corporations in 99.8 percent of the thousands of cases brought before it. Perhaps even more shocking, Swanson alleged that NAF was actually owned by an investment group that also owned many of the companies its private judges were siding with in arbitration hearings. NAF denied all the claims against it.
Now, California attorneys, academics and lawmakers want to know if there are other arbitration firms operating in the state with similar records.
They hope the new legislation they’re pushing will finally provide the data they need to figure that out.
“The Legislature passes laws and they have no idea whether those laws are working,” said Cliff Palefsky, a San Francisco attorney who has been a vocal critic of mandatory arbitration for years. “This is the only way they can get the information they need to take corrective measures.”
‘I Don’t Know Where That Came From’
Victoria Walsh was confused.
“We don’t publish data and we never have. We very rarely release any data,” the communications specialist at arbitration giant JAMS told me on April 22. “I don’t know where that came from!”
Turns out that came from the California Legislature.
Section 1281.96 of the California Code of Civil Procedure requires companies like JAMS to put certain case information on their websites, including the name of the company being challenged, the name of the arbitrator who ruled on the case and how much the winning side received.
The law was introduced back in 2002. At the time, California was leading the country: No other state required arbitration firms to make their findings public.
Lawmakers wanted individuals and attorneys to be able to find out about the company that would oversee their hearings and provide the private judge who would decide their case.
They hoped the data would allow plaintiffs lawyers to avoid so-called “repeat players” — arbitrators who made a name for themselves as being business-friendly and received more work from companies as a result.
And by collecting data on arbitrations, more could be learned about how often plaintiffs win challenges against companies that have forced them into arbitration.
Two months ago, the Assembly Judiciary Committee discovered just how little attention was being paid to the law.
“Many firms simply don’t comply with the reporting requirements,” David Jung, director of the Center for State and Local Government Law at the University of California, Hastings College of the Law, told the committee.
Jung and his staff had spent months studying arbitration providers in California.
They had scoured the internet searching for arbitration firms doing business in the state and came up with a list of 26 companies. After investigating each one, Jung’s team concluded that about half the firms weren’t making any information public whatsoever. Of the rest, only one, the American Arbitration Association, even came close to meeting the legal requirements.
“It’s really shocking that they’ve just disregarded this legal obligation,” committee chair Wieckowski said. “How can I be confident and trust them if they’re not going to do their reporting?”
After hours of testimony, including from San Diegan Jon Perz, whose six-year journey through the world of arbitration has made him the poster boy for the case against mandatory arbitration in California, the lawmakers were left to ponder how to fix a clearly broken system.
The day after her flustered response to my requests for data from JAMS, Walsh called back.
She had been mistaken, she said, and would email a link to the information I requested.
Walsh then sent a link to a sprawling 3,000-page document that was missing much of the required information.
‘Show the People of California’
To tackle the problems uncovered in the March committee hearing, Wieckowski introduced a new bill: AB 802.
The proposed legislation broadens the type of information arbitration companies must share and requires them to make their data searchable, in an Excel spreadsheet or similar format.
Most significantly, the bill also proposes steep fines for companies that continue to flout the law: up to $25,000 per violation.
Wieckowski said the bill, which he hopes will be voted on before the end of the month, is facing strong resistance from the arbitration industry and business lobbyists.
[rtb-pushquote]”These people never wanted a reporting requirement anyway, and when they got one, they just ignored it for 10 years,”[/rtb-pushquote] he said. “Now they’ve come together to oppose this bill and it’s challenging my patience. I say to them, ‘If arbitration is so fair, if it’s such a good thing, then show me, show the people of California.’”
A May 20 letter from the American Arbitration Association laid out the provider’s case against Wieckowski’s bill.
It states that arbitration providers can’t meet the additional reporting requirements, since they don’t have access to some of the information required to be made public. And the letter argues that allowing consumers and public prosecutors to sue arbitration providers who don’t provide information would be problematic for the industry.
The creation of grounds for potentially frivolous lawsuits against a reputable and ethical arbitration provider, in concert with 18 additional data points that are either impossible to provide or are exceptionally onerous in aggregate will likely lead AAA and other organizations to cease administering consumer and employment arbitrations in California.
A May 14 letter to members of the Assembly from the California Dispute Resolution Council, an arbitration industry trade group, made similar points, and urged lawmakers to vote no on the legislation.
Jennifer Barrera, a policy advocate for the California Chamber of Commerce, said companies should be compelled to make their data public, but argued the proposed legislation goes too far.
“What AB 802 does is basically shut down arbitration,” Barrera said. “Maybe if you’re a company that hasn’t been reporting for an entire year, let’s talk about a penalty for that. But if you’re a company that got an isolated thing wrong, in all these numerous categories, and now I have to cease arbitrating, that’s pretty significant.”
The penalties in the legislation aren’t automatic, however. Rather, they are at the discretion of a court, something Alan Schulman, a law professor at the University of San Diego, said is an important distinction.
“Generally speaking, a judge charged with discretion is not going to give a fine where the indiscretion is trivial or inadvertent as opposed to an institutional failure to report,” Schulman said.
‘It’s Not an Unregulated Industry’
For veterans of the consumer arbitration world, it wasn’t news that the law has long been ignored.
“There’s really only two alternatives: one is they don’t know about the law that governs their conduct or they know about it and they’re simply not choosing to comply,” attorney Palefsky said. “Neither one of those is acceptable when you’re talking about the only place you can go to have justice dispensed.”
Representatives of the arbitration industry present at the March hearing acknowledged that companies need to abide by the law.
But they were also skeptical of whether forcing providers to publish their data would really reveal much about their business.
“It’s not an unregulated industry where anything goes,” Barrera told the committee.
Barrera said that arbitrators are required to disclose the reasoning behind individual rulings. And she echoed the point made in the trade group letter: that arbitrators must also disclose any potential conflicts that they may have before hearing a case.
But consumer advocates like Palefsky say that’s not the point.
Many consumers fight arbitrations on their own, without attorneys to enforce disclosure from arbitrators, he said. For those plaintiffs, the sort of data required by law, in a format they could easily search, would be invaluable, he said.
There are a host of other reasons why consumers should be able to research arbitration providers too, Palefsky said. The providers make the rules for arbitrations. If either party to the case wants to have an arbitrator dismissed for bias or any other reason, that’s the arbitration firm’s call.
And the arbitration provider makes crucial decisions on individual cases, such as who will pay the fees for the arbitration, he said.
There’s also the overarching reasoning for collecting this data: to give lawmakers, academics and anyone else a detailed view of the guts of the arbitration industry, to see whether it is functioning fairly.
To understand how crucial such information could be, it’s useful to look to the last time an arbitration firm was forced to reveal its statistics.
Consumers: 30; Corporations: 18,045
In March 2008, Herrera, the San Francisco city attorney, sued the National Arbitration Forum, one of the largest arbitration companies in the country.
Herrera accused NAF of running an “arbitration mill.” The company was non-neutral, biased and unfair, he claimed, and he had the stats to prove it.
According to its own reported statistics, NAF had held 18,075 hearings before arbitrators in California between Jan. 1, 2003 and March 31, 2007. Of those, consumers had prevailed in 30 cases. That’s a success rate of less than 0.2 percent.
Following Herrera’s lawsuit, Swanson, the Minnesota attorney general, also sued the company, which is based in Minneapolis. Swanson’s lawsuit claimed that NAF was owned by a massive hedge fund that also owned several of the companies that were routinely bringing cases in front of NAF arbitrators.
NAF quickly reached a settlement with Swanson agreeing to get out of the consumer arbitration business permanently.