Mandatory arbitration stacks deck against you

CONSUMING INTERESTS

December 23, 2007|By DAN THANH DANG

How many of you would give up your rights to get a cell phone that works, a car that runs properly, or a home repair that actually fixes what was wrong?

I'm betting most of you would object indignantly. But for years you've been signing away your rights to properly remedy any problems you may encounter with defective products and services without realizing it.

Almost every time you get a credit card, finance a car, get telephone service, sign up for insurance, take out a loan, take a new job or purchase any number of things, you're likely signing contracts with insidious mandatory arbitration clauses that force you to waive your rights to a jury trial.

Earl Ross, a 43-year-old graphic artist, found that out the hard way a couple of years ago after a contractor royally mucked up a hot tub installation at his Owings Mills home.

Ross paid the installer almost $8,000 up front to do the job, but when it was completed, Ross said he came home to a spa half-full.

"It leaked about 400 gallons of water every day into the foundation of my house," Ross said.

"I had to hire someone else to redo the job. The second said the first guy didn't install a pipeline correctly. The seeping water damaged my stairwell and cinder blocks, which I paid a waterproofing company $7,200 to repair.

"I also had to pay the second company $8,000 to fix the first guy's mistake," Ross said.

Believing he had a solid case against the first contractor, Ross contacted the Maryland Home Improvement Commission. The MHIC has a guaranty fund to compensate homeowners for actual losses due to poor workmanship or failure to perform a contract by licensed contractors. Homeowners who entered into contracts with licensed contractors can recover up to $15,000.

But the MHIC said it couldn't take his case because the contract he signed included an arb clause. Puzzled, Ross contacted consumer attorney Jane Santoni, who explained to him that the only way he could collect any money would be to sign up for private arbitration, a sometimes costly legal system that often favors defendants.

"I read the contract when I signed it, but I didn't really understand what it meant," Ross said. "I figured I wasn't going down without a fight. So I paid $900 for the administrative fee to go into arbitration. I also paid $900 for an arbitrator."

Had Ross been able to take the case to civil court, the filing fee would have cost $80. Worse, Ross' chances of prevailing in arbitration were slim.

In a report this year, Washington advocacy group Public Citizen found that in cases decided in California by a major arbitration firm over a four-year period, consumers lost 94 percent of the time. Why was the study limited to California? Because it's the only state that requires some disclosure of arbitration decisions. In other states, proceedings and verdicts are largely secret, said Paul Bland, staff attorney for Trial Lawyers for Public Justice.

"This is the single most important issue for consumers today," Bland said. "These arbitration clauses are popping up everywhere and the problem is that very, very few people are conscious of the issue. The vast majority of Americans don't read the fine print of contracts. Companies know that, rely on that and take advantage of that by slipping these clauses into the fine print."

" ... When you sign a contract with an arbitration clause, you forfeit your right to sue. If more people knew it stripped them of their rights, there would be a lot more angry people."

Back in the day, the Federal Arbitration Act was applied only to settle disputes between two businesses. Instead of duking it out in expensive court battles, the two Goliaths would let a seemingly neutral third party judge the quarrel.

In 1995, though, the U.S. Supreme Court expanded the act's scope to consumer cases. Soon, banks started adopting the clauses into contracts. In 1999, credit card companies followed suit. By 2001, all long-distance and cellular carriers joined the bandwagon, Bland said.

What started off as an admirable concept to avoid a proliferation of lawsuits has morphed into a system that stacks the deck against consumers.

Consider the reasons why:

Companies that write the contract get to pick the arbitrator. Consumer groups argue that arbitrators have a financial incentive to tilt the field in favor of companies. Arbitrators who favor consumers are often blackballed, Bland said.

Decisions from arbitrators, who do not have to be lawyers, are final and not appealable. There's no review of what the arbitrator does, even if they make a mistake of fact.

The decisions are secret.

Arbitration can be costly to consumers as shown by Ross' case. Often, however, a company will pay for arbitration as a way to avoid class action lawsuits.

In most cases, signing an arb clause is not voluntary. Cross one out of a contract or decline to sign and a business can refuse to do business with you. Just try to get a cell phone these days without signing such a contract.

In Ross' case, he decided his chances in arbitration weren't great, so his attorney tracked down the contractor's insurer and won a $7,200 settlement for Ross. He was also refunded about $500 from the arbitrator.

But all told, Ross still took a huge loss - more than $27,200, counting his attorney fees.

Make no mistake, this is not a defense of trial attorneys. I'm not an advocate of suing. But I support everyone's right to sue should it come to that.

If you feel the same way, you should contact your congressman. The U.S. Senate and House of Representatives have been holding hearings on mandatory arbitration clauses.

Let them know exactly how you feel about companies inserting despicable language into contracts that essentially repeal hard-fought-for civil rights and consumer protection laws.

Reach Consuming Interests by e-mail at consuminginterests@baltsun .com or by phone at 410-332-6151. Consuming Interests now is also a blog, at baltimoresun.com/consuminginterests.

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