Justice for Sale, Part Two: Ignoring the Law
By: Will Carless
May 23, 2013
See Part 1 HERE.
See Part 3 HERE.
Graphic by Amy Krone
A 2008 lawsuit by the San Francisco city attorney alleged that one large private arbitration provider, the National Arbitration Forum, found against consumers 99.8 percent of the time in hearings between Jan. 1, 2003 and March 31, 2007.
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.v 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.
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