Consumer Federation of California

Silvi Rider thought she was buying a brand-new Honda Accord. With interest and the trade-in of her used car, it cost her more than $35,000.

But she was stunned to discover that the car, which had 385 miles on the odometer, had previously been owned – meaning it was worth a lot less than she paid.

The dealer wouldn’t unwind the deal, so she tried to sue. Her purchase agreement required arbitration – a private alternative to the courts that proponents say is faster, cheaper and more flexible. Others say it raises concerns about fairness, even as it becomes pervasive in consumer transactions.

The arbitrator ruled against Rider, who said she lost thousands of dollars on the deal.

“This was clear-cut fraud,” Rider said. “I went in thinking I would have a trial, when it’s really like a kangaroo court. Arbitration is bought and paid for by the other side.”

When you buy a product, get a credit card, visit the doctor or start a new job, often you agree to binding arbitration if a dispute arises, giving up the right to a day in court. Once mainly for business squabbles, arbitration clauses have become ubiquitous in the fine print for all sorts of consumer transactions.

Now consumer advocates and a California legislator are pressuring arbitration companies to provide more information about how often they side with consumers or corporations.

“These guys are almost totally under the radar, working without any public oversight or regulations,” said Kevin Baker, deputy chief counsel for the Assembly Judiciary Committee. “Nobody knows the number of arbitrations being conducted, or how they are decided. There are more rules about who can be a plumber or a massage therapist than an arbitrator or an arbitration company.”

In fact, a decade-old California law already requires arbitration companies to post data on their cases online. The problem is that many don’t do it. A UC Hastings study found that only half post any data, and it’s short of what’s required.

“They are flouting the law,” said Assemblyman Bob Wieckowski, D-Fremont, who has proposed a bill, AB802, that would allow lawsuits against arbitration firms that don’t post case outcomes. “We’re not trying to get into whether arbitration companies are good or bad – just give us the data so we can check.”

Industry’s response

The arbitration industry said the proposed legislation would be overkill because it’s only some small companies that fail to post their results.

“The vast majority of California consumer arbitrations, about 95 percent, are done by JAMS (formerly Judicial Arbitration and Mediation Services), the American Arbitration Association or Kaiser’s independent administrator, and all of these organizations comply with the disclosure law,” said Donne Brownsey, a lobbyist for the California arbitration industry.

“JAMS is compliant with California’s consumer arbitration disclosure requirements,” the organization’s general counsel, John Walsh, said in a statement.

Consumer advocates say arbitration raises red flags. Corporations pick and pay for arbitrators, which lets them stack the deck by selecting those who are friendly to their interests, they charge.

But arbitration supporters say the companies are more like service bureaus that provide lists of arbitrators and space for the meetings. Details on individual arbitrators, including past cases and potential conflicts of interest, are disclosed, they said. While corporations often pick the arbitration firm, both parties in a dispute select the individual arbitrator, said Jennifer Barrera, policy advocate for the California Chamber of Commerce.

“A lot of safeguards are already in place, especially in California,” she said.

Another consumer beef: While many arbitrators are lawyers or retired judges, there is no requirement for them to have legal training, to follow legal precedents, to consider evidence – or even to issue written decisions.

“Arbitrators are perfectly free to ignore the law,” said Rosemary Shahan, president of Consumers for Auto Reliability and Safety, a Sacramento advocacy group.

Barrera disputed that characterization. “It’s an efficient alternative with the same rights and remedies afforded in the court system,” she said.

Investigation urged

Consumers for Auto Reliability and Safety was among seven advocacy groups, including the Consumer Federation of America, Consumer Action, Private Rights Clearinghouse and Consumers Union, that recently wrote to California Attorney General Kamala Harris, urging her to investigate private arbitration companies.

“Forced arbitration has become a shield against any accountability, undermining our nation’s system of justice and denying the public access to the courts,” the letter said.

“We received the letter and are reviewing it,” said Nicholas Pacilio, a spokesman for Harris.

Those who fear that “unscrupulous arbitration companies (might) gain an unfair advantage over their law-abiding competitors” by skewing results to favor businesses, as the letter puts it, point to a notorious case.

Ties to collection firm

The National Arbitration Forum was forced to exit consumer arbitrations in 2009 after lawsuits by San Francisco City Attorney Dennis Herrera and the Minnesota attorney general uncovered that it was partly owned by a hedge fund that also owned a debt-collection company that used it. The National Arbitration Forum pitched potential corporate clients, mainly credit-card companies, saying it would help them improve their debt collection rates, Herrera charged. His suit disclosed that of 18,075 California cases the forum handled from 2003 through 2007, only 30 were won by consumers.

Mel Dorin, a U.S. customs and border protection officer at San Francisco International Airport, said he tried to buy a new Chevy Volt from four California dealers, which each required that he sign a contract with an arbitration clause. He refused because he considers arbitration to be consumer unfriendly, and each dealer declined to sell him the car.

“I felt like I was living in a scene from ‘The Godfather,” he said. He plans to do whatever he can to keep his current car, which has 150,000 miles, running.

For Rider, a single mother who does medical billing work, losing her mediation case was devastating, she said. Her lawyer told her to stop payments, and the car was repossessed with her personal property inside. She couldn’t get to work. She has since moved in with her mother in San Mateo and bought an older Buick, bartering for some of the cost because she was so cash-strapped.

“I’m grateful to have wheels to get to work,” she said.

The system

What is it: A private alternative to the courts system, provided by for-profit companies.

Who uses it: Arbitration clauses are embedded in many consumer deals, including purchase contracts and employment agreements.

What’s the issue: Consumer advocates want arbitration firms to provide scorecards on case decisions. The firms say they provide information on each individual arbitrator.
Seeking details

California law already requires arbitration data, but not all companies comply.

Number of arbitration companies in California: 26

Number posting data: 11

Number with links that didn’t lead to data: 3

Number with no data: 12

“Among the firms that publish reports, important information is often missing,” including amount of claim, employee’s salary range and repeat customers, according to a UC Hastings report. “It is often difficult to understand the outcome of cases from the reports.”

Sources: UC Hastings College of the Law, Public Law Research Institute