On May 5, 2009, the House Judiciary Committee’s Subcommittee on Commercial and Administrative Law held a hearing entitled “Federal Arbitration Act: Is the Credit Card Industry Using it to Quash Legal Claims?” The hearing focused on the use of arbitration clauses in credit card agreements and referenced the Arbitration Fairness Act of 2009 (H.R. 1020) a bill introduced by Congressman Hank Johnson (D-GA) in February. H.R. 1020 would prohibit predispute arbitration agreements for certain types of disputes, including consumer disputes, and would allow the courts, instead of the arbitrators, to determine the validity or enforceability of an arbitration agreement. Several members of the Subcommittee offered statements on the issue before hearing testimony from the witnesses.

Testifying before the Subcommittee were the following witnesses:

  • Michael D. Donovan, Partner, Donovan Searles, LLC and on behalf of The National Association of Consumer Advocates
  • Richard H. Frankel, Associate Professor of Law, Drexel University Earle Mack School of Law
  • Christopher R. Drahozal, John M. Rounds Professor of Law, University of Kansas School of Law and Chair, Consumer Arbitration Task Force of the Searle Civil Justice Institute
  • David Arkush, Director, Public Citizen’s Congress Watch Division

In his testimony, Mr. Donovan focused on the “abuses of the credit card industry” and offered examples of specific cases where his clients have had troubles with the practices of various credit card companies. Mr. Donovan also discussed his views on “the use of forced arbitration to deprive consumers of due process and access to the courts” and that “forced arbitration is, in fact, far more expensive for the consumer credit market and the U.S. economy in general.” Additionally, according to Mr. Donovan, “credit card class actions are essential for deterrence.”

Mr. Frankel also discussed the negative aspects of mandatory arbitration, specifically criticizing the “closed, opaque nature of mandatory arbitration.” According to Mr. Frankel, “forced arbitration stunts the development of legal principles because arbitrators are not required to give written reasons for their decisions and because their decisions do not create binding law.” Additionally, “the lack of meaningful review of arbitrators’ decisions, judicial or otherwise, reduces public confidence in the fairness of mandatory arbitration.” Mr. Frankel emphasized Congress’ role in reforming the arbitration system due to the “sweeping and overbroad preemptive reach” of the Federal Arbitration Act.

Mr. Drahozal discussed a new empirical study, entitled “Consumer Arbitration Before the American Arbitration Association,” issued by a task force of the Searle Civil Justice Institute, of which he is the chair. A summary of the report was attached to Mr. Drahozal’s prepared testimony. Using the empirical study as a source for his testimony, Mr. Drahozal focused on five issues: (1) the upfront costs to consumers of resolving disputes through arbitration; (2) the fairness of procedures in arbitration; (3) how consumers fare in arbitration; (4) whether arbitrators are biased in favor of repeat players (in this case, credit card issuers); and (5) the relationship between arbitration and class actions Mr. Drahozal stressed the importance of empirical evidence in making good policy decisions. His group is continuing its research in this area.

Mr. Arkush disagreed with the idea that arbitration provides a “quicker, simpler, less expensive forum in which to pursue disputes” or that it “provides consumers with cheaper credit.” Instead, according to Mr. Arkush, “[t]he real functions of forced arbitration are (1) to deter consumers from bringing claims at all; and (2) to give creditors a fast-track forum for collecting debts, even unlawful debts, in which they can run up additional fees to charge consumers.” Ultimately, Mr. Arkush would like to ban the practice of forced arbitration and supports the Arbitration Fairness Act.