Stuck in a Bind: Can the Arbitration Fairness Act Solve the Problems of Mandatory Binding Arbitration in the Consumer Context?

J.D. Candidate, The University of Iowa College of Law, 2009; B.A., Brown University, 2001. I would like to thank Professor Edward Brunet for his comments and suggestions and the editors and writers of Volumes 93 and 94 of the Iowa Law Review for their efforts in guiding this work though the publication process. I would like to give a special thanks to Gretchen Lewis for her love, support, and patience throughout this endeavor.

I. Introduction

Hardly a day goes by without the average American consumer talking on a cell phone, or making a credit- or debit-card purchase. Ask a passerby on the street, and he is likely to tell you that he cannot imagine life without these everyday conveniences that were rare or unheard of a generation ago. However, along with these new conveniences, many consumers receive something they did not bargain for-mandatory binding arbitration.

Consumers are likely to encounter mandatory binding arbitration for products beyond credit cards and cell phones. In transactions for home loans, car loans, personal accounts, gym memberships, exterminator services, computers, goods on eBay, prizes in fast-food-restaurant contests, and a variety of other products, companies frequently require mandatory binding arbitration.1 In all, over 1000 companies include mandatory binding arbitration in routine transactions.2

While mandatory binding arbitration is not unique to the consumer context,3 consumer arbitration has been particularly controversial.4 Critics of consumer arbitration point out its many problems for consumers and society. These problems include high fees, a lack of due-process safeguards, unequal bargaining power, arbitrator bias toward the business, the bar of class-action suits, potential private usurpation of the roles of the judicial and legislative branches, and society's inability to make good policy decisions going forward because of a lack of information.5 On the other hand, defenders of mandatory binding arbitration argue that it is a cheaper, quicker, and fairer way to resolve disputes,6 and that the cost savings it generates ultimately benefit consumers.7

A quick search of the popular press demonstrates that there is an abundance of anecdotal evidence documenting the horror stories of mandatory binding arbitration for consumers. For example, without even knowing that there was an arbitration hearing, Beth Plowman had an arbitration judgment of over $27,000 entered against her for credit-card charges that an identity thief accrued.8 Stories like this illustrate dramatically the problems of consumer arbitration-problems that consumer advocates and academics are trying to highlight with their work.

The plight of individuals entangled in mandatory binding arbitration and the resulting outcry of critics have caught the attention of legislators. Over the last decade, a variety of bills have been introduced in Congress to curb mandatory binding arbitration in various contexts.9 These bills have typically died with a whimper, killed in committee without so much as a hearing.10 However, the 2006 elections brought a shift in power to Washington and with it a renewed effort for legislative change on arbitration policy. Advocates and legislators have rallied around the Arbitration Fairness Act, a bill originally introduced in 2007 by Senator Russ Feingold (D-WI) and Congressman Hank Johnson (D-GA)11 and reintroduced in nearly identical form by Congressman Johnson in 2009.12

This Note critically assesses the Arbitration Fairness Act to determine if it is the best way to achieve the consumer-arbitration reform that advocates and academics have championed. Part II of this Note highlights the convergence of factors behind the rise of mandatory binding arbitration. Part III explores the problems for consumers and society created by the widespread use of mandatory binding arbitration. Part IV describes the potential options for correcting the problems of mandatory binding arbitration and assesses their efficacy. Part V details and analyzes the likely congressional approach to addressing mandatory binding arbitration, as represented by the Arbitration Fairness Act. Part VI argues that the Arbitration Fairness Act approaches consumer protection through disclosure; it concludes, however, that the bill fails to require critical substantive disclosures that are necessary to protect consumers from the full range of problems associated with mandatory binding arbitration.

II. The Rise of Consume...

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