No Suits Allowed (washingtonpost.com)

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No Suits Allowed

Increasingly, Arbitration Is the Only Recourse

By Caroline E. Mayer

Washington Post Staff Writer

Sunday, July 14, 2002; Page H01

Five weeks after Dawn and and their family moved into their

new $300,000 house in Austin, they moved out. Dawn says the house

had become so contaminated with toxic mold and volatile chemicals -- benzene

and formaldehyde and more -- that she and her then-16-month-old daughter

suffered bloody noses, rashes, dizziness, shortness of breath and

neurological disorders.

In March, nine months after abandoning their home and its contents, the

s sued the builder, Weekley Homes, seeking millions of

dollars for property damage, physical pain and mental anguish.

But they discovered they couldn't take their case to court. The six-page

construction agreement they had signed contained a clause that said all

disputes had to be resolved through binding arbitration.

" My husband and I are both college-educated, but we did not know that

signing a construction contract meant that we forever gave up our

constitutional rights to a trial by jury for any and all future disputes

with our builder, " Dawn said in a telephone interview.

Binding arbitration: It means that a designated third party will

unilaterally settle a suit -- no judge, no jury, no compromise as with

mediation, no right of appeal and often no public record. And the

s' case illustrates how such arbitration has penetrated everyday

life.

Until a decade ago, most arbitrations pitted two businesses against each

other over a contract dispute. Then arbitration spread to disagreements

between companies and their customers or employees, with contractual or

discrimination issues on the table.

Now, as the s' case demonstrates, private, third-party

adjudicators are being used to resolve many other types of claims, including

personal injury.

" In the old days, arbitration would not have covered personal-injury

claims, " said India , senior vice president of the American

Arbitration Association, the nation's largest arbitration provider. " These

would have gone to court. "

Earlier this year, for example, a Florida state judge ruled that the courts

cannot be the judicial forum for a father seeking damages from a travel

agency after his 11-year-old son was killed by hyenas while on an African

safari. Why? Before the trip, the boy's mother signed a liability release

that included a provision requiring that any future controversy or claim go

to binding arbitration. The father is appealing the judge's decision.

Arbitration is now everywhere: in employee and customer agreements with

banks, credit card providers, retailers, computer makers, exterminators and

long-distance telephone firms. They and others want employees and customers

to agree, in advance, to refer all future disputes to a third-party

arbitration firm, usually one selected by the companies -- all in the name

of avoiding protracted and costly court fights. In many cases, however,

consumers may find they still have to pay to have a lawyer represent their

interests.

Sign one of these agreements -- or continue to use a credit card, do

business with a firm or work for it -- and consumers and employees find they

have waived their rights to a court trial for any grievance that may arise.

Businesses say arbitration is a faster and more efficient way to resolve

disputes. Weekley Homes' general counsel, Burchfield, explained: " It

often takes two to three years to get to trial -- all while the homeowner

wants his home repaired. " And as the disputes linger, the house " may be

deteriorating into worse and worse condition, " he added. Arbitration can

solve a dispute within months and get any alleged problems fixed.

Opponents of mandatory arbitration argue that it also protects many firms

from large jury verdicts, particularly from class-action lawsuits. And, they

add, the process itself often stacks the deck against the individual.

Deriving from the same Latin root, " arbitrator " and " arbitrary " both do

suggest a certain amount of independence: Arbitrators can limit an aggrieved

individual's access to a company's documents, thus possibly reducing support

for the complaint. Arbitrations are decided in private -- hearings can take

place in a law office, a hotel room, the company's headquarters; they can

even be limited to an arbitrator looking over written materials, with no

personal appearances. Decisions are kept confidential, so consumers don't

necessarily learn what the arbitrator based a decision on. And many consumer

agreements call for the arbitration firm to be chosen by the company being

complained about.

Arbitration has been around for years, of course, one of the most common

usages being between unions and companies, with each side presumably

boasting considerable bargaining power. But pit a company against an

employee or a customer and the system is inherently biased in favor of the

company, said Cliff Palefsky, a San Francisco lawyer who has been

representing employees in their fights against mandatory-arbitration clauses

for the past decade.

" It's a modern-day version of separate but equal, " he said.

Palefsky cited an advertisement that the American Arbitration Association

ran in a legal journal: It boasted that 500 companies, such as FedEx Corp.,

Texaco Inc. and General Electric Co., have turned to the firm " for

innovative alternatives to costly, time-consuming litigation. "

" It's one thing to put an ad in a newspaper announcing general

availability, " Palefsky said, but another to advertise in a way that's

designed to appeal only to businesses.

Palefsky also said arbitration clearinghouses such as the American

Arbitration Association and the National Arbitration Forum consistently side

with companies in court disputes, filing briefs on their behalf. One such

filing by the association prompted complaints from two of its own

arbitrators, with one saying it destroyed the group's " hard-earned

neutrality. "

Arbitration supporters say such criticism is unfounded and simply a ploy by

trial lawyers like Palefsky to get rid of arbitration. " When trial lawyers

come into the arbitration process, their fees are diminished, " said the

association's president, K. Slate. " This is a matter of real

economic importance to them. "

Slate said the association has a roster of about 12,000 arbitrators; each

acts as an independent contractor. Two complaints in that context " is not

excessive, " he said.

As for the firm's advertising, companies " can write us in " their contracts

as the arbitration provider " one day, and write us out tomorrow -- it's no

skin off their nose. "

, head of the National Arbitration Forum, said his company

markets its services " more to the courts than anybody else, making everyone

know arbitration is a good way to get quick access to dispute resolution. "

" We market to lawyers in general and we pitch to legal-aid offices. We're

only too happy to have a case come from anywhere, " he said.

Few state or federal laws govern arbitrators or firms such as the American

Arbitration Association and the National Arbitration Forum, but as the use

of arbitration grows, some states are moving to create some regulatory

oversight. California is the furthest along, with the state legislature

close to passing a handful of laws to foster more openness and competition

in the arbitration process. The measures would regulate how arbitration

firms may solicit business and would bar companies from designating an

exclusive arbitration firm to handle all of its disputes. Hearings have also

been held in the Texas legislature.

The issue also has reached Congress, but most bills on the subject seek to

eliminate mandatory arbitration entirely and are deemed to have little

chance of passage -- with the exception of a measure that would bar

automakers from requiring their franchised dealers to take all disputes with

the car companies to arbitration. (Dealers would still be permitted to

require their customers to arbitrate disagreements.)

Arbitration officials say that no new laws or rules are needed because there

is plenty of oversight from state and federal courts. " The courts get to

take a bite of every arbitration twice -- before it happens a party can

argue the process is unfair, and then they get another bite after the

award, " said. " An opinion is issued almost every day now; the

oversight is intense. "

But the opinions vary greatly, with some courts upholding

mandatory-arbitration clauses, some not.

There are no firm numbers on how big the business of arbitration has become.

The American Arbitration Association is the only arbitration firm whose

finances are available to the public, because it's a nonprofit organization.

Last year, it administered more than 218,000 cases, a 10 percent increase

from 2000 and the seventh year that its caseload increased. Association

officials say less than 2 percent of the cases were consumer- or

employee-related; more than a third were no-fault auto insurance cases that

the group has been designated to resolve in New York, New Jersey and

Minnesota. Revenue last year was $83.1 million, up 3 percent from the year

before.

" In the last 10 to 15 years, there's been a significant change in the

business, " said Rocco Scanza, executive director of the Alliance for

Education in Dispute Resolution, a consortium of universities and

professional organizations with an interest in employment mediation and

arbitration. In the past, a lot of arbitration was done by volunteers,

Scanza said. Today, it's become a profession.

" That means you've got more good choices of people, and cases run smoother

and there's greater efficiency. But the flip side is that there are more

potential risks. As an arbitrator, you're going to get work as long as

parties choose to use you, and if this is your career or it makes up a good

part of your practice, then if you render a decision that is unpopular " with

parties that frequently use arbitration, they " may not choose to use you

again. "

This potential risk, which Scanza calls " the repeat-player syndrome, " does

not concern him as long as the decision to go to arbitration is voluntary

and between two parties with similar bargaining power. But Scanza worries

when consumers or employees have no choice but to arbitrate.

Arbitration firms say his fears are misplaced. The association " is an

administrative agency, " Slate said. " We don't decide the cases; the

arbitrators do, and they are independent contractors. "

, the association's senior vice president, adds that the organization

helps make the arbitration process fair. " We play a critical role in being

the buffer zone, setting up fairness rules, time limits. People would beat

each other to death like they do in court, " she said.

But arbitration critics say the rules set by the big arbitration groups, law

firms and other providers can affect the process and the outcome. " They are

essential to the process -- they create the rules, select a list of

potential arbitrators and, in the absence of an agreement of the parties,

can actually select an arbitrator. And they can rule for cause and dismiss

an arbitrator or a decision, " Palefsky said.

To help reduce the possibility of repeat-player syndrome, Scanza said

arbitrators must fully disclose any possible ties to either party before an

adjudication begins.

The major arbitration firms say they require such disclosure, and new

voluntary guidelines drawn up for the industry also seek greater disclosure

of possible conflicts of interest.

Most arbitration firms, including the American Arbitration Association,

applaud the guidelines, though Slate said, " We can't say all aspects apply

to us. " The rules are relevant to the small firms that accept and decide

cases, but in the association's case, he said, " we do not decide cases --

arbitrators do. We take ethics very seriously but should not be bound by a

process we're not engaged in. "

Similarly, the National Arbitration Forum's said that because it

doesn't have any contracts with companies (companies merely write its name

into consumer and employee contracts, often without the group's knowledge),

it doesn't need to disclose how many other cases it has handled involving

any of the arbitrating parties.

Slate said his association demands that its arbitrators disclose any

potential conflict of interest. But how much disclosure is enough? That's

the question now being debated in a Texas case that, like the s',

involves a homeowner against a builder. The homeowner charges that the

builder improperly prepared the foundation; the concrete slab broke in half

and the entire house started sliding down a hill.

The builder made repairs, but the homeowner tried to sue for monetary and

emotional damages. He was ordered to settle his complaint through the

arbitration association. A list of 10 adjudicators was sent to the parties,

and each was allowed to delete three names, narrowing the field to four. The

final selection was Houston lawyer Paxson, who forwarded his résumé

to both sides. The résumé said Paxson was a member of the Greater Houston

Builders Association and noted some law articles that he had written several

years earlier.

The attorneys for the homeowner, T. and Fair Woo, said

they didn't consider Paxson's membership in the builders association

significant because many lawyers in the area belong, so they agreed to his

selection. In the end, Paxson ruled for the builder.

Later the homeowner's attorneys discovered that Paxson was more than just a

member of the builders association -- he had also served as its legal

counsel for various proceedings. They also learned that while the case was

pending, Paxson was hired to write a brief arguing for a change in the law

the homeowner was using as the basis for his case against the builder.

Although the brief was submitted after the decision was made, court papers

indicate that Paxson made the same argument in testimony before the Texas

legislature while the case he was arbitrating was pending.

Paxson said he did not try to hide his legal affiliation with the builders

association; he said it was duly noted in one of the law articles listed in

his résumé. Additionally, he said, " if they had read the article, they would

have also found what my views were prior to the case. . . . I don't think

disclosure requirements call for me to disclose all my legal positions that

could be involved in an arbitration. . . . At what point do I disclose

enough? Every brief I have written over the last five years? "

District Judge Caroline Baker in County, Tex., vacated Paxson's

decision, saying his relationship with the builders association and his

preparation of legal briefs during the arbitration " are facts which to an

objective observer might create a reasonable impression of Mr. Paxson's

partiality. "

Paxson and the home builder are appealing that decision. Meanwhile, the

homeowner has now filed suit against Paxson and the arbitration association,

seeking triple damages under the state's consumer-protection laws, for

failing to provide a fair and impartial hearing as was promised under the

contract.

The association's declined to talk about the suit but said generally

that " we tell the arbitrator to make disclosures, but we can't get inside

their heads and live with their thoughts. " He added: " We encourage

disclosure in training, and obviously we want to ramp up our disclosure

efforts. "

The s' case will also be heard by an association arbitrator, as

called for under the Weekley Homes contract.

Weekley counsel Burchfield said company officials do not " believe we built a

toxic home. " Burchfield said Weekley's environmental tests showed no mold

contamination, although they did show a " marginal level " of a common

allergen.

Dawn said the common allergen that Weekley found was mold -- and

that subsequent tests she paid for showed far higher doses of the mold than

the home builder's tests showed.

is convinced she won't get a fair hearing. " We have not found a

single example of a single homeowner who's ever won against a builder in

binding arbitration, " she said. " Why would an AAA [American Arbitration

Association] arbitrator find in favor of the consumer when AAA is Weekley's

exclusive arbitration firm? If the arbitrator finds against Weekley Homes,

AAA will no longer be on the contract, and the arbitrator may be blackballed

from future work. "

had sought a court order barring arbitration, but the judge,

former state Supreme Court justice Rose Spector, ruled against her. Spector

said in court that she considered recusing herself because she herself is an

association arbitrator.

But Spector left a loophole for : While she ruled that

and her husband must go to arbitration, she said any claims brought on

behalf of their daughter could be heard in court because the little girl

didn't sign the contract.

© 2002 The Washington Post Company

http://www.washingtonpost.com/wp-dyn/articles/A64365-2002Jul13.html