Arbitration Under Fire

The growing use of arbitration agreemeents in contracts with consumers has drawn considerable criticism. Georgia State University College of Law Professor Mark Budnitz has been a leading critic of this trend. Local radio host and consumer advocate, Clark Howard, becomes almost apoplectic when hitting this topic, which he often does. A recent WSB-TV Consumer Investigation segment was highly critical of the arbitral process: A couple brought claims against the builder of their dreamhouse. The construction contract included an arbitration clause, and the arbitrator found against them. The homeowners' legal fees mounted, with the arbitrator alone charging $21,000 (the cost was split between the homeowners and the builder). Not only were the claimants angry at the cost of the process (and the outcome), the builder's lawyer has recommended that his client no longer require arbitration due to the expense. Interviewed for the story, but not commenting on the case at hand, Professor Budnitz commented that an arbitrator is not required to follow consumer protection law (or any law) when he or she decides a case. The American Arbitration Association declined to be interviewed for the story. To watch this WSB-TV Consumer Investigation, click HERE.

I imagine that there is a lot more to the story than could be covered on a short TV segment. For example, were the attorneys familiar with the process and how to maximize its potential benefits for their clients? Regardless, this is damaging PR for a process that is touted for being cheaper than litigation. Moreover, this was a construction arbitration case, a more traditional area for using arbitration.

In a related development, I was approached for a consultation recently on a dispute over the enforcement of an employment arbitration agreement. Non-union employment disputes are another area in which the use of arbitration has exploded and attracted criticism and increased scrutiny. The arbitral agreement in this case requires the employee and employer to split the costs of the arbitration, and the parties are fighting over the enforceability of this provision. The employee says the costs so exceed those of filing a lawsuit that the provision impedes his pursuit of his statutory claims. Usually, employers avoid this attack on arbitration by offering to pay the entire costs, and the AAA employment arbitration rules now require the employer to do so in a case like this. This employer doesn't want to do that, and since the agreement was entered into before the AAA changed its rules on who pays costs, the employer feels that the employee should be bound by the cost-splitting provision. Although the employer recognizes that it is bound to abide by the applicable AAA rules in force at the time of the dispute, it is planning to contest the ability of the AAA to unilaterally change rules that will affect the cost-splitting terms of the arbitral agreement already in force.