Process of transparency in consumer arbitration receives scrutiny

150 150 Matthew Grant Anson

(photo credit: Lois Elling)

If you’ve ever signed a contract to buy a car, chances are that tucked somewhere at the very bottom of the page, in eight-point font, is a stipulation that forbids you from suing the company should your brakes fail.

Instead, you and the company will duke it out in arbitration court, a type of private justice system that is becoming more and more common as businesses place arbitration clauses in contracts specifically to prevent lawsuits. Considering how prevalent arbitration has become, it has the potential to affect every single Californian that will ever make a major purchase.

As such, it is critical for the process to not only be fair but transparent. The parallels here to other issues of transparency in state government are illuminating.

“We did an oversight hearing in February to look at how the arbitration companies are complying with this law that’s been in existence for 10 years,” deputy chief council of the Assembly Judiciary Committee Kevin Baker said. “We asked the Hastings Institute to conduct an examination of how the compliance has been as far as what info they’re reporting: are they reporting it completely, accurately, that kind of stuff.” 

The study concluded that there were significant problems with the transparency process, says Baker. “It became clear that the companies were not complying with the law,” he said. “There’s no penalty. There’s no enforcement mechanism. You can violate the law with impunity.”

Faced with the reality of an allegedly ineffective and unenforceable transparency law, Assembly Member Bob Wieckowski introduced AB 802, a bill that would have shored up existing law and placed heavy fines on companies that violated the mandates. “We tried to address that by putting some teeth in the bill so there would be an option for enforcement,” Baker said. “The arbitration companies objected to that. They didn’t want any teeth, that’s for sure.”

The objections carried enough weight that eventually the bill’s support base began to crumble, leading Wieckowski to withdraw it two weeks ago and wait until January to reintroduce it to the Assembly.

Cliff Palefsky, a San Francisco lawyer specializing in employment law and civil rights, says there’s no doubt that arbitration companies aren’t complying with transparency law.

“The study done by the Hastings people is pretty specific,” Palefsky said. “There is no doubt that the law needs to be modified and given some teeth. It wasn’t fulfilling its purpose.”

However, arbitration companies contend that the information required for release is of no value to consumers or the public, and that AB 802 would have exposed them to frivolous lawsuits on the basis of simple clerical errors. Doug Noll, president of the board of directors at the California Dispute Resolution Council, stresses that arbitrators are in favor of transparency, but it has to happen the right way.

“We favor transparency in arbitration in terms of disclosures and arbitration companies disclosing information about arbitrators,” Noll said. “The problem with AB 802 was it created a whole new cause of action. It created a right to sue if a provider failed for whatever reason to put the info on the website in exactly the way the bill wanted. That would kill arbitration in California.”

Paul Dubow, a San Francisco arbitrator and mediator that chairs the Legislative Committee of the CDRC as well as sits on the board, says that the information required is also of no use to a consumer, because a consumer just wants to know if they have a fair arbitrator. “It doesn’t really tell the parties what the way to know,” he said. “They can’t tell that from this report. All they know is the number of times someone won or lost in arbitration with that organization – they are more interested in the arbitrator, not the provider.”

The loss of support caused Wieckowski to withdraw the bill. “Rather than have the bill fail, we decided that we would put it on ice and have a chance to come back and reengage in January and see what the performance of arbitration companies has been since the hearing,” Baker said. “We’re going to have to make some compromises.”

Comments from Noll and Dubow also inspire optimism in the idea of a bill being agreed upon eventually. “The bill is 90 percent acceptable,” Noll said. “I don’t think anyone disagrees that there should be transparency.”

“We’re willing to do a reasonable bill,” Dubow said. “We’re willing as long as it’s a reasonable method.”

This story contains many parallels to other issues of transparency we follow here at California Forward. There has been much talk of modernizing the Brown Act, of it not having any teeth or any enforcement mechanism. The same concerns of how it would be enforced and what the additional costs would be, both procedurally and financially are raised.

It also parallels the issue of pension data being widely available and searchable for the public. The same concerns expressed here very closely resemble the back and forth between CalPERS and those representing the retirees’ interests. Just how much does the public have the right to know and do policymakers have the right to tell them what they would like to know?

We are champions of transparency increasing accountability at any level of government, whether it is pension data or consumer arbitration. We are encouraged that despite differences in both sides, there is a move toward compromise in the name of transparency. It’s our hope that this case can be a model for the others if AB 802 does in fact pass as a version satisfactory to all of those involved.


Matthew Grant Anson

All stories by: Matthew Grant Anson