Volume 4.1

Even in Victory: Darcy Ting Defeated AT&T, Yet the Consumer-At-Large, Again Has Lost

By: Eric Weiner

I.   Introduction

                  Recently,[1] binding arbitration clauses have become a routine component of nearly all consumer service agreements.[2] These types of agreements, such as telephone long-distance contracts,[3] generally do not involve arm’s length negotiation, but instead apply a “take-it-or-leave-it” basis,[4] creating contracts of adhesion.[5] In the 1990s, government officials began to investigate these clauses as they discovered that unconscionability and adhesion issues arise most often in regard to arbitrability.[6] Such “boilerplate provisions raise particular fairness concerns, since they replace the right to go to court with a private adjudication system of which the consumer . . . may be unaware until she seeks legal redress.”[7] While the state and federal legislatures and the legal community agree that the speed and economy of arbitration may be beneficial to all parties involved, the private arbitration process has increasingly fallen short of parties’ reasonable expectations of fairness while substantially impacting consumers’ substantive rights and remedies.[8] The American courts have begun to hear numerous issues concerning the potential problems raised by arbitration agreements in consumer contracts including,[9] amongst other things:[10] (a) awareness of the arbitration agreement and of waiver of the right to trial; (b) access to information about the arbitration program; (c) the independence and impartiality of decision-makers, and of the administering institution; (d) the quality of the process and the competence of arbitrators; (e) the cost, location, and time frame of arbitration; (f) the right to representation; (g) the fundamental fairness of hearings and access to information through discovery; (h) the nature of arbitral remedies, including the availability of punitive damages in cases where they would be available in court; (i) the availability of class actions and the scope of judicial review of arbitration awards, and finally (j) the possibility that whole categories of contract-related disputes, including statute-based claims, will vanish from the court system into a private realm of justice, preventing further evolution of the law and effective oversight of decisions.

When deciding these issues, courts examine a number of factors.[11] Areas of particular concern include the bargaining positions of the parties, existence of an opt-out provision, clarity and conspicuousness, unfair advantage, and the ability to negotiate the inclusion of the arbitration clause.

Even though the legislature,[12] the judiciary,[13] and the consumer[14] are beginning to realize the negative implications, and in some cases have attempted to take action against companies unfairly imposing binding arbitration agreements in adhesion contracts,[15] their efforts have not resulted in the banishment of these unconscionable clauses. Even though some believe this will change in light of the landmark ruling on January 15, 2002 in the class action suit Darcy Ting v. AT&T,[16] the unfortunate reality is that San Francisco Federal Judge Bernard Zimmerman did not go far enough. By holding AT&T’s mandatory arbitration clause to be illegal, unconscionable and unenforceable,[17] the United States District Court successfully warned corporate America that it must be careful when adhesively requiring the American consumer to agree to unfair, mandatory arbitration clauses inconspicuously inserted into consumer service agreements. Although significant, the decision will not result in the permanent elimination of these inherently unfair provisions.[18]

                  Part II of this Note will discuss the complaint prepared by Darcy Ting, as representative of a class, and Consumer Action, in their action against AT&T. Part III will examine the purposes of alternative dispute resolution (“ADR”) and how the AT&T arbitration provision violated them. Part IV will discuss the decision by the United States District Court for the Northern District of California in Darcy Ting v. AT&T.[19] Finally, Part V will discuss how AT&T went wrong, and more specifically, what AT&T and other companies can now do in order to provide fair and enforceable arbitration provisions within their consumer service agreements.

II.               The Complaint Filed By Darcy Ting, As Representative Of A Class, And Consumer Action, Against AT&T

                  Darcy Ting, as the representative of a class, and Consumer Action,[20] a non-profit organization committed to consumer education and advocacy, filed a class action suit against AT&T on July 30, 2001.[21] Specifically, the Plaintiffs asserted that “in the last several months, AT&T has sent plaintiff Ting and its other customers a ‘Consumer Services Agreement’ (“CSA”)[22] that would eliminate their ability to obtain compensation for most wrongs AT&T might commit against them by, amongst other things, requiring plaintiff Ting and AT&T’s other customers to submit to mandatory, binding, secret arbitration[23] and prohibiting them from participating in class actions.”[24] The Plaintiff Class’s claim of unconscionability was far-reaching, alleging a broad range of violations against AT&T.[25]

First, it was asserted that AT&T’s arbitration provision[26] purported to strip consumers of their substantive rights under the law.[27] Notwithstanding contrasting authority,[28] the CSA attempted to shorten the limitations period that applied to any of its customers’ claims.[29] Specifically, the two-year statute of limitations placed on a customer’s claim is shorter than the limitations provisions for similar claims brought in a court of law and is therefore violative of California’s Legal Remedies Act (the CSA is seeking to impose an effective waiver of the statutory rights provided by this Act).[30] For example, there is a three-year limitation for most statutory causes of action in California,[31] a four-year limitations period that applies to written agreements, and a three-year limitations period that applies to a cause of action for fraud.[32]

Second, the Plaintiff Class alleged that the Arbitration Provision seeks to immunize AT&T from liability by preventing its customers from participating in class actions.[33] The Plaintiff Class also claimed this stipulation to be in direct conflict with the California Supreme Court’s recent decision in Linder v. Thrift Oil Company,[34] where the Court held that “class actions offer consumers a means of recovery for most individual damages.”[35] Furthermore, since the CSA provides for resolution of disputes through arbitration instead of through class action,[36] it violated the Plaintiff Class’s statutory right to bring a class action under the CLRA[37] by attempting to affect an invalid waiver of that right.[38]

Third, since the Arbitration Provision incorporates the American Arbitration Association’s (“AAA”) Consumer Arbitration Rules[39] (for disputes involving $10,000 or less) or its Commercial Arbitration Rules[40] (for disputes in excess of $10,000), the Plaintiff Class claimed that the provision was inherently unfair to consumers.[41] The Complaint alleged that most customers would not be privy to the AAA’s rules because the CSA never informed consumers that in order to obtain a copy of either set of these regulations, either AT&T’s or AAA’s website must be visited.[42] Moreover, by requiring its customers to follow the standards of the AAA when seeking redress through arbitration, AT&T will essentially force its customers to pay enormous arbitration fees,[43] with or without a fair and objective arbitrator.[44] Under the AAA’s Commercial Rules, the minimum filing fee for a claimant is $500, and the fees quickly escalate as the amount of the claim increases.[45] A claimant must also pay one half of the fees of the arbitrator(s) handling the case.[46] AAA arbitrators frequently charge up to $300 to $400 per hour or more, which includes fees for research and preparation.[47] Prior cases have demonstrated that the AAA’s fees can reach extremely high levels, some as high as $18,000.[48]

Fourth, the Complaint asserted that “AAA’s arbitrators are overwhelmingly and disproportionately drawn from the ranks of attorneys who principally represent corporations in defending actions brought by individuals.”[49] In the past, where AAA has been specified as the arbitration service provider, many individual claimants against corporations have experienced AAA selecting an arbitrator who is in the same business as the corporate defendant,[50] who represented other corporations in the same business,[51] or identified a list of potential arbitrators primarily or solely composed of such individuals.[52] Therefore, the plaintiffs strongly contended that the Arbitration Provision forces consumers to submit to arbitration with a company, the AAA, not only designated by AT&T, but one which has been recognized as biased in favor of corporate defendants. For example, AAA actively solicits corporate clients, receives regular and substantial cash stipends, retainers, or payments from a large number of corporations,[53] regularly files amicus briefs with courts that support the efforts of corporate defendants to force individuals to submit their claims to arbitration,[54] and sometimes assists corporations in their efforts to pitch their mandatory arbitration clauses to individual consumers and/or employees.[55]

Fifth, by providing its new CSA amongst many other documents within a regular monthly bill without a conspicuous writing informing customers that they must adhere to the new binding and mandatory Arbitration Provision,[56] the plaintiffs maintained that AT&T communicated the clause in such a way that few of its customers would voluntarily, knowingly and intelligently consent to it.[57] Specifically, AT&T communicated the arbitration clause in a way that practically assured that few customers would have read it, “much less have voluntarily, knowingly, and intelligently consented to it.”[58]

Finally, the plaintiffs declared that the arbitration provision “enshrine[d] sweeping secrecy by depriving any consumers the right to public, open and/or reviewable dispute resolution.”[59] The fear established by the enshrined secrecy of the Arbitration Provision is that AT&T and AAA would be able to exercise unchecked discretion. Essentially:

AT&T has the ability to conceal not only the truth about AAA’s performance, but even its mere existence, eliminating any realistic check against any abuses that AAA arbitrators might commit. AAA could rule for AT&T in every single case it arbitrates (and thus give AT&T a strong incentive to continue to patronize AAA), and this fact would forever remain ‘confidential’ from AT&T customers and the public at large.[60]

                  Therefore, the plaintiffs alleged, the extensive and significantly burdensome terms found in AT&T’s CSA, and in particular, its “Arbitration Provision,” were in stark contrast to the principles in which the system of ADR was founded and is a violation of the fundamental purposes of the laws of California and the United States. They specifically asked the Federal District Court for the Northern District of California to find in favor of Darcy Ting, as representative of the “Plaintiff Class,” and rule that the “Arbitration Provision” was unconscionable, invalid and accordingly, unenforceable.[61]

III.              Purposes of ADR and How the AT&T Arbitration Provision Violates Them

 

                  Arbitration is an alternative to court action where there is a private, judicial determination of a dispute by an independent third party whose decision is generally just as final and binding as that of a judge overseeing litigation.[62] It is the most widely used form of ADR and is usually voluntarily agreed to by both parties to the action.[63] Although many refer to arbitration as an innovation, it has actually existed for centuries.[64] Archaeologists have uncovered evidence of the use of arbitration in the ancient civilizations of Egypt, Mesopotamia, and Assyria.[65] Arbitration was also significantly used by the ancient Greeks and Romans.[66] History has shown that ancient forms of arbitration are substantially similar to those used today.[67] In fact, Aristotle wrote, “for an arbitrator goes by the equity of a case, a judge by the law, and arbitration was invented with the express purpose of securing full power for equity.”[68]

                  Formerly, all arbitration was contractually based, meaning that it was private and voluntary.[69] However, the American consumer has recently observed the evolution of a nonconsensual form of arbitration.[70] This form has operated under the protection of the courts,[71] remaining an alternative to the full use of the litigation system.[72] The voluntary form of arbitration has been called “private,” “commercial,” or “contractual” arbitration,[73] while the court-associated form is known as “judicial” arbitration.[74] Presently, since arbitration has been used extensively in certain industries in the United States,[75] it has become the standard process for resolving many kinds of disputes.[76] These industries include maritime, securities, commodities, international trade, labor, construction, medical malpractice, escrow, and other services.[77]

                  An arbitration hearing bears some resemblance to the look and feel of a trial court.[78] Both parties make opening statements and then make their cases through the presentation of evidence, including witness testimony.[79] Nevertheless, the process is more informal than a trial in court because the arbitrators take a more active role than is typical of trial judges.[80] For example, in a private setting, the arbitrators may engage in in-depth questioning of both parties’ witnesses.[81] Furthermore, like in court, both parties generally make closing statements at the end of the hearing.[82] The arbitrators are then given a set period of time in which to render a decision on the merits of the parties’ claims.[83] The final decision is known as an “award.”[84]

Consumer arbitration, the type that was disputed in Ting v. AT&T, addresses controversies between a consumer and a supplier of goods or services.[85] It has generally been held that “arbitration is intended to provide a quicker, less expensive, and more private alternative to litigation.”[86] Essentially, the object of arbitration is to obtain a fair resolution of disputes by an impartial third party[87] without unnecessary expense or delay.[88] Both parties to the arbitration should be free to agree how their disputes are resolved.[89] However, clauses like the one found in AT&T’s consumer services agreement exploit the dangers[90] of mandatory arbitration provisions and put consumer protection in jeopardy.

One of the general principles of the arbitration process is the choice of the decision-maker.[91] ADR was designed to give the arbitrant more options than the litigant.[92] Ordinarily, arbitrators are appointed by one of three means:[93] 1) directly by the parties involved in the proceeding (this is done by mutual agreement, or by each party appointing their own arbitrator); 2) by existing tribunal members (for example, each side appoints one arbitrator and then the arbitrators appoint a third); or 3) by an outside party (for example, the court or an individual or institution nominated by the parties).[94] However, the modern practice in adhesive agreements, such as AT&T’s, is to deprive the weaker party of these choices by forcing the consumer to abide to the corporation’s handpicked arbitrators, members of the AAA.[95]

Unlike courts, arbitration tribunals are not required to apply court-established procedural or evidentiary rules unless the parties specifically agree to.[96] Here, Ms. Ting and the rest of the class were not given the opportunity to agree on any of the procedures of the arbitration process prescribed by AT&T’s arbitration provision. AT&T, like many other major corporations,[97] demanded the consumer submit to arbitration as defined by the rules of the AAA.[98] The only choice given to the consumer was to follow AT&T’s rules, or be without relief.[99]

Furthermore, AAA and AT&T, not the consumer, coordinate arbitrator selection, schedule the hearing space, and choose the arbitrators.[100] The consumer has no choice but to submit to arbitration that is quite possibly exceedingly unfair to, and deficient for, the consumers. Therefore, an arbitration agreement which forces one party to use the handpicked arbitrator of the other undermines one of ADR’s initial and fundamental purposes.[101]

                  Even though the fees for arbitrators can be significant,[102] many parties choose arbitration over litigation because it is presumed to save money and time.[103] It is commonly held throughout the legal community that litigation is often an expensive and drawn out process whereas arbitration is a cheaper, swifter, and in some cases, a more satisfactory method. Arbitration usually results in savings due to reduced attorneys fees.[104] There are less formal procedures employed in private arbitration. Therefore, attorneys spend less time attending depositions, answering interrogatories, participating in pretrial conferences and other hearings, preparing pretrial memoranda and engaging in pretrial motion practice.[105] In theory, arbitration seems to benefit the consumer, which may be why the courts have favored arbitration as a method for resolving disputes.[106] However, Ting v. AT&T may be the catalyst for a trend reversal.

Even in denying Ting’s initial motion for a temporary restraining order,[107] Judge Zimmerman was laying the foundation for his January 15th ruling. In that initial decision, he clearly made known his concerns about the problems presented by the plaintiffs.[108] In agreeing that there was value in the plaintiffs’ arguments, the District Court confirmed that Ting, as representative of the class, “may probably succeed on the merits on at least some of the contentions she raises.”[109] According to the Drafting Subcommittee on Consumer Contract Issues under the Revised Uniform Arbitration Act, these concerns are increasingly reflected in decisional law as a growing number of courts appear to be more closely scrutinizing arbitration agreements in consumer contracts.[110] On January 15, 2002, Judge Zimmerman substantiated the Subcommittee’s report by dissecting the arbitration provision found in AT&T’s consumer services agreement and finding the entire clause illegal, unconscionable and, consequently, unenforceable.[111]

                  Many parties have chosen to arbitrate rather than go through a long, drawn out court proceeding because of the general belief that arbitration is efficient, convenient and flexible.[112] Specifically, arbitration is thought to be efficient because it can usually be heard sooner than a court proceeding while at the same time being shorter in length with less demanding preparation work.[113] However, mandatory and binding arbitration provisions, like the one contained in AT&T’s Consumer Services Agreement, invite litigation and, therefore, undermine the efficiency of ADR. AT&T’s arbitration provision, like many others before it, has induced class action litigation, which by definition substantially weakens the efficiency standard.[114] Furthermore, it is neither efficient nor advantageous to have arbitration sessions that contain one extraordinarily weaker party who sits across the table from another much stronger one, even if the claim is heard sooner than if brought within a court of law. At the very least, such a gathering cannot meet the efficiency standards originally envisioned by the creators of the arbitration process.

                  Additionally, AT&T’s arbitration provision was neither convenient nor flexible. In fact, the arbitration provision was solely favorable to AT&T but absolutely disadvantageous to the consumer.[115] AT&T, as previously stated, chose the method of arbitration, who the arbitrator will be, the time in which a claim can and cannot be brought, whether or not the arbitration session may be made public, and implemented all these rules in an underhanded and secretive manner.[116] By placing the new CSA amongst their customers’ regular monthly bills, AT&T was certainly aware that the great majority of these consumers would not read, or even know, that the new contract existed.[117] Arbitrationsucks.com, consumer advocates who have rigorously researched the effect of mandatory and binding arbitration clauses in consumer agreements,[118] recently stated that: “Often, the arbitration clause is hidden in a mix of fine print, or sometimes printed on the back of a page of text. At the time a consumer signs a contract containing an arbitration clause, the consumer may not even know the clause is in the document.”[119] As previously stated, AT&T attempted to hide the arbitration clause that most benefited their company inside a contract that they knew most of their customers would not even know existed.

                  The arbitration process proscribed by the clause found in the CSA is certainly not flexible since every aspect of the arbitration agreement follows terms that were created by and benefit AT&T.[120] The obvious difference between AT&T and the consumer in this instance is that AT&T is a business that is experienced in service agreements and has lawyers on retainer or on staff who understand how to negotiate and write a contract.[121] However, the average consumer does not share this experience. Most consumers do not fully understand the implications of arbitration agreements and the severe limitations that the agreements place on their ability to seek a remedy.[122] The consumer’s utter lack of any choices within AT&T’s arbitration process, as well as being flatly unaware that such an arbitration provision exists, forcefully diminishes the process’s inherent nature. The consumer can no longer bring a class action lawsuit (limiting the company’s liability substantially),[123] is bound by AT&T’s choice for an arbitrator, has to bring any claim to action within a time specified by AT&T (which conflicts with California law),[124] must take part in a secretive arbitration even if the consumer believes publicity will help, and is ultimately responsible for extremely high fees that could legitimately be in excess of the claim to be arbitrated.

                  The system of arbitration set up by AT&T seriously undermines the purposes of arbitration. It has already created litigation by inconspicuously trying to devise an arbitration provision that conspicuously discriminates against the consumer. This provision was not meant to save time or money, to be flexible, or to be fair. It was solely conceived to protect AT&T from its own mischievous practices. It was not originated in the spirit of ADR, and therefore was not given credibility by the United States District Court for the Northern District of California.

IV.              AT&T’s Mandatory Arbitration Provision Is Illegal, Unconscionable and Unenforceable

In a surprising decision on January 15, 2002, Judge Zimmerman held that AT&T’s mandatory arbitration provision was unlawful under California’s Consumer Legal Remedies Act and Unfair Competition Law.[125] As a result, the court gave the plaintiffs until January 31, 2002 to file a proposed permanent injunction that prevents the arbitration and limitation on liabilities clauses of AT&T’s contracts from taking effect.[126]

A.     AT&T Did Not Properly Communicate the New Arbitration Provision to Its Customers

Before sending the new CSA to its customers, AT&T presented it to their company-

sponsored “AT&T Consumer Strategy and Issues Council” (“Council”).[127] Upon reviewing the CSA, members of the Council expressed substantial concerns about numerous provisions in the Agreement.[128] Specifically, the Council objected to AT&T’s desire to implement this new contract without requiring any affirmative assent from its customers.[129] Despite these warnings, it was decided to present the CSA as a negative option, which is “an offer that could be accepted by doing nothing other than continuing to use AT&T’s service even when the customer was not aware of the offer.”[130] Such a decision was made even though AT&T was aware, through a Qualitative Study, that most consumers would stop reading the CSA after gazing at the bolded text in the cover letter that stated: “please be assured that your AT&T service or billing will not change under the AT&T Consumer Services Agreement; there’s nothing you need to do.”[131] By placing the CSA, and the binding arbitration provision, inconspicuously amongst the customers’ regular monthly bill and effectively convincing the class member that there was nothing to read, AT&T was purposely diverting its customers from learning that they were being asked to relinquish many important legal rights and remedies.[132] At the very least, AT&T should have directly and specifically communicated the new rights to its customers[133] and should have never introduced the concept of assent by non-action on the bolded text on the cover letter.[134] Conspicuousness, when legal rights are at stake, is an absolute necessity.[135]

B.     The Legal Remedies Provision of the CSA is a Prohibition of Class Action Litigation

The Legal Remedies Provision attempts to limit AT&T’s customers to four dispute

resolution procedures, none of which includes the class action suit.[136] These mechanisms include:[137] (i) informal contact with AT&T’s customer account representatives; (ii) an action in small claims court; (iii) a complaint to a federal or state agency; and (iv) binding arbitration before the AAA. Due to the extremely high costs of arbitration hearings with the AAA,[138] and the undisputed fact that, before the implementation of the CSA, 99% of all customer complaints regarding billing and service were already being resolved through informal contact with customer representatives,[139] AT&T knew that its new provision would remove all of its class action opponents from the courtroom and place them in their living rooms, on the phone with an AT&T customer service representative.[140] Essentially, the CSA, which binds customers to arbitrate for any claim over $1,000, necessarily prohibits any class action litigation for individual claims below that amount.[141] In doing so, class action suits which have been brought against AT&T in recent years will disappear from American courthouses.[142] Because it would not have been economically feasible to pursue these claims individually, either in court or pursuant to the arbitration agreement, it is extremely doubtful that these past claims would have been prosecuted.[143]

The net result is that cases such as the ones listed above will not be prosecuted even if meritorious. Thus, the prohibition on class action litigation functions as an effective deterrent to litigating many types of claims involving rates, services or billing practices and, ultimately, would serve to shield AT&T from liability even in cases where it has violated the law.[144]

Therefore, the binding arbitration provision is an effective deterrent for AT&T customers to make a claim to any authority other than a customer service representative. Such practice is neither efficient, fair nor voluntary, and, is ultimately violative of any of the fundamental tenets of arbitration.[145] Furthermore, denying consumers the protection of the class action suit not only violates public policy, but is in conflict with the decisions of the United States Supreme Court.[146]

C.     AT&T’s Imposition of a Two Year Statute of Limitations Period is an Illegal Attempt to Effect a Waiver of the Class Members’ Statutory Rights

By attempting to require an effective waiver of the plaintiffs’ statutory rights as provided to them under the CLRA,[147] the consumer contract violates public policy.[148] It is well-settled, in both California and the United States at large, that parties willing to arbitrate statutory claims must do so while complying with the substantive and remedial provisions of the statute.[149] However, the two-year limitation provision found within the CSA clearly waives the CLRA’s three-year statute of limitations. Therefore, it expressly violates the CLRA’s anti-waiver provision and is unenforceable, unconscionable and void.[150]

D.     The Confidentiality and Secrecy Provisions Have Substantially Negative Societal Effects

Calling these provisions “draconian” and their implications of secrecy troubling to

society, Judge Zimmerman explained that AT&T’s goal was to prevent, among other things, “a class member from talking to family members about a problem that may involve them all, a class member from talking to a neighbor or co-worker that may have a similar problem or a class member from complaining to an elected official about the fairness of the arbitration.”[151] In other words, if a class member, through the AT&T mandated arbitration process, obtains a favorable decision, they are forbidden from informing other consumers.[152] Again, AT&T is put in a much stronger position because, as a party to every arbitration, it will be privy to all the hearings’ outcomes, and therefore will be able to form applicable legal strategies. On the other hand, the class member is clearly disadvantaged because he or she enters the hearing blindly, without the benefit of being informed of the hearings’ history.[153]

V.               Ting v. AT&T Did Not Do Enough To Protect

A.     Judge Zimmerman Did Not Go Far Enough

Even though Judge Zimmerman’s decision has made tremendous strides for the

consumer, he did not go far enough. Although the Ninth Circuit demanded the allowance of class action suits, extended the statute of limitations for claims equal to those mandated by state statutes, and required a conspicuous clause within the Consumer Service Agreement, the court failed to banish these inherently unfair clauses.[154] Even in victory, the consumer still loses because no matter what conditions are placed upon him or her, mandatory pre-dispute arbitration clauses inordinately disadvantage the consumer.[155]

                  Although a step in the right direction, Judge Zimmerman’s decision still does not grant the consumer the choice of whether or not to arbitrate, does not cut the cost of the arbitration,[156] barely speeds up the arbitration process, and allows the inclusion of binding arbitration provisions in future consumer service agreements. Thus, Judge Zimmerman has granted corporations time to figure out new ways to use these clauses to their advantage.[157] Essentially, corporations can now rework mandatory arbitration provisions to fall in line with the Ninth Circuit’s ruling. The corporation and, presumably, its high-priced team of lawyers, remain in a superior bargaining position because they remain the drafters of these clauses. Therefore, they can still make all of the significant conclusions regarding the arbitration,[158] including, amongst other things, the choice of arbitrators, the rules governing the process, the type of arbitration to be used, and even the arbitration’s locale.[159] The consumer, even in light of Ting, is still reduced to accepting these mandatory arbitration provisions through non-negotiated contracts of adhesion.[160] Therefore, either they accept the corporation’s offer, which will still demand binding arbitration, or be without service.

                  Furthermore, even if AT&T, and other long-distance carriers, follow the current ruling and begin to conspicuously place their mandatory arbitration provisions within their consumer service agreements, the California consumer is still without a real choice.[161] Because over 70% of all long-distance carriers in California have provisions demanding mandatory arbitration, the consumer must still either accept binding arbitration, or have no long-distance service.[162] Again, the consumer is left with no place to turn.

 

B.     Binding Arbitration Provisions Must Be Banished, Leaving the Consumer With the Choice of Whether or Not to Arbitrate

 

The abuse to the consumer through binding pre-dispute arbitration clauses is now

widely recognized.[163] Therefore, the “best approach to this problem is to simply ban the imposition of [these] clauses altogether.”[164] Consumers should be given the option of deciding whether or not to choose arbitration after a dispute has arisen, i.e., post-dispute arbitration should be made available.[165] Post-dispute arbitration gives both parties the opportunity to compare different methods as well as providers of ADR with the litigation process.[166] Therefore, the consumer, as well as the corporation, “can choose the most efficient and cost-effective forum for an individual case. This competitive marketplace for dispute resolution options, sometimes called the ‘multi-door courthouse’ approach, forces both the courts and ADR providers to resolve cases speedily and inexpensively.”[167] If allowed inside the “multi-door courthouse,” the consumer will no longer be pre-empted from the use of small claims court in favor of mandatory arbitration.[168] In order to stop “people who draft contracts [from] including mandatory-arbitration provisions like popcorn,”[169] consumer service agreements must conspicuously include post-dispute arbitration clauses clearly indicating that the agreement by the consumer was voluntary.[170] Only then will the consumer be treated fairly by corporations. Therefore, although Judge Zimmerman decided in favor of Darcy Ting, he did not find in favor of the consumer-at-large.

VI.              Conclusion

The purpose of arbitration has always been to achieve fair resolutions of disputes

through the use of an impartial third party without any unnecessary expenses or delays.[171] However, through the use of adhesion contracts, corporations have been using coercive pre-dispute mandatory arbitration clauses in order to create an unfair, expensive and one-sided arbitration system.[172] Fundamentally, this practice has not only undermined the elementary tenets of ADR, but the rights of the consumer as well. The American consumer can no longer tolerate this abuse of the arbitration process.

                  While Judge Zimmerman, in Ting v. AT&T, began to recognize the ills of the mandatory arbitration provision, he only demanded a change in form rather than substance. Darcy Ting may have won her case against AT&T, but the consumer-at-large lost. As long as binding pre-dispute arbitration provisions are found in consumer service agreements, they will inherently disadvantage the consumer. Until both parties are able to consider all possible alternatives, such as litigation, and voluntarily choose their own forms of dispute resolution, the arbitration process available to consumers will remain fundamentally unfair. With the option of post-dispute arbitration, the consumer will finally be able to voice whether or not they truly prefer ADR over litigation. Judge Zimmerman erred in not ensuring that consumers get that choice.

                 

 


[1] See Memorandum to RUAA Drafting Committee Members, Liaisons, and Academic Advisors, Contracts of Adhesion and Unconscionability, (Sept. 29, 1998), http://www.law.upenn.edu/bll/ulc/uarba/arb1098m.htm (discussing the developing problems that have been discovered through the use of binding arbitration from the early 1990s to the present) (last visited Nov. 8, 2001) (hereinafter “Mem. to RUAA”).


[2] See Memorandum to NCCUSL Commissioners, Regarding Adhesion Arbitration Agreements and the Revised Uniform Arbitration Act, at http://www.law.upenn.edu/bll/ulc/uarba/arbzm.wp6 (stating that although binding arbitration clauses are common in many types of contracts, there remains a propensity for unfairness to the weaker contracting party, i.e., the consumer) (last visited Nov. 1, 2001) (hereinafter “Mem. to NCCUSL”). See also classactionlitigation.info, A service provided by Timothy E. Eble, P.A., Class Action and Complex Litigation Information, at http://www.classactionlitigation.com/arbitrate.html (last visited Nov. 1, 2001). “[The Federal Arbitration Act] is now being utilized by big corporations against the public in contracts of adhesion.” Id.


[3] Many long distance telephone companies now incorporate a mandatory and binding arbitration agreement within their customer service agreements. For example, five out of the top six long distance carriers in California had incorporated such clauses by the second quarter of 2001. These companies included AT&T, which had a 44% market share, MCI, whose market share was 14.2%, Sprint with a 5% share, Qwest with a 1.7% market share, and finally, Working Assets Long Distance, which owned a 0.7% market share (the remaining 13 long distance carriers controlled only 25.6% of the remaining customers). Therefore, long distance providers who have imposed substantially similar mandatory arbitration clauses within their customer services agreement had a combined market share of “well over 65% of all California long distance customers” as of 2001. See Ting, et al, v. AT&T, 182 F.Supp. 2d 902 (N.D. Ca 2002).


[4] See id.


[5] See id. When a party is unable to negotiate the terms of a contract and is merely left with the choice of accepting or denying the offer, this is classic indicium of a contract of adhesion.


[6] See Mem. to RUAA, supra note 1, at 1. At a March 20, 1998 meeting, the RUAA Drafting Committee members, academic advisors and observers thoroughly and vigorously discussed the issues of arbitration agreements, contracts of adhesion and unconscionability. The Reporter presented four options: (1) add specific statutory language in every section of the RUAA that might touch on adhesion situations; (2) have the RUAA cover only commercial agreements and propose that the National Conference of Commissioners on Uniform State Laws have separate Acts for situations involving unequal bargaining power, such as consumer, employment, franchises, etc.; (3) discuss the special problems of adhesion contracts in the arbitration setting in the Official Comments but leave to developing state (and federal) substantive law the applicable doctrines for contracts of adhesion and unconscionability; and (4) discuss the use of industry protocols similar to the Due Process Protocol for Mediation and Arbitration of Statutory Disputes Arising out of the Employment Relationship. The Drafting Committee voted unanimously to leave the issue of adhesion contracts and unconscionability to developing law but to discuss these issues in the Official Comments and to also point out the development of industry protocols. Id.


[7] Id.


[8] See id. See also Fried, Frank, Harris, Shriver & Jacobson: Client Memoranda Archive, The California Supreme Court Takes a Middle Course on Arbitration Agreements in Consumer Contracts - Where Will the Court Go from Here?, available at http://www.ffhsj.com/cmemos/000103_cal_courts.htm (last visited Nov. 1, 2001) (hereinafter “Fried, Frank”). “In the past, most California courts have been willing to encourage arbitration. However, as the number and types of arbitration agreements have increased, particularly ‘form’ agreements in the employment and consumer settings, the courts have become more cautious.” Id.


[9] See Memorandum to RUAA, supra note 1, at 1. In the last few years, courts have begun to scrutinize more closely the enforceability of arbitration agreements. See, e.g., Paladino v. Avnet Computer Tech, Inc, 134 F.3d 1054 (11th Cir. 1998) (stating that an employee is not required to arbitrate Title VII claim where the contract limits damages below that allowed by statute); Hooters of America, Inc. v. Phillips, 1998 U.S. Dist. LEXIS 3962 (D. S.C. 1998) (holding that a one-sided arbitration agreement that took away numerous substantive rights and remedies of employees under Title VII was unenforceable as unconscionable and void on public policy grounds); Broemmer v. Abortion Services of Pheonix, Ltd, 840 P.2d 1013 (1992) (holding an arbitration agreement unenforceable as a contract of adhesion because it required a patient to arbitrate a malpractice claim and to waive the right to jury trial and was beyond the patient’s reasonable expectations where the drafter inserted a potentially advantageous term that required the arbitrator of malpractice claims to be a licensed medical doctor); Engalla v. Permanente Medical Group, 64 Cal. Rptr. 2d 843 (1997) (holding that a health maintenance organization may not compel arbitration where it fraudulently induced the participant to agree to the arbitration of disputes, fraudulently misrepresented speed of arbitration selection process and forced delays so as to waive the right of arbitration); Stirlen v. Supercuts, Inc., 60 Cal. Rptr. 2d 138 (1997) (finding unconscionable a one-sided compulsory arbitration clause which reserved litigation rights to the employer only and denied employees rights to exemplary damages, equitable relief, attorney fees, costs, and a shorter statute of limitations).


[10] See Mem. to NCCUSL, supra note 2, at 1.


[11] See Mem. to RUAA, supra note 1, at 1.


[12] See id.


[13] See Fried, Frank, supra note 8.


[14] See generally Ting, 182 F.Supp. 2d 902.


[15] See Fried, Frank, supra note 8.


[16] See Ting, 182 F.Supp. 2d 902, supra note 3. This decision by the United States District Court for the Northern District of California was already considered a landmark ruling on its initial press release. See also Press Release, Consumer Action Wins Landmark Ruling Against AT&T Over Binding Arbitration Clause: Federal Judge Holds AT&T’s Arbitration Clause Illegal, Unconscionable and Unenforceable (January 15, 2002), available at http://www.consumer-action.org/Library/English/Press_Release/PR-I-60_EN.html (last visited Jan. 29, 2002). “Consumer Action has won a landmark ruling in a suit to stop AT&T from forcing a binding arbitration clause on its customers.” Id.


[17] Judge Zimmerman concluded that:

 

AT&T sought to shield itself from liability . . . by imposing Legal Remedies Provisions that eliminate class actions, sharply curtail damages in cases of misrepresentation, fraud, and other intentional torts, cloak the arbitration process with secrecy and place significant hurdles in the path of the potential litigant. It is not just that AT&T wants to litigate in the forum of its choice-arbitration; it’s that AT&T wants to make it very difficult for anyone to effectively vindicate here rights, even in that forum. That is illegal and unconscionable and must be enjoined. See Ting, 182 F.Supp. 2d at 939.

 


[18] The court noted:

This lawsuit is not about arbitration. If all AT&T had done was to move customer disputes that survive its informal resolution process from the courts to arbitration, its actions would likely have been sanctioned by the state and federal policies favoring arbitration. While that is what it suggested it was doing to its customers, it was actually doing much more. Id. at 938.


[19] 182 F.Supp. 2d 902 (N.D. Ca. 2002).


[20] See About CA, Consumer @ction, at http://www.consumer-action.org/About_CA_EN.html (last visited Oct. 8, 2001). Consumer Action is a non-profit, membership-based organization that was founded in San Francisco in 1971. Their purpose is to serve consumers across America by advancing consumer rights, referring consumers to complaint-handling agencies, publishing educational materials, comparing prices on credit cards, bank accounts and long distance services, and advocating for consumers in the media and before lawmakers.


[21] See Compl. on Behalf of Darcy Ting (July 30, 2001), available at http://www.tlpj.org/tlpjf/briefs/54935_1.htm (last visited Oct. 10, 2001). The complaint, originally filed in the Superior Court of the State of California in and for Alameda County, was removed to the federal court in the Northern District of California. The Plaintiffs, while demanding a jury trial, requested declaratory and injunctive relief. Id.


[22] The new agreement took effect on August 1, 2001. See id.


[23] See Section 7 (hereinafter “Arbitration Provision”) of AT&T’s Consumer Services Agreement, available at http://www.serviceguide.att.com/ACS/ext/agreement.cfm (last visited Nov. 2, 2001) provides, in relevant part:

                 

This section provides for resolution of disputes through final and binding arbitration before a neutral arbitrator instead of in a court by a judge or jury or through a class action. You continue to have certain rights to obtain relief from a federal or state regulatory agency.

 

(a)    Binding Arbitration. The arbitration process established by this section is governed by the Federal Arbitration Act (“FAA”), 9 USC §§ 1-16. You have the right to take any dispute that qualifies to small claims court rather than arbitration. All other disputes arising out of or related to this Agreement (whether based in contract, tort, statute, fraud, misrepresentation or any other legal or equitable theory) must be resolved by final and binding arbitration. This includes any dispute based on any product, service or advertising having a connection with this Agreement and any dispute not finally resolved by a small claims court. The arbitration will be conducted by one arbitrator using the procedures described by this Section 7. If any portion of this Dispute Resolution Section is determined unenforceable, then the remainder shall be given full force and effect.

 

The arbitration of any dispute involving $10,000 or less shall be conducted in accordance with the Consumer Arbitration Rules of the American Arbitration Association (“AAA”), as modified by this Agreement, which are in effect on the date a dispute is submitted to the AAA. The AAA’s Commercial Arbitration Rules and fee schedules will apply to any disputes in excess of $10,000. You have the right to be represented in an arbitration. In conducting the arbitration and making any award, the arbitrator shall be bound by and strictly enforce the terms of this Agreement and may not limit, expand, or otherwise modify its terms.

 

No dispute may be joined with another lawsuit, or in an arbitration with a dispute of any other person, or resolved on a class-wide basis. The arbitrator may not award damages that are not expressly authorized by this Agreement and may not award punitive damages or attorneys’ fees unless such damages are expressly authorized by a statute. You and AT&T both waive any claims for an award of damages that are excluded under this Agreement.

Id.


[24] See Compl. on Behalf of Darcy Ting, supra note 20, at 2.


[25] See id. Not all of the Complaint’s allegations will be included in this paper.


[26] It is important to note that both parties agree that California law governs the validity of the contract known as the Consumer Services Agreement. See Ting, 182 F.Supp. 2d at 921.


[27] “Under both the Federal Arbitration Act and California law, arbitration clauses are unenforceable unless they permit a claimant effectively to vindicate the substantive rights that they could enforce in court.” Complaint on Behalf of Darcy Ting, supra note 20, at 8.


[28] “The complaint seeks declaratory and injunctive relief, alleging that the Legal Services Provisions of the CSA violate California’s Consumer Legal Remedies Act, California Civil Code §§ 1750, et seq. and California’s Unfair Practices Act, California Business & Professional Code §§ 17200, et seq.Ting, 182 F.Supp. at 921.


[29] See id. The provision states that “any claim or dispute arising out of or relating to this agreement must be brought within two years after the date the basis for the claim or dispute first arises.” Id.


[30] § 1783 of the California Legal Remedies Act (“CLRA”) provides, in pertinent part: “Any action brought under the specific provisions of Section 1770 shall be commenced not more than three years from the date of the commission of such method, act, or practice.” Id. See also Armendariz v. Foundation Health Psychcare Services, 24 Cal. 4th 83, 101 (2000) (stating the rule that “parties agreeing to arbitrate statutory claims must be deemed to ‘consent to abide by the substantive and remedial provisions of the statute. Otherwise, a party would not be able to fully vindicate his or her statutory cause of action in the arbitral form.’”).


[31] See § 1783 of the CLRA, http://www.harp.org/clra.htm (last visited Mar. 23, 2002).


[32] See Compl. on Behalf of Darcy Ting, supra note 20, at 8.


[33] Id.


[34] 23 Cal. 4th 429 (2001).


[35] Id. at 445. The Court further stated that “defendants should not profit from their wrongdoing simply because their conduct harmed large numbers of people in small amounts instead of small numbers of people in large amounts.” Id. at 446.


[36] See Arbitration Provision, supra note 22. The CSA further states that “no dispute may be . . . resolved on a class-wide basis.” Id. at § 7(a).


[37] Section 1781 (a) of the CLRA provides, in pertinent part:

 

Any consumer entitled to bring an action under Section 1780 may, if the unlawful method, act, or practice has caused damage to other consumers similarly situated, bring an action on behalf of himself and such other consumers to recover damages or obtain other relief as provided for in Section 1780.

 

See also Cal. Civ. Code § 1780(a).


[38] Significantly, the CLRA contains an anti-waiver provision which provides: “any waiver by a consumer of the provisions of this title is contrary to public policy and shall be unenforceable and void.” Id at § 1751. Section 1751 is to be read in conjunction with CLRA § 1770(a)(19), which provides, in pertinent part: “(a) The following unfair methods of competition and unfair or deceptive acts or practices undertaken by any person in a transaction intended to result or which results in the sale or lease of goods or services to any consumer are unlawful: . . . (19) Inserting an unconscionable provision in the contract.” Id.


[39]See American Arbitration Association (Rules) [hereinafter “AAA Rules”], http://www.adr.org/index2.1.jsp?JSPssid=11131 (last visited March 23, 2002). Rule 6 of the AAA Consumer Rules states:

 

A party may request in writing that the arbitrator hold one hearing by telephone. The telephonic hearing may occur even if the other party refuses to participate. An additional $100 fee will be charged to the business for a telephonic hearing. If a party wants to have an in-person hearing, instead of a telephonic hearing, the dispute must be administered under the AAA’s Commercial Arbitration Rules.

 

Id.

See also AT&T Consumer Services Dispute Resolution (Arbitration) Process, http://www.serviceguide.att.com/ACS/ext/arb.cfm (last visited Feb. 9, 2002).


[40]See AAA Rules, supra note 38. Rules 51 and 54, respectively, of the AAA’s Commercial Rules provide, in pertinent part:

 

“Administrative Fees”: The AAA shall prescribe an initial filing fee and a case service fee to compensate it for the cost of providing administrative services. The fees in effect when the fee or charge is incurred shall be applicable.

 

The filing fee shall be advanced by the party or parties making a claim or counterclaim, subject to final apportionment by the arbitrator in the award. The AAA may, in the event of extreme hardship on the part of any party, defer or reduce the administrative fees.

 

“Deposits”: The AAA may require the parties to deposit in advance of any hearings such sums of money as it deems necessary to cover the expenses of the arbitration, including the arbitrator’s fee, if any, and shall render an accounting to the parties and return any unexpended balance at the conclusion of the case.

 

Id.

See also AT&T Consumer Services Dispute Resolution (Arbitration) Process, supra note 38.


[41] See Complaint on Behalf of Darcy Ting, supra note 20, at 10-11.


[42] See id.


[43] See id.

 

Different AAA arbitrators charge different hourly rates. To estimate the costs of an arbitration to be conducted under the AAA’s Commercial Rules, a claimant must learn the hourly rate of the arbitrator who will hear the case. To determine the hourly rate of the specific AAA arbitrators who may hear a particular case under AAA’s Commercial Rules, a claimant must first initiate an arbitration with the AAA and, unless the fee is waived or deferred by AAA, must pay any filing fee. This makes it difficult for a class member before filing to meaningfully estimate the cost to have the case arbitrated under the Commercial Rules. Neither the AAA website or rules, nor the AT&T website, provides a class member with any information about likely arbitrator’s fees.

 

A random sampling compiled by an AAA Vice President of 82 arbitrators on the AAA Commercial Panel in Northern California provides the following compensation information: (a) arbitrator compensation ranges from $600 to $3,850 per day; (b) the average (mean) daily rate of arbitrator compensation is $1,899; (c) the median daily rate of arbitrator compensation is $1,750.

Ting, 182 F.Supp. 2d at 916 – 917.


[44] See Complaint on Behalf of Darcy Ting, supra note 20.


[45] See id.


[46] See id. at 10.


[47] See id.


[48] See id.


[49] Id.


[50] See id.


[51] See id.


[52] See id.


[53] See id.


[54] See Michael Joe, Embattled Brief: AAA Faces Criticism from Two of Its Own for Weighing in on a Mandatory ADR Case, The Recorder, Sept. 27, 2000 (quoting Oakland arbitrator R. Elaine Leitner who in a recent case involving employment disputes wrote “taking the strong position the Association took in this brief, where half of its clients in the employment area – claimants – take the opposing position, is not only unseemly, but destroys AAA’s hard earned neutrality.”). See also Compl. on Behalf of Darcy Ting, supra note 20.


[55] See Compl. on Behalf of Darcy Ting, supra note 20, at 12-13:

 

In a case involving Red Lobster Restaurants, for example, a man identified as Bruce Chapin, an AAA arbitrator, appeared in a corporate-produced video tape aimed at convincing employees to accept Red Lobster’s new mandatory arbitration policy. When an employee (or an actor pretending to be an employee) asks about the right to a jury trial, Mr. Chapin states: ‘Certainly anyone who is ever charged with a crime should insist upon a jury trial. But in a civil setting, a dispute in the workplace, for instance, this is not a matter that would be best tried in front of a jury.’ Thus, AAA is so eager to help corporate clients impose mandatory pre-dispute arbitration upon individuals that its representatives will urge those individuals to conclude that it is ‘best’ for them to waive their constitutional rights.

 

Id.


[56] The cover letter to the CSA provided, “please be assured that your AT&T service or billing will not change under the AT&T Consumer Services Agreement; there’s nothing you need to do (emphasis added).” See Ting, 182 F.Supp 2d at 913.


[57] See Compl. on Behalf of Darcy Ting, supra note 20, at 14.


[58] Id. See also Ting, 182 F.Supp 2d at 913 (stating that due to a Qualitative Study performed as a part of AT&T’s market research, AT&T executives were aware that once customers viewed the cover letter to the Consumer Services Agreement, “most would stop reading and discard the letter.”) “While presenting the CSA as a non-event may have helped AT&T retain its customers, it also made customers less alert to the fact that they were being asked to give up important legal rights and remedies.” Id at ___.


[59] See AT&T’s Consumer Services Agreement, supra note 22. The Agreement provides, in pertinent part, “Any arbitration shall remain confidential. Neither you nor AT&T may disclose the existence, content, or results of any arbitration award, except as may be required by law, or to confirm and enforce an award.” Id.


[60] See Complaint of Behalf of Darcy Ting, supra note 20, at 14-15.


[61] See id. See generally Mission Statement: arbitrationsucks.com, http://www.arbitrationsucks.com/ (last visited Oct. 10, 2001) (stating that when mandatory arbitration clauses are placed in consumer transactions, the result is almost always unfair to the consumer).

 

When buying a product or entering into a service contract, thousands of people everyday are unknowingly giving up their right to sue, and as a practical matter, their rights to a legal remedy by entering into such contracts. As companies learn they can avoid class action litigation with this simple slight of hand, honesty becomes less important in their business dealings. As a result, companies that do business openly and honestly suffer or turn to similar conduct. America is quickly becoming the land of unjust and unfair dealings. Mandatory arbitration clauses in consumer contracts are nothing to big corporations but a license for consumer abuse.

 

Id.

 


[62] Leslie Grant, What is Arbitration?, http://www.mediate.com/articles/grant.cfm, (last visited Oct. 10, 2001).


[63] See Robert M. Smith, Arbitration Overview, an excerpt from ADR for Financial Institutions, http://www.robertsmith.com/arbitration.html, (last visited Nov. 8, 2001). Arbitration is a process by which parties refer, usually voluntarily, their disputes to an impartial third person, an arbitrator, selected by them for a decision based on the evidence and arguments to be presented before the arbitration tribunal. Id.


[64] See id.


[65] See id.


[66] See id.


[67] See id.


[68] Id. at 1.


[69] See id.


[70] See id.


[71] “I cannot emphasize too strongly those in business and industry, and especially to lawyers, that every private contract of real consequence to the parties ought to be treated as a ‘candidate’ for binding private arbitration.” Smith, supra note 62, at 1 (excerpt of a speech given by Chief Justice Warren E. Burger). However, there has been a trend in the past few years that has seen the courts more tightly scrutinizing binding arbitration agreements. See also Fried, Frank supra note 8.


[72] See Smith, supra note 62.


[73] See id.


[74] See id.


[75] See id. “George Washington included in his will a clause calling for arbitration of any dispute over the interpretation of his will and the distribution of his estate.” Furthermore, in 1635, a Boston town meeting agreed that inhabitants would not sue one another, but rather settle their disputes “amicably by arbitration . . . without recourse to law and courts.” Id. See also History of Alternate Dispute Resolution, infra note 86:

 

The federal government has promoted commercial arbitration since as early as 1887, when it passed the Interstate Commerce Act. The Act set up a mechanism for the voluntary submission of labor disputes to arbitration by the Railroads and their employees. Then, in 1925, Congress passed the Federal Arbitration Act which governs the arbitration of contractual disputes involving commerce. More recently, the federal judiciary has found employment disputes, civil rights violations, securities fraud, RICO and anti-trust claims to present arbitrable issues.

Id.


[76] See Smith, supra note 62.


[77] See id.


[78] See id.


[79] See id.


[80] See id.


[81] See id.


[82] See id.


[83] See id.


[84] See id.


[85] See Grant, supra note 61.


[86] Murray S. Levin, The Role of Substantive Law in Business Arbitration and the Importance of Volition, 35 Am. Bus. L.J. 105, 106 (1997). In writing this article, however, Professor Levin was speaking of the arbitration system in which both parties had equal choices. “Arbitrants have the ability to control the form that their own arbitration is to take. This is done through the agreement to arbitrate. Thus, arbitrations can operate under different sets of rules by design of the parties.” Id. at 112. This purpose is not served by unconscionable and adhesive arbitration agreements which leave one party in a much greater position than the other. See also Grant, supra note 61.


[87] See History of Alternate Dispute Resolution, at http://www.gama.com/HTML/history.html, (last visited Nov. 8, 2001).


[88] Grant, supra note 61, at 6; See generally Stephen L. Hayford, Commercial Arbitration in the Supreme Court 1983-1995: A Sea Change, 31 Wake Forest L. Rev. 1 (1996).


[89] Id.


[90] See Mandatory Imposition of Arbitration Requirements and Dangers Thereof, http://www.butera-andrews.com/legislative-updates/directory/Federal/Congress/Hearings%20&%20Statements/NACA%20view%20on%20Mandatory%20Arbitration%20Clauses.pdf, (last visited Nov. 8, 2001) [hereinafter “Arbitration Dangers”]. Arbitration agreements, like the one found in AT&T’s consumer services agreement, can be very unfair to consumers and deficient in a number of ways: (1) discovery is not available as a matter of right; (2) the proceedings are secret; (3) the arbitrator need not follow precedent or explain reasons for his or her decision, and the decision is immune from judicial review, except on very narrow grounds, even if it is wrong as a matter of fact and law. It can also be exceedingly expensive. Although it may be faster than litigation, there is no public policy served by a process that results in speedy injustice. Id.


[91] See id.


[92] A party to a litigation has options when deciding where a case will be tried. They can remove the case from state to federal court (as was done in this case), etc.


[93] See Grant, supra note 61.


[94] Even though this is a situation where the arbitrator might be chosen by someone who is not a party to the arbitration, it is common practice that the parties agree upon who that arbitrator actually is. See id.


[95] See Arbitration Dangers, supra note 89, at 1-2.

 

Consumer protection in this country is in jeopardy. All across the country, banks, financial institutions and even automobile dealers are including standardized terms in contracts of adhesion which provide that consumers agree to resolve any disputes by arbitration and waive their rights to trial by judge or jury. The purpose and intent of such clauses is to insulate unlawful, unfair, or deceptive practices from any meaningful review. In arbitration, it is difficult to obtain discovery, and consumers may not be able to proceed on behalf of a class, obtain injunctive relief against unlawful practice, or receive awards of punitive damages.

 

There simply is no public policy favoring arbitration as a mechanism of dispute resolution but only a policy favoring the enforcement of the parties’ freely negotiated agreements.

 

Id.

 

Perhaps Judge Zimmerman’s landmark decision is the first ruling that truly takes these concerns at face value and gives birth to their legitimacy.

 


[96] See Smith, supra note 62.


[97] See id. “Generally, the dispute is submitted for arbitration to an administrative organization, such as the American Arbitration Association or Judicial Arbitration and Mediation Services, Inc., which handles most of the administration of the arbitration.” Id.


[98] See Discussion of AAA’s Arbitration Provisions, infra pp. 8-9.


[99] See Ting, 182 F. Supp. 2d 902.

 

The terms and conditions of AT&T’s contract were imposed on the class members without an opportunity for negotiation, modification or waiver . . . customers did not have any meaningful choice with respect to the Legal Remedies Provisions because the carriers who service two-thirds of the California market all include substantially similar dispute resolution provisions in their contracts.

Id. at 928 - 929.

 


[100] See id.


[101] See Grant, supra note 61.


[102] Id.


[103] See Philip Zimmerman, Who Uses Mediation and Arbitration, And Why, Mediate.com, http://www.mediate.com/articles/zimmerman1.cfm (last visited Oct. 10, 2001) (explaining that nearly 90% of respondents found that mediation saved money and only a slightly lower percentage that arbitration had saved them time as well). See also Grant, supra note 61.


[104] See Smith, supra note 62.


[105] See id.


[106] See Arbitration Dangers, supra note 89:

 

Arbitration is supposedly favored as a method of resolving disputes. But that preference is derived from a series of Supreme Court cases between commercial entities that had bargained for the speed and efficiency of arbitration, so the Court was merely enforcing their contractual agreement. Some courts are now using that supposed preference to require arbitration in cases involving consumers who did not know about, negotiate, or accept the clause.

Id.

 


[107] See Staff Reporters, Court Denies Bid to Block AT&T Arbitration Clause, But Judge Voices Concern With Arbitration Scheme, ADRWorld.com, available at http://www.adrworld.com/opendocument.asp (last visited Oct. 8, 2001) (citing Ting, 182 F.Supp. 2d 902). Judge Zimmerman stated that Ting had not met the standards for injunctive relief, but iterated that the issues raised were indeed troubling. Id.


[108] See id.


[109] See id.


[110] See Mem. to NCCUSL Commissioners, supra note 2.


[111] See id. See also Trial Lawyers for Public Justice (“TLPJ”) Press Release, TLPJ Sues AT&T for Trying to Eliminate Long Distance Phone Customer’s Rights, http://www.consumer-action.org/Library/English/Alert/AT-I-09_EN/AT-I-09_EN.html (last visited Oct. 8, 2001). It seems Judge Zimmerman agreed with the argument of TLPJ’s Michael J. Quirk, co-counsel in the case. In the Press Release, Quirk stated, “AT&T is seeking to hang up on its long distance customers’ right to voice a complaint in a fair, cost-effective, and open forum. Customers with small claims run up against AT&T’s class action ban. Customers with bigger claims run up against AAA’s fee structure. Even if they clear these hurdles, they then have to submit their claims to AT&T’s own privately designated judge whose decision in the case will remain forever concealed from the public’s view.” Id.


[112] See Grant, supra note 61.


[113] See id.


[114] See Complaint on Behalf of Darcy Ting, supra note 20.


[115] See Ting, 182 F.Supp. 2d 902.


[116] See infra Section.


[117] See id.


[118] In their mission statement, the members of arbitrationsucks.com state that “the purpose of this website is to inform the public about the threat posed by mandatory arbitration clauses that are being inserted into consumer contracts.” See arbitrationsucks.com, http://www.arbitrationsucks.com/ (last visited Oct. 10, 2001). However, it is important to note that the members of this organization are aware of the benefits of arbitration, and clearly state as such:

 

Arbitration does have a purpose and can serve a beneficial purpose when used in commercial agreements, that is agreements where parties are represented by lawyers, the contract is a product of legitimate bargained terms, and all parties are clearly aware of the implications. Also, arbitrations can be useful in connection with collective bargaining agreements and the resolution of disputes arising from those agreements.

Id.

 


[119] Arbitrationsucks.com, FAQ, http://www.arbitrationsucks.com/faq.htm (last visited Nov. 1, 2001). Such practices by large corporations exploit the inexperienced nature of the consumer. Furthermore, since the consumer is not represented by an attorney upon signing these agreements, he or she is unaware of what rights they are retaining or signing away. Id.


[120] See Section II infra.


[121] See arbitrationsucks.com. Businesses fully understand the ramifications of arbitration against a weaker party and its difference between that of parties of equal bargaining power who agree to terms of the arbitration. Id.


[122] See id.


[123] See arbitrationsucks.com, supra note 118:

 

Since no claims can be arbitrated as a class action, the most the defendant could ever be held accountable for is the claim of the individual who filed a demand for arbitration. So as long as the corporation only cheats each consumer out of two or three hundred dollars, they probably have a license to steal. Even if the consumer gets mad, in the absence of a right to pursue a class action, he would likely never find a lawyer willing to take a case that involves only a couple hundred dollars. Therefore, the consumer would probably have to represent himself, the filing fee to demand arbitration could be as much as a hundred dollars or more. If the consumer pays the filing fee and attempts to represent himself, he won’t likely get the “legal discovery” that he needs to prove his claim. Finally, when the claim comes up for hearing, generally corporations will send in highly skilled lawyers to object to any evidence the consumer wants to present. Does this sound lop-sided? Now you know why corporations like arbitration clauses.

Id. (last visited Nov. 4, 2001).

 


[124] See Arbitration Provision, supra note 22.


[125] See Ting, 182 F.Supp. 2d 902. See also Press Release, supra note 17.


[126] See Ting, 182 F.Supp. 2d 902.


[127] See id. The AT&T Consumer Council is a group of consumer advocates who meet with each other five to six times per year in order to advise AT&T on the implications of its particular dealings with consumers. Interestingly, Ken McEldowney, who is the executive director of plaintiff Consumer Action, has served as the Chair of the Council for the past several years, while being a member of the Council for nearly fifteen years. See id. at 910. “Drafts of the CSA, a cover letter to customers, and a set of Frequently Asked Questions were discussed at two Consumer Council meetings, September 20, 2000, and April 5, 2001.” Id.


[128] Their concerns were focused on particular elements of the Legal Remedies Provision, specifically the CSA’s binding arbitration clause, whether portions of the Legal Remedies Provision were enforceable under California law, and the need for a foreign-language translation along with clearer descriptions of some other portions of the Agreement. See id.


[129] See id. See Press Release, supra note 17.


[130] See Ting, 182 F.Supp. 2d at 911, n.2.


[131] Id. at 912.

 

While the Council suggested at least one alternative, AT&T determined to implement the CSA as a negative option. AT&T believed that a significant number of its customers would never affirmatively signify their assent to the CSA, that any process designed to obtain individualized informed consent to legal services would be very expensive, and that no such process was likely to produce a response from all or most of AT&T’s approximately sixty million residential long distance consumers. . . Between May 2 and June 9, 2001, AT&T mailed the CSA, a cover letter, and Frequently Asked Questions to approximately eighteen million of its residential long distance customers whom it bills directly by including these materials in the envelope that contained the customer’s bill. No statement regarding the CSA appeared on the outside of the envelope. . . A reasonable class member would not have expected the billing statement to contain a new contract, and therefore might well have discarded the CSA as a stuffer. A class member would have been more likely to read the CSA had the envelope stated that a new contract was included with the bill, which AT&T did not do.

Id. at 911-912.

 


[132] See id..


[133] “From the perspective of affecting a person’s legal rights, the most effective communication is generally one that is direct and specific.” Id. at 16.


[134] See id. at 17.


[135] “California courts have long been disinclined to effectuate clauses . . . which are unclear, unexpected, inconspicuous, or unconscionable.” Fields v. Blue Shield of California, 163 Cal. App. 3d 570, 579 (1985). “Not only must the language . . . be clear and plain, the clause itself must be placed conspicuously in the contract.” Lynch v. Commercial Union Insurance Co., 2001 Cal. App. LEXIS 3857, *11 (2001) (quoting Thompson v. Mercury Casualty Co., 84 Cal. App. 4th 90, 94 (2000) (discussing exclusionary clauses in insurance contracts). See also Haynes v. Farmers Insurance Exchange, 2002 Cal. App. LEXIS 654 (2002).


[136] See Ting, 182 F.Supp. 2d at 915.


[137] Id.


[138] See pp. 8-10 infra. See also nn. 40-43 infra.


[139] See Ting, 182 F.Supp. 2d at 915.


[140] See id. at 917.


[141] See id.


[142] Here’s an example of two recent lawsuits filed against AT&T that would be barred by the new CSA:

 

A putative class action case captioned Allen v. AT&T pending in the District Court for Muskogee County, Oklahoma, alleging AT&T fraudulently and in breach of contract collected a municipal sales tax which was either (1) not authorized by law or (2) not remitted in full to the proper taxing authority. Plaintiff is seeking restitution, a declaratory judgment and other damages. His individual claim is less than $1 a month.

 

In re AT&T Consumer Class Action Litigation, which was settled in the Superior Court of New Jersey, Somerset County, Law Division, on July 27, 2000. According to the Settlement Agreement, the alleged overcharges involved AT&T’s practice of charging class members for certain per-minute usage charges in a month subsequent to the month in which the usage occurred, even when the subscribers had not used all of their contractually provided for minutes for either the month in which the usage occurred or the month in which the subscriber was billed for usage. AT&T ultimately paid $1.98 million, which was 100% of the 83,611 class members’ damages, as well as the costs of notice and settlement administration.

See id. at 917-918.

 


[143] See id. at 918. “It is undisputed that the lawyers who represented the plaintiffs in these cases would not have taken them if the only claim they could have pursued was the claim of the individual plaintiff. The reasons for this are not hard to see . . . The damage limitations in the Legal Remedies Provisions attempt to make any award of substantial damages, even if justified, highly unlikely.” Id.


[144] Id.

 

There likely will be other claims which a class member may have in which potential damages would ordinarily be much more than nominal. Examples include discrimination or harassment in the provision of service, identity theft, fraudulent sales tactics, or harassing debt collection techniques. In such cases, the costs associated with preparing an arbitration claim and presenting it for even a “desk arbitration” would likely exceed the recovery any consumer could reasonably expect to obtain given the cost of arbitration and the limitations on damages and attorneys’ fees in the Legal Remedies Provisions. These Provisions make it unlikely that a class member, unless she wanted to represent herself, would be able to pursue many of the sorts of claims that are to be expected in the ordinary business-customer relationship.

Id. at 919.


[145] See infra § III.


[146] The Supreme Court has specified the significant advantages offered by class action procedures:

 

[I]t may motivate [plaintiffs] to bring cases that for economic reasons might not be brought otherwise, [thereby] vindicating the rights of individuals who otherwise might not consider it worth the candle to embark on litigation in which the optimum result might be more than consumed by the cost . . . [T]he financial incentive that class actions offer . . . is a natural outgrowth of the increasing reliance on the ‘private attorney general’ for the vindication of legal rights. . . Where it is not economically feasible to obtain relief within the traditional framework of a multiplicity of small individual suits for damages, aggrieved persons may be without any effective redress unless they may employ the class action device. Deposit Guar. Nat’l Bank v. Roper, 445 U.S. 326, 338-339 (1980).

 

See also Ortiz v. Fibreboard Corp., 527 U.S. 815, 860 (1999) (“One great advantage of class action treatment . . . is the opportunity to save the enormous transaction costs of piecemeal litigation.”). “Class actions serve an important function in our system of civil justice.” Gulf Oil v. Bernard, 452 U.S. 89, 99 (1981).


[147] “Any action brought under the specific provisions of Section 1770 shall be commenced not more than three years from the date of the commission of such method, act, or practice.” § 1783, California’s Consumer Legal Remedies Act.


[148] See Ting, 182 F.Supp. 2d at 923.


[149] “Parties agreeing to arbitrate statutory claims must be deemed to ‘consent to abide by the substantive and remedial provisions of the statute. Otherwise, a party would not be able to fully vindicate [his or her] statutory cause of action in the arbitral forum.’” Armendariz v. Foundation Health Psychcare Services, 24 Cal. 4th 83, 101 (2000) (quoting Broughton v. Cigna Healthplans, 21 Cal. 4th 1066, 1087 (1999)). See also Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 28 (1991) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 (1985)) (“So long as the prospective litigant effectively may vindicate [his or her] statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function.”).


[150] See Ting, 182 F.Supp. 2d at 931-932.


[151] See id. at 932.


[152] It is important to note that the AAA does not require their arbitrators to state reasons for the award and does not provide a public record of their rulings. Therefore, “this confidentiality provision means that a contract that affects seven million Californians will be interpreted largely without public scrutiny.” Id.


[153] See id. See also Llewellyn Joseph Gibbons, Private Law, Public “Justice”: Another Look at Privacy, Arbitration, and Global E-Commerce, Ohio St. J. on Disp. Resol., 769, (2000). “The institutional repeat player . . . will quickly have access to a variety of arbitral awards . . . that can be used . . . to argue for or against any position the repeat player chooses to take in each arbitration. The one-shot player has no such arsenal of arbitral awards to choose from to cite as precedent for her position on interpreting the contract.” Id. at 786-787.


[154] See Section IV infra.


[155] See Hossam M. Fahmy, Arbitration: Wiping Out Consumers Rights?, http://www.texasbar.com/globals/tbj/oct01/fahmy.asp (last visited Mar. 20, 2002).

‘There’s no question that arbitration is an excellent, wonderful dispute-resolution device. . . . But if it’s so good for consumers, then why don’t companies make such provisions very clear and explain everything to consumers, and not try to hide the terms in bill stuffers or a pile of documents?’ The answer is that results are not . . . good for consumers. Mandatory arbitration clauses are designed to protect companies from suits and high juridical awards and minimize compensation a consumer can receive. Id. (quoting Mark Budnitz, professor of law at Georgia State University).

See also Reynolds Holding, Private Justice: Millions Are Losing Their Legal Rights, S.F. Chron., Oct. 7, 2001 (quoting Justice Terry Trieweiler of the Montana Supreme Court). “Mandatory arbitration allows corporations to undermine the whole system by which we hold them accountable.” Id.


[156] Two years ago, the Supreme Court held that excessive arbitration costs may be sufficient to invalidate a mandatory arbitration provision, but only if it precluded the consumer from “effectively vindicating her federal statutory rights.” Essentially, the decision left unclear exactly how high the arbitration cost must be in order for the clause to be invalidated. Furthermore, they did not create any clear standard of how to determine that cost. See Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 90 (2000).


[157] See Marc Galanter, Why the “Haves” Come Out Ahead: Speculations on the Limits of Legal Change, 9 Law & Soc’y Rev. 95 (1974) (stating that corporations, as repeat-players with substantial assets, will always be able to use the legal system to their advantage. Their experience, as opposed to the individual consumers, gives corporations the opportunity to manipulate the long-term results of their actions).


[158] See Richard M. Alderman, Pre-Dispute Mandatory Arbitration in Consumer Contracts: A Call for Reform, 38 Hous. L. Rev. 1237 (2001), available at http://www.law.uh.edu/Journals/hlr/hlrtoc38n4.htm (last visited Mar. 20, 2002).

There is one advantage held by the repeat-player that consumers might not be able to offset – the choice of mandatory arbitration. [Corporations] will choose a favorable dispute resolution forum based on the nature of the party with whom the dispute exists. Repeat-players . . . will choose to avoid the formal civil justice system when interacting with other repeat-players. It is logical to assume that if one party is given the absolute right to choose the field of battle, it will select the one most favorable to its position. Accordingly, as consumers have marshaled the resources and expertise to compete with the repeat-player in the courts, the repeat-player has taken steps to change the forum through the imposition of mandatory arbitration.

Id. at 1255.


[159] See id. at n.77. See also David S. Schwartz, Enforcing Small Print to Protect Big Business: Employee and Consumer Rights Claims in an Age of Compelled Arbitration, 1997 Wis. L. Rev. 33, 57 (1997) (“Commentators have long observed the tendency of standard-form contracting to lead to the ‘accumulation of seller-protective instead of consumer-protective clauses.’”).


[160] See Alderman, supra note 157, at 1255.


[161] See note 3 supra.


[162] See id.


[163] See Arbitration Clauses in Insurance Contracts: The Urgent Need for Reform, http://www.citizen.org/congress/civjus/arbitration/articles.cfm?ID=6561 (last visited Mar. 20, 2002) (hereinafter “Arbitration Clauses”) (“The growing use of binding, pre-dispute arbitration clauses poses a huge threat to insurance consumers. It represents a major shift in the balance of power between insurers and consumers that must be addressed.”). See also Senate Judiciary Subcommittee on Administrative Oversight and the Courts Hearing on “Overview of Contractual Mandatory Binding Arbitration”, Opening Statement of Senator Russ Feingold, (March 1, 2000) http://www.judiciary.senate.gov/beta/oldsite/312000rf.htm (last visited Mar. 20, 2002) (“[The Senate] is working in a bipartisan way to address the issues raised by the growing prevalence of pre-dispute contractual agreements to substitute mandatory, binding arbitration for the right to take a claim to court. As you know [Mr. Chairman,] these mandatory arbitration provisions have shown up in many contractual settings.”).


[164] Id. at 4.


[165] See id. See also Alderman, supra note 157, at 1265. “Therefore, I recommend that post-dispute agreements to arbitrate should be recognized as valid and enforceable.” Id.


[166] See Arbitration Clauses, supra note 162. See also Alderman, supra note 157.


[167] Arbitration Clauses, at 4.


[168] See Alderman, supra note 157.


[169] Fahmy, supra note 154, at 1 (quoting Edward Anderson, the managing director of the National Arbitration Forum, one of the nation’s major arbitration providers).


[170] See Alderman, supra note 157.


[171] See Section III infra.


[172] See Alderman, supra note 157.