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A Good Arbiter
Congress considers new laws regulating the resolution of disputes between businesses and consumers.

Saturday, April 12, 2008

VIRTUALLY everyone who carries a credit card is subject to something called a binding mandatory arbitration agreement. So is almost anyone who owns a cellphone or who recently purchased a car from a dealer.

These agreements are often buried deep in the fine print of consumer contracts; they mandate that any dispute between the consumer and the company be resolved through private arbitration. That means a neutral third party -- often a former judge -- rules on the issue, and both sides are bound by the decision. Arbitration is generally cheaper and speedier than litigation. Surveys show that business strongly favors it, while consumers are also generally approving.

Still, binding mandatory arbitration provisions in consumer contracts have come under attack recently, and for some good reasons. Most consumers aren't aware that many of the contracts they sign include these provisions. Even those aware of the provisions are helpless to do anything about them because consumers generally must accept contracts in their entirety. And some provisions -- such as those that force consumers to travel cross-country to attend arbitration hearings -- can be unfair. Courts from time to time have struck down extreme provisions, but there are no uniform national standards. Several bills pending in Congress attempt to address these inequities.

Sen. Russell Feingold (D-Wis.) would prohibit binding mandatory arbitration provisions in all consumer and employment contracts; the bill allows arbitration only after a dispute arises and only if both parties agree. This goes too far and risks eliminating arbitration as a serious alternative to litigation for such routine matters as warranty disputes, as even some supporters of the bill acknowledge. Sen. Jeff Sessions (R-Ala.) provides a better framework to improve the system. Mr. Sessions's bill would, among other things, force companies to more prominently display arbitration provisions and provide an explanation of how the costs of the arbitration are to be split between consumer and business. The bill also would allow consumers to opt out of arbitration in favor of small-claims court. Any hearing would have to take place in a location convenient to the consumer, and arbitrators would be required to apply the laws of the state in which the consumer resides.

This week, Sens. Mel Martinez (R-Fla.) and Herb Kohl (D-Wis.) introduced legislation to ban mandatory arbitration clauses in nursing home contracts. This narrow exception may be warranted. Nursing home residents are among the most vulnerable in the country, and decisions to place family members in these facilities are often made under the most stressful of circumstances. Allowing residents or their families to sue may be the only way to prod nursing homes to improve care.

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