Arbitration Horror Stories

This is a great story reprinted from the Consumer Law and Policy Blog and available at: http://pubcit.typepad.com/clpblog/2009/04/outrage-in-ohio-an-unfair-decision-on-arbitration.html

by Paul Bland and Tami Alpert (Power-Cotchett Felow, Public Justice)

Something really crazy has happened in Ohio. Last summer an Ohio State Court of Appeals held that, under Ohio law, if a company claims there is an agreement to arbitrate, then the plaintiffs can be automatically kicked out of the courtroom without being given a chance to respond. The decision is Garber v. Buckeye Chrysler-Jeep-Dodge of Shelby, 2008 WL 2789074, No. 2007-CA-0121 (Ohio. App. 5 Dist. 2008). We urged the Ohio Supreme Court to review and overturn this decision, but several months ago it refused to hear the case. For now, at least, this decision is the law in one part, and possibly all, of Ohio. Under the Garber rule, a plaintiff can be forced go before a private arbitrator picked by the company they are suing, without ever being given an opportunity to respond.

This new decision in Ohio is a complete aberration – court cases are normally like a game of chess in the sense that parties are given a chance to respond whenever the other side makes a move. But now, in Ohio, if a corporation simply claims that there’s an agreement to arbitrate, the corporation gets to have the legal equivalent of a checkmate on the first move. Under the Garber ruling, the consumer immediately loses and is kicked out of court. Under this decision, no matter how unfair a given arbitration clause may be, the consumer has no meaningful chance to appeal.

The Big Problem
To understand why the Garber ruling is so bad, it is important to know a bit about binding mandatory arbitration. Arbitration is not court trial, nor is it mediation. Instead of going before a publically chosen and accountable judge, using standard court rules and fees, under arbitration, a case is resolved by a private decision maker selected by a private arbitration company (there are three big arbitration companies in the US right now that do about 90% of the business). The private arbitration company makes up its own rules and fees, and the arbitrators usually do not issue written decisions explaining their awards. Even if they do write decisions, those are usually not publicly available or searchable – it’s very hard if not impossible for a consumer to find out why an arbitrator decided an earlier decision one way or the other. Unlike a court judgment or mediation, the decision of the arbitrator is final. It is binding and is not subject to any meaningful appeal. (See this prior post for more on the lack of judicial review in arbitration.)
Arbitration clauses are generally enforceable under the law. But like any contract, sometimes arbitration clauses have problems that make them so unfair that they are unenforceable. For example, there are some cases where the arbitration clause was never actually agreed to by the consumer. We have seen this in a lot of car sales; indeed we’ve even seen forgeries by some car dealers of consumer’s signatures. Like any contract, an arbitration clause that wasn’t assented to by both parties is not enforceable. Another example of why arbitration clauses should not be made automatically enforceable without giving consumers a chance to respond is that corporations often add ridiculously unfair terms to the fine print of an arbitration clause. One arbitration company used to require that all consumers, regardless of their residence or the amount of money they claimed in a dispute, had to physically go to Minnesota to have their cases heard in arbitration. Similarly, some corporations and/or arbitration companies have set such high fees for arbitration that they prevent people from proceeding. We’ve represented consumers who were faced with arbitration fees that were greater than the value of the underlying dispute. Other arbitration clauses have terms that are terribly biased and one-sided. In the infamous Hooter’s sexual harrassment case, 173 F.3d 933 (4th Cir. 1999), the arbitration clause allowed the company to pick practically anyone to be the arbitrator. Under the language of the clause, the company could even have selected themanager accused of harassing a waitress to serve as arbitrator in the case.

When parties challenge unfair arbitration clauses, it serves as a critical policing system. Many courts – including Ohio courts–have struck down abusive arbitration clauses in particular cases. In Ohio, as in most other states, there are cases holding when the terms of an agreement to arbitrate are so unfair they are unconscionable, the agreement is deemed unenforceable, and rather than arbitrate, the dispute can proceed in court. (I wonder if these pro-consumer cases still mean anything after the Garber decision.) Some companies have responded to these kinds of decisions by revising their arbitration clauses to jettison some of the most obviously unfair provisions. For example, some companies now will bear the full cost of arbitration. If consumers can’t challenge the most abusive arbitration clauses, corporations will have no incentive not to put in the most unfair provisions they can invent.

We’ve reviewed hundreds of cases involving unconscionability challenges to arbitration clauses, and we have NEVER before seen a court issue a ruling like the Garber case in Ohio. No other court has simply taken the word of one side, and refused to allow the other side to respond to a claim that there is an agreement to arbitrate. This is simply outrageous.
What Happened
In Garber, two car buyers filed a lawsuit in court against a car dealer, alleging fraud and violation of consumer protection statutes. A few weeks later, the dealer responded with a motion to compel arbitration. The NEXT DAY, without giving the car buyers any opportunity to respond, the trial court automatically granted the motion to compel arbitration! The following day, the car buyers rushed back to court asking to re-open the case and permit them to challenge the enforceability of the arbitration clause.
The car buyers raised very serious legal challenges, arguments that would have won in many courts. For example, one of the two consumers never even signed the agreement, and the agreement required that they use of a very expensive arbitration company. But the trial court refused to even consider the car buyer’s arguments and denied their motion.
Going against all previous precedent, the Ohio Court of Appeals affirmed, holding that the car buyers waived any arguments they might have against the arbitration clause because they did not raise the arguments IN THEIR COMPLAINT. Shockingly, the Court of Appeals also held that, under Ohio
law, the trial court was not required to permit the plaintiffs any response to the car dealer’s motion to compel arbitration.

We at Public Justice petitioned the Ohio Supreme Court to review the case, but the court refused, making this decision the final rule in at least a large part of Ohio. You can find a copy of our Petition, which sets forth the legal reasons why this ruling should have been overturned, here.

Why It’s Wrong
The ruling in Garber creates an entirely new procedural barrier and substantive requirement that has never before been recognized by any court, and that contradicts a number of established rules of law.
First, by ruling against the plaintiffs without even providing them an opportunity to be heard, the court violated their fundamental due process rights. Due process means that when one party makes a claim, the other party must be notified and given an opportunity to have their side of the story heard. What’s happened in Ohio s that the Garber ruling has eliminated this vital Constitutional protection for consumers alleged to have entered arbitration clauses. Now, if a corporation says there is an arbitration clause, the court is supposed to just take the corporation’s word for it and throw the lawsuit out of court. The plaintiff is never given an opportunity to challenge the existence of a valid arbitration agreement, and thus is denied basic due process.
Second, the Garber decision ignores the hefty body of law from around the country establishing that a party should be permitted to take discovery when resisting a motion to compel arbitration. Now, in Ohio, plaintiffs are forced to put forward their responses to an affirmative defense in their complaint, before they’ve had the opportunity to take discovery. This makes no sense. A lot of these situations are fact-specific, and therefore require discovery. Our petition lists many cases supporting the right of consumers to take discovery before being forced into arbitration.

Third, in many cases, consumers do not even know about a supposed “arbitration clause” until it is evoked as a defense. Sometimes this happens because a consumer never actually sees nor signs a contract. In other cases, the consumer won’t know about the arbitration clause – they’re often embedded deep within the body of the agreement, and unsuspecting consumers or employees sign without being informed of the arbitration clause. We have also seen cases where there is a language barrier, and the arbitration clause is never adequately translated. To say that these consumers are supposed to attack an arbitration clause that they don’t know about and usually don’t have a copy of in their complaint is an unfair and ridiculous burden.
Fourth, the Garber ruling creates a strict new pleading rule that does not exist in Ohio law for any other affirmative defense. For example, when addressing this very question in a non-arbitration context, the Ohio Supreme Court in Royce v. Smith held that “a matter constituting an affirmative defense . . . need not be alleged in the complaint.” Royce v. Smith, 68 Ohio St.2d 106, 112 (Ohio, 1981). This holding is consistent with the approach under the Federal Rules of Civil Procedure (which Ohio follows). Similarly, appellate courts in other jurisdictions have refused to automatically enforce arbitration clauses. Treating arbitration clauses differently than other affirmative defenses or other contracts that require judicial enforcement, and automatically enforceable, violates the U.S. Supreme Court’s repeated statements that arbitration clauses are “as enforceable as other types of contracts, but not more so.” Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n. 12 (1967).
Finally, up until now, courts across the nation, as well as in Ohio, have repeatedly rejected efforts to force cases into arbitration where no agreement had been reached, or where the arbitration clauses were unconscionable. As explained above, this can happen when the terms such as the venue or cost of arbitration are not reasonable, or when the agreement is otherwise downright unfair or one-sided. Because there are so many circumstances that can make an arbitration agreement unenforceable, blindly and automatically enforcing all arbitration agreements is simply bad law. The new rule created by Garber is unfair and unsound.

Conclusion
Because of the terrible Garber decision, many Ohio consumers are faced with this unfair barrier to justice unless the court rules are-rewritten or the legislature takes some action. Until then, consumers, employees, and other plaintiffs will be forced to jump through ridiculous hoops at the outset of a case in order to preserve any hope of a day in court.

~ by ebragg on April 27, 2009.

Posted in arbitration reform, legal system victims
Tags: arbitration ohio, arbitration reform, consumer law and policy blog, garber v. buckeye