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Meet Big Business' Favorite Granny

With congressional Democrats moving to ban one of corporate America's most useful tricks, industry is fighting back with a 63-year-old widow who squeezed $281 out of Sears.

| Mon May 12, 2008 3:00 AM EDT

In early May, the Texas Supreme Court overturned an $800,000 arbitrator's award given to Jane and Bob Cull, a couple who'd bought a defective house from homebuilder Bob Perry. Perry has given millions of dollars to Republican political causes and helped underwrite the Swiftboat Veterans for Truth, whose media campaign derailed John Kerry's presidential bid in 2004. Perry's company has aggressively used mandatory arbitration clauses in building contracts to avoid litigation over alleged construction defects. But when the arbitrator made the rare ruling against him, Perry refused to pay. He appealed to the state Supreme Court, where he and his family had donated more than $260,000 in campaign contributions to all nine sitting justices. The court sided with him, and the Culls are out hundreds of thousands of dollars in repair and legal costs.

Even if the chamber could find some big-ticket consumer victories in arbitration, they probably don't want to promote them. After all, that would entail bad PR for one of their members caught defrauding or otherwise injuring someone. So instead, the chamber has chosen to reframe the debate by focusing on tiny awards like Kruse's. While the move smacks of desperation, there is a kernel of genius in it. The chamber has smartly tapped into a real American pet peeve, which is getting nickeled and dimed by big companies.

At its April press conference kicking off a counterattack against the "trial lawyer assault on arbitration," the chamber released the results of a new survey it commissioned designed to prove that Americans actually love being forced into private arbitration. Conducted by Joel Benenson, Barack Obama's pollster, along with a Republican counterpart, the survey claims that "71 percent of likely voters oppose efforts by Congress to remove arbitration agreements from consumer contracts." But the survey also shows that Americans don't think too highly of many of the chamber's big donors, either. Most of the voters polled think they have virtually no chance of resolving a dispute with a company. Of course, Kruse notwithstanding, mandatory arbitration won't change that, and in fact, it usually impedes real consumer-instigated change of corporate behavior.

Companies like Sears are more than willing to cough up $281 in small disputes with people like Kruse because arbitration clauses facilitate much bigger rip-offs. Here's how it works: Let's assume, hypothetically, that Kruse's case is not an isolated one. Let's say Sears has been gypping lots of people on boiler service contracts, maybe even every single one of its customers in the state of Michigan. While the arbitration clause in the service contract may allow Kruse to reclaim her $281, most of Sears' victims probably won't go that route. They'll just eat the relatively small loss, while Sears ends up with a huge windfall.

Meanwhile, standard arbitration clauses these days would prevent Kruse from joining with other similarly aggrieved consumers in bringing a class action to force Sears to stick by the terms of its contract for all of its customers, not just the ones who complain, and to disgorge some of its ill-gotten profits. Such a suit could result in sizable damages, not to mention legal fees. The chamber has spent the last 10 years trying to get rid of these kinds of suits, and arbitration clauses have been a useful tool in that regard. That's why businesses are so eager to preserve them.

Despite the weak elements of its new defense campaign, the chamber remains a formidable lobbying force in Washington. Already, it's persuaded the Washington Post to take up its cause. In mid-April, not long after the press conference, the Post editorialized against the passage of the Arbitration Fairness Act, arguing that it "goes too far" in limiting an alternative to litigation, an argument straight from the chamber's talking points.

But the chamber is still working with a bad set of facts that is only getting worse. Last month, for instance, the San Francisco district attorney sued one of the country's biggest arbitration firms, the National Arbitration Forum, for unfair and unlawful business practices. The suit challenges the NAF's claim to being a neutral arbiter, stating, "NAF is actually in the business of operating an arbitration mill, churning out arbitration awards in favor of debt collectors and against California consumers, often without regard to whether consumers actually owe the money sought by the debt collectors. NAF's arbitration process is the antithesis of fair...according to NAF's own disclosures, in NAF arbitrations involving claims by business entities against consumers that were disposed of by hearing in California, the NAF arbitrator decided in favor of the business entity and against the consumer 100% of the time." (Emphasis in complaint.)

More recently, the Second Circuit Court of Appeals reinstated an anti-trust class action against Bank of America and a host of the country's biggest banks alleging they illegally colluded to force cardholders to accept mandatory arbitration provisions in their credit card agreements. The lawsuit seeks to void the arbitration agreements in millions of credit card accounts. If it's successful, it might accomplish part of what trial lawyers and consumer advocates are seeking in Congress.

Such stories are chipping away at the chamber's assertions that arbitration is "faster, fairer, cheaper" than going to court. What really might sink the chamber's new campaign, though, is its false premise that if Congress bans mandatory arbitration, consumers will be left defenseless. Indeed, even Kruse had a few other options available to get her money back from Sears without arbitration, namely complaining to the Better Business Bureau, of which Sears has been a member since 1926. As a BBB member, Sears is obligated to respond to her complaint to remain in good standing, and the BBB offers its own mediation services, free of charge. She wouldn't have even needed a lawyer.

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