Arbitration Warning: Deep Pockets Required

by Dick Larsen, senior editor

The dictionary defines “arbitration” as the process by which the parties to a dispute submit their differences to the judgment of an impartial person or group appointed by mutual consent or statutory provision.

Sounds attractive, doesn’t it — the offer of a quick resolution and no time-consuming hours spent in court. However, the dictionary doesn’t spell out the downside.

In fact, a more accurate definition of arbitration might be: “The process by which a wealthy entity can delay justice by forcing the aggrieved and less wealthy party to pay through the nose for an unspecified amount of time.”

A case in point: The Owner-Operator Independent Drivers Association filed a class-action suit June 11, 2002, against Swift Transportation Co. Inc. of Arizona and Nevada and M.S. Carriers Warehousing Distribution Inc.

Swift Transportation Co. Inc., NV, is the holding company of M.S. Carriers and Swift. M.S. Carriers Warehousing is a subsidiary of M.S. Carriers engaged in leasing equipment to owner-operators.

The suit, filed in U.S. District Court for the District of Arizona, alleges Swift’s and M.S. Carriers’ leases violated federal truth-in-leasing regulations. A key complaint is the failure of M.S. Carriers at the time of that company’s takeover by Swift to return truckdrivers’ escrow accounts.

Meanwhile, on Nov. 4, 2002, the carriers filed a motion to force OOIDA’s owner-operators to resolve their claims against M.S. Carriers by arbitration. M.S. Carriers has a contract containing a driver arbitration provision.

Responding to this request, OOIDA petitioned the court in mid-January and said, in part: The defendants waived arbitration by asking the court to rule on the merits of whether M.S. Carriers’ lease violated the truth-in-leasing regulations; plaintiffs are exempt from compulsory arbitration as a matter of federal arbitration law; the arbitration clause is unenforceable because M.S. Carrier’s entire lease is void under federal transportation laws; the arbitration clause is unenforceable here because it fails to provide an effective and accessible method to resolve plaintiff’s claims; and further, the arbitration clause is unenforceable because it is unconscionable under state law (in this case, Tennessee law).

“The truth-in-leasing regulations were promulgated precisely because owner-operators lack the economic leverage and bargaining power to protect themselves in transactions with carriers,” OOIDA told the court.

OOIDA also pointed out that in 1994, the ICC told Congress: “Some federal regulatory oversight of owner-operator leasing would ensure that an important segment of the transportation community can conduct its operations safely and without being subjected to abusive practices that cannot be prevented by market forces.”

As a result, when Congress passed the ICC Termination Act of 1995, it left truth-in-leasing regulations intact and created a judicial mechanism for individuals, enabling them to enforce leasing provisions by going to a court to obtain relief.

Moreover, the U.S. Department of Transportation said truth-in-leasing provisions should be retained to protect owner-operators, and “in lieu of federal enforcement, owner-operators will be given the right of private action to enforce them.”

OOIDA’s President Johnston comments
Commenting on the suit, OOIDA President Jim Johnston said, “When major carriers are allowed to profit from unethical or illegal business practices, the dividing line between ethical and unethical business practices and treatment of professional drivers is continually driven lower and lower.

“We don’t undertake this kind of litigation lightly. However, we believe the violations of these carriers’ leases with owner-operators are so blatant and extensive that legal action is necessary.”

OOIDA’s case involves several issues apart from arbitration. First, the suit says Swift’s and M.S. Carriers’ leases are in gross violation of the federal truth-in-leasing regulations. Specifically, the lease contracts don’t contain provisions required by 49 C.F.R. 376.12.

In addition, the carriers are accused of: failing to provide owner-operators with required documentation for chargebacks; forcing purchase of insurance and services and products, including a $25 per week settlement processing fee, $15 per month for TripPack services and mailbox charges for use of required Qualcomm systems; and failing to return escrow accounts within the required amount of time.

Arbitration: a money pit
M.S. Carriers’ contract attempts to force arbitration under commercial rules established by the American Arbitration Association. Under these AAA rules, the parties to the arbitration must pay attorneys’ fees, litigation expenses and “forum” costs, which are fees paid to the institution that adjudicates the dispute.

The minimum filing fee is usually $500. Fees to the arbitrator normally include about $2,000 per hearing day plus pre- and post-hearing fees of about $250 an hour. In some cases, payment of all fees may be required in advance.

Claimants under arbitration often are saddled with many extra fees they would not be charged if they went to court. For example, the National Arbitration Forum as of May 2002 charged $75 to issue a subpoena, which can be obtained for free from the court or by downloading it from the Internet. NAF also charges fees for discovery requests ($150) and continuances ($100). The AAA charges extra fees for use of a hearing room.

“High arbitration costs can be used to bludgeon an adversary,” according to an April 2002 study by Public Citizen called “The Costs of Arbitration.” “For instance, the party being sued can file a motion to dismiss or a motion for summary judgment. The claimant must then advance additional funds to pay the arbitrator to decide the motion, even if the motion has no merit.”

In addition, a defendant may refuse to provide discovery information, in which case the claimant must pay the arbitrator to decide the discovery dispute. Sometimes, the suit is dropped because the claimant can’t pay the fees.

“Arbitration saddles claimants with a plethora of extra fees they would not be charged if they went to court,” the study says. “Arbitration costs will probably always be higher than court costs, because the expenses of a private legal system are so substantial. The same support personnel that expedite cases at a courthouse, such as file clerks and court administrators, are also necessary to manage arbitration cases.”

For example, the study found it costs the clerk of the Circuit Court of Cook County an average of $44.20 to administer a case. AAA’s administrative cost per case averages $340.63 — about 700 percent more.

Report findings
In its report, Public Citizen found:

The cost to the plaintiff of initiating arbitration is almost always higher than the cost of instituting a lawsuit. Forum costs — the costs charged by the tribunal that decides a dispute — can be up to 5,000 percent higher in arbitration than in court litigation. In fact, these costs often prevent a claimant from filing a case.

The report found, for example, the forum fee for a $60,000 employment discrimination claim in the Circuit Court of Cook County, IL, is $221. The forum fees for the same claim before the National Arbitration Forum would be $10,925 — 4,943 percent higher. An $80,000 consumer claim brought in Cook County would cost $221, vs. $11,625 at NAF, a 5,260 percent difference. For the same $80,000 claim, the AAA would charge the plaintiff up to $6,650, and the Judicial Arbitration and Mediation Services would charge up to $7,950, amounting to a 3,009 percent and 3,597 percent difference in cost, respectively.

The costs of arbitration are so high even some businesses that choose to include arbitration clauses in contracts with consumers and farmers have refused to pay the fees. Moreover, there is no evidence arbitration reduces the overall transaction costs of litigation, including witness fees, attorney fees and discovery costs.

Arbitration costs are high under a pre-dispute arbitration clause because there is no price competition among providers. Companies that want to use arbitration costs as a barrier to prevent consumers and others from asserting their legal rights have no incentive to arrange low-cost arbitration services. Instead, it’s in their interest to seek out the highest-cost arbitration providers.

Taking a case to arbitration does not guarantee the consumer or employee will stay out of court. First, a plaintiff bound by a one-way arbitration clause, the most common type, may be forced to go to court to litigate the same issues being decided in the arbitration. This is because the other party to the clause has retained its right to sue in court. Second, if crucial documents or testimony must come from a third party, court litigation is necessary to enforce subpoenas. Due to a quirk in arbitration law, sometimes two different federal lawsuits are necessary to enforce one subpoena. Third, if a plaintiff wins a case in arbitration, but the defendant refuses to honor the award, the plaintiff must ask a judge to enforce the award.

In short, arbitration clauses are not what they appear on the surface. A $2,000 suit could cost well beyond what a claimant ever imagined. So if you’re asked to sign a lease containing an arbitration clause, remember, there’s a difference between the dictionary definition and how things work in the real world.