Private Judges Arbitrate More Consumer Suits

It’s almost impossible these days to open a checking account, get automobile insurance, buy stock, obtain health care or even take an ocean cruise without being asked--or compelled--to surrender one of America’s most basic constitutional rights.

Through tiny paragraphs of legalese that many people never see or read, Americans are forfeiting their rights to a day in court if they believe that some provider has done them wrong.

Instead of having their disputes settled in a courtroom by judges subject to public votes of confidence, more and more people are discovering that fine print “arbitration clauses” are obliging them to argue their cases before rented judges in private offices.

The booming industry this movement has spawned is deeply rooted in Orange County, home of the nation’s largest for-profit vendor of private justice, JAMS/Endispute Inc., whose 350 arbitrators, most of them retired judges, resolve more than 20,000 cases a year in 30 offices nationwide. Superior Court judges in California, by comparison, dispose of roughly 77,000 similar cases each year.

Arbitration clauses have shown up with monthly bank and credit card statements from Bank of America, on the service agreements of long-distance giant MCI, and on the basic enrollment forms of major HMOs such as Kaiser Permanente.

Often they are easy to overlook. Someone in the market for automobile insurance, for example, would have to flip to page 25 of some Allstate policies to read: “No legal action can be brought against us under this coverage” and any “arbitration award will be binding.” In other words, it can’t be appealed.

Proponents of arbitration note that it is helping unclog the nation’s courts, once so backlogged that cases routinely gathered dust for years before they could be resolved.

They say consumers are coming to prefer arbitration over court proceedings, which tend to end in win-it-all or lose-it-all judgments, while arbitration can often result in each side getting half a loaf.

“The biggest advantage is speed,” said Timothy J. Rabun, chief executive of Costa Mesa’s Judicial Dispute Resolution. “You can bring the most complex construction defect or medical malpractice case here . . . and be done in eight hours.”

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Forms of binding arbitration have been practiced for decades, primarily between businesses with commercial disputes. Today, thousands of cases that once inched through state courts are now routinely arbitrated, in part because of the growth of arbitration agreements aimed at consumers.

In most cases, the two combatants must agree on an arbitrator in advance, ensuring a fair result, said Richard Chernick, a prominent Los Angeles arbitrator.

“In court you’re at the mercy of inflexible rules, enormous calendar congestion and judicial officers who usually could care less,” he said.

But critics say the spread of binding arbitration is an alarming end run by corporate America, which is winning, by stealth, the limits on punitive damages and protection from huge jury awards that it has largely failed to get through Congress, state ballot initiatives or state laws.

Although arbitration is promoted as a less costly alternative to the civil courts, that isn’t always the case. Generally, both parties must share the costs of any arbitration hearings. But often their financial resources are anything but equal.

The arbitrator’s fee can average $250 an hour or more; when expert witness and attorney fees are included, a simple hearing can run into thousands of dollars.

Able to dangle the prospect of immense volume, large companies negotiate exclusive contracts with private justice providers. This creates the perception that an arbitration company may be biased toward large companies--which repeatedly appear before private judges, according to an Indiana University study. It noted that complainants rarely appear more than once.

California Chief Justice Ronald George has appointed a task force of legal experts to examine whether the state’s increasingly influential private judges and arbitrators ought to be subject to stricter ethical standards.

In many ways, arbitration is turning the legal world upside down.

Secrecy now cloaks legal disputes once heard by a branch of government that has traditionally been open. Disputes that might have established important legal precedents now leave no trace in court.

Hearing transcripts and arbitration records that could prove helpful to other would-be litigants are rarely kept and seldom available to the public. Consumers are routinely denied the rights they would have in court to know the names of other people caught in their situations. Appeals seldom succeed.

The secrecy also hides awards won as a result of shoddy medical care or mismanagement of a client’s money, for example. That prevents other potential victims from hearing warnings found in public court judgments.

“Mandatory arbitration is one of the great legal scandals of our time,” said Cliff Palefsky, a San Francisco-based employment lawyer and a leading critic of the practice. “And it has been perpetrated by the courts.

“Millions of people are being denied constitutionally guaranteed access to the courthouse,” he added, “all because arbitration is being misrepresented and foisted on an unsuspecting public.”

Arbitration has its legal roots in the Federal Arbitration Act of 1925, part of whose intent was to help businesses engaged in interstate commerce resolve disputes. Court rulings have expanded the law’s scope and meaning.

The U.S. Supreme Court opened the floodgates to the use of binding arbitration in 1989 by declaring that “federal policy favors arbitration over litigation.”

Critics such as Jamie Court, director of Consumers for Quality Care, a Santa Monica-based health care watchdog group, now believe that “binding arbitration has closed the courthouse door--the last place the average citizen can go to take on a powerful corporation.”

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Those who have been through arbitration say it is often a bewildering process, full of pitfalls. Consumers discover that their perceptions of court proceedings don’t apply in arbitrations. Rules for introducing evidence are not as strict, less information is discoverable, and rules for conduct of the arbitration are fashioned on the fly.

For example, consumers generally are bound by the terms of an arbitration agreement, even if they were never aware it existed.

In June 1992, Bank of America inserted an announcement in the bills of its depositors and credit card customers, advising them that disputes would henceforth be resolved through arbitration.

Many of the bank’s customers were not asked to sign anything. But unless they closed their accounts, they were bound from that point on to seek arbitration if any problems arose.

James C. Sturdevant, who sued the bank on behalf of Consumers Action, a San Francisco-based public interest group, said, “There was no agreement, that it takes knowledge and consent for an agreement to exist.

“A readership survey by the bank that was introduced at trial showed 96% of [the bank’s] customers do not read inserts,” Sturdevant added, “so the bank knew in advance that most people would never even read it and many would not understand it.”

But the judge rejected Consumers Action’s arguments, concluding that the bank had the power under state law to unilaterally change customers’ agreements, because “arbitration [is] viewed under California law and public policy as a favored means of resolving legal disputes.” The case is now on appeal.

Said B of A spokesman Mike Zampa: “We think it’s fair . . . and we think our disclosure is fair, and so far the courts have agreed with us.”

Arbitration participants also complain that there are few rules of evidence or conduct, and seldom any basis for appeal.

William and Judy Seymour of San Clemente found themselves in a situation familiar to any investor who has experienced problems with a brokerage firm. Nearly all standard investment account agreements require disputes to be settled by arbitration.

But the Seymours claim that the other side also distorted facts and introduced arguments that had little relevance.

Seymour, a retired builder, and his wife, who uses a wheelchair because of multiple sclerosis, were looking for investments that would yield a little more than the certificates of deposit they held.

So they entrusted their retirement savings to a Pasadena financial planner. Instead of following the Seymours’ oral instructions to limit their exposure to risk, he invested much of their money in high-risk securities and charged, in some instances, up to 29% in commissions. Over a four-year period, while the U.S. stock market was posting record gains, their $349,000 retirement nest egg shrank by more than $110,000, nearly 32%.

The Seymours got nothing and the arbitrators ordered them to pay the planner’s share of the arbitration costs, about $2,300. They thought briefly about challenging the outcome in court, but the panel gave no reason for its decision in a terse two-paragraph ruling anddeclined to elaborate when later asked, leaving them in the dark about why their case had failed.

“The whole experience was bizarre,” Judy Seymour said. But the Seymours’ financial planner, who spoke on condition that he not be identified, said: “Three objective persons sat there and listened to both sides [and] we won it hands down.”

Statistics don’t exist on how long the average waiting period is for an arbitration hearing. But it took Geneva Potter of Mission Hills nearly two years to even get to a hearing after an accident with an uninsured motorist.

Potter, a school psychologist, was hit from behind on the Harbor Freeway two years ago by a hit-and-run driver. She suffered a back injury that required her to wear a brace for eight months and take a disability leave from her job.

When authorities found the car, the owner said his brother had been driving at the time and that he did not have insurance, Potter said. Her only hope was to make a claim against her own insurance company.

It took months of telephone calls, Potter said, for the company to even agree to submit her claim to arbitration, and “it took almost another year just to get a hearing.” An attorney Potter hired complained in a letter to her insurance company that the carrier “denied the accident [had been a] hit-and-run [by an] uninsured motorist until the time of the arbitration hearing.”

Potter was eventually awarded $4,492--from which she paid her attorney fees, the doctor who treated her and her share of the arbitration costs. That left her with a little more than $1,000.

A spokesman for the insurance company that sold Potter her policy said it was prohibited by the federal Privacy Act “from discussing matters involving individual policyholders.”

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Times staff writer Kenneth Reich contributed to this story.