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Justice for Sale, Part One: Arbitration Purgatory

Companies across the country insert wording into their small-print contracts that bars consumers from taking them to court.

The contracts require consumers to settle disputes in arbitration, a private form of conflict resolution. As mandatory arbitration clauses have become ubiquitous, companies have carved out a world of justice that some insiders and academics say is deeply flawed and biased against consumers.

Not only do corporations write arbitration into their contracts, they're also increasingly stipulating the exact company or organization that will facilitate the arbitration. "It is almost impossible for us not to be self-serving," says one arbitrator. Another disagrees.

This is the first story in our three-part series that looks at the extraordinary growth in mandatory arbitration clauses in contracts for everything from jobs to cell phones to medical care. Check out Part Two and Part Three.

Six years ago, Jon Perz bought a used blue Ford Escort from Mossy Toyota in Pacific Beach.

During a test drive, Perz said he noticed a jarring vibration emanating from the car’s bowels every time he stopped at a red light or a stop sign. He said the salesman told him not to worry, that the engine’s idler needed a minor adjustment, and that he could bring the car in any day for a quick fix. Satisfied, Perz signed a contract to buy the vehicle for a cash price of $7,995.

As he drove home to Hillcrest, Perz noticed the vibration again. A couple days later, he brought the car back to Mossy for the adjustment. But when he picked it up, he said the car was still shaking violently. That’s when he started to get worried.

Perz said he took the car back to the dealership another two times, and tried to negotiate with Mossy repeatedly over the next few weeks. “They basically laughed in my face,” he said.

Perz said an independent expert he hired concluded the car had probably been submerged in water, causing the electrics to fail and rotting the vehicle’s frame with rust. Perz decided he couldn’t in good faith sell it to recoup his money. So he hired a lawyer.

That’s when he learned that he couldn’t take Mossy to court.

“My lawyer said I had to go to to arbitration,” Perz said. “I didn’t know even what that was.”

It was the first time he had heard the word, but arbitration was about to become a big part of Perz’s life. He had signed a contract that included a section known as a “mandatory arbitration clause,” meaning he had essentially waived his right to sue Mossy.

For the last decade or so, companies across the country have been inserting wording into their sprawling, small-print contracts that bars consumers from taking them to court.

Instead, the contracts require consumers to settle disputes in arbitration, an alternative, private form of conflict resolution that has none of the oversight or transparency of the courts. As mandatory arbitration clauses have become ubiquitous in contracts for everything from cell phones to employment, companies have carved out an alternative world of justice that some insiders and academics say is deeply flawed and biased against consumers from the outset.

Bob Fellmeth, a University of San Diego professor who has taught about consumer law, calls the shift toward the secretive world of arbitration “the most important consumer issue of our time.”

Over the last six years, as he has fought Mossy Toyota, Perz has become the poster boy for the burgeoning campaign against consumer arbitration in California.

Photo by Sam Hodgson

Photo by Sam Hodgson

As the blue Ford Escort sits in his garage, un-driven, gathering rust and dust, Perz has taken to the internet to tell his story. A video detailing his legal fight has raked in more than 280,000 views on YouTube, and Perz has attracted the attention of consumer advocates across the nation.

Richard J. Ritchie, who represents Mossy, said none of Perz’s claims about the car, or the way he has been treated by the dealership, are true.

He said the car was mechanically sound when Perz bought it, and said any claim that it was submerged in water is completely false. Mossy Toyota even tracked down the previous owner of the car, who stated in a deposition that it was in good shape when the dealership took ownership of it and had never sustained water damage, Ritchie said.

Mossy would love to have the case heard as soon as possible, he said, but Perz has spent the last six years coming up with excuses to keep the matter out of a hearing.

Ritchie said Perz has turned his fight into a crusade against the arbitration industry as a whole. Perz’s argument would quickly evaporate if he were to ever have his case examined on its merits, he said.

“His fight against the arbitration business has swallowed his initial complaint completely,” Ritchie said.

Perz counters that the only reason he is bound to arbitration is because Mossy forced him into it.

“I’ve spent six years in arbitration purgatory,” he said.

Signing Away Access to the Court System

It’s almost impossible to live in modern America without regularly signing away one’s constitutional right to a jury trial or even access to small claims court.

Those multi-page contracts you sign or click through online without reading invariably contain mandatory arbitration clauses that bar you from taking disputes to court.

The clauses are ever-present in contracts for medical procedures, car rentals and countless other services. Manufacturers have even begun placing mandatory arbitration clauses inside the plastic wrap on their products. The moment you unwrap the plastic on some new electronic products, you’ve lost your chance to take the company to court.

“When you pay your utility bills, you consent to arbitration. When you pay your credit card bills, you consent to arbitration, when you buy a house, you consent to arbitration,” said Hal Rosner, a local plaintiffs attorney. “There’s nothing you’re doing anymore that isn’t consent.”

Arbitration is supposed to provide a cheaper and quicker way to settle legal disputes than the court system. But academics, attorneys, plaintiffs and even an independent arbitrator contacted for this story described arbitration as an uneven playing field, with consumers facing an uphill battle from the start.

A Stable of Lame Horses

The challenge for consumers starts with the selection of the arbitrator, essentially a private judge who will hear the case and rule on its merits.

Not only do corporations write arbitration into their contracts, they’re also increasingly stipulating the exact company or organization that will facilitate the arbitration.

In California, most arbitrators are affiliated with one of several large organizations. The largest is the American Arbitration Association (AAA); another big one is JAMS (formerly Judicial Arbitration and Mediation Services). Both have offices in San Diego. Both companies declined to comment for this story.

When Perz started his legal fight, he was told to choose from one of a handful of arbitrators with AAA. His attorney, Michael Lindsey, researched each one and finally settled on Toni-Diane Donnet, a former plaintiffs attorney.

Two weeks before the case was due for a hearing, however, Lindsey said he discovered Donnet had previously run a website offering legal advice to car dealerships. And as the hearing approached, the arbitrator began to send him and Perz solicitations for her real estate business, Lindsey said.

Worried his client was headed for an unfair hearing, Lindsey requested that Donnet be removed from the case. She was disqualified, and the process began anew.

Donnet, who now works as a mediator for the San Diego Association of Realtors, said she didn’t recall the Perz case. She said she spent much of her legal career suing car dealerships, and was surprised, looking back, that it was Perz and not Mossy Toyota who asked to have her disqualified. She also denied sending the real estate solicitations.

In a brief in San Diego Superior Court years later, Ritchie wrote that the objection to Donnet was the first in a series of attempts to delay the case because Perz wanted it to be heard in court, not arbitration.

Indeed, Perz and Lindsey later rejected another arbitrator, JoBeth Halper. Out of the 40 cases Lindsey could find that she had arbitrated for AAA, he said, Halper had never once found in favor of the consumer.

But AAA declined to disqualify Halper. Desperate, Lindsey appeared before Superior Court Judge Steven R. Denton, who sided with Mossy, and said the matter should continue in arbitration. Frustrated, Lindsey pulled out of the arbitration a few weeks later.

Ritchie said that was just another stalling tactic. Perz and Lindsey couldn’t prove that the second chosen arbitrator was biased, he said, and they just didn’t want the case heard on its merits.

These disagreements highlight one of the problems frequently cited with arbitration: The process is controlled by an arbitration provider, which makes the rules for the hearings and selects the private judges a plaintiff can choose from.

Kevin Baker, deputy chief counsel for the state Assembly’s Judicial Committee, which is currently looking into the growth of arbitration clauses in California, likened that aspect of the process to a rigged horse race.

The company gets to choose which stable the consumer selects their horse from, Baker said. Inside that stable might be five horses, all showing signs of impairment.

“Once you’re in that stable, you can say, ‘That horse is lame,’ or, ‘That horse is foaming at the mouth,’ but you’re still limited to those horses,” Baker said. “You can pick, but you only get to pick the least-worst horse.”

‘How Often Would You Rule Against Your Family?’

The selection of an arbitration company isn’t the only factor working in big business’s favor.

There’s also a more fundamental flaw with the arbitration system: volume.

Most often, the cost of arbitration is borne by the company being sued. Some arbitrators charge hundreds of dollars an hour or thousands of dollars a day. Put simply: Arbitration is big business for a few people who make a name for themselves, primarily retired trial judges.

That causes an inherent conflict: Large businesses naturally want to hire arbitrators likely to rule in their favor, said Alan Schulman, a law professor at USD.

“Arbitrators want to be hired again and again, and they won’t be selected again if they get a reputation as ruling for consumers,” Schulman said. “If they get a reputation for having awarded plaintiffs damages repeatedly, businesses are not going to select them.”

Schulman acknowledged that there are checks in California law to guard against companies and arbitrators developing relationships that handicap plaintiffs. Individuals who believe they have been wronged by a biased arbitrator can appeal to a judge, he said.

“But the reality is that a business would rather have its case decided by a professional judge than by 12 jurors,” Schulman said.

Victoria Pynchon has been working as an independent arbitrator for almost 10 years. The San Diego native didn’t mince words when asked whether the system is fair.

“It’s a huge justice problem,” Pynchon said. [rtb-pushquote]”Consumers are getting screwed. Every single day, their constitutional right to a jury trial is being stolen from them.”[/rtb-pushquote]

Pynchon, who works in Los Angeles, said she makes an enormous effort to discard her biases when she’s judging cases. But she said it’s almost impossible for arbitrators to completely forget who is buttering their bread. The result is “asymmetrical warfare,” she said.

“It is almost impossible for us not to be self-serving,” she said. “Just think of family. How often are you going to rule against your family?”

Longtime local arbitrator Mandel Himelstein begged to differ. He acknowledged that the system has room for unscrupulous individuals, but he said all of the hundreds of arbitrations he has worked on have had fair outcomes.

He said most arbitrators aren’t in it for the money. Rather, they’re trying to provide a fair, balanced forum where parties can get their disputes settled quickly, easily and cheaply, he said.

“I may live in a Pollyannaish world, but the people I work with are fair,” Himelstein said.

Arbitration Purgatory

At this point, the stakes have risen considerably for Perz.

His dispute is no longer just about the money he paid for his blue Ford Escort. He could find himself on the hook for tens of thousands of dollars that Mossy has spent on legal fees over the past six years.

Last year, in an arbitration hearing, retired Judge William J. Howett ruled that Perz had taken too long to bring his case.

In the six years Perz had been fighting his battle, the statute of limitations for bringing a lawsuit against Mossy Toyota had expired, Howett said.

Lindsey has appealed the decision, and is trying to get the case in front of a different arbitrator — one who doesn’t work for AAA.

For his part, Perz seems at times a little confused by the case that has defined his life for the last half-decade. There have been so many legal documents, arguments, claims and counter-claims over the years that his tale can get rather overwhelming.

He believes he could prove that Mossy sold him the lemon of all lemons. All he wants is the chance to make that case in a courtroom.

“In no way in my wildest dreams did I realize an arbitration agreement would allow them to do this,” he said. “It’s so frustrating. It’s just heartbreaking.”

Next in the series: Arbitration companies in California have long been required to make their records public, but many don’t bother, leaving consumers in the dark about a rapidly growing sector of the state’s justice system.

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