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As you know, a few years ago arbitration clauses included in automobile purchase agreements were to simplify the litigation process with a disgruntled consumer. At first, the arbitration clauses worked very well, not only on behalf of the dealer, but also on behalf of the consumer. The reason behind this was the fact that the parties were able to have an impartial hearing within a short period of time after the arbitration was filed. The cost of defending an arbitration was significantly less than the standard litigation process in the courts of common pleas or federal courts. Further, the fact that there was a faster resolution other than a year plus while the case wound its way through Common Pleas Court was a benefit not only to the dealer, but to the consumer. Obviously, if the consumer prevailed, the consumer would be able to either rescind the purchase sooner and/or obtain his or her damages much faster. If the dealer prevailed, the dealer’s time and expenses were considerably reduced. However, there was one downfall to the arbitration. The Plaintiff’s attorney fees were significantly reduced. Obviously, this lead to litigation which has substantially redefined the arbitration system.
Although the United States Supreme Court in the case entitled Green Tree Fin. Corporation-Alabama v. Randolph (2000), 531 U.S. 79, 121 S.Ct. 513, 148 L.Ed.2d 373 endorsed arbitrations, their scope and application has been narrowed by state law. In fact, in Ohio, if a plaintiff pleads that the arbitration clause was one of adhesion and he or she was coerced into executing an unconscionable agreement, then the Court has the ability to hold a full blown hearing (trial) specifically on the topic of the arbitration clause itself. Obviously, this defeats the purpose of the arbitration clause, in that all parties must incur time and litigation expenses in determining whether or not the arbitration is valid. Granted, many arbitration clauses that were contained in various buyers orders were wholly deficient with respect to the rights that were permitted to the consumers. However, a properly drafted arbitration clause does provide all the necessary information that a consumer needs to knowingly enter into the agreement which should overcome the objections of unconscionability and adhesion. These are the defenses which are typically pled by a plaintiff’s attorney. Notwithstanding a well-written arbitration clause and the fact that a consumer has the right to purchase a vehicle without being obligated to an arbitration agreement, many consumers and now legislators are attempting to pass legislation that would specifically define parameters relative to arbitration clauses.
On July 12, 2007, Senate Bill 1782 was introduced in the United States Senate. The bill, which has been dubbed the “Arbitration Fairness Act,” not only addresses consumer issues, but also employment disputes and franchise disputes. It is generally a bill against mandatory arbitration agreements, not those entered into voluntarily.
According to the bill:
The consumer dispute…“means a dispute between a person other than an organization who seeks or acquires real or personal property, services, money or credit for personal, family or household purposes and the seller or provider of such property, services, money or credits.”
The franchise dispute under paragraph 5 is defined as a “dispute between a franchisor and franchisee arising out of or relating to the contract or agreement by which; (A) a franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor; (B) the operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logo type, advertising or other commercial symbol designating the franchisor…and (C) the franchisee is required to pay, directly or indirectly a franchise fee.”
The Senate states that the bill applies to any arbitration agreement that is required for any dispute regarding the transaction, whether the dispute occurs before, during or after the contract is signed. The bill specifically prohibits a pre-dispute arbitration agreement for a dispute that has not yet arisen at the time of making the contract as it applies to employment, consumer or franchise disputes and/or disputes that may occur under any civil rights laws, contracts or transactions between parties of “unequal bargaining power.” Most importantly, the bill provides that the validity of an arbitration agreement is to be determined by a court rather than an arbitrator. Generally, in a well-written arbitration agreement, a dispute as to whether or not an arbitration agreement is enforceable is to be determined by an arbitrator and not by the judicial system.
Obviously, the passing of this bill is a two-edged sword since, on the one hand, it protects consumers from mandatory arbitration agreements while, at the same time, it protects you as a franchisee from the mandatory arbitration provisions in dealer sales and service agreements.
This bill applies to pre-dispute arbitration agreements, it is silent as to voluntarily arbitration clauses. Therefore it can be construed as applicable in both situations.
The downside for the dealer in any arbitration is still a “runaway” arbitrator(s) who chooses to ignore the law and award damages to an undeserving plaintiff.
As always, these are highlights of the law and are not to be construed as containing the entire law. This is not to be construed or relied upon as a legal opinion. If you are presented with this problem, contact your legal counsel for advice.
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