Dealers Push for Arbitration
More dealerships demand that customers give up the right to sue
By Donna Harris
Automotive News / June 07, 2004
More dealers are requiring customers to accept third-party arbitration of disputes as an alternative to consumer lawsuits.
Arbitration typically is quicker and costs less than taking consumer disputes to court. Industry lawyers say dealers can slash legal exposure by including mandatory arbitration provisions in sales orders, provided such clauses can withstand legal scrutiny.
But plaintiffs' lawyers and consumer advocates say the clauses often are deceptive and unfair to customers. They accuse dealers of hypocrisy, noting that dealers successfully lobbied Congress to prohibit automakers from using franchise agreements that stipulated mandatory arbitration.
Both sides agree that dealers' reliance on arbitration is growing rapidly, although precise figures are not available.
A buyer's refusal to sign a mandatory arbitration agreement and give up his or her right to sue generally kills the deal. Advocates of arbitration say that rarely happens. Critics counter that consumers often don't know they've agreed to arbitration.
Cherry Hill, N.J., dealer Tom Hessert Jr. was a defendant in two recent consumer class-action lawsuits. To avoid further litigation, he says, "We have arbitration clauses in all the buyer's orders."
The typical consumer arbitration case takes about five months, says Richard Naimark, senior vice president of the American Arbitration Association, a nonprofit organization in New York that administers arbitration proceedings.
Most automotive arbitration cases involve customer claims that the vehicle is a lemon, Naimark says.
Many cases are settled before the arbitrator makes a decision. A consumer's chances of winning an arbitration proceeding are about the same as they are in court: slightly more than 50 percent, Naimark says.
Cutting legal expenses
Joel Aronson, a Bethesda, Md., lawyer who represents dealers, says arbitration clauses in sales agreements eliminate nuisance suits.
"In arbitration, the biggest savings come through the limitations on (legal) discovery because there are generally few depositions, if any," Aronson says. "In state court, discovery can take nine months or longer. The entire arbitration process is completed in four to six months."
Aronson says most large dealership groups in the Washington area have embraced arbitration. Naimark says dealer arbitration also is gaining popularity in the Southeast and on the West Coast.
Large publicly held dealership groups such as AutoNation Inc. of Fort Lauderdale, Fla., and Sonic Automotive Inc. of Charlotte, N.C., include arbitration clauses in consumer contracts.
Ken Rojc, a Chicago lawyer who represents auto lenders, says banks and finance companies increasingly are inserting arbitration clauses in loan and lease contracts. In recent years, class-action lawyers have challenged auto finance practices.
The American Arbitration Association limits consumers' fees to $125 in cases it arbitrates that involve claims of $10,000 or less, Naimark says. When claims exceed $10,000, the fee is $350.
Naimark says businesses pick up the rest of the cost, which generally does not exceed $700, of an arbitration proceeding handled by his group. But other arbitrators can charge significantly more.
"If there is no built-in advantage for one side or the other, arbitration is a benefit to both sides," Naimark says. "It offers efficient access to justice."
Not all dealers' arbitration clauses pass legal muster. Some consumer advocates advise customers not to sign sales agreements that include arbitration clauses. They also suggest that consumers avoid doing business with dealers who require arbitration to settle disputes.
Some media reports, including a recent expose of dealer finance practices by NBC TV's "Dateline," conclude that arbitration clauses are not in consumers' best interest. More consumers are fighting the clauses in court - the outcome arbitration is designed to avoid.
"Dealers say arbitration is so much fairer and faster than court," says Paul Bland, a lawyer with Trial Lawyers for Public Justice, a Washington group that works with plaintiffs' lawyers. "If they feel that way, why are they only making the consumer do it?"
Rosemary Shahan, president of Consumers for Auto Reliability and Safety, an advocacy group in Sacramento, Calif., says arbitration clauses can pose a legal trap for buyers - "as dealers know, having won the right to retain their constitutional rights vis-a-vis manufacturers."
Jim Appleton, president of the New Jersey Coalition of Automobile Retailers, says dealers have more at stake than consumers when disputes arise. Many dealers have invested their life savings in a franchise, he says.
"The hypocrisy is not that dealers try to live by different rules," Appleton says. "The hypocrisy is that the trial bar is masquerading as a consumer protection force."
Tom Hudson, a Linthicum, Md., lawyer who represents dealers and auto lenders, says the industry wins most cases that challenge arbitration clauses. But he adds: "Some state courts are very hostile to arbitration agreements and will try hard to find them unenforceable."
Last December a California court denied AutoNation Inc.'s effort to force a couple that had leased a Dodge Durango to submit to arbitration. The couple sued the company, alleging that the lease terms failed to live up to advertising claims. The court sided with the couple and ruled that the fees in the lease's arbitration clause were excessive.
The court also noted customers were not told about the arbitration provision, did not have a chance to negotiate it, and would have to pay more than $10,000 in addition to attorney's fees to have a case resolved by arbitration. The court said the arbitration clause was "particularly inconspicuous" on the back of the lease's signature page.
Disclosure is important
Lawyers say dealers must clearly disclose arbitration clauses in sales documents. They recommend use of boldface type and capital letters. "Courts generally will enforce arbitration clauses if they are clear and in writing, even if the customer didn't read them," Aronson says.
Bland suggests that dealers require customers to sign their name or initials next to the arbitration clause to express their understanding and consent. He recommends giving buyers a choice of arbitrators and requiring the arbitrator to produce a written opinion.
Unfair provisions can make arbitration clauses vulnerable, Bland adds. Examples include:
"Sometimes consumers have to pay huge sums of money to the arbitrator to go forward," Bland says. Arbitrators, who generally are retired judges, can charge $400 an hour, he adds.
Bland says many consumer lawyers refuse to take part in arbitration cases "because they know the system is rigged against them."
But industry officials say plaintiffs' lawyers disdain arbitration because litigation is more lucrative. Says Appleton: "They are just chasing legal fees."
How Arbitration Works