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Private Justice: Millions are Losing Their Legal Rights
Fair Use Statement

<-- Return To Right-to-Know or Left-to-Wonder?

Source: Common Dreams.

Published on Sunday, October 7, 2001 in the San Francisco Chronicle

Private Justice: Millions are Losing Their Legal Rights

Supreme Court Forces Disputes From Court to Arbitration - A System With No Laws

by Reynolds Holding, Chronicle Staff Writer

A private brand of civil justice, one without laws or juries or constitutional rights, has swept quietly across the nation's commercial landscape, shielding corporations from costly verdicts, compromising judges and stripping the public of its right to a day in court.

Tens of millions of Americans can no longer get medical treatment, a job, a home, a credit card or a host of goods and services without agreeing to resolve future disputes in confidential, unregulated proceedings riddled with conflicts of interest.

They cannot claim injury, fraud or discrimination without paying filing fees that may reach thousands of dollars. They cannot rely on legal guarantees of due process and fair treatment. They cannot appeal, except in rare circumstances.

And most of them don't even know it.

They have been forced into binding arbitration, a quasi-legal process that allows private individuals to pass final judgment on the disputes of the parties who hire them.

Voluntary arbitration has a long history in corporate commerce, organized labor and professional sports, where it has earned praise for efficiently resolving conflicts between adversaries of equal strength.

But over the past two decades, corporate America has imposed mandatory arbitration on the public as a condition of doing business - with the blessing of the U.S. Supreme Court.

Legal experts, including advocates of voluntary arbitration and several members of the court itself, have accused the justices of ignoring the intent of Congress and distorting the Federal Arbitration Act so that business interests can avoid the costs and risks of lawsuits and judges can lighten their workloads.

"The Supreme Court rewrote that statute as a service to corporations that don't like jury trials," says Professor Paul Carrington of Duke University School of Law.

The result, critics say, is a second-class justice system in which obscure clauses buried deep in bank statements, phone bills and job applications deprive millions of people of their legal rights:

Lost rights: In mandatory arbitration, high fees can discourage individuals from pursuing cases. The system lacks the procedural safeguards of court, and limited awards can make hiring a lawyer difficult. Arbitrators don't have to be lawyers and may not follow the law or justify their rulings. Their decisions are confidential and final.

Conflicts of interest: Some arbitration firms have invested in the companies whose disputes the firms' arbitrators hear, creating the appearance of conflicts that would never be tolerated in court. Studies show that arbitrators may favor large corporations and other frequent clients.

Compromised judges: Soaring demand and potentially high pay have lured an increasing number of sitting judges into arbitration - particularly in California - and pressured some to act in ways that may impress arbitration firms but weaken public confidence in the courts.

"Mandatory arbitration allows corporations to undermine the whole system by which we hold them accountable," says Montana Supreme Court Justice Terry Trieweiler. "Every day it becomes more pervasive, and more oppressive."

Taking a case through mandatory arbitration can be financially and emotionally devastating.

While a vice president at NationsBank Capital Markets, Renee Cecala says male bosses grabbed, cursed and pawed her. A stripper dressed as a pizza delivery boy disrobed as she stood on the trading floor. For Halloween, she received a small coffin containing a nude figure with a penis as long as its body.

In 1998, under securities-industry rules, her complaint was assigned to a panel of three arbitrators.

The panel's chairman was a retired music teacher. The second arbitrator had run a small stock-brokerage firm in Indiana and, Cecala says, "was immensely hard of hearing." The third, a small-town lawyer and diabetic, often slept during the proceedings as his insulin pump whistled in the background.

"I remember walking into the room, seeing these three and thinking, "Oh, my God,' " says Cecala.

Transcripts show the panel losing control of the attorneys, misstating the law and making bizarre rulings. The hearings lasted 18 days over more than two years and cost Cecala almost $25,000 in arbitrator and hearing fees alone. Then the panel ruled against her.

Cecala says she fell into deep depression, unable to sleep for days at a time.

"In terms of the massiveness of the mess, it's hard to top her case," says Cecala's current attorney, Mitchell Aberman, who is asking a federal judge to overturn the arbitrators' ruling.

In response to mounting criticism, several arbitration firms have adopted fairness standards. But the protocols are sometimes ignored and, in any event, cannot be enforced in court.

Reforms that would protect the public have been proposed in Congress and state legislatures. On Sept. 26, Gov. Gray Davis signed a bill calling for rules requiring arbitrators to disclose conflicts of interest. A bill now before the U.S. House of Representatives would prohibit employers from imposing arbitration on most workers.

But the prospects for further reform are uncertain. The California Chamber of Commerce, the American Insurance Association and other business interests from Silicon Valley to Wall Street have consistently fought to defeat proposed limits.

"What you're talking about here," says Rep. Dennis Kucinich, D-Ohio, a sponsor of the House bill, "is a classic struggle between the basic rights of workers and the desire of corporations to have absolute control of the workplace."

On Wednesday, the U.S. Supreme Court will hear arguments in a case that could extend the reach of mandatory arbitration even further. The court will decide whether the federal Equal Employment Opportunity Commission can sue an employer on behalf of Scotty Baker, a fired short-order cook who unwittingly signed away his right to a jury trial.

The case may show how far the court is willing to go in limiting not only the rights of individuals but the authority of the agencies created to protect them.

"Employers see a green light posted on the front steps of the Supreme Court, emboldening them to make arguments that 20 years ago would have been deemed outrageous," says San Francisco attorney Michael Rubin, author of a brief supporting the EEOC's position. "This time, I hope the Supreme Court tells them that they have finally pushed too far."

FEDERAL ARBITRATION ACT

For years, the nation's courts refused to enforce arbitration agreements, frustrating companies eager to conduct business without lawyers or courts.

Then, in 1923, Republican Rep. Ogden L. Mills of New York introduced a bill that would make arbitration contracts enforceable in federal court.

Critics of arbitration worried the legislation would undercut the rights of individuals. But the bill's authors and supporters said it would only apply to "merchants" in contract disputes.

The Federal Arbitration Act became law in 1925, and for decades the nation's courts honored the limits Congress intended to impose on the act.

But by the mid-1970s, the fear of an explosion in litigation gripped the federal judiciary. Business interests warned of skyrocketing lawsuits. Insurance company Crum & Forster ran a full page advertisement in Time magazine, condemning lawyers for filing more than 1 million product liability cases each year. Although the actual number never exceeded about 80,000, the point had been made.

In 1983, without explanation, the Supreme Court declared that the Federal Arbitration Act had created a "liberal federal policy favoring arbitration," meaning arbitration agreements should be upheld whenever possible.

The pronouncement marked a stark change in the high court's thinking, and the new policy soon drew criticism from its own members, including Justice Sandra Day O'Connor, who said the court "utterly fails to recognize the clear congressional intent underlying the Federal Arbitration Act."

But the court repeatedly invoked the new policy as it expanded mandatory arbitration throughout the nation's commercial life - even when civil rights were at stake.

The court had long maintained that arbitrators "may be wholly unqualified" to decide civil rights cases and similar legal matters, said Justice Hugo Black.

But in 1991, the justices ruled 7 to 2 that Robert Gilmer, a 62-year-old financial services manager replaced by his 28-year-old protege, must take his age discrimination case to arbitration.

The ruling cleared the way for companies in every industry to prohibit their employees from going to court with their grievances.

HIDDEN WAIVERS

In its rulings, the Supreme Court has treated arbitration clauses as ordinary contracts between consenting parties.

But for individuals, the clauses are much more. They are waivers of the constitutional right to a jury trial. And in all contexts other than arbitration clauses, federal courts have consistently ruled that such waivers must be "knowing, voluntary and intentional," says Jean Sternlight, a law professor at the University of Missouri.

Yet thousands of medical patients, credit cardholders, homeowners and employees give up that right every day without even knowing they have done so.

Many mandatory arbitration clauses are tucked into shipping materials. Some lurk in the dense pages of bills and bank statements. Often the clauses appear in tiny type.

In 1992, the Bank of America started slipping mandatory arbitration clauses into bills sent to its credit card and account holders. Customers who continued to use their card or account, said the notices, would agree not to sue.

But a group of cardholders sued the bank, arguing that the so-called "bill stuffers" were unfair and deceptive. In 1998, the California Court of Appeal in San Francisco ruled in their favor, becoming one of the few courts in the nation to say that a business imposing arbitration on its customers "must clearly and unambiguously show" that they have agreed to waive their constitutional right to a jury trial.

For a while, the decision discouraged bill stuffing in the state. But in July, Berkeley resident Darcy Ting and other phone customers received "Dear AT&T Customer" letters. If they made one more long-distance call, the letters said, they would have to resolve all disputes of more than $5,000 in arbitration.

Ting was outraged. She led a class-action suit against AT&T in federal court in San Francisco.

"Why should I lose my rights?" asked Ting. "It is really unfair."

PROHIBITIVE FEES

Filing a case in California Superior Court typically costs from $90 to $185.

If the complaint involves discrimination, a state agency such as the California Department of Fair Employment and Housing or the federal Equal Employment Opportunity Commission might take the case for free. In certain employment disputes, the state Labor Commission might take the case, also for free.

But mandatory arbitration can require thousands of dollars to file a case. As a result, some people must pay fees they cannot afford or drop their legal complaints.

Lorraine Aho had to make that choice earlier this year in her wrongful firing case against Maxager Technology in San Rafael.

The American Arbitration Association ordered her to pay a $3,000 filing fee, plus any fees the arbitrator might charge. Her attorney, Mary Dryovage, says the fees could have topped $50,000.

"We told them to forget it," Dryovage says. "I wasn't going to let one of my clients get into a situation of having to declare bankruptcy to pursue her case."

Some arbitration firms charge less. Several courts, including the California Supreme Court, have ruled that employers must foot the bill in employment discrimination cases.

But American Arbitration Association, the nation's largest arbitration firm with more than 140,000 cases each year, charges up-front fees ranging from $500 for claims under $10,000 to more than $7,000 for claims above $1 million in commercial cases.

NO CLASS ACTIONS

Mandatory arbitration agreements often prohibit class actions, lawsuits that combine many claims so awards are large enough to cover legal fees and other costs. Class actions help people of modest means afford litigation and, although subject to abuse, enforce consumer protection and civil rights laws.

The National Arbitration Forum has assured potential clients that its rules will shield them from class actions and improve "the bottom line."

FleetBoston Financial Corp., Citigroup Inc. and MBNA Corp. recently barred credit card customers from joining any class actions against the companies, including suits already filed but not yet "certified" by courts.

NO JUDGES

Although many arbitrators are former judges, they are rarely required to follow the law. Some arbitrators are not even lawyers.

In 1997, Carl Posey's defamation and wrongful firing case against PaineWebber Inc. was assigned to a panel of three arbitrators in Nashville, Tenn. Two of the arbitrators weren't lawyers. The third, the panel's chairman, showed up wearing a white T-shirt and a khaki vest adorned with fishing lures.

"I remember asking the case administrator, "Where did you get these guys - off a barstool?' " says Posey's attorney, Jeffrey Liddle.

After a full day of opening statements, the panel asked if the lawyers could go through the statements again. It soon became clear that the arbitrators would never grasp the case's nuances, says Liddle, so they agreed to quit.

A second panel was appointed. But when its chairman, a nonlawyer, leaped to his feet to stop Posey from getting documents he was legally entitled to, Liddle sensed more trouble. After a three-hour discussion, the second panel also quit.

Ultimately, the case was filed in federal court and settled.

"They just had a total misunderstanding of what we were about," says Posey, who had to pay the arbitrators $10,000 for the aborted hearings.

PaineWebber, now UBS PaineWebber, declined to comment.

LOST RIGHTS

Although supporters of arbitration praise the system's swift resolution of disputes, critics say speed and efficiency come at a price: the loss of rights guaranteed in court.

In 1999, San Francisco investment banker Nicholas Prassas sued Smith Barney Inc., claiming the bank fired him for not lying about campaign contributions that could have disqualified the firm from doing a bond deal with the state of Hawaii.

Smith Barney forced Prassas into arbitration, preventing the allegations from being aired in open court. During the case, his attorney says, the firm turned over few documents and gave superficial answers to his written questions. When the attorney tried to take deposition testimony from witnesses, the arbitrators stopped him.

Left with scant information to make his case, Prassas settled without a hearing.

"It was awful," says Prassas. "There seemed to be no rationale behind the arbitrators' decisions."

Smith Barney, now Salomon Smith Barney, declined to comment.

SMALL AWARDS

In many cases, arbitration agreements limit the size of awards.

In July, for example, AT&T's customer notice said disputes with the company would go to arbitration rather than to court and that the company would only pay for faulty phone service or direct damages to property - not for indirect, punitive or other damages normally allowed by law.

Award limits can make finding an attorney difficult. In December, the California Research Bureau, the Legislature's research wing, reported that almost a third of the medical patients who go to arbitration don't have attorneys.

Cliff Palefsky, a San Francisco attorney who has led the legal opposition to mandatory arbitration, says he has advised many women - particularly securities industry professionals - not to pursue a discrimination case in arbitration.

"The high costs, the amount they could win and the chances of winning all militate against pursuing it, because of the damage it could do to their careers," he says. "It breaks my heart to have to give someone with a good case that kind of advice."

NO EXPLANATION

Three years ago, after Sherri Warner lost her discrimination and wrongful firing suit in mandatory arbitration, a San Francisco arbitrator not only charged her nearly $16,000 for his time, he ordered her to pay her opponent's legal fees of more than $207,000.

The fee award would probably not have been allowed in court, and it forced Warner into bankruptcy. But after her lawyer, Stephen Gorski, asked the arbitrator to explain his decision, the arbitrator refused when reminded no rules required him to do so.

Arbitrators rarely issue written opinions, making requests for review virtually impossible.

The National Association of Securities Dealers generally limits arbitration opinions to the names of the participants and their attorneys, the claims asserted and the outcome. In some cases, major clients of arbitration firms have prohibited arbitrators from even issuing opinions.

MCI Telecommunications Corp., for example, agreed in 1994 with Endispute, which later merged with Judicial Arbitration and Mediation Service now JAMS, that awards "shall not include any findings of fact or conclusions of law."

As a marketing company pointed out in its 1996 lawsuit against MCI, an arbitrator's finding that MCI had engaged in "willful misconduct" would have exposed the company to increased liability under federal regulations.

UNENFORCED ETHICS CODES

In recent years, mounting complaints about arbitration have prompted the nation's largest arbitration firms to adopt fairness standards.

Starting in 1995, for example, American Arbitration Association agreed to abide by "protocols" for running arbitrations in employment, consumer and health care cases. In health care, the association said it would accept only cases that people had voluntarily agreed to submit to arbitration after the dispute arose.

But the standards are not enforceable, and the association seems to ignore them.

In 1999, for example, Maureen Alexander filed a complaint against Blue Cross of California, claiming that a doctor removed her gown during a routine checkup and, for no apparent reason, poked her breasts and pelvic area with a pin, according to court papers.

Blue Cross forced her into arbitration, and American Arbitration took the case, even though Alexander said she didn't know she had signed an arbitration clause.

The arbitrator failed to apply the association's health care rules, including requirements for sharing documents and other information, and ruled against Alexander.

She sued Blue Cross to overturn the award, claiming the arbitrator was biased and ignored applicable laws, but she lost. She then sued the American Arbitration Association for breaching its own protocols, but a federal court dismissed her suit earlier this year.

Meanwhile, in a separate case last year, American Arbitration Senior Vice President Robert Meade submitted a sworn affidavit saying the organization "does not require compliance with the (health care) protocol for cases we administer."

In other cases, the association has also failed to require its arbitrators to follow the consumer or employment protocols.

American Arbitration spokeswoman Kersten Norlin says the association enforces the protocols unless a case "doesn't fall under one of the defined categories. You may have an employment arbitration clause involving a health care company, for example. So it's not always black or white."

Palefsky says that's nonsense.

"The protocols," he says, "are all just a marketing ploy."

THE LAST BARRIERS

On Wednesday, attorneys for the Equal Employment Opportunity Commission will appear before the U.S. Supreme Court on behalf of 27-year-old Scotty Baker.

In November 1992, Baker's white Corolla flipped off a rain-slickened highway near his home in South Carolina. He walked away with a bump on his head, but a week later started to have periodic seizures.

In 1994, he filled out an application for a job cooking at the Waffle House in Columbia. He got the job, but turned it down. A few weeks later, he applied for a similar job at the Waffle House in West Columbia.

The manager hired him on the spot, without asking Baker to complete an application. When Baker mentioned his seizures, the manager just said, "Show up for work at 7 a.m.," Baker says.

About two weeks into the job, Baker suff

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