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Unhappy customers say a dealer's arbitration clause turned into a license to steal

The use of arbitration clauses in consumer contracts has risen in the last few years. Paul Bland, of Trial Lawyers for Public Justice, says it started when a banking lawyer saw a way to avoid expensive suits filed by customers who thought they had been screwed by the terms of loans and other financing. "A clever banking lawyer came up with this as a way of getting out from under the consumer lawsuits," says Bland. "The strategy has been successful and it's spread."

The arbitration process is set up to limit legal fees, but in doing so it provides a disincentive for a lawyer to represent a client for small amounts of money. There is no provision for punitive damages, and sometimes, if the arbitrator rules against the complaint, the person pursuing arbitration has to pay the cost of arbitration.

"Most lawyers, in consumer cases, will drop the case rather than pursue it into arbitration because it's generally understood that arbitrators are extremely favorable to defendants," Bland says.

It took Andrew Jones two years to get most of his deposit back from car dealer Daniel Schmitt.
Jennifer Silverberg
It took Andrew Jones two years to get most of his deposit back from car dealer Daniel Schmitt.

"The arbitration clauses are generally a rigged deal against consumers. The companies are self-deregulating themselves with them. They're repealing all the laws that govern themselves. They're immunizing themselves from any responsibility no matter what they do."

There have been efforts in Congress to limit how arbitration clauses are used in consumer contracts, but so far nothing has been resolved. Swearingen thinks it will take something federal to fix this. "If consumers went in and said to Daniel Schmitt, 'I want to x out paragraph eight,' he'd say, 'Go take a hike.' Just like if you went in to apply for a loan or financing and you saw an arbitration clause and tried to bargain with them, you're just not in a position to bargain with equal footing," Swearingen says. "The idea of freedom of contract between a consumer and a corporation is a fiction. There is no freedom on both sides to negotiate this contract. You either take it or leave it."

When Sheryl Logue got the vehicle identification number from the Lexus and ran it through, she found out the car had been through several wrecks and more than a couple of auto auctions. "They basically did not return phone calls. They knew our voices. You know, we have jobs and children to take care of, so we couldn't continue to keep calling and fighting it. I put a statement into my Visa so my bank is fighting his bank," Logue says. "Who's going to go and sue for $500? They know that. Who's going to take off work, flying there and fighting it. That's why they make the deposit small, so people aren't going to fight it."

But recently, after much ado, the used-car dealer appears to have felt the heat. Last week, after four months of hassles, Logue received a call from Daniel Schmitt Car Gallery with a settlement offer. "I almost dropped the phone," she says.

Jones, in the second go-round in small-claims court on July 20, was offered a deal, two years after losing his deposit. His new legal tactic was to state that the car's failure to pass an inspection should have neutralized the arbitration clause. For whatever reason, Jones says Schmitt's lawyer offered him $700 to drop his complaint. "Their attorney pulled me to the side and thought we should try to settle," says Jones. "It had been going on for so long, I just said, 'Heck, I didn't want to go in front of the judge and take a chance."

Jones settled for $900, but he hasn't changed his mind about Daniel Schmitt and his used-car lot.

"He held my money that long and played those games with me," says Jones. "He's a big jerk, a real jerk."

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